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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Year Ended December 31, 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: 0-23289
HYBRID NETWORKS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 77-0252931
(STATE OF OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
6409 Guadalupe Mines Road San Jose, California, 95120
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (408) 323-6500
Securities registered pursuant to Section 12(b) of the Exchange Act: None
Securities registered pursuant to Section 12(g) of the Exchange Act: Common
Stock, par value $0.001 per share
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act during the past
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 / / (Such reports are filed concurrently herewith.)
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-B is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K / /
As of May 28, 1999, there were outstanding 10,517,399 shares of the
Registrant's Common Stock, $0.001 par value per share. As of that date, the
aggregate market value of the shares of voting common stock held by
non-affiliates of the Registrant, based on the average bid and ask prices of
such stock as of such date on the pink sheets (although the Registrant disclaims
that such prices accurately reflect the fair market value of such stock), was
approximately $15,770,432. This excludes shares of common stock held by
directors, officers and stockholders whose ownership exceeded ten percent of the
shares outstanding. Exclusion of shares held by any person should not be
construed to indicate that such person possesses power, direct or indirect, to
direct or cause the direction of the management or policies of the Registrant,
or that such person is controlled by or is under common control with the
Registrant.
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HYBRID NETWORKS, INC.
Annual Report on Form 10-K
For the fiscal year ended December 31, 1998
TABLE OF CONTENTS
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PART I
ITEM 1 Business 4
ITEM 2 Properties 12
ITEM 3 Legal Proceedings 12
ITEM 4 Submission of Matters to a Vote of Security Holders 14
PART II
ITEM 5 Market for the Registrants Common Equity and Related
Stockholder Matters 15
ITEM 6 Selected Financial Data 17
ITEM 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations 18
ITEM 7A Quantitative and Qualitative Disclosures About Market Risk 35
ITEM 8 Financial Statements and Supplementary Data 36
ITEM 9 Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure 62
PART III
ITEM 10 Directors and Executive Officers of the Company 63
ITEM 11 Executive Compensation 66
ITEM 12. Security Ownership of Certain Beneficial Owners and Management 69
ITEM 13 Certain Relationships and Related Transactions 70
ITEM 14 Exhibits, Financial Statements Schedules and Reports on
Form 8-K 71
Signatures 74
Exhibits
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As used in this report on Form 10-K, unless the context otherwise requires,
the terms "we," "us," or, "the Company" and "Hybrid" refer to Hybrid Networks,
Inc., a Delaware corporation.
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PART I
THIS REPORT ON FORM 10-K CONTAINS FORWARD-LOOKING STATEMENTS RELATING TO
FUTURE EVENTS OR FINANCIAL RESULTS, SUCH STATEMENTS INDICATING THAT "WE
BELIEVE," "WE EXPECT," "WE ANTICIPATE" OR "WE INTEND" THAT CERTAIN EVENTS MAY
OCCUR OR CERTAIN TRENDS MAY CONTINUE. OTHER FORWARD-LOOKING STATEMENTS INCLUDE
STATEMENTS ABOUT THE FUTURE DEVELOPMENT OF PRODUCTS OR TECHNOLOGIES, MATTERS
RELATING TO OUR PROPRIETARY RIGHTS, YEAR 2000 COMPLIANCE, FACILITIES NEEDS, OUR
LIQUIDITY AND CAPITAL NEEDS AND OTHER STATEMENTS ABOUT FUTURE MATTERS. ALL THESE
FORWARD-LOOKING STATEMENTS INVOLVE RISKS AND UNCERTAINTIES. YOU SHOULD NOT RELY
TOO HEAVILY ON THESE STATEMENTS; ALTHOUGH THEY REFLECT THE GOOD FAITH JUDGMENT
OF OUR MANAGEMENT, THEY INVOLVE FUTURE EVENTS THAT MIGHT NOT OCCUR. WE CAN ONLY
BASE SUCH STATEMENTS ON FACTS AND FACTORS THAT WE CURRENTLY KNOW. OUR ACTUAL
RESULTS COULD DIFFER MATERIALLY FROM THOSE IN THESE FORWARD-LOOKING STATEMENTS
AS A RESULT OF VARIOUS FACTORS, INCLUDING THOSE SET FORTH UNDER "RISK FACTORS"
AND ELSEWHERE IN THIS FORM 10-K.
RESTATEMENT OF OUR FINANCIAL STATEMENTS
On May 18, 1998 and June 1, 1998, we were engaged with our independent
accountants, Coopers & Lybrand LLP (which later became PricewaterhouseCoopers
LLP and is referred to herein as "PwC"), in a review of our financial statements
for 1997 and the first quarter of 1998. On June 18, 1998, we announced that PwC
had notified us that its audit reports on our 1997 financial statements should
no longer be relied upon and that we were continuing our review of financial
statements. On July 9, 1998, PwC resigned as our independent accountants,
stating that it believed our 1997 financial statements should be restated but
that, although there had been no disagreements between PwC and us on any matter
of our accounting principles or practices, financial statement disclosure or
auditing procedure, PwC would not continue as our independent accountants to
address the restatement.
In August 1998, we retained Arthur Andersen LLP ("AA") as our independent
accountants. After extensive work in connection with our 1997 financial
statements, AA resigned as our independent accountants on November 24, 1998. AA
informed us that, in AA's view, material weaknesses existed in our internal
controls of a nature that prevented AA from being able to form an opinion on our
conclusions as to the appropriate timing and amount of revenue recognition for
the purposes of our 1997 financial statements. AA also stated that during the
course of its work, it had reached the conclusion that it needed to expand
significantly the scope of its audit, which it did with our approval and
cooperation, and that, while AA did not complete its audit, it concluded that
our 1997 financial statements were materially misstated. AA confirmed that there
had been no disagreements between AA and us on any matter of our accounting
principles and practices, financial statement disclosure or auditing procedure.
In December 1998, we engaged Hein + Associates LLP ("Hein") as our
independent accountants. During the review of our financial statements in
conjunction with Hein (and, earlier, with PwC and AA), we became aware of errors
and irregularities that caused our financial statements for 1997 and the first
quarter of 1998 to be misstated, particularly with respect to the timing and
amount of our sales in 1997 and the first quarter of 1998. We also concluded
that the financial effects of warrants issued by us in 1997 had not been
properly reflected in our financial statements. Our financial statements for
1997 and the first quarter of 1998 have been restated to correct these errors.
As indicated in Note 1 to the financial statements in Item 8 of this report, as
a result of the restatement net sales for 1997 were reduced from $14,270,000 to
$4,120,000 (resulting in gross loss of $4,799,000 rather than gross profit of
$2,012,000), net loss increased from $13,590,000 to $21,602,000 and accumulated
deficit increased from $30,932,000 to $38,944,000. Our basic and diluted loss
per share increased from $3.84 to $6.10. For additional information regarding
the restatement, see Note 1 to the financial statements in Item 8 of this
report.
In June 1999, Hein completed its audit of our 1997 and 1998 financial
statements. Those financial statements, and Hein's audit report on them are
included in this report (The financial statements included in Item 8 of this
report are referred to as the "Financial Statements").
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Our inability to issue audited financial statements during the last 12
months has had serious consequences for our business. As a result, the Nasdaq
National Market suspended trading in our Common Stock from June 18, 1998 to
December 1, 1998, at which time our Common Stock was delisted from the Nasdaq
National Market. Primarily due to our announcements regarding the need to
restate our financial statements, a number of class action litigations were
brought in June, July and August 1998, and the Securities and Exchange
Commission initiated a formal investigation in October 1998. We believe these
actions hurt our business during the latter part of 1998, made it more difficult
for us to attract and retain employees, disrupted our management, sales and
marketing, engineering and research and development staffs, contributed to our
inability to complete the restatement of our financial statements during 1998
and adversely affected the sales of our products and services.
ITEM 1. BUSINESS
OVERVIEW
We are a broadband access equipment company that designs, develops,
manufactures and markets wireless and cable systems that provide high-speed
broadband access to the Internet and corporate intranets for both businesses and
consumers. Our products remove the bottleneck over the local connection to the
end-user which causes slow response time for those accessing bandwidth-intensive
information. Customers include broadband wireless system operators, cable system
operators, internet service providers ("ISPs"), resellers and other companies
that provide broadband networking solutions or services to business and
residential users. Our Series 2000 product line consists of headend routers,
wireless or cable modems and management software for use with either cable TV or
wireless transmission facilities. Because a majority of wireless and cable
transmission facilities are not capable of two-way transmissions, the Series
2000 has been designed to utilize a variety of return paths, including the
public switched telephone network. The Series 2000 is capable of supporting a
combination of speeds, media and protocols in a single wireless or cable system,
providing system operators with flexible, scalable and upgradeable solutions
that allow them to offer cost-effective broadband access to their subscribers.
PRODUCTS, TECHNOLOGY AND SERVICES
Our Series 2000 product line provides broadband wireless system operators,
cable system operators, ISPs and other businesses with a cost-effective, high
speed Internet and intranet access solution. Our products include headend
routers, wireless and cable modems and management software for use with either
wireless transmission facilities or cable TV transmission facilities. Our
headend products are used by broadband wireless system operators, cable system
operators and other customers to transmit and receive data across networks and
to manage networks and modems. Our client modems are used by subscribers of our
customers and can be used as single-user devices or in multi-user local area
networks. Our products incorporate proprietary technology that enables the same
system to be deployed in either broadband wireless or cable systems.
Additionally, our products support both one-way downstream transmission
accompanied by upstream transmission via a telephone modem or return router or
two-way wireless or cable transmission using a wireless channel or cable
channel.
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PRODUCTS
The following table outlines the primary components of the Company's Series
2000:
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HEADEND EQUIPMENT (1)(2) PRODUCT DESCRIPTION
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CyberManager 2000 (CMG-2000) Workstation with proprietary Hybrid software that
provides subscriber and network management
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CyberMaster Downstream Router (CMD-2000) High speed downstream RF router that supports up to
60 Mbps aggregate throughput in 12 MHz of spectrum.
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CyberMaster Upstream Router QPSK Return Upstream receiver and demodulator for two-way
(CMU 2000-14C and QDC-030-2) QPSK configuration
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END-USER EQUIPMENT (1)(3)
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Multi-User Modem/Router (CCM-201, CCM-202) Client modem and router that can be used in either
CCM-231) wireless or cable systems. Supports up to 20 users.
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Single-User Modem (N-201, N202) Similar to CCM-201, CCM-202 and CCM-231 but
N-231) restricted to a single user.
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(1) All products are available for use with wireless or cable systems.
(2) Headend equipment typically ranges in price from $40,000 to $90,000 for a
single system.
(3) Modem list prices range from approximately $320 to $480 depending on
features.
HEADEND EQUIPMENT
CYBERMANAGER 2000. The CyberManager 2000 ("CMG-2000") is our proprietary
subscriber and network management workstation built on a Sun Microsystems
Sparc 5. Running Hybrid software, the CMG-2000 operates as the system
administrator interface to the upstream and downstream routers and other
supported third party headend equipment. The CMG-2000 has a 10/100BaseT
(Ethernet) interface to connect to a fast Ethernet switch in the headend.
Currently, the CMG-2000 supports up to 5,000 modems.
CYBERMASTER DOWNSTREAM ROUTER. The CyberMaster Downstream Router
("CMD-2000") is our rack-mounted, Pentium based, PCI/ISA bus industrial
microcomputer. It supports Hybrid's proprietary SIF and QAM cards, which are
used for downstream routing and for 64-quadrature amplitude modulation
("64-QAM") downstream modulation. The CMD-2000 has a 10/100BaseT interface to
connect to a fast Ethernet switch within the headend. The CMD-2000 supports
up to six independent 10 Mbps downstream channels normally feeding two TV
channels or transmitters. Each 10 Mbps channel occupies 2 MHz of either
wireless or cable spectrum.
CYBERMASTER UPSTREAM ROUTER QPSK RETURN. The Cybermaster upstream router
is our rack mounted, Pentium based, PCI/ISA bus industrial microcomputer. The
product houses dual quadrature phase-shift keying ("QPSK") receiver cards
which demodulate upstream QPSK signals. The CMU-2000-14C has a 10/100BaseT
interface to connect to a fast Ethernet switch at the headend. The CMU
supports up to 28 upstream ports each with a 256 Kbits per second (Kbps) to 5
Mbits per second (Mbps) data rate. It is usually configured to support up to
2,400 wireless or cable modem subscribers.
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END-USER EQUIPMENT
MULTI-USER MODEM/ROUTER. The Multi-User Modem/Router supports 10 Mbps,
64-QAM downstream data transmission on both wireless and cable systems and
upstream transmission via phone modem, router or wireless or cable return.
The router includes the CCM-201, a phone return with external modem, the
CCM-202 phone return with internal modem, and the CCM-231, for phone,
wireless or cable. Each CCM-201 includes routing capability to support up to
20 networked devices (PC, Macintosh or workstation). The CCM-201 has a number
of security features including system authentication and user ID.
SINGLE-USER MODEM. The Single-User Modems are similar to the Multi-User
Modem/Routers (CCM-201, CCM-202 and CCM231, respectively) but support only one
client device which can be a PC, Macintosh or workstation.
All modems are available in a version which supports DES encryption.
TECHNOLOGY
The Series 2000 product line is a proprietary, integrated broadband
access system. The Series 2000 is media independent, allowing the same system
components to be deployed in either wireless or cable systems. It utilizes
proprietary asymmetric networking technology that allows for optimal use of
available frequencies. The Series 2000 supports both asymmetric two-way
transmission on a wireless or cable system and asymmetric telephone- or
router-return on either a broadband wireless or cable system using the same
wireless transmitter or downstream TV channel. Our proprietary
sub-channelization technology splits a standard 6 MHz channel into three 2
MHz slices for downstream transmission, providing greater flexibility and
minimizing the effects of multipath interference in wireless systems. By
providing 2 MHz sub-channelization, our products are also positioned to serve
the new WCS frequencies, which are 5 MHz wide. The Series 2000 provides for
downstream transmission over wired cable in the interference prone "rolloff"
channels that are unsuitable for video broadcast, preserving scarce channels
for the cable system operator. The Series 2000 is expandable from an
entry-level system to large systems that serve more than 5,000 modems.
SERVICES
Our product support services include consulting, systems engineering,
systems integration, installation, training and technical support. Network
operations engineers, who combine radio frequency and TCP/IP networking
expertise, provide network consulting to support the sales force, assisting
sales representatives and customers in defining the specifications for the
system to be installed. Our network operations group also works with the
customer during site preparation to aid in systems engineering, system
integration, installation and acceptance testing to ensure a successful system
start-up. Each customer is required to enroll, for a fee, at least one person in
our one-week training course; enrollment for multiple employees from the
customer organization is encouraged and supported with a discounted fee
schedule. These training courses are tailored to specific implementations of our
products and cover the installation, operation and maintenance of our headend
and client modem products in a network operating environment. We typically
provide a one-year warranty on our hardware products that includes factory and
on-site repair service as needed. Customer support also includes telephone
support, maintenance releases and technical bulletins covering all of our
software and firmware products that contain application code. We provide support
after expiration of the warranty period as a purchase option, including on-site
field support.
CUSTOMERS
Our customers include broadband wireless system operators, cable system
operators, ISPs, resellers and other businesses. A small number of customers has
accounted for a large portion of our net sales. In 1998, RCN Corporation and
Knology Holdings, Inc. accounted for 25% and 13% of our net sales. In 1997, RCN
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Corporation and Jones Intercable accounted for 13% and 12% of our net sales.
In 1996, AT&T Corporation and Intel Corporation accounted for 41% and 21% of
our net sales. During 1998, 58% of our net sales were attributable to cable
system applications and the balance to broadband wireless applications.
A number of cable operators have adopted a standard for products used in
transmitting data over cable systems called Data Over Cable System Interface
Specification ("DOCSIS"). Our products do not meet this standard, and the
adoption of the standard by cable operators has adversely affected our sales to
cable customers and is likely to continue to do so in the future.
SALES, MARKETING AND DISTRIBUTION
We market and sell our products in the United States through our own field
sales force and sales support organization. We also sell our products through
distributors, VARs and OEMs. We have field sales offices in Atlanta, Georgia and
Tinton Falls, New Jersey.
The sale of our products typically involves a great deal of time and
expense. Customers usually want to engage in significant technical evaluation
before making a purchase commitment. There are often delays associated with
customers' internal procedures to complete the evaluation and to approve the
large capital expenditures that are typically involved in purchasing our
products. The sales cycle for our products has been lengthy, generally lasting
three to nine months, and is subject to a number of significant risks, including
customers' budgetary constraints and internal acceptance reviews. Because our
sales cycle may be long and uncertain, and because we depend on a relatively few
customers who place relatively large orders, any delay or loss of an order that
is expected to be received in a quarter can have a major effect on our sales and
operating results for that quarter. The same is true of any failure of a
customer to pay for products on a timely basis.
We have a limited backlog of orders. We believe this is not necessarily an
indication of our future sales, because our customers typically demand prompt
delivery after placing an order and because most of our orders are booked and
shipped in the same quarter.
Our marketing efforts are targeted at broadband wireless system operators,
cable system operators, local and long-distance telephone service companies
(LECs and IXCs) and existing ISPs. In the past, we devoted considerable time and
effort to educating potential customers on the business opportunity of providing
high speed Internet and intranet access (through white papers, prototype
customer business models, industry speaking engagements, product and system
demonstrations and direct customer presentations). We have tried to maintain an
industry presence by exhibiting at industry tradeshows and speaking at
conferences and seminars. During the latter part of 1998, constraints in our
financial resources have limited our sales and marketing efforts. By the end of
the year, our principal focus has been on supplying and supporting our existing
customers.
The market for our products has historically experienced significant price
erosion over the life of a product, and we have experienced and expect to
continue to experience pressure on our unit average selling prices. While we
have initiated cost reduction programs to offset pricing pressures on our
products, there can be no assurance that we will keep pace with competitive
price pressures or improve our gross margins. If we are unable to continue to
reduce costs, our profitability will be adversely affected. Our profitability is
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also affected by the sales mix of headends and modems. Our single user modems
generally have lower margins than our multi-user modems, both of which have
lower margins than our headend routers. Due to current customer demand, we
anticipate that the sales mix of modems will be weighted toward lower-margin
single-user modems in the foreseeable future. As a result, gross margins, and
our business, could be adversely affected.
In order to market and sell our products internationally, we had entered
into several distribution relationships. European interest in the DOCSIS
standard has adversely affected our distribution arrangements. We had no
international sales in 1998.
MANUFACTURING
Our manufacturing strategy is to perform system integration, testing and
quality inspection internally and to outsource the manufacturing of the product
modules to third parties. We maintain a limited in-house manufacturing
capability for performing system integration and testing on headend products and
for manufacturing small quantities of modems at our headquarters in San Jose.
During 1998, we used our in-house manufacturing capability largely for (i) pilot
production of new modem designs, (ii) configuration changes to adjust inventory
to customer volume requirements for various models and (iii) sample testing of
products received from volume modem manufacturers.
Our Series 2000 client modems are manufactured by Sharp Corporation through
an agreement we have had since early 1997 with Sharp and its distributor, Itochu
Corporation. We have not developed an alternative manufacturing source. Our
inability to develop alternative manufacturing sources has adversely affected
our ability to reduce the manufacturing costs of our modems despite competitive
pressures that have caused us to reduce our selling prices. We expect downward
pressure on the prices of our products to continue. In order for us to compete
effectively in the sale of modems, we will need to reduce our prices, and the
underlying costs, of our modems. As long as Sharp is the only manufacturing
source of our modems, our ability to reduce the manufacturing costs of our
modems may be limited.
We have subcontractors for the standard components and subassemblies for
our products. Standard components include the Sun Microsystems Sparc 5
workstation and its Sun Operating System (OS); and Intel's Ethernet cards and
Pentium-based PCI processor cards. Our CyberManager 2000 Router is built on the
Sparc 5/Sun OS platform by installing our proprietary network subscriber and
network management software, HybridWare. Our CyberMaster Downstream Router
("CMD") and CyberMaster Upstream Router ("CMU") are built on Intel's
Pentium-based PCI/ISA-based computer cards installed in standard rack-mounted
backplanes from Industrial Computer Source that are configured to our
specifications. Our proprietary software, Hybrid OS, is overlaid on a standard
Berkeley Systems operating system for the CMD and CMU.
We are dependent upon certain key suppliers for a number of the components
for our 64-QAM products. For example, we have only one vendor, BroadCom
Corporation, for the 64-QAM demodulator semiconductors that are used in our
client modem products, and in past periods these semiconductors have been in
short supply. In 1997, BroadCom announced a program whereby certain of its
technological and product enhancements may be made available to certain of our
competitors before making them available to us, thereby giving us a competitive
disadvantage. Hitachi is the sole supplier of the processors used in certain of
our modems. Stanford Telecom, which is a competitor for at least one of our
broadband wireless products, is currently the sole supplier for certain
components used in our products and has indicated that they might stop supplying
these components to us, although it has not yet done so. There can be no
assurance that these and other single-source components will continue to be
available to us, or that deliveries of them to us will not be interrupted or
delayed (due to shortages or other factors). Having single-source components
also makes it more difficult for us to reduce our costs for these components and
makes us vulnerable to price increases by the component manufacturer. Any
significant interruption or delay in the supply of
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components for our products or any increase in our costs for components, or
our inability to reduce component costs, could hurt our business.
Our products generally carry a one-year warranty for replacement of parts.
Although we have not experienced any significant product liability claims to
date, we could be subjected to such claims in the future.
RESEARCH AND DEVELOPMENT
As of December 31, 1998, our research and development staff consisted of 22
full-time employees. As of April 30, 1999, our research and development staff
had been reduced to 8 full-time employees, due primarily to a reduction in
workforce that we implemented in the first quarter of 1999. To supplement our
research and development efforts, we have hired a consulting firm in India to
work on various projects. Our agreement with the firm is to provide up to 20
engineers as consultants depending upon the project needs. In addition, we have
hired consultants in California to work on various projects. Our total research
and development expenses for 1998, 1997 and 1996 were $7,771,000, $7,831,000 and
$5,076,000, respectively, but they have declined substantially in 1999 due to
lack of resources. Our research and development during 1998 was directed
primarily towards (i) increasing the performance and improving the scalability
of our broadband systems and (ii) reducing the cost of our modems. We are
currently enhancing our QPSK return product software in cooperation with certain
of our wireless customers to improve performance as the customers introduce
antenna sectorization to increase return path capacity. Developments now being
tested would, if successful, increase the capacity of the manager to 20,000
modems and extend the CCM-231 multi-user modem to serve 60 computers. We are
continuing our efforts to reduce the cost of manufacturing client modems
significantly through design and engineering changes. There can be no assurance
that we will be successful in these efforts.
The market for high speed Internet access products is characterized by
rapidly changing and competing technologies, evolving industry standards and
frequent new product introductions leading to short product life cycles. There
can be no assurance that we will be able to keep up with these changes.
COMPETITION
Our market is intensely competitive, and we expect even more competition in
the future. The principal competitive factors in this market include:
- product performance and features including both downstream and
upstream transmission capabilities,
- reliability and stability of operation,
- breadth of product line,
- sales and distribution capability,
- technical support and service,
- relationships with cable and broadband wireless system operators
and ISPs,
- meeting standards compliance and
- general industry and economic conditions.
While we believe our products and services are competitive with or superior
to those of our competitors, we have been hampered by a lack of resources, by
disruptions resulting from management and personnel changes, uncertainties
caused by our financial reporting difficulties referred to at the beginning of
this report and by our competitors having established relationships with
principal cable companies, wireless
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operators, and ISPs, including @Home. Although our products have been
particularly well received in the broadband wireless market, financial
difficulties among our wireless customers have limited our sales to and
collections from these customers. In addition, conditions in our market could
change rapidly and significantly as a result of technological changes, and
the development and market acceptance of alternative technologies could
decrease the demand for our products or render them obsolete. Similarly, the
continued emergence or evolution of industry standards or specifications may
put us at a disadvantage in relation to our competitors. There can be no
assurance that we will be able to compete successfully in the future.
In general, our competitors are producers of asymmetric cable modems and
other types of cable modems and other broadband access products. Most of our
competitors are substantially larger and have greater financial, technical,
marketing, distribution, customer support and other resources, as well as
greater name recognition and access to customers, than we have. Many of our
competitors are in a better position to withstand any significant reduction in
capital spending by cable or broadband wireless system operators.
CABLE MODEM COMPETITORS
Our competitors in the cable modem market include Cisco Systems, Com21,
Terayon, GI, Nortel Networks, Motorola, General Instrument and 3Com and its
subsidiary U.S. Robotics. Other cable modem competitors include Phasecom,
Scientific-Atlanta, Toshiba and Zenith Electronics, as well as a number of
smaller, more specialized companies. Certain competitors have established
relationships in the cable industry and with @Home, which is the ISP for a
number of major cable operators, and have more experience than we have in
selling two-way cable transmission products. Some of these competitors have
entered into partnerships with computer networking companies and with @Home that
may give such competitors greater visibility in this market. A number of
competitors have already introduced or announced high speed connectivity
products that are priced lower than ours, and certain other competitors are more
focused on and experienced in selling and marketing two-way cable transmission
products.
Certain of our competitors have established relationships with cable system
operators and telephone companies ("telcos"), and ISPs, including @Home, and,
based on these relationships, may have more direct access to the decision-makers
of such cable system operators and telcos. In addition, we could face potential
competition from certain of our suppliers, such as Sharp, if it were to launch
or license competitive modems for sale to others.
The adoption of the DOCSIS cable standard by large cable operators has
adversely affected our ability to sell to cable customers, particularly new
customers. Further, our products are not compatible with headend equipment and
modems of other suppliers of broadband Internet access products, including
DOCSIS products, and, as a result, potential customers who wish to purchase
broadband Internet access products from multiple suppliers may be reluctant to
purchase our products.
WIRELESS CABLE COMPETITIORS
Our principal competitors in the wireless MMDS market include Nortel
Networks (which is active in Canada), Cisco Systems (which has proprietary
products under development due to its acquisition of Clarity Wireless, Inc.),
COM21 (which is attempting to adapt its proprietary cable systems for wireless),
Phasecom and other vendors that may be attracted by recent investments by MCI
Worldcom and Sprint in wireless operations. Stanford Telecommunications (which
manufactures QPSK products) is providing wireless Internet connectivity over
LMDS frequencies and has added telephone service, which is potentially
attractive to new operators. Stanford Telecom is the sole supplier for certain
components used in our products and has indicated that they might stop shipping
these components to us. Our products have been more widely accepted in the
broadband wireless market than in the cable market partly because the adoption
of the DOCSIS standard has not had a significant effect on wireless customers.
We believe that products meeting the present DOCSIS standard will not perform
well over wireless. This belief is based in part on the performance of the
adaptive equalizer in the modem in the presence of multiple signals, the
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<PAGE>
power required from the transceiver in the return path and the probable
disruption of the TDMA return path in the presence of noise or multi-path
propagation. However, there can be no assurance that improvements in
integrated circuit technology, transceiver output power levels or changes in
the DOCSIS TDMA protocol will not allow systems developed for cable to
perform effectively over wireless. One of the DOCSIS compliant vendors might
also modify the DOCSIS equipment to a proprietary non-standard form to work
over wireless.
OTHER COMPETITION
Broadband wireless and cable system operators face competition from
providers of alternative high speed connectivity systems. In the wireless high
speed access market, broadband wireless system operators are in competition with
satellite TV providers. In telephony networks, Digital Subscriber Line ("xDSL")
technology enables digitally compressed video signals to be transmitted through
existing telephone lines to the home. Market acceptance of xDSL, or other wired
technologies such as Integrated Services Digital Network ("ISDN"), or satellite
technologies such as DBS, could decrease the demand for our products. Recently,
several companies, including Compaq, Intel, Microsoft, 3Com, Alcatel, Lucent,
several RBOCs, MCI and others announced the formation of a group focused on
accelerating the pace of ADSL ( a form of xDSL) service. Further, if any
competing architecture or technology were to limit or halt the deployment of
coaxial or hybrid fiber-coax ("HFC") systems, our business could be materially
adversely affected.
To be successful, we must respond promptly and effectively to the
challenges of new competitive products and tactics, alternate technologies,
technological changes and evolving industry standards. We must continue to
develop products with improved performance over two-way wireless transmission
facilities. There can be no assurance that we will meet these challenges.
INTELLECTUAL PROPERTY
PATENTS
We rely on a combination of patent, trade secret, copyright and
trademark laws and contractual restrictions to establish and protect
proprietary rights in our products. We have received five patents from the
U.S. Patent and Trademark Office: 5,586,121; 5,818,845; 5,828,655; 5,859,852;
and RE 35,774, which is a re-issuance of our earlier U.S. Pat. 5,374,304.
These patents are directed to various aspects of cable and wireless modems
and headend systems. In addition, the U.S. Patent and Trademark Office has
issued formal notices of allowances for nine pending patent applications
which are also directed to cable and wireless modems and headend systems, as
well as various modulation and transmission schemes used in cable modem
systems. We have other patent applications pending before the U.S. Patent and
Trademark Office. We have patent applications pending in a number of foreign
jurisdictions as well. We do not know whether any pending or foreign patent
applications will result in the issuance of patents.
We cannot assure you that our patents will not be challenged or
invalidated, or that the claims allowed in our patents will be of sufficient
scope or strength to provide meaningful protection or commercial advantage to
us. We have initiated one patent infringement litigation to enforce our patent
rights, and it resulted in a settlement in which we granted licenses to the
defendants containing certain terms that are in some respects favorable for
them, including a right of first refusal to purchase our patents that we granted
to one defendant (Com21, Inc.) in the event that in the future we propose to
sell our patents (separately or together with our other assets) to any third
party (See Item 3 "Legal Proceedings"). We do not know whether we will bring
litigation in the future in an effort to assert our patent rights, or whether
other companies will bring litigation challenging our patents. Any such
litigation could be time consuming and costly for us and could result in our
patents being held invalid or unenforceable. Furthermore, even if the patents
are upheld or are not challenged, third parties might be able to develop other
technologies or products without infringing any such patents.
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<PAGE>
SOFTWARE PROTECTION
We have entered into confidentiality and invention assignment agreements
with our employees, and we enter into non-disclosure agreements with certain of
our suppliers, distributors and customers, in order to limit access to and
disclosure of our proprietary information. There can be no assurance that these
contractual arrangements or the other steps we take to protect our intellectual
property will prove sufficient to prevent misappropriation of our technology or
deter independent third-party development of similar technologies. The laws of
certain foreign countries may not protect our products or intellectual property
rights to the same extent as do the laws of the United States.
INFRINGEMENT
We have in the past, received, and may in the future receive, notices from
third parties claiming that our products, software or asserted proprietary
rights infringe the proprietary rights of third parties. We expect that
developers of wireless and cable modems will be increasingly subject to
infringement claims as the number of products and competitors in our market
grows. While we are not currently subject to any such claim, any future claim,
with or without merit, could be time consuming, result in costly litigation,
cause product shipment delays or require us to enter into royalty or licensing
agreements. Such royalty or licensing agreements might not be available on terms
acceptable to us or at all.
In the future, we may also file lawsuits to enforce our intellectual
property rights, to protect our trade secrets or to determine the validity and
scope of the proprietary rights of others. Such litigation, whether successful
or not, could result in substantial costs and diversion of resources. As
indicated above, we were engaged during 1998 in an infringement lawsuit that we
brought against two third parties. In 1999, in order to stop the diversion of
resources caused by the litigation, we entered into a settlement pursuant to
which the defendants obtained licenses to our products on terms that in certain
respects were favorable to the defendants (See "--Patents" above and Item 3
"Legal Proceedings" below). Nonetheless, we may find it necessary to institute
further infringement litigation in the future.
EMPLOYEES
As of December 31, 1998, we had 87 full-time employees. None of our
employees is represented by a collective bargaining unit with respect to his or
her employment, and we have never experienced an organized work stoppage. As of
April 30, 1999, the number of full- time employees had been reduced to 32, due
primarily to the reduction in workforce we implemented during the first quarter
of 1999. We used consultants heavily to supplement our workforce and as of April
30, 1999 we had 14 consultants in various areas.
ITEM 2. PROPERTIES
We currently sublease approximately 55,000 square feet of office, research
and development and manufacturing space in San Jose, California. The sublease
expires in April 2004, and we have an option to extend the term of the lease
through October 2009. We also lease approximately 900 square feet of office
space in Tinton Falls, New Jersey and approximately 1,000 square feet of office
space in Atlanta, Georgia. Both leases expire in 1999. We believe our facilities
are in excess of our needs. As of May 1999, our San Jose facility was
significantly underutilized, and attempts to sublease the excess space have been
unsuccessful.
ITEM 3. LEGAL PROCEEDINGS
CLASS ACTION LITIGATION
In June 1998, five class action lawsuits were filed in San Mateo County
Superior Court, California against us, our five directors (one of whom is an
officer), two former officers and one former director. The
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<PAGE>
lawsuits were brought on behalf of purchasers of our Common Stock during the
class period commencing November 12, 1997 (the date of our initial public
offering) and ending June 1, 1998. In July 1998, a sixth class action lawsuit
was filed in the same court against the same defendants, although the class
period was extended to June 18, 1998. All six lawsuits also named as
defendants the underwriters in our initial public offering, but the
underwriters have since been dismissed from the cases.
The complaints in these lawsuits claim that we and the other defendants
violated the anti-fraud provisions of the California securities laws, alleging
that the financial statements we used in connection with our initial public
offering and the financial statements we issued subsequently during the class
period, as well as related statements made on our behalf during the initial
public offering and subsequently regarding our past and prospective financial
condition and results of operations, were false and misleading. The complaints
also allege that we and the other defendants caused these misrepresentations to
be made in order to inflate the price of our stock for the initial public
offering and during the class period. We and the other defendants denied the
charges of wrongdoing.
In March 1999, the parties entered into an agreement in principle to settle
these lawsuits, as indicated below.
In July and August 1998, two class action lawsuits were filed in the U.S.
District Court for the Northern District of California. Both of these federal
class action lawsuits were brought against the same defendants as the six state
court class actions referred to above, except that the second federal class
action lawsuit also named as a defendant PwC, our former independent auditors.
(The underwriters in our initial public offering were named as defendants in the
first federal class action lawsuit but were subsequently dismissed.) The class
period for the first federal class action lawsuit is from November 12, 1997 to
June 1, 1998, and the class period in the second class action lawsuit extends to
June 17, 1998. The complaints in both federal class action lawsuits claim that
we and the other defendants violated the anti-fraud provisions of the federal
securities laws, on the basis of allegations that are similar to those made by
the plaintiffs in the state class action lawsuits. We and the other defendants
denied these charges of wrongdoing.
We believe that the state and federal class action lawsuits hurt our
business during the latter part of 1998, made it more difficult for us to
attract and retain employees, disrupted our management, sales and marketing,
engineering and research and development staffs, contributed to our inability
during the year to complete the restatement of our financial statements and
adversely affected the sales of our products and services.
In March 1999, we and the other parties to the state class action lawsuits
and the federal class action lawsuits (other than PwC) reached an agreement in
principle to settle the lawsuits. The agreement is subject to the parties'
entering into a binding stipulation of settlement and approval by the U.S.
District Court for the Northern District of California. Under the agreement in
principle, (i) our insurers would pay $8.8 million on our behalf (and on behalf
of the other officer and director defendants), (ii) we would issue 3.0 million
shares of our Common Stock to the plaintiffs (the number of shares would be
increased proportionately to the extent that there are more than 10.5 million
shares of our Common Stock outstanding on the date of distribution so that, as
of such date, the plaintiffs would hold approximately 22.6% of all of the shares
of our Common Stock that are then outstanding), (iii) if we are acquired within
nine months after March 9, 1999, the date of the agreement in principle, then,
in addition to the consideration referred to in (i) and (ii), we would pay to
the plaintiffs an amount equal to 10% of the consideration received by our
stockholders in the acquisition. As a result of the agreement in principle and a
related agreement between us and our insurers, we have paid, and will not be
reimbursed by our insurers for, $1.2 million in attorney's fees and other
litigation expenses that would otherwise be covered by our insurance, and we
will not have insurance coverage for the attorney's fees and expenses relating
to the settlement that we incur in the future.
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SEC INVESTIGATION
In October 1998, the Securities and Exchange Commission began a formal
investigation of us and unidentified individuals with respect to our financial
statements and public disclosures. We have been producing documents in response
to the Securities and Exchange Commission's subpoena and are cooperating with
the investigation. A number of current and former officers and employees and
outside directors have testified or may testify before the Securities and
Exchange Commission's staff.
PATENT LITIGATION
In January 1998, we brought a lawsuit in the U.S. District Court for the
Eastern District of Virginia against Com21, Inc. and Celestica, Inc. in which we
alleged that the defendants infringed our patents. In response to our lawsuit,
Com21 initiated a declaratory judgment action six days later in the U.S.
District Court for the Northern District of California to obtain a declaration
that our patents are invalid and unenforceable and that in any event Com21 did
not infringe them. In February 1998, the action in the Eastern District of
Virginia was transferred to the Northern District of California, and the two
actions were consolidated. Pre-trial discovery continued in the consolidated
action until September 1998 when the parties agreed to stay the proceedings
while they attempted to reach a settlement. In January 1999, the parties entered
into a settlement agreement and the actions were dismissed. Pursuant to the
settlement, we granted Com21 and Celestica a nonexclusive license on our patents
under which they may be required to pay royalties in the event that they sell
certain products in the future, subject to certain contingencies, and we granted
Com21 a right of first refusal to purchase our patents in the event that we
propose in the future to sell our patents (whether separately or together with
our other assets) to any third party. The Company has agreed to pay its legal
counsel in this action, as a partial contingency fee (in return for such
counsel's acceptance of reduced current legal fees), an amount equal to 50% of
any royalties that the Company receives from its license with the defendants in
the litigation (but not in excess of $3,000,000). To date the Company has
received virtually no royalties from the license.
SUBSEQUENT LAWSUIT: FILED BY PACIFIC MONOLITHICS
In March 1999, Pacific Monolithics, Inc. (which had filed a voluntary
petition under Chapter 11 of the U.S. Bankruptcy Code and is suing as
debtor-in-possession) filed a lawsuit in Santa Clara County Superior Court,
California against us, our five directors (one of whom is an officer), a former
director (who was subsequently dismissed), a former officer and PwC. The lawsuit
concerns an agreement which we entered into in March 1998 to acquire Pacific
Monolithics through a merger, which acquisition was never consummated. The
complaint alleges that we induced Pacific Monolithics to enter into the
agreement by providing it with our financial statements, and by making other
representations concerning our financial condition and results of operations,
which were false and misleading, and further alleges that we wrongfully failed
to consummate the acquisition. The complaint claims the defendants committed
breach of contract and breach of the implied covenant of good faith and fair
dealing, as well as fraud and negligent misrepresentation. The complaint seeks
compensatory and punitive damages according to proof, plus attorneys' fees and
costs. The plaintiff has attempted to initiate discovery, which defendants have
opposed on the basis that the plaintiff and the Company had agreed that any
disputes would be submitted to arbitration. The defendants have filed a motion
to compel arbitration and to stay the court action. The Company does not
believe, based on current information (which is only preliminary, since
discovery has not commenced in the litigation), that the outcome of this
litigation will have a material adverse impact on the Company's financial
statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of our security holders during 1998.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
MARKET INFORMATION FOR COMMON STOCK
Our Common Stock was traded on the Nasdaq National Market under the symbol
"HYBR" during the period from our initial public offering on November 12, 1997
through June 16, 1998. The high and low closing sales prices indicted below are
as reported on the Nasdaq National Market.
<TABLE>
<CAPTION>
HIGH LOW
-------- -------
<S> <C> <C>
Fourth Quarter 1997 $24 1/4 $9 1/4
First Quarter 1998 $13 $4 1/8
Second Quarter 1998
(through June 16, 1998) $ 8 $2 3/16
</TABLE>
On June 17, 1998, trading in our Common Stock was suspended by the Nasdaq
National Market in response to our independent auditors, PwC, withdrawing their
reports on our 1997 financial statements. The suspension continued until
December 1, 1998, when our Common Stock was delisted by the Nasdaq National
Market due to continuing noncompliance with listing requirements. Since December
1, 1998, our stock has been traded, without our consent or approval, in the
over-the-counter market on the Pink Sheets. During December 1998, the high and
low closing prices of our Common Stock on the Pink Sheets was $3/4 and $1/8,
respectively. On June 1, 1999, the closing price of our Common Stock on the Pink
Sheets was $2 1/8.
STOCKHOLDERS
As of February 27, 1998, there were approximately 183 holders of record of
our Common Stock
DIVIDENDS
We have not paid any cash dividends on our capital stock to date. We
currently anticipate that we will retain any future earnings for use in our
business and do not anticipate paying any dividends in the foreseeable future.
The terms of a $5.5 million senior secured convertible debenture (the "$5.5
Million Debenture") prohibit us from paying any cash dividends for so long as
the $5.5 Million Debenture remains outstanding.
RECENT SALES OF UNREGISTERED SECURITIES
We did not sell any of our securities within 1998 which were not registered
under the Securities Act, except for the following issuances of shares of our
Common Stock upon the exercise of stock options that were made under exemptions
provided under Rule 701 under the Securities Act: A total of 94,968 shares of
Common Stock were issued, 43,000 to former officers.
USE OF INITIAL PUBLIC OFFERING PROCEEDS
The Form S-1 Registration Statement (SEC File No. 333-36001) related to our
initial public offering of Common Stock was declared effective by the SEC on
November 11, 1997. A total of 3,105,000 shares of
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Common Stock was registered with the SEC, which consisted of 2,836,053 shares
registered on our behalf (with an aggregate offering price of $39,705,000)
and 268,947 shares registered on behalf of certain of our stockholders (with
an aggregate offering price of $3,765,000). The offering took place on
November 12, 1997, and all 2,836,053 and 268,947 shares of Common Stock being
offered by us and certain stockholders of ours, respectively, were sold at
the offering price through a syndicate of underwriters managed by NationsBanc
Montgomery Securities and UBS Securities.
We and the selling stockholders paid to the underwriters an underwriting
discount totaling $2,779,000 and $264,000, respectively, in connection with the
offering. We estimate that we incurred additional expenses of approximately
$1,184,000 in connection with the offering. Thus the net offering proceeds to us
and the selling stockholders were approximately $35,737,000 and $3,502,000,
respectively. The underwriting discount and the other offering expenses were not
made directly or indirectly to any of our directors or officers (or their
associates), or to persons owning 10% or more of any class of equity securities
or to any other affiliates of ours.
Through December 31, 1998 the net offering proceeds to us have been
utilized as follows:
<TABLE>
<CAPTION>
Direct or indirect payments to
directors, officers or their
associates; to persons owning
ten percent or more of any
class of our equity securities; Direct or indirect
Use and to our affiliates payments to others
- ------------------------- ------------------------------ -------------------
<S> <C> <C>
Construction of plant, -- --
building and facilities
Purchase and installation of -- $ 3,817,000
machinery and equipment
Purchase of real estate -- --
Acquisition of other business(es) -- --
Repayment of indebtedness $ 1,371,000 $ 5,627,000
Working capital -- $20,960,000
Temporary investment in -- $ 3,962,000
Alex. Brown Investment Account
and General Bank Account
Other purposes -- --
</TABLE>
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ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with
the Company's financial statements and related notes thereto and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere in this Form 10-K.
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------------------
1998 1997(1) 1996 1995 1994
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales $ 12,418 $ 4,120 $ 2,962 $ 630 $ 668
Cost of sales 14,046 8,899 3,130 761 1,362
-------- -------- -------- -------- --------
Gross profit (1,628) (4,779) (168) (131) (694)
-------- -------- -------- -------- --------
Operating expenses:
Research and development 7,771 7,831 5,076 3,862 1,251
Sales and marketing 3,642 4,678 1,786 390 348
General and administrative 8,933 2,964 1,714 748 533
Asset impairment charge 1,250 - - - -
Write off of technology license 1,283 - - - -
-------- -------- -------- -------- --------
Total operating expenses 22,879 15,473 8,576 5,000 2,132
-------- -------- -------- -------- --------
Loss from operations (24,507) (20,252) (8,744) (5,131) (2,826)
Interest income and other expense, net 779 316 257 166 30
Interest expense (897) (1,666) (28) (304) (101)
-------- -------- -------- -------- --------
Net loss $(24,625) $(21,602) $ (8,515) $ (5,269) $ (2,897)
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Basic and diluted net loss per share $ (2.37) $ (6.10) $ (3.36) $ (2.37) $ (1.30)
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Shares used in basic and diluted
per share calculation (2) 10,410 3,541 2,535 2,223 2,226
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
<CAPTION>
December 31,
------------------------------------------------------------
1998 1997(1) 1996 1995 1994
---------- ---------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and
short-term investments $ 3,966 $ 27,143 $ 6,886 $ 3,353 $ 1,426
Working capital (812) 23,795 6,944 3,149 1,129
Total assets 15,420 39,065 10,539 4,586 1,892
Long-term debt 419 654 472 228 2,108
Total stockholders' equity (deficit) 2,702 27,303 7,709 3,661 (708)
</TABLE>
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(1) See Note 1 of Notes to Financial Statements for information concerning
the restatement of our financial statements. All financial data
presented in the table above as of and for the year ended December 31,
1997 reflect such restatement.
(2) See Note 2 of Notes to Financial Statements for an explanation of the
number of shares used to compute basic and diluted net loss per share.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THE DISCUSSION IN THIS ITEM 7 SHOULD BE READ IN CONJUNCTION WITH THE
FINANCIAL STATEMENTS AND THE NOTES THERETO INCLUDED IN ITEM 8 OF THIS REPORT ON
FORM 10-K. THE DISCUSSION IN THIS ITEM 7 CONTAINS FORWARD-LOOKING STATEMENTS
RELATING TO FUTURE EVENTS OR FINANCIAL RESULTS, SUCH AS STATEMENTS INDICATING
THAT "WE BELIEVE," "WE EXPECT," "WE ANTICIPATE" OR "WE INTEND" THAT CERTAIN
EVENTS MAY OCCUR OR CERTAIN TRENDS MAY CONTINUE. OTHER FORWARD-LOOKING
STATEMENTS INCLUDE STATEMENTS ABOUT THE FUTURE DEVELOPMENT OF PRODUCTS OR
TECHNOLOGIES, MATTERS RELATING TO OUR PROPRIETARY RIGHTS, YEAR 2000 COMPLIANCE,
FACILITIES NEEDS, OUR LIQUIDITY AND CAPITAL NEEDS AND OTHER STATEMENTS ABOUT
FUTURE MATTERS. ALL THESE FORWARD-LOOKING STATEMENTS INVOLVE RISKS AND
UNCERTAINTIES. YOU SHOULD NOT RELY TOO HEAVILY ON THESE STATEMENTS; ALTHOUGH
THEY REFLECT THE GOOD FAITH JUDGMENT OF OUR MANAGEMENT, THEY INVOLVE FUTURE
EVENTS THAT MIGHT NOT OCCUR. WE CAN ONLY BASE SUCH STATEMENTS ON FACTS AND
FACTORS THAT WE CURRENTLY KNOW. OUR ACTUAL RESULTS COULD DIFFER MATERIALLY FROM
THOSE IN THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF VARIOUS FACTORS,
INCLUDING THOSE SET FORTH UNDER "RISK FACTORS" AND ELSEWHERE IN THIS REPORT ON
FORM 10-K.
OVERVIEW
GENERAL
We are a broadband access equipment company that designs, develops,
manufactures and markets wireless and cable systems that provide high speed
access to the Internet and corporate intranets for both businesses and
consumers. Our products remove the bottleneck over the local connection to the
end-user which causes slow response time for those accessing bandwidth-intensive
information. Our Series 2000 product line consists of secure headend routers,
wireless and cable modems and management software for use with either wireless
transmission or cable TV facilities.
From our inception in June 1990 until September 1996, we focused on the
design, development, manufacturing and market introduction of the first two
generations of Hybrid's Series 1000 product line. These product generations
offered 5 and 10Mbps access speeds for downstream data. In October 1996, we
introduced our third generation product line, the Series 2000, which provides
30Mbps downstream access speeds. During the three years ended December 31, 1997,
we sold a limited number of points of presence headend equipment ("headends")
and cable modems from both product series. We expect to generate substantially
all of our future sales from our Series 2000 products, enhancements to these
products, new products and related support and networking services. To date, net
sales include principally product sales and, to a lesser extent, support and
networking services.
We sell our products primarily in the United States. Our customers
include broadband wireless system operators, cable system operators, ISPs,
resellers and certain distributors and communications equipment resellers.
Historically, a small number of customers has accounted for a substantial
portion of our net sales, and we expect the trend to continue. As a result,
we have experienced, and expect to continue to experience, significant
fluctuations in our results of operations on a quarterly and an annual basis.
The sales cycle for our products has been lengthy, generally lasting three to
nine months, and is subject to a number of significant risks, including
customers' budgetary constraints and internal acceptance reviews. Because our
18
<PAGE>
sales cycle may be long and uncertain, and because we depend on relatively
few customers who place relatively large orders, any delay or loss of an
order that is expected to be received in a quarter can have a major effect on
our sales and operating results for that quarter. The same is true of any
failure of a customer to pay for products on a timely basis.
The market for high speed network connectivity products and services is
intensely competitive and is characterized by rapid technological change, new
product development and product obsolescence, and evolving industry
standards. Our ability to develop and offer competitive products on a timely
basis that satisfy industry demands, such as for two-way QPSK, or industry
standards such as DOCSIS, could have a material effect on our business. In
addition, the market for our products has historically experienced
significant price erosion over the life of a product, and we have experienced
and expect to continue to experience pressure on our unit average selling
prices. While we have initiated cost reduction programs to offset pricing
pressures on our products, there can be no assurance that we will keep pace
with competitive price pressures or improve our gross margins. If we are
unable to continue to reduce costs quickly enough, our profitability will be
adversely affected. Our profitability is also affected by the sales mix of
headends and modems. Our single-user modems generally have lower margins than
our multi-user modems, both of which have lower margins than our headend
routers. Due to current customer demand, we anticipate that the sales mix of
modems will be weighted toward lower-margin single-user modems in the
foreseeable future. As a result, our gross margins, and our business, could
be adversely affected.
RESTATEMENT OF OUR FINANCIAL STATEMENTS
In May and June 1998, we and PwC, our independent auditors, engaged in a
review of our financial statements for 1997 and the first quarter of 1998. On
June 18, 1998, we announced that PwC had notified us that its audit reports on
our 1997 financial statements should no longer be relied upon and that we and
they were continuing to review those financial statements. On July 9, 1998, PwC
resigned as our independent auditors, stating that it believed our 1997
financial statements should be restated but that, although there had been no
disagreements between PwC and us on any matter of our accounting principles, or
practices, financial statement disclosure or auditing procedure, PwC would not
continue as our independent auditors to address the restatement.
In August 1998, we retained AA as our independent auditors. After extensive
work in examining our 1997 financial statements, AA resigned as our independent
auditors on November 24, 1998. AA informed us that, in its view, material
weaknesses existed in our internal controls of a nature that prevented AA from
being able to form an opinion on our conclusions as to the appropriate timing
and amount of revenue recognition for the purposes of our 1997 financial
statements. AA also stated that, during the course of its work, it had reached
the conclusion that it needed to expand significantly the scope of its audit,
which it did with our approval and cooperation, and that, while AA did not
complete its audit, it concluded that our 1997 financial statements were
materially misstated. AA confirmed that there had been no disagreements between
AA and us on any matter of our accounting principles and practices, financial
statement disclosure or auditing procedure.
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<PAGE>
In December 1998, we engaged Hein as our independent auditors. During the
review of our financial statements in conjunction with Hein (and earlier with
PwC and AA), we became aware of errors and irregularities that caused our
financial statements for 1997 and the first quarter of 1998 to be misstated,
particularly with respect to the timing and amount of our sales in 1997 and the
first quarter of 1998. We also concluded that the financial effects of warrants
issued by us in 1997 had not been properly reflected in our financial
statements. Our financial statements for 1997 and the first quarter of 1998 have
been restated to correct these errors. As indicated in Note 1 to the Financial
Statements in Item 8 of this report, as a result of the restatement net sales
for 1997 were reduced from $14,270,000 to $4,120,000 (resulting in gross loss of
$4,799,000 rather than gross profit of $2,012,000), net loss increased from
$13,590,000 to $21,602,000 and accumulated deficit increased from $30,932,000 to
$38,944,000. Our basic and diluted loss per share increased from $3.84 to $6.10.
For additional information regarding the restatement, see Note 1 to the
Financial Statements in Item 8 of this report.
In June 1999, Hein completed its audit of our 1997 and 1998 financial
statements. Those financial statements, and Hein's audit report on them are
included in the Financial Statements and the Notes thereto which appear in Item
8 of this report.
Our inability to issue audited financial statements during the last 12
months has had serious consequences for our business. As a result, the Nasdaq
National Market suspended trading in our Common Stock from June 18, 1998 to
December 1, 1998, at which time our Common Stock was delisted from the Nasdaq
National Market. Primarily due to our announcements regarding the need to
restate our financial statements, a number of class action litigations were
brought in June, July and August 1998, and the Securities and Exchange
Commission initiated a formal investigation in October 1998. We believe these
actions hurt our business during the latter part of 1998, made it more difficult
for us to attract and retain employees, disrupted our management, sales and
marketing, engineering and research and development staffs, contributed to our
inability to complete the restatement of our financial statements during 1998
and adversely affected the sales of our products and services.
REVENUE RECOGNITION
We normally ship our products based upon a bona fide Purchase Order and
Volume Purchase Agreement. The Company generally recognizes its revenue at the
time a transaction is shipped and collection of the resulting account receivable
is probable. Shipments on customer orders with either acceptance criteria,
installation criteria, or rights of return are recognized as revenue only when
the criteria are satisfied according to the contract. Revenue related to
shipments to distributors is normally recognized upon sell through which is
generally signified by receipt of payment for such transactions.
For the Cybermanager 2000, the hardware and software sales are generally
bundled with upgrades, maintenance and system support and service, and sold for
a period of three years. Revenue attributed to hardware is recognized upon
shipment. Revenue attributed to software is recognized over the three year
maintenance, system support and service period. When a maintenance contract is
sold separately, the revenue is recognized ratably over the term of the
maintenance contract, generally on a straight-line basis. Where maintenance
revenue is not separately invoiced, it is unbundled from hardware and software
license revenue and deferred for revenue recognition purposes. Other service
revenue, primarily training and consulting, is generally recognized at the time
the service is performed.
WARRANTY COSTS
We accrue for estimated warranty costs when the related sales revenue is
recognized. Our modem manufacturer, Sharp Corporation, provides a 15 month
warranty on all cable modems manufactured by it. The warranty period begins on
the date the modems are completely assembled. We provide a 12 month warranty on
all headend equipment sold. Actual warranty costs incurred have not differed
materially from those provided.
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NET LOSSES
We incurred net losses for the years ended December 31, 1998, 1997 and 1996
of $24,625,000, $21,602,000 and $8,515,000, respectively. As a result, we had an
accumulated deficit of $63,569,000 as of December 31, 1998. If we are able to
raise additional capital, we would expect to increase in the future our capital
expenditures, as well as our research and development and other operating
expenses, in order to support and expand our operations. There can be no
assurance that we will be able to raise additional capital. Whether or not we
raise such capital, we expect to incur losses for the foreseeable future,
although we may not be able to continue as a going concern without that
additional financing.
DEFERRED TAXES
As of December 31, 1998, we had approximately $27.6 million in gross
deferred tax assets comprised primarily of net operating loss carryforwards and
capitalized research expenditures. We believe that we might not be able to
realize our deferred tax assets, due to uncertainties regarding our future, our
history of net losses and our lack of capital resources. In addition, the
utilization of net operating loss carry forwards may be subject to a substantial
annual limitation due to the "change in ownership" provisions of the Internal
Revenue Code of 1986 and similar state provisions. We will continue to assess
the realizability of the deferred tax assets based on actual and forecasted
operating results. See Note 12 of Notes to Financial Statements.
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RESULTS OF OPERATIONS
The following table sets forth the percentage of net sales represented
by the items in our statements of operations for the periods indicated:
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------
1998 1997(1) 1996
---- ------- ----
<S> <C> <C> <C>
Net sales 100.0% 100.0% 100.0%
Cost of sales 113.1% 216.0% 105.7%
----- ----- -----
Gross loss -13.1% -116.0% -5.7%
----- ----- -----
Operating expenses:
Research and development 62.6% 190.1% 171.4%
Sales and marketing 29.3% 113.5% 60.3%
General and administrative 71.9% 72.0% 57.8%
Asset impairment charge 10.1% - -
Write off technology license 10.3% - -
----- ----- -----
Total operating expenses 184.2% 375.6% 289.5%
----- ----- -----
Loss from operations -197.3% -491.6% -295.2%
Interest income and other expenses, net 6.2% 7.7% 8.7%
Interest expense -7.2% -40.4% -1.0%
----- ----- -----
Net loss -198.3% -524.3% -287.5%
----- ----- -----
----- ----- -----
</TABLE>
(1) See Note 1 of Notes to Financial Statements for information concerning the
restatement of our financial statements. All financial data in the table
above as of and for the year ended December 31, 1997 presented reflect such
restatement.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997.
NET SALES. Net sales for 1998 were $12,418,000, compared to net sales of
$4,120,000 for 1997. The growth in net sales was primarily due to increased unit
shipments of the Series 2000 product line offset in part by price declines on
certain products in connection with volume purchases. In 1998, cable systems
operators accounted for approximately 57% of net sales, broadband wireless
systems operators accounted for 38% of net sales, with ISPs accounting for 5% of
net sales. During 1997, broadband wireless system operators accounted for
approximately 59% of net sales, cable system operators accounted for 39% of net
sales, with ISPs accounting for 2% of net sales. There were no international
sales in 1998. International sales accounted for 13.5% of net sales in 1997. We
had two customers that individually accounted for 25% and 13% of net sales
during 1998. We had two customers that individually accounted for 13% and 12% of
net sales during 1997.
GROSS PROFIT. Gross margin was negative 13.1% and negative 116.0%, in 1998
and 1997, respectively. Gross margin in 1997 reflected an increase in the
inventory provision included in cost of sales by $2.6 million as compared to
1996, largely related to excess inventory levels and to shipments being made
during 1997 in
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transactions that were not recognized as sales (due to restatement of our
financial statements). Such a large inventory provision relative to sales was
not made in 1998, and is not anticipated in future periods. Excluding this
nonrecurring inventory charge, gross margin for 1997 would have been a
negative 40%. The remaining increase in gross margin from 1997 was primarily
due to efficiencies resulting from increased unit shipments and to decreased
cost per unit.
RESEARCH AND DEVELOPMENT. Research and development expenses include ongoing
headend, software and cable modem development expenses, as well as design
expenditures associated with product cost reduction programs and improving
manufacturability of our existing products. Research and development expenses
were $7,771,000 and $7,831,000 during the years ended December 31, 1998 and
1997, respectively, representing 62.6% and 190.1% of net sales, respectively. If
we are able to obtain additional financing (see "--Liquidity and Capital
Resources" below), we would expect to increase our investment in research and
development programs in future periods, focusing on wireless technologies, cost
improvement and software enhancements.
SALES AND MARKETING. Sales and marketing expenses consist primarily of
salaries and related payroll costs of sales and marketing personnel,
commissions, advertising, promotions and travel. Sales and marketing expenses
were $3,642,000 and $4,678,000 during the years ended December 31, 1998 and
1997, respectively, representing 29.3% and 113.5% of net sales, respectively.
The decrease in sales and marketing expenses in absolute dollars was
principally due to decreased headcount and related payroll costs and
marketing and promotion costs incurred in 1997 in connection with our Series
2000 product line. If we are able to obtain additional financing (see
"--Liquidity and Capital Resources" below), we would expect sales and
marketing expenses to increase in the future.
GENERAL AND ADMINISTRATIVE. General and administrative expenses consist
primarily of executive personnel salaries, provision for doubtful accounts,
travel expenses, legal fees and costs of outside services. General and
administrative expenses were $8,933,000 and $2,964,000 during the years ended
December 31, 1998 and 1997, respectively, representing 71.9% and 72.0% of net
sales, respectively. The increase in absolute dollars in 1998 was due to
increased legal costs and reserves in connection with the various litigations in
which we were engaged during 1998, including the accrual of $1,547,000 related
to the class action settlement (see Item 3 "Legal Proceedings"), and to support
our patent program, increased headcount and related payroll costs and increased
expenses for professional and other fees required of a publicly traded company
and to support the aforementioned restatement of our financial statements.
OTHER CHARGES. Due to the underutilization of our San Jose headquarters,
operating expenses include a fourth quarter charge of $1,250,000 reflecting the
impairment of leasehold improvements and office furniture and fixtures.
Operating expenses also include a nonrecurring charge of $1,283,000 relating to
the write off of the rights to certain technology acquired in November 1997.
INTEREST INCOME (EXPENSE) AND OTHER EXPENSE, NET. We incurred net interest
expense during 1998 and 1997 of $118,000 and $1,350,000, respectively. Net
interest expense incurred in 1998 decreased in comparison to 1997 due (i) to
interest income on increased average cash and cash equivalents resulting
primarily from our initial public offering of Common Stock in November 1997, and
(ii) to noncash interest expense of $870,000 incurred in the fourth quarter of
1997 related to issuance of warrants with respect to certain loans obtained in
September 1997.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996.
NET SALES. The restated Net sales for the year ended December 31, 1997,
were $4,120,000, compared to net sales of $2,962,000 for the same period in
1996. The growth in net sales was primarily due to
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increased unit shipments as a result of the introduction of the Series 2000
product line in October 1996 offset in part by price declines on certain
products in connection with volume purchases.
GROSS PROFIT. Gross margin was negative 116.0% and negative 5.7%, in 1997
and 1996, respectively. The inventory provision included in cost of sales
increased by approximately $2.6 million in 1997 compared to 1996, largely
related to excess inventory levels and to shipments being made during 1997 in
transactions that were not recognized as sales (due to restatement of our
financial statements). Excluding this nonrecurring charge, gross margin for 1997
would have approximated a negative 40%. The remaining decrease in gross margin
from 1996 was primarily due to decreases in average selling prices due to volume
purchase arrangements and other promotions.
RESEARCH AND DEVELOPMENT. Research and development expenses were $7,831,000
and $5,076,000 during the years ended December 31, 1997 and 1996, respectively,
representing 190.1% and 171.4% of net sales, respectively. Research and
development expenses grew in absolute dollars as a result of increased staffing
and associated engineering costs related to new and existing product
development.
SALES AND MARKETING. Sales and marketing expenses were $4,678,000 and
$1,786,000 during the years ended December 31, 1997 and 1996, respectively,
representing 113.5% and 60.3% of net sales, respectively. The increase in
sales and marketing expenses in absolute dollars was principally due to
increased headcount and related payroll costs and increased costs for
marketing and promoting the Company's Series 2000 product line, as well as
increased product demonstration costs.
GENERAL AND ADMINISTRATIVE. General and administrative expenses were
$2,964,000 and $1,714,000 during the years ended December 31, 1997 and 1996,
respectively, representing 72.0% and 57.8% of net sales, respectively. The
increase in absolute dollars was due to increased legal costs to support the
Company's patent program and increased headcount and related payroll costs.
INTEREST INCOME (EXPENSE) AND OTHER EXPENSE, NET. We incurred net interest
expense during 1997 of $1,350,000 and earned net interest income of $229,000
during 1996. Net interest expense incurred during 1997 was the result of (i) our
use of capital lease financing to fund a majority of our capital expenditures
and (ii) interest expense (including non cash expense of $870,000 incurred in
the fourth quarter of 1997 related to issuance of warrants with respect to
certain loans obtained in September 1997) incurred on loans obtained to support
working capital requirements. Net interest income earned during 1996 was
primarily due to higher cash balances as a result of Preferred Stock financings
in December 1995 and June 1996, offset in part by the interest expense incurred
on outstanding capital lease obligations.
LIQUIDITY AND CAPITAL RESOURCES
We have historically financed our operations primarily through a
combination of debt, equity and equipment lease financing. Despite our initial
public offering in November 1997 and other debt and equity financing during 1997
in which we raised $42,507,000 in net proceeds, by December 31, 1998, our cash,
cash equivalents and short-term investments had been reduced to $3,451,000 (from
$27,148,000 as of December 31, 1997), our working capital was negative $812,000,
and we are in violation of a covenant (not involving payment of interest or
principal) under the terms of the $5.5 Million Debenture pursuant to which the
holder of the debenture has the right to declare a default.
Net cash used in operating activities was $19,302,000, $21,677,000 and
$8,577,000 during 1998, 1997 and 1996, respectively. The net cash used in
operating activities in 1998 was primarily due to our net loss of $24,625,000,
partially offset by non-cash charges of $6,336,000 and a decrease in net current
assets related to operating activities of $1,013,000. Net cash used in
operations in 1997 was primarily the result of our net loss of $21,602,000 and
an increase of $8,086,000 in inventories to support increased sales, shipments
and
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<PAGE>
orders expected in the fourth quarter of 1997 that were not received, offset
by non-cash charges of $4,966,000 and by increases in accrued liabilities and
accounts payable of $3,062,000 resulting from increased inventory purchases and
operating expenditures. Net cash used in operating activities during 1996 was
primarily due to our net loss of $8,515,000.
Net cash used in investing activities was $3,014,000 and $1,559,000 during
1998 and 1997, respectively. Cash provided by investing activities in 1996 was
$143,000. Aggregate capital expenditures for property and equipment, primarily
computers, leasehold improvements, furniture, fixtures and engineering test
equipment were $3,907,000, $629,000 and $321,000 during 1998, 1997 and 1996,
respectively. The significant increase in capital expenditures in 1998 was
primarily due to leasehold improvements. The Company purchased short-term
investments of $893,000 in 1997 and $11,772,000 in 1998. All short-term
investments were liquidated in 1998. We have funded a substantial portion of our
property and equipment expenditures from direct vendor leasing programs and
third party commercial lease arrangements. At December 31, 1998, we had no
material commitments for capital expenditures.
Net cash used in financing activities of $391,000 in 1998 was primarily
the result of payment of $478,000 on capital lease obligations, partially
offset by net proceeds of $87,000 from issuance of common stock. Net cash
provided by financing activities was $42,508,000 and $12,457,000 during 1997
and 1996, respectively. Net cash provided by financing activities during 1997
was primarily due to our initial public offering and to the debt and
Preferred Stock financings totaling $42,741,000 referred to above and to the
exercise of stock options of $94,000. Cash provided by financing activities
during 1996 resulted from the issuance of convertible debentures and
Preferred Stock.
At December 31, 1998, our only source of liquidity consisted of cash and
cash equivalents of $3,451,000. We had no available line of credit or other
source of borrowings or financing. As indicated above, we were (and are) not
in compliance with certain of the terms of the $5.5 Million Debenture and, as
a result, the holder of the debenture has the right to declare a default
under the debenture at any time. Our obligations under the $5.5 Million
Debenture are collateralized by a security interest in substantially all our
assets. We will need to raise additional capital promptly in order to offset
our expected future operating losses.
To fund our operations during 1999 and continue as a going concern, we are
seeking to raise additional capital through debt or equity financing, but there
is no assurance that we will be able to do so. If we do obtain additional
financing, it may be on terms that would be unfavorable to us and may hurt our
ability to raise further capital in the future.
SEASONALITY AND INFLATION
We do not believe that our business is seasonal or is impacted by
inflation.
RISK FACTORS
AN INVESTMENT IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. YOU
SHOULD CAREFULLY CONSIDER THE RISKS DESCRIBED BELOW AND THE OTHER INFORMATION IN
THIS REPORT ON FORM 10-K BEFORE INVESTING IN OUR COMMON STOCK. THE RISKS
DESCRIBED BELOW ARE NOT THE ONLY ONES WE FACE. ADDITIONAL RISKS THAT WE ARE
AWARE OF OR THAT WE CURRENTLY BELIEVE ARE IMMATERIAL MAY BECOME IMPORTANT
FACTORS THAT AFFECT OUR BUSINESS. IF ANY OF THE FOLLOWING RISKS OCCUR, OR IF
OTHERS OCCUR, OUR BUSINESS, OPERATING RESULTS AND FINANCIAL CONDITION COULD BE
SERIOUSLY HARMED.
WE WILL NEED ADDITIONAL CAPITAL SOON TO CONTINUE IN BUSINESS.
Although we raised over $35 million in net proceeds from our initial public
offering in November 1997, our capital resources are now largely depleted. We
are not in compliance with certain terms of the $5.5 Million Debenture, and, as
a result, the holder of the debenture may declare a default under the debenture
at any time. We currently do not have the capital resources to make such
payment. Should we fail to make payment on demand, the debenture holder may
elect, subject to certain restrictions and limitations, to exercise its security
interest in all our assets, which may involve the seizure and sale of our
assets. In
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<PAGE>
addition to meeting our obligations under the debenture, we need to raise
additional capital in order to continue in operation. Our ability to raise
additional capital has been limited by a number of factors, including (i) our
noncompliance with certain terms of the $5.5 Million Debenture, (ii) our not
having audited financial statements for 1997 or 1998 or a quarterly report
for the first quarter of 1999, (iii) our Common Stock being delisted from the
Nasdaq National Market and not traded on any other public market (except for
a small number of sales on the Pink Sheets which have occurred without our
consent), (iv) the state and federal class action litigation and the
Securities and Exchange Commission investigation that are pending against us
(although we have agreed in principle to settle the class action litigation,
that agreement is not yet final), (v) uncertainty which the foregoing has
caused regarding our financial condition and results of operations, (vi) the
adverse effect which the foregoing has had on sales to our customers, (vii)
the disruption in our management and our employees caused by the foregoing,
including the substantial reduction in force we implemented in February 1999,
(viii) our history of heavy losses and (ix) the other risk factors referred
to herein. We can give no assurance that, within a short period of time, we
will be able to raise the additional capital we need or that any financing we
may be able to obtain will not be on terms that are detrimental to our
business and our ability to raise additional capital.
IT IS NOT CLEAR THAT WE WILL BE ABLE TO RECOVER FROM THE ADVERSE EFFECTS OF
HAVING TO RESTATE OUR FINANCIAL STATEMENTS.
The adverse effects of having to restate our financial statements have
been severe, and there can be no assurance that we will not suffer additional
adverse consequences in the future. The restatement and related issues have
resulted in the resignation of two successive audit firms that were hired by
us, in our continuing for 12 months as a public company without having
audited financial statements, in the multiple class action lawsuits, the
Securities and Exchange Commission investigation and the Pacific Monolithics
litigation referred to in Item 3 "Legal Proceedings" above and in the other
adverse consequences referred to in the preceding paragraph. We do not know
whether additional litigation will arise in the future, or whether other
adverse developments will result, from the difficulties we have encountered
in connection with our financial statements.
OUR LIMITED OPERATING HISTORY AND HEAVY LOSSES MAKE OUR BUSINESS DIFFICULT
TO EVALUATE.
We were organized in 1990 and have had operating losses each year since
then. Our accumulated deficit was $63,569,000 as of December 31, 1998. The
revenue and profit potential of our business is unproven. The market for our
products has only recently begun to develop, is rapidly changing, has an
increasing number of competing technologies and competitors, and many of the
competitors are significantly larger than we are. We have had negative gross
margins in the past and the price pressures on sales of our products continues.
We expect to incur losses for the foreseeable future.
WE FACE LITIGATION RISKS.
As indicated in Item 3 "Legal Proceedings," there are a number of lawsuits
pending against us. The principal lawsuits are the class action lawsuits
referred to on pages 12 and 13. Although we have reached an agreement in
principle to settle these lawsuits, the agreement is subject to the parties'
entering into a binding stipulation of settlement, which has not yet occurred,
and upon the subsequent approval of the settlement by the court in a hearing at
which any persons opposing the settlement will have an opportunity to be heard.
If the settlement is not consummated, we could be subjected to lengthy,
expensive and potentially damaging class action litigation.
It is difficult for us to evaluate what the outcome of the Securities and
Exchange Commission investigation (referred to page 14) will be. Responding to
the investigation has been, and probably will be, expensive and time-consuming
for us. We do not know whether the results of the investigation will be damaging
for us.
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The Pacific Monolithics litigation referred to on page 14 is in its early
stages and is difficult for us to evaluate at this point.
It is possible that we may be exposed to further litigation in the
future, particularly in light of the restatement of our financial statements,
and the adverse developments that have occurred partly as a result of the
restatement (see the two risk factors immediately above). In addition,
litigation may be necessary in the future to enforce our intellectual
property rights or to determine the validity and scope of our patents or of
the proprietary rights of others. Such litigation might result in substantial
costs and diversion of resources and management attention. Furthermore, our
business activities may infringe upon the proprietary rights of others, and
in the past third parties have claimed, and may in the future claim,
infringement by our software or products. Any such claims, with or without
merit, could result in significant litigation costs and diversion of
management attention, and could require us to enter into royalty and license
agreements that may be disadvantageous to us or suffer other harm to our
business. If litigation is successful against us, it could result in
invalidation of our proprietary rights and liability for damages, which could
have a harmful effect on our business. We initiated one patent infringement
litigation to enforce our patent rights, and it resulted in a settlement in
which we granted licenses to the defendants containing terms that are in some
respects favorable to them, including a right of first refusal to purchase
our patents that we granted to one defendant (Com21, Inc.) in the event that
we propose in the future to sell our patents (whether we separately or
together with our other assets) to any third party. (See Item 3 "Legal
Proceedings--Patent Litigation.") Nonetheless, we may find it necessary to
institute further infringement litigation in the future.
RECENT REDUCTIONS IN OUR EXPENDITURES AND IN THE NUMBER OF OUR EMPLOYEES
COULD HURT OUR BUSINESS.
Commencing in the latter part of 1998, we began to reduce our expenditures
on research and development and on other aspects of our business. We also began
to reduce the number of our employees. During the first quarter of 1999 we
implemented a reduction in force that reduced the number of full-time employees
to 32, as compared to 87 full-time employees at December 31, 1998. We used
consultants heavily to supplement our workforce and as of April 30, 1999 we had
14 consultants in various areas. While we believe these reductions were
necessary to conserve our remaining capital resources, they have limited and
delayed the enhancement of our products and our development of new products, and
our sales and marketing efforts have been adversely affected. These limitations
on our activities, (together with the other factors referred to above and
elsewhere herein), have hurt us competitively and may continue to harm our
business in the future. We do not know whether we will be successful in
obtaining sufficient capital resources to expand our business in the future.
MARKET PRESSURE TO REDUCE PRICES MAY HURT OUR BUSINESS.
The market has historically demanded increasingly lower prices for our
products, and we expect downward pressure on the prices of our products to
continue. The list prices for our Series 2000 client modems currently range from
approximately $320 to $480, depending upon features and volume. Customers
wishing to purchase client modems generally must also purchase an Ethernet
adapter for their computer. These prices make our products relatively expensive
for the consumer electronics and the small office or home office markets. Market
acceptance of our products, and our future success, will depend in significant
part on reductions in the unit cost of our client modems. In a number of
instances, the prices of our competitors' products are lower than ours. Our
ability to reduce our prices has been limited by a number of factors, including
our reliance on a single manufacturer of our modems and on single-sources for
certain of the components of our products.
One of the principal objectives of our research and development efforts
has been to reduce the cost of our products through design and engineering
changes, although, as indicated above, we have recently had to reduce the
scope of our research and development efforts due to lack of capital
resources. We have no
27
<PAGE>
assurance that we will be able to redesign our products to achieve substantial
cost reductions or that we will otherwise be able to reduce our manufacturing
and other costs, or that any reductions in cost will be sufficient to improve
our gross margins, which have historically been negative.
We expect that the market price pressure to reduce the prices on our
products will continue to exert downward pressure on our gross margins. Our
gross margins are also affected by the sales mix of our headends and modems. Our
single-user modems generally have lower margins than our multi-user modems, both
of which have lower margins than our headends. We anticipate that, due to
customer demand, the sales mix of our products will continue to be weighted
toward lower-margin single-user modems.
WE RELY ON A SINGLE MANUFACTURER FOR OUR MODEMS AND ON SINGLE-SOURCE
COMPONENTS.
Our Series 2000 client modems are manufactured by Sharp Corporation through
an agreement we have had since early 1997 with Sharp and its distributor, Itochu
Corporation. We have not developed an alternative manufacturing source. Our
inability to develop alternative manufacturing sources has adversely affected
our ability to reduce the manufacturing costs of our modems despite competitive
pressures that have caused us to reduce our selling prices. We expect downward
pressure on the prices of our products to continue. In order for us to compete
effectively in the sale of modems, we will need to reduce our prices, and the
underlying costs, of our modems. As long as Sharp is the only manufacturing
source of our modems, our ability to reduce the manufacturing costs of our
modems may be limited.
We are dependent upon certain key suppliers for a number of the
components for our 64QAM products. For example, we have only one vendor,
BroadCom Corporation, for the 64QAM demodulator semiconductors that are used
in our client modem products, and in past periods these semiconductors have
been in short supply. In 1997, BroadCom announced a program whereby certain
of its technological and product enhancements may be made available to
certain of our competitors before making them available to us, thereby giving
us a competitive disadvantage. Hitachi is the sole supplier of the processors
used in certain of our modems. Stanford Telecom, which is a competitor for at
least one of our broadband wireless products, is currently the sole supplier
for certain components used in our products and has indicated that they might
stop supplying these components to us, although it has not yet done so. There
can be no assurance that these and other single-source components will
continue to be available to us, or that deliveries of them to us will not be
interrupted or delayed (due to shortages or other factors). Having
single-source components also makes it more difficult for us to reduce our
cost for these components and makes us vulnerable to price increases by the
component manufacturer. Any significant interruption or delay in the supply
of components for our products or any increase in our costs for components,
or our inability to reduce component costs, could hurt our business.
WE ARE IN AN INTENSELY COMPETITIVE MARKET, AND WE COMPETE WITH MUCH LARGER
COMPANIES.
Our market is intensely competitive, and we expect even more competition in
the future. The principal competitive factors in this market include:
- product performance and features including both downstream and
upstream transmission capabilities,
- reliability and stability of operation,
- breadth of product line,
- sales and distribution capability,
- technical support and service,
- relationships with cable and broadband wireless system operators
and ISPs,
28
<PAGE>
- meeting standards compliance and
- general industry and economic conditions.
While we believe our products and services are competitive with or superior
to those of our competitors, we have been hampered by a lack of resources, by
disruptions resulting from management and personnel changes, by uncertainties
caused by our financial reporting difficulties referred to at the beginning of
this report, and by our competitors having established relationships with
principal cable companies, wireless operators, and ISPs, including @Home.
Although our products have been particularly well received in the broadband
wireless market, financial difficulties among our wireless customers have
limited our sales to and collections from these customers until recently. In
addition, conditions in our market could change rapidly and significantly as a
result of technological changes, and the development and market acceptance of
alternative technologies could decrease the demand for our products or render
them obsolete. Similarly, the continued emergence or evolution of industry
standards or specifications may put us at a disadvantage in relation to its
competitors. There can be no assurance that we will be able to compete
successfully in the future.
In general, our competitors are producers of asymmetric cable modems and
other types of cable modems and other broadband access products. Most of our
competitors are substantially larger and have greater financial, technical,
marketing, distribution, customer support and other resources, as well as
greater name recognition and access to customers, than we have. Many of our
competitors are in a better position to withstand any significant reduction in
capital spending by cable or broadband wireless system operators.
CABLE MODEM COMPETITORS. Our competitors in the cable modem market include
Cisco Systems, Com21, Terayon, Nortel Networks, Motorola, General Instrument and
3Com and its subsidiary U.S. Robotics. Other cable modem competitors include
Phasecom, Scientific-Atlanta, Toshiba and Zenith Electronics, as well as a
number of smaller, more specialized companies. Certain competitors have
established relationships in the cable industry and with @Home, which is the ISP
for a number of major cable operators, and have more experience than we have in
selling two-way cable transmission products. Some of these competitors have
entered into partnerships with computer networking companies and with @Home that
may give such competitors greater visibility in this market. A number of
competitors have already introduced or announced high speed connectivity
products that are priced lower than ours, and certain other competitors are more
focused on and experienced in selling and marketing two-way cable transmission
products.
Certain of our competitors have established relationships with cable system
operators and telephone companies ("telcos"), and ISPs, including @Home, and,
based on these relationships, may have more direct access to the decision-makers
of such cable system operators and telcos. In addition, we could face potential
competition from certain of our suppliers, such as Sharp, if it were to launch
or license competitive modems for sale to others.
The adoption of the DOCSIS cable standard by large cable operators has
adversely affected our ability to sell to cable customers, particularly new
customers. Further, our products are not compatible with headend equipment and
modems of other suppliers of broadband Internet access products, including
DOCSIS products, and, as a result, potential customers who wish to purchase
broadband Internet access products from multiple suppliers may be reluctant to
purchase our products.
WIRELESS CABLE COMPETITORS. Our principal competitors in the wireless
broadband wireless market include Nortel Networks (which is active in Canada),
Cisco Systems (which has proprietary products under development due to its
acquisition of Clarity Wireless, Inc.), COM21 (which is attempting to adapt its
proprietary cable systems for wireless), Phasecom and other vendors that may be
attracted by recent investments by MCI Worldcom and Sprint in wireless
operations. Stanford Telecommunications (which manufactures QPSK products) is
providing wireless Internet connectivity over LMDS frequencies and has
29
<PAGE>
added telephone service, which is potentially attractive to new operators.
Stanford Telecom is the sole supplier for certain components used in our
products and has indicated that they might stop shipping these components to
us. Our products have been more widely accepted in the broadband wireless
market than in the cable market partly because the adoption of the DOCSIS
standard has not had a significant effect on wireless customers. We believe
that products meeting the present DOCSIS standard will not perform well over
wireless. This belief is based on the performance of the adaptive equalizer
in the modem in the presence of multiple signals, the power required from the
transceiver in the return path and the probable disruption of the TDMA return
path in the presence of noise or multi-path propagation. However, there can
be no assurance that improvements in integrated circuit technology,
transceiver output power levels or changes in the DOCSIS TDMA protocol will
not allow systems developed for cable to perform effectively over wireless.
One of the DOCSIS compliant vendors might also modify the DOCSIS equipment to
a proprietary non-standard form to work over wireless.
OTHER COMPETITION. Broadband wireless and cable system operators face
competition from providers of alternative high speed connectivity systems. In
the wireless high speed access market, broadband wireless system operators are
in competition with satellite TV providers. In telephony networks, xDSL
technology enables digitally compressed video signals to be transmitted through
existing telephone lines to the home. Market acceptance of xDSL, or other wired
technologies such as ISDN, or satellite technologies, such as DBS, could
decrease the demand for our products. Recently, several companies, including
Compaq, Intel, Microsoft, 3Com, Alcatel, Lucent, several RBOCs, MCI and others
announced the formation of a group focused on accelerating the pace of ADSL
service. Further, if any competing architecture or technology were to limit or
halt the deployment of coaxial or HFC systems, our business could be materially
adversely affected.
To be successful, we must respond promptly and effectively to the
challenges of new competitive products and tactics, alternate technologies,
technological changes and evolving industry standards. We must continue to
develop products with improved performance over two-way wireless transmission
facilities. There can be no assurance that we will meet these challenges.
EVOLVING INDUSTRY STANDARDS, COMPETING TECHNOLOGIES AND TECHNOLOGICAL
CHANGES MAY HURT OUR BUSINESS.
Our products are not in compliance with the DOCSIS standard that has been
adopted by a number of large cable operators, and this has adversely affected
our ability to sell to cable customers, particularly new customers. Further, our
products are not compatible with headend equipment and modems of other suppliers
of broadband Internet access products, including DOCSIS products, and, as a
result, potential customers who wish to purchase broadband Internet access
products from multiple suppliers may be reluctant to purchase our products. Our
products are not in compliance with the DAVIC specifications that are supported
in Europe. The emergence of these standards has hurt our business, and the
adoption of other industry standards in the future could have a further adverse
effect.
There are a number of competing technologies for providing high speed
internet access. Alternative high speed connectivity technologies include
wired technologies such as xDSL and ISDN. As indicated in "Competition"
above, several large companies have announced the formation of a group to
accelerate the pace of ADSL service. To the extent that customers view these
or other alternative technologies as providing faster access or greater
reliability or cost-effectiveness, sales of our products would be adversely
affected.
The market for high speed Internet access products is characterized by
rapidly changing technologies and short product life cycles. The rapid
development of new competing technologies increases the risk that the
competitiveness of our products could be adversely affected. Future advances in
technology may not be beneficial to, or compatible with, our business and
products, and we might not be able to respond to the advances, or our response
might not be timely or cost-effective. Market acceptance of new technologies and
30
<PAGE>
our failure to develop and introduce new products and enhancements to keep pace
with technological developments could hurt our business.
OUR MARKET IS NEW AND DEVELOPING, AND WE MUST DEPEND UPON CABLE AND
WIRELESS OPERATORS.
The market for broadband Internet access products has only recently begun
to develop and is characterized by an increasing number of market entrants and
competing technologies. Our success will depend primarily on our ability to sell
our cable and wireless modem systems to cable system operators and broadband
system operators and on their sales of our client modems to end-users.
In selling to cable system operators, we face a number of difficulties. Our
products are not in compliance with the DOCSIS standard that has been adopted by
a number of large cable operators and which is preferred by @Home, which has
adversely affected our sales. Also, our products are not compatible with the
headend equipment or modems of other suppliers. Many cable system operators and
their customers may be reluctant to adopt and commit to a technology such as
ours which has not gained wide acceptance among their industry peers. Certain of
our competitors have already established relationships in the cable market and
with @Home, further limiting our ability to sell products to penetrate the
market. The cable industry has undergone evolution and reorganization, which has
adversely affected certain of our customer relationships. Moreover, the extent
to which (and the manner in which) cable system operators will commit to
providing broadband Internet access remains uncertain. Cable system operators
have a limited number of programming channels over which they can offer
services, and there can be no assurance that they will choose to provide
Internet access. Cable service operators have little experience in providing
Internet networks or launching, marketing and supporting Internet services, and
providing such services will involve substantial capital expenditures. To the
extent that cable service operators elect to provide Internet access, there is
no assurance that they will choose to do so through our cable modem systems.
We have become increasingly dependent on sales to broadband wireless system
operators and distributors. Our net sales to customers in the broadband wireless
industry increased from $2.4 million in 1997 to $4.7 million in 1998. The
adoption of the DOCSIS standard, which has adversely affected our sales to cable
system operators, has not had a significant effect on wireless customers. We
believe that products meeting the present DOCSIS standard will not perform well
over wireless, but this could change in the future as a result of modifications
in the DOCSIS TDMA protocol, improvements in technology or other developments.
Many broadband wireless system companies are in the early stage of development
or are in need of capital to upgrade and expand their services in order to
compete effectively with cable system operators, satellite TV and telcos. The
weak financial condition of many wireless customers has adversely affected our
sales to these customers and their ability to pay for the products we have
shipped to them. The principal disadvantage of wireless cable is that it
requires a direct line of sight between the wireless cable system operator's
antenna and the customer's location and the installation of an antenna at the
customer premises. Therefore, despite a typical range of up to 35 miles, a
number of factors, such as buildings, trees or uneven terrain, can interfere
with reception, thus limiting broadband wireless system operators' customer
bases. We estimate that there were only approximately 1.0 million wireless video
cable customers in the United States as of March 1998. In addition, current
technical and legislative restrictions have limited the number of analog
channels that wireless cable companies can offer in the most commonly used
frequency bands to 33. In order to better compete with cable system operators,
satellite TV and telcos, broadband wireless system operators have begun to
examine the implementation of digital TV and/or Internet access to create new
revenue streams. To the extent that such operators choose to invest in digital
TV, such decisions will limit the amount of capital available for investment in
deploying other services, such as Internet access. To the extent wireless
operators choose to provide Internet access, there is no assurance that they
will not select technologies other than our high speed modem system to do so
(such as Internet plus telephony, or new equipment standards such as DOCSIS with
which our products are not compatible). Moreover, broadband wireless system
operators will require substantial capital to introduce and market Internet
access products. There can be no assurance that broadband wireless system
operators will have the capital to supply Internet services in a competitive
environment. While many broadband wireless system operators
31
<PAGE>
are currently utilizing telephone return for upstream data transmission, we
believe that wireless operators will demand two-way wireless transmission as
more of these entities obtain licenses for additional frequencies under the
new FCC two-way authorization for MMDS frequencies released in September
1998. Currently, we are attempting to refine our products so as to satisfy
the two-way transmission needs of broadband wireless system operators, and
our customers have six headend installations in place to do this. But, there
can be no assurance that we or our customers will be successful in our
efforts to make this a commercially viable alternative to two-way cable. The
failure of our products to gain market acceptance would hurt our business.
WE DEPEND UPON A SMALL NUMBER OF CUSTOMERS.
A small number of customers has accounted for a large portion of our net
sales, and we expect this trend to continue. Our headend equipment and modems do
not operate with other companies' headend equipment or modems, and, as a result,
we are typically the sole source provider to our customers. The fact that our
customer base is highly concentrated increases our risk of loss as a result of
the loss of any of our principal customers. In 1998, RCN Corporation and Knology
Holdings, Inc. accounted for 25% and 13% of our net sales, respectively. In
1997, RCN Corporation and Jones Intercable accounted for 13% and 12% of our net
sales, respectively In 1998, Jones Intercable was sold to Comcast and ceased
purchasing our products, which adversely affected our business. There is no
assurance that RCN or Knology will continue as our customers. The loss of either
of these customers or any of our other principal customers would hurt our
business.
THE SALES CYCLE FOR OUR PRODUCTS IS LENGTHY AND UNCERTAIN AND OUR OPERATING
RESULTS FLUCTUATE WIDELY.
The sale of our products typically involves a great deal of time and
expense. Customers usually want to engage in significant technical evaluation
before making a purchase commitment. There are often delays associated with
customers' internal procedures to complete the evaluation and to approve the
large capital expenditures that are typically involved in purchasing our
products. The sales cycle for our products has been lengthy, generally lasting
three to nine months, and is subject to a number of significant risks, including
customers' budgetary constraints and internal acceptance reviews. Because our
sales cycle may be long and uncertain, and because we depend on a relatively few
customers who place relatively large orders, any delay or loss of an order that
is expected to be received in a quarter can have a major effect on our sales and
operating results for that quarter. The same is true of any failure of a
customer to pay for products on a timely basis.
These factors, together with the other factors referred to in this "Risk
Factors" section, tend to cause our operating results to vary substantially from
quarter to quarter. These fluctuations have adversely affected the prices of our
Common Stock in the past and may adversely affect such prices in the future.
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WE DEPEND ON KEY PERSONNEL.
Our success depends in significant part upon the continued services of our
key technical, sales and management personnel. Any officer or employee can
terminate his or her relationship with us at any time. Our future success will
also depend on our ability to attract, train, retain and motivate highly
qualified technical, marketing, sales and management personnel. Competition for
such personnel is intense, and there can be no assurance that we will be able to
attract and retain key personnel. The loss of the services of one or more of our
key personnel or our failure to attract additional qualified personnel could
have a material adverse effect on our business, operating results and financial
condition. We carry a $1.5 million key-person life insurance policy on Mr.
Ledbetter, our Chief Executive Officer.
WE MAY BE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY.
We rely on a combination of patent, trade secret, copyrights and trademark
laws and contractual restrictions to establish and protect our intellectual
property rights. We cannot assure you that our patents will cover all the
aspects of our technology that require patent protection or that our patents
will not be challenged or invalidated, or that the claims allowed in our patents
will be of sufficient scope or strength to provide meaningful protection or
commercial advantage to us. We have initiated one patent infringement lawsuit to
enforce our patent rights, and it resulted in a settlement in which we granted
licenses to the defendants containing certain terms that are in some respects
favorable for them, including a right of first refusal to purchase our patents
that we granted to one defendant (Com21, Inc.) in the event that in the future
we propose to sell our patents (separately or together with our other assets) to
any third party. (See Item 3 "Legal Proceedings.") We do not know whether we
will bring litigation in the future in an effort to assert our patent rights, or
whether other companies will bring litigation challenging our patents. Any such
litigation could be time consuming and costly for us and could result in our
patents being held invalid or unenforceable. Furthermore, even if the patents
are upheld or are not challenged, third parties might be able to develop other
technologies or products without infringing any such patents.
We have entered into confidentiality and invention assignment agreements
with our employees, and we enter into non-disclosure agreements with certain of
our suppliers, distributors and customers, in order to limit access to and
disclosure of our proprietary information. There can be no assurance that these
contractual arrangements or the other steps we take to protect our intellectual
property will prove sufficient to prevent misappropriation of our technology or
deter independent third-party development of similar technologies. The laws of
certain foreign countries may not protect our products or intellectual property
rights to the same extent as do the laws of the United States.
We have in the past, received, and may in the future receive, notices from
third parties claiming that our products, software or asserted proprietary
rights infringe the proprietary rights of third parties. We expect that
developers of wireless and cable modems will be increasingly subject to
infringement claims as the number of products and competitors in our market
grows. While we are not currently subject to any such claim, any future claim,
with or without merit, could be time consuming, result in costly litigation,
cause product shipment delays or require us to enter into royalty or licensing
agreements. Such royalty or licensing agreements might not be available on terms
acceptable to us or at all.
In the future, we may also file lawsuits to enforce our intellectual
property rights, to protect our trade secrets or to determine the validity and
scope of the proprietary rights of others. Such litigation, whether successful
or not, could result in substantial costs and diversion of resources. As
indicated above we were engaged during 1998 in an infringement lawsuit that we
brought against two third parties. In 1999, in order to stop the diversion of
resources caused by the litigation, we entered into a settlement pursuant to
which the defendants obtained licenses to our products on terms that in certain
respects were favorable to the defendants. (See "Patents" above and Item 3
"Legal Proceedings" below.) Nonetheless, we may find it necessary to institute
further infringement litigation in the future.
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<PAGE>
DEFECTS IN OUR PRODUCTS COULD CAUSE PRODUCT RETURNS AND PRODUCT LIABILITY.
Products as complex as those offered by us frequently contain undetected
errors, defects or failures, especially when first introduced or when new
versions are released. In the past, such errors have occurred in our products
and there can be no assurance that errors will not be found in our current and
future products. The occurrence of such errors, defects or failures could result
in product returns and other losses. They could also result in the loss of or
delay in market acceptance of our products.
GOVERNMENT REGULATION MAY ADVERSELY AFFECT OUR BUSINESS.
We are subject to varying degrees of governmental, federal, state and local
regulation. For instance, the jurisdiction of the FCC extends to high speed
Internet access products such as ours. The FCC has promulgated regulations that,
among other things, set installation and equipment standards for communications
systems. Further, regulation of our customers may adversely affect our business.
VOLATILITY OF OUR STOCK PRICE.
Our Common Stock has been delisted from the Nasdaq National Market and has
not traded on Nasdaq since mid-June 1998. Until the filing of this report, there
has not been current information regarding our business and financial condition
for over one year, and our previous financial statements have been restated. As
a result, it is difficult to estimate based on current information what the
price for our Common Stock will be if and when our stock is actively traded on a
public market. In addition, the market price of our Common Stock has fluctuated
in the past and is likely to fluctuate in the future.
INTERNATIONAL SALES COULD INVOLVE GREATER RISKS.
To date, sales of our products outside of the United States have
represented an insignificant portion of our net sales. To the extent that we
sell our products internationally, such sales will be subject to a number of
risks, including longer payment cycles, export and import restrictions, foreign
regulatory requirements, greater difficulty in accounts receivable collection,
potentially adverse tax consequences, currency fluctuations and political and
economic instability.
RISKS RELATED TO THE YEAR 2000 ISSUE.
BACKGROUND. The "Year 2000 Issue" refers generally to the problems that
some software, including firmware embedded in the Company's products, may have
in determining the correct century for the year. For example, software with
date-sensitive functions that is not Year 2000 compliant may not be able to
distinguish whether "00" means 1900 or 2000, which may result in failures or the
creation of erroneous results.
OUR READINESS PLAN. We have developed a Year 2000 readiness plan for the
current versions of our products. The plan includes development of corporate
awareness, assessment, implementation (including remediation, upgrading and
replacement of certain product versions), validation testing and contingency
planning. We continue to respond to customer concerns about prior versions of
our products on a case-by-case basis because we believe most products that could
be affected have been withdrawn from service.
We have largely completed our plan, except for contingency planning, with
respect to the current versions of all of our products in an effort to assure
that they are Year 2000 compliant. As a result of our readiness plan,
substantially all of the current versions of each of our products currently
offered for sale are Year 2000 compliant (with the exception of final quality
assurance and customer network testing), when configured and used in accordance
with the related documentation, and provided that the underlying operating
system of the host machine and any other software used with or in the host
machine or our products are also Year
34
<PAGE>
2000 compliant. In some cases, our products require an upgrade which is
either sold as a complete substitute or as a kit for in-service systems to be
Year 2000 Compliant. We consider our products to be Year 2000 compliant if
they have the ability to: (i) correctly handle date information needed for
the December 31, 1999 to January 1, 2000 date change; (ii) function according
to the product documentation provided for this date change without changes in
operation resulting from the advent of a new century, assuming correct
configuration; (iii) where appropriate, respond to two-digit date input in a
way that resolves the ambiguity as to century in a disclosed, defined, and
predetermined manner; and (iv) recognize year 2000 as a leap year.
RISKS. Despite our testing and testing by our current customers, and any
assurances from developers of products incorporated into our products, our
products may contain undetected errors or defects associated with Year 2000 date
functions. Also, certain prior versions of our products are not fully Year 2000
compliant and may remain in service. Known or unknown errors or defects in our
products could result in delay or loss of revenue, diversion of development
resources, damage to our reputation, or increased service and warranty costs,
any of which could materially adversely affect our business.
We do not currently have any information concerning the Year 2000
compliance status of our customers. If our customers suspend or defer
investments in system enhancements or new products to address Year 2000
compliance problems, our business could be materially adversely affected.
Some commentators have predicted significant litigation regarding Year 2000
compliance issues. Because this type of litigation lacks precedent, it is
uncertain whether or to what extent we may be affected by it.
We have an ongoing program in an effort to prevent any adverse effects
caused by the Year 2000 Issue with regard to our mission critical internal
information systems (including the third-party software for our management
information systems, networks and desktop applications, and our hardware
telecommunications technology). We expect to complete this program before the
end of 1999.
COSTS. We have funded our Year 2000 efforts from operating cash. While we
do not expect such costs to be material, additional costs will be incurred
related to Year 2000 programs for administrative personnel to manage our
readiness plans, technical support for our product engineering and customer
satisfaction. Although we are not currently aware of any material operational
issues or costs associated with preparing our internal information systems for
the Year 2000, we may experience material unanticipated problems and costs
caused by undetected errors or defects in the technology used in our information
systems. We can give no assurance that other material problems and costs will
not arise in connection with Year 2000 compliance or that these problems and
costs will not adversely affect our business.
CONTINGENCY PLANNING. We have not developed a comprehensive contingency
plan to address situations that may result if we are unable to achieve Year 2000
readiness of our critical operations. The cost of developing and implementing
such a plan may itself be material. We are also subject to external forces that
might generally affect industry and commerce, such as utility or transportation
company Year 2000 compliance failures and related service interruptions. Were we
to experience an unanticipated Year 2000 interruption, business operations could
be seriously impaired for an indefinite period of time until remedial efforts
could be achieved.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
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<PAGE>
ITEM 8. FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Independent Auditors Reports 37-38
Balance Sheets as of December 31, 1998 and 1997 39
Statements of Operations for the Years Ended
December 31, 1998, 1997 and 1996 40
Statements for Stockholders' Equity for the
Years Ended December 31, 1998, 1997 and 1996 41
Statements of Cash Flows for the Years Ended
December 31, 1998, 1997 and 1996 42
Notes to Financial Statements 43
Schedule II - Valuation and Qualifying Accounts 76
</TABLE>
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<PAGE>
INDEPENDENT AUDITORS REPORT
The Stockholders and Board of Directors
Hybrid Networks, Inc.
San Jose, California
We have audited the accompanying balance sheets of Hybrid Networks, Inc.
as of December 31, 1998 and 1997, and the related statements of operations,
stockholders' equity and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Hybrid Networks,
Inc. as of December 31, 1998 and 1997, and the results of its operations and
its cash flows for the years ended December 31, 1998 and 1997, in conformity
with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Note 3 to the
financial statements, the Company has suffered recurring losses from
operations and has an accumulated deficit of $63,569,000, that raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans with regard to these matters are also described in Note 3.
The financial statements do not include any adjustments relating to the
recoverability and classification of reported asset amounts or the amounts
and classification of liabilities that might result from the outcome of this
uncertainty.
As discussed in Note 1 to the financial statements, the Company has
restated its 1997 financial statements for the application of revisions to its
revenue recognition policy and for revisions in the valuation of warrants.
/s/ HEIN + ASSOCIATES LLP
HEIN + ASSOCIATES LLP
Certified Public Accountants
Orange, California
April 23, 1999, except for the last
two paragraphs of Note 16
which are as of May 5, 1999
37
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
Hybrid Networks, Inc.:
We have audited the balance sheet of Hybrid Networks, Inc. as of
December 31, 1996 and the related statements of operations, stockholders'
equity (deficit) and cash flows for the year ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Hybrid Networks,
Inc. as of December 31, 1996 and the results of its operations and its cash
flows for the year ended, in conformity with generally accepted accounting
principles.
PricewaterhouseCoopers LLP
San Jose, California
August 28, 1997
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<PAGE>
HYBRID NETWORKS, INC.
BALANCE SHEETS
(in thousands, except per share data)
<TABLE>
<CAPTION>
December 31,
---------------------------
1998 1997
----------- -----------
(restated -
See Note 1)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 3,451 $ 26,158
Restricted cash 515 -
Short-term investments - 985
Accounts receivable, net of allowance for doubtful accounts
of $200 in 1998 and $0 in 1997 1,433 1,128
Inventories 5,224 6,270
Prepaid expenses and other current assets 864 362
-------- --------
Total current assets 11,487 34,903
Property and equipment, net 3,438 1,808
Intangibles and other assets 495 2,354
-------- --------
Total assets $ 15,420 $ 39,065
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Convertible debenture $ 5,500 $ 5,500
Current portion of capital lease obligations 465 410
Accounts payable 2,063 2,285
Accrued liabilities and other 4,271 2,913
-------- --------
Total current liabilities 12,299 11,108
Capital lease obligations, less current portion 365 618
Other long-term liabilities 54 36
-------- --------
Total liabilities 12,718 11,762
-------- --------
Commitments and contingencies ( Notes 3,7,9, 10 and 16)
Stockholders' equity:
Convertible preferred stock, $.001 par value:
Authorized: 5,000 shares;
Issued and outstanding: no shares in 1998 or 1997 - -
Common stock, $.001 par value:
Authorized: 100,000 shares;
Issued and outstanding: 10,473 shares in 1998 and
10,345 shares in 1997 10 10
Additional paid-in capital 66,261 66,145
Unrealized gain on available-for-sale securities - 92
Accumulated deficit (63,569) (38,944)
-------- --------
Total stockholders' equity 2,702 27,303
-------- --------
Total liabilities and stockholders' equity $ 15,420 $ 39,065
-------- --------
-------- --------
</TABLE>
The accompanying notes are an integral part of these financial statements.
39
<PAGE>
HYBRID NETWORKS, INC.
STATEMENTS OF OPERATIONS
(in thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------
1998 1997 1996
-------- -------- --------
(restated -
See Note 1)
<S> <C> <C> <C>
Net sales $ 12,418 $ 4,120 $ 2,962
Cost of sales 14,046 8,899 3,130
-------- -------- --------
Gross loss (1,628) (4,779) (168)
-------- -------- --------
Operating expenses:
Research and development 7,771 7,831 5,076
Sales and marketing 3,642 4,678 1,786
General and administrative 8,933 2,964 1,714
Asset impairment charge 1,250 - -
Write off of technology license 1,283 - -
-------- -------- --------
Total operating expenses 22,879 15,473 8,576
-------- -------- --------
Loss from operations (24,507) (20,252) (8,744)
Interest income and other expenses, net 779 316 257
Interest expense (897) (1,666) (28)
-------- -------- --------
Net loss $(24,625) $(21,602) $ (8,515)
-------- -------- --------
-------- -------- --------
Basic and diluted loss per share $ (2.37) $ (6.10) $ (3.36)
-------- -------- --------
-------- -------- --------
Shares used in basic and diluted per share calculation 10,410 3,541 2,535
-------- -------- --------
-------- -------- --------
</TABLE>
The accompanying notes are an integral part of these financial statements.
40
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HYBRID NETWORKS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands)
<TABLE>
<CAPTION>
Preferred Stock Common Stock Additional
---------------- ---------------- Paid-in
Shares Amount Shares Amount Capital
------- ------ ------ ------ ----------
<S> <C> <C> <C> <C> <C>
Balances, January 1, 1996 8,363 $ 8 2,497 $ 2 $ 12,478
Exercise of common stock options - - 65 - 34
Repurchase of common stock - - (42) - (9)
Issuance of Series B preferred stock
upon net exercise of warrants 248 - - - -
Issuance of Series G preferred stock
for cash and conversion of notes payable,
net of issuance costs of $704 3,458 4 - - 12,534
Net loss - - - - -
Comprehensive loss
------- ---- ------ ---- --------
Balances, December 31, 1996 12,069 12 2,520 2 25,037
Exercise of common stock options - - 150 - 94
Repurchase of common stock - - (12) - (7)
Grant of stock bonus awards - - 13 - 26
Issuance of common stock for
services rendered - - 9 - 181
Issuance of Series H preferred stock 494 1 1,999
Issuance of warrants in connection
with convertible subordinated notes - - - - 870
Issuance of warrants in connection
with technology support and
development agreement - - - - 2,200
Issuance of common stock, net of
issuance costs of $1,185 - - 2,836 3 35,737
Conversion of preferred stock
to common stock (12,563) (13) 4,653 5 8
Issuance of common stock upon net
exercise of warrants - - 176 - -
Unrealized gain on investments - - - - -
Net loss - - - - -
Comprehensive loss - - - - -
------- ---- ------ ---- --------
Balances, December 31, 1997 - - 10,345 10 66,145
Exercise of common stock options - - 127 - 87
Grant of stock bonus awards - - 1 5
Charge due to acceleration of options - - - - 24
Reclassification for gains
included in net loss - - - - -
Net loss - - - - -
Comprehensive loss - - - - -
------- ---- ------ ---- --------
Balances, December 31, 1998 - $ - 10,473 $ 10 $ 66,261
------- ---- ------ ---- --------
------- ---- ------ ---- --------
<CAPTION>
Accumulated
Other
Comprehensive Accumulated Comprehensive
Income(loss) Deficit Total Loss
-------------- ----------- --------- -------------
(restated - See Note 1)
<S> <C> <C> <C> <C>
Balances, January 1, 1996 $ - $ (8,827) $ 3,661
Exercise of common stock options - - 34
Repurchase of common stock - - (9)
Issuance of Series B preferred stock -
upon net exercise of warrants - - -
Issuance of Series G preferred stock -
for cash and conversion of notes payable, -
net of issuance costs of $704 - - 12,538
Net loss - (8,515) (8,515) $ (8,515)
--------
Comprehensive loss $ (8,515)
----- -------- -------- --------
--------
Balances, December 31, 1996 - (17,342) 7,709
Exercise of common stock options - - 94
Repurchase of common stock - - (7)
Grant of stock bonus awards - - 26
Issuance of common stock for -
services rendered - - 181
Issuance of Series H preferred stock - - 2,000
Issuance of warrants in connection -
with convertible subordinated notes - - 870
Issuance of warrants in connection -
with technology support and
development agreement - - 2,200
Issuance of common stock, net of -
issuance costs of $1,185 - - 35,740
Conversion of preferred stock -
to common stock - - -
Issuance of common stock upon net -
exercise of warrants - - -
Unrealized gain on investments 92 - 92 $ 92
Net loss - (21,602) (21,602) (21,602)
--------
Comprehensive loss - - - $(21,510)
----- -------- -------- --------
--------
Balances, December 31, 1997 92 (38,944) 27,303
Exercise of common stock options - - 87
Grant of stock bonus awards - - 5
Charge due to acceleration of options - - 24
Reclassification for gains
included in net loss (92) - (92) $ (92)
Net loss - (24,625) (24,625) (24,625)
--------
Comprehensive loss - - - $(24,717)
----- -------- -------- --------
--------
Balances, December 31, 1998 $ - $(63,569) $ 2,702
----- -------- --------
----- -------- --------
</TABLE>
The accompanying notes are an integral part of these financial statements.
41
<PAGE>
HYBRID NETWORKS, INC.
STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------
1998 1997 1996
---------- ---------- ----------
(restated -
See Note 1)
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(24,625) $(21,602) $ (8,515)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 1,883 1,130 322
Asset impairment charge 1,250 - -
Provision for doubtful accounts 200 - -
Provision for excess and obsolete inventory 1,691 2,759 126
Common stock issued for services rendered - 181 -
Stock bonus 5 26 -
Charge for accelerated vesting of options 24 - -
Interest related to issuance of warrant in connection
with convertible subordinated note - 870 -
Write off technology license 1,283 - -
Change in assets and liabilities:
Restricted cash (515) - -
Accounts receivable (505) 220 (1,061)
Inventories (645) (8,086) (873)
Prepaid expenses and other current assets (502) (237) (115)
Accounts payable (222) 861 1,144
Accrued liabilities 1,376 2,201 395
-------- -------- --------
Net cash used in operating activities (19,302) (21,677) (8,577)
-------- -------- --------
Cash flows from investing activities:
Purchase of property and equipment (3,907) (629) (321)
Disposal of property and equipment 74 - -
Change in other assets (74) (37) (26)
Purchase of short-term investments (11,772) (893) -
Proceeds from disposal of short-term investments 12,665 - 490
-------- -------- --------
Net cash provided by (used in) investing activities (3,014) (1,559) 143
-------- -------- --------
Cash flows from financing activities:
Repayment of capital lease obligations (478) (320) (106)
Net proceeds from issuance of preferred stock - 2,000 9,378
Net proceeds from issuance of common stock 87 35,835 34
Repurchase of common stock - (7) (9)
Proceeds from issuance of convertible subordinated note payable
and related common stock warrants - 6,882 -
Repayment of convertible subordinated note payable
and related common stock warrants - (6,882)
Net proceeds from issuance of convertible debenture - 5,000 3,160
-------- -------- --------
Net cash provided by (used in) financing activities (391) 42,508 12,457
-------- -------- --------
Increase (Decrease) in cash and cash equivalents (22,707) 19,272 4,023
Cash and cash equivalents, beginning of period 26,158 6,886 2,863
-------- -------- --------
Cash and cash equivalents, end of period $ 3,451 $ 26,158 $ 6,886
-------- -------- --------
-------- -------- --------
SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING ACTIVITIES:
Conversion of notes payable into preferred stock $ - $ - $ 3,160
Property and equipment acquired under capital leases 280 688 472
Issuance of warrants in connection with technology
support and development agreement - 2,200 -
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid 802 718 28
Income taxes paid 1 1 1
</TABLE>
The accompanying notes are an integral part of these financial statements.
42
<PAGE>
HYBRID NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS
1. RESTATEMENT OF FINANCIAL STATEMENTS
Subsequent to the filing of its Annual Report on Form 10-K for the year
ended December 31, 1997 with the Securities and Exchange Commission, the Company
became aware of errors and irregularities that ultimately affected the timing
and dollar amount of reported sales from product shipments in 1997 and the first
quarter of 1998.
The Company undertook and completed extensive procedures related to product
sales in 1997 and the first quarter of 1998. As a result of these findings and
other relevant information now known or disclosed, the Company has determined
that a significant number and dollar amount of product shipments were improperly
reported as sales in the aforementioned periods.
The Company has determined that revenue is earned and should be recorded
only after any related obligations have been satisfied (i.e. when there are no
longer any significant remaining uncertainties related to the earnings process).
This revenue recognition policy has been followed for all transactions with
customers reflected in these financial statements.
Additionally, during 1998 the Company became aware that warrants to
purchase common stock issued and outstanding in 1997 had not been properly
valued, resulting in an understatement of operating expenses and interest
expense. These warrants have now been properly valued and reflected in the
financial statements.
43
<PAGE>
As a result of the above, the statement of operations for the year ended
December 31, 1997 has been restated as follows:
<TABLE>
<CAPTION>
1997
------------------------------
Previously
Restated Reported
------------- ------------
<S> <C> <C>
Net sales $ 4,120 $ 14,270
Cost of sales 8,899 12,258
-------- --------
Gross profit (loss) (4,779) 2,012
-------- --------
Operating expenses:
Research and development 7,831 7,108
Sales and marketing 4,678 4,319
General and administrative 2,964 3,606
-------- --------
Total operating expenses 15,473 15,033
-------- --------
Loss from operations (20,252) (13,021)
Interest income and other
expenses, net 316 399
Interest expense (1,666) (968)
-------- --------
Net loss $(21,602) $(13,590)
-------- --------
-------- --------
Basic and diluted loss per share $ (6.10) $($3.84)
-------- --------
-------- --------
Shares used in basic and diluted
per share calculation 3,541 3,541
-------- --------
-------- --------
</TABLE>
2. FORMATION AND BUSINESS OF THE COMPANY
The Company, which was incorporated in Delaware on June 6, 1990, is a
broadband access equipment company that designs, develops, manufactures and
markets wireless and cable systems that provide high speed access to the
Internet and corporate intranets for both businesses and consumers. The
Company's products remove the bottleneck over the local connection to the end
user which causes slow response time for those accessing bandwidth intensive
information.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. As shown in the
44
<PAGE>
financial statements, during 1998, 1997 and 1996, the Company incurred net
losses of approximately $24,625,000, $21,602,000 and $8,515,000,
respectively. Additionally, the Company had accumulated deficits of
$63,569,000 and $38,944,000 at December 31, 1998 and 1997, respectively, and
is highly dependent on its ability to obtain sufficient additional financing
in order to fund the current and planned operating levels. Additionally, the
Company is subject to a number of lawsuits involving substantial dollar
amounts, and is subject to an official investigation by the Securities and
Exchange Commission regarding its financial reporting practices (See Note
10). These factors among others raise substantial doubt about the ability of
the Company to continue as a going concern for a reasonable period of time.
The financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts or the amounts and
classification of liabilities that might be necessary should the Company be
unable to continue as a going concern. The Company's continuation as a going
concern is dependent upon its ability to obtain additional financing to continue
its product development and marketing plans and to fund other general operating
expenses, achievement of a financially satisfactory resolution to outstanding
litigation and the SEC investigation, and ultimately is dependent upon its
ability to obtain sufficient customer demand to attain profitable operations. No
assurance can be given that the Company will be successful in these efforts.
CHANGE IN FISCAL YEAR
In 1997, the Company changed its fiscal year end from March 31, to December
31, effective January 1, 1992.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
The Company's financial statements are based upon a number of significant
estimates, including the estimated useful lives selected for property and
equipment, accrued liabilities related to product warranties and litigation, and
valuation allowances for accounts receivable, inventory and property and
equipment. Due to uncertainties inherent in the estimation process, it is at
least reasonably possible that these estimates will be further revised in the
near term and such revisions could be material.
FAIR VALUE OF FINANCIAL INSTRUMENTS, BUSINESS RISKS AND CREDIT
CONCENTRATION
The carrying amounts of certain of the Company's financial instruments
including cash and cash equivalents, short-term cash investments, accounts
receivable, accounts payable, capital leases, convertible debenture and other
accrued liabilities' approximate fair value due to their short maturities.
The Company sells its products primarily to cable system operators,
broadband wireless system operators, Internet Service Providers, third party
distributors and other companies that provide broadband networking systems or
services, principally in North America. The Company performs ongoing credit
evaluations of its customers and does not require collateral. The Company also
maintains allowances for potential losses on collectability of accounts
receivable, as needed, and such losses have been within Management's
expectations.
45
<PAGE>
The Company operates in the intensely competitive and rapidly changing
communications industry which has been characterized by rapid technological
change, evolving industry standards and federal, state and local regulation
which may impede the Company's penetration of certain markets.
The Company currently operates with one product line. The Company's future
success depends upon its ability to develop, introduce and market new products,
its ability to obtain components from key suppliers, obtaining sufficient
manufacturing capacity, and the success of the broadband access business. The
Company may experience future fluctuations in operating results and declines in
selling prices.
CASH AND CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
Cash equivalents consist of highly liquid investment instruments with a
maturity at the time of purchase of three months or less. Instruments with a
maturity at the time of purchase of greater than three months but less than one
year from the date of purchase are included in short-term investments. The
Company's cash and cash equivalents as of December 31, 1997 included corporate
commercial paper which was classified as available for sale. Accordingly, the
investments were carried at fair value and unrealized holding gains of $92,000
were recorded in stockholders' equity.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out basis) or
market.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation is computed on a
straight-line basis over the estimated useful lives of two to five years.
Leasehold improvements are amortized over the lesser of their estimated useful
lives or the lease term. The cost of normal maintenance and repairs is charged
to operations as incurred. Material expenditures which increase the life of an
asset are capitalized and depreciated over the estimated remaining useful life
of the asset. The cost of fixed assets sold, or otherwise disposed of, and the
related accumulated depreciation or amortization is removed from the accounts,
and any gains or losses are reflected in current operations.
INTANGIBLES AND OTHER ASSETS
Intangibles and other assets include deferred financing costs relating to
fees incurred in connection with the issuance of a senior convertible debenture
in April 1997 and, at December 31, 1997, the value assigned to the purchase of
certain technologies relating to a technology support and development agreement
signed in November 1997. In connection with entering into the technology support
and development agreement, the Company issued a five-year warrant to purchase
458,295 shares of Common Stock at an exercise price of $10.91 per share. The
amount attributed to the value of the warrants was $2,200,000. The deferred
financing costs are amortized over the five year life of the debenture (see Note
7). The unamortized value of the technologies of approximately $1,283,000 was
charged to expense in the second quarter of 1998 as it was determined to be of
no further value to the Company. Total accumulated amortization as of December
31, 1998 and 1997 was $178,000 and $408,000, respectively. The Company
periodically assesses the recoverability of intangible assets by determining
whether the amortization of the asset balance over the remaining life can be
recovered through undiscounted future operating cash flows. The amount of
impairment, if any, is measured based on projected discounted future operating
cash flows and is recognized as a write down of the asset to a net realizable
value.
REVENUE RECOGNITION
The Company normally ships its products based upon a bona fide Purchase
Order and Volume Purchase Agreement. The Company generally recognizes its
revenue at the time a transaction is shipped and
46
<PAGE>
collection of the resulting account receivable is probable. Shipments on
customer orders with either acceptance criteria, installation criteria, or
rights of return are recognized as revenue only when the criteria are
satisfied according to the contract. Revenue related to shipments to
distributors is normally recognized upon sell-through which is generally
signified by receipt of payment for such transactions.
For Cybermanager 2000, the hardware and software sales are generally
bundled with upgrade, maintenance and system support and service and sold for a
period of three years. Revenue attributed to hardware is recognized upon
shipment. Revenue attributed to software is recognized over the three year
maintenance, system support and service period. When a maintenance contract is
sold separately, the revenue is recognized ratably over the term of the
maintenance contract, generally on a straight-line basis. Where maintenance
revenue is not separately invoiced, it is unbundled from hardware and software
license revenue and deferred for revenue recognition purposes. Other service
revenue, primarily training and consulting, is generally recognized at the time
the service is performed.
The Company accrues for estimated warranty costs when the related sales
revenue is recognized. The Company's third party manufacturer provides a fifteen
month warranty period on all cable modems manufactured by them. The warranty
period begins on the date the modems are completely assembled. The Company
provides a twelve month warranty on all headend equipment sold. Actual warranty
costs incurred have not differed materially from those estimated and accrued by
the Company.
PRODUCT DEVELOPMENT COSTS
Costs related to research, design and development of products are charged
to research and development expenses as incurred. Software development costs are
included in research and development and are expensed as incurred. Statement of
Financial Accounting Standards No. 86 (SFAS 86) requires the capitalization of
certain software development costs from when technological feasibility is
established, which the Company defines as completion of a working model, to when
the software is available for sale to the Company's customers. The capitalized
cost is then amortized on a straight-line basis over the estimated product life,
or on the ratio of current revenues to total projected product revenues,
whichever is greater. To date, the period between achieving technological
feasibility and the general availability of such software has been short and
software development costs qualifying for capitalization have been
insignificant. Accordingly, the Company has not capitalized any software
development costs.
STOCK-BASED COMPENSATION
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" ("APB 25") and related
interpretations in accounting for its employee stock options. In accordance with
Statement of Financial Accounting Standards No. 123 (SFAS. 123), "Accounting for
Stock-Based Compensation," the Company will disclose the impact of adopting the
fair value accounting of employee stock options. Transactions in equity
instruments with non-employees for goods or services have been accounted for
using the fair value method prescribed by SFAS 123.
COMPUTATION OF BASIC AND DILUTED LOSS PER SHARE
Basic earnings per share excludes dilution and is computed by dividing
income available to common stockholders by the weighted average number of shares
of common stock outstanding for the period. Diluted earnings per share reflects
the potential dilution that could occur if securities or other contracts to
issue common stock were exercised or converted into common stock or resulted in
the issuance of common stock that then shared in the earnings of the entity. All
such securities or other contracts were anti-dilutive for all periods presented
and, therefore, excluded from the computation of earnings per share.
COMPREHENSIVE INCOME (LOSS)
47
<PAGE>
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130 (SFAS No. 130), "Reporting Comprehensive Income."
SFAS No. 130 requires that all items recognized under accounting standards as
comprehensive income be reported in an annual financial statement that is
displayed with the same prominence as other annual financial statements.
Comprehensive income (loss) includes all changes in equity (net assets) during a
period from nonowner sources. Examples of items to be included in comprehensive
income, which are excluded from net income (loss), include foreign currency
translation adjustments and unrealized gain/loss on available-for-sale
securities. The Company has presented comprehensive income (loss) for each
period presented within the Statements of Stockholder's Equity.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"). The new standard requires companies to
record derivatives on the balance sheet as assets or liabilities, measured at
fair value. Under SFAS 133, gains or losses resulting from changes in the values
of derivatives are to be reported in the statement of operations or as a
deferred item, depending on the use of the derivatives and whether they qualify
for hedge accounting. The key criterion for hedge accounting is that the
derivative must be highly effective in achieving offsetting changes in fair
value or cash flows of the hedged items during the term of the hedge. The
Company is required to adopt SFAS 133 in the first quarter of 2000. The Company
currently transacts substantially all of its revenues and costs in U.S. dollars
and to date has not entered into any material amounts of derivative instruments.
Accordingly, management does not currently expect adoption of this new standard
to have a significant impact on the Company.
Statement of Financial Accounting Standards No. 132, "Employers Disclosures
about Pensions and Other Postretirement Benefits" and Statement of Financial
Accounting Standards No. 134, "Accounting for Mortgage-Backed Securities
Retained after the Securitization of Mortgage Loans Held for Sale by a Mortgage
Banking Enterprise" were issued in 1998 and are not expected to impact the
Company's future financial statement disclosures, results of operations or
financial position.
RECLASSIFICATIONS
Certain reclassifications have been made to the 1997 and 1996 financial
statements in order to conform to the 1998 presentation. Such reclassifications
had no effect on the previously reported net loss.
4. INVENTORIES
Inventories are comprised of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
------------------------
1998 1997
----------- -----------
(restated)
<S> <C> <C>
Raw materials $1,371 $2,175
Work in progress 386 229
Finished goods 3,467 3,866
------ ------
$5,224 $6,270
------ ------
------ ------
</TABLE>
48
<PAGE>
The allowance for excess and obsolete inventory was $3,135,000 and
$3,015,000 at December 31, 1998 and 1997, respectively. The provision for excess
and obsolete inventory included in cost of sales was $1,691,000, $2,759,000 and
$126,000 for the years ended December 31, 1998, 1997 and 1996, respectively.
5. PROPERTY AND EQUIPMENT
Property and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
------------------------
1998 1997
----------- -----------
<S> <C> <C>
Machinery and equipment $ 3,048 $ 2,780
Office furniture and fixtures 737 164
Leasehold improvements 1,914 110
------- -------
5,699 3,054
Less accumulated depreciation and amortization (2,261) (1,246)
------- -------
$ 3,438 $ 1,808
------- -------
------- -------
</TABLE>
Furniture and equipment under capital leases included in the above table
total $1,691,000 and $920,000, net of accumulated amortization of $1,005,000 and
$541,000 as of December 31, 1998 and 1997, respectively. Depreciation and
amortization expense related to property and equipment was $1,233,000, $687,000
and $162,000 for the years ended December 31, 1998, 1997, and 1996,
respectively.
Due to the underutilization of the Company's San Jose headquarters, the
1998 financial statements include a fourth quarter charge of $1,250,000
reflecting the impairment of leasehold improvements and office furniture and
fixtures.
6. CONVERTIBLE SUBORDINATED NOTE PAYABLE
In September 1997, the Company entered into a Convertible Subordinated
Promissory Note Purchase Agreement to issue $6,882,000 of subordinated notes at
10% interest (increasing to 18% after March 30, 1998 under certain
circumstances).
The principal amount of the notes was payable at the earlier of September
30, 1998 or the effective date of an initial public offering of the Company's
common stock. In connection with the Convertible Subordinated Note Purchase
Agreement, the Company issued warrants to purchase 252,381 shares of its common
stock at $10.91 per share. The warrant was exercisable at the earlier of 180
days after issuance or the effective date of an initial public stock offering
and expires in five years. The amount attributed to the value of the warrants
was $870,000 which was charged to interest expense upon repayment of the notes.
At December 31, 1997 no amount was outstanding under the convertible
subordinated note payable.
49
<PAGE>
7. CONVERTIBLE DEBENTURE
On April 30, 1997, the Company issued a senior convertible secured
debenture in the amount of $5,500,000, bearing interest at 12% per annum,
payable quarterly, and maturing on April 30, 2002. An arrangement fee of
$500,000 was paid by the Company. The debenture is convertible, at the option of
the holder, at any time, into common stock at $10.71 per share. If the Company
issues any shares (with certain exceptions for employee stock options and the
like) for consideration less then $10.71 per share, any such issuance would be
subject to certain "weighted average" antidilution provisions.
The debenture is collaterized by certain of the Company's assets. The
Company may not make any plant or fixed capital expenditures in excess of
$1,500,000, $2,500,000, $5,500,000 and $11,000,000 during the twelve months
ending March 31, 1998, 1999, 2000 and 2001, respectively. Additionally, the
Company may, among other things, not declare dividends, retire any subordinated
debt other than in accordance with its terms, or distribute its assets to any
stockholder as long as the debenture remains outstanding.
The Company's capital expenditures have exceeded the maximum capital
expenditures allowed for the twelve months ending March 31, 1999. Consequently,
the debt has been classified as a current liability in the accompanying
financial statements as the holder has the right to declare a default under the
convertible debenture at any time.
8. ACCRUED LIABILITIES AND OTHER
Accrued liabilities and other consists of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
------------------------
1998 1997
----------- -----------
(restated)
<S> <C> <C>
Accrued payroll and related accruals $ 385 $ 954
Accrued class action settlement and related legal expenses 1,946 -
Deferred revenue and customer deposits 1,381 1,448
Other liabilities 559 511
------ ------
$4,271 $2,913
------ ------
------ ------
</TABLE>
50
<PAGE>
9. LEASE OBLIGATIONS
The Company entered into certain non-cancelable operating and capital lease
commitments which expire at various dates through April 2004. Capital leases
bear interest at rates ranging from 7.6% to 10.1%. Future minimum lease payments
under all non-cancelable leases are as follows (in thousands):
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
--------- ---------
<S> <C> <C>
1999 $ 516 $ 839
2000 352 899
2001 30 899
2002 - 950
2003 - 975
Thereafter - 406
------- -------
898 $ 4,968
Less amount representing interest (68) -------
------- -------
830
Less current portion (465)
-------
$ 365
-------
-------
</TABLE>
Rent expense for 1998, 1997 and 1996 was approximately $955,000, $494,000
and $263,000, respectively.
The Company's only long-term operating lease is for approximately 55,000
square feet of office, research and development and manufacturing space in San
Jose, CA. This sublease expires in April 2004.
10. CONTINGENCIES
CLASS ACTION LITIGATION
In June 1998, five class action lawsuits were filed in San Mateo County
Superior Court, California against the Company, its five directors (one of whom
is an officer), two former officers and one former director. The lawsuits were
brought on behalf of purchasers of the Company's Common Stock during the class
period commencing November 12, 1997 (the date of the Company's initial public
offering) and ending June 1, 1998. In July 1998, a sixth class action lawsuit
was filed in the same court against the same defendants, although the class
period was extended to June 18, 1998. All six lawsuits also named as defendants
the underwriters in the Company's initial public offering, but the underwriters
have since been dismissed from the cases.
The complaints in these lawsuits claim that the Company and the other
defendants violated the anti-fraud provisions of the California securities laws,
alleging that the financial statements used in connection with the Company's
initial public offering and the financial statements issued subsequently during
the class period, as well as related statements made on behalf of the Company
during the initial public offering and subsequently regarding the Company's past
and prospective financial condition and results of operations, were false and
misleading. The complaints also allege that the Company and the other defendants
made
51
<PAGE>
these misrepresentations in order to inflate the price of the Company's
Common Stock stock for the initial public offering and during the class
period. The Company and the other defendants denied the charges of wrongdoing.
In July and August 1998, two class action lawsuits were filed in the U.S.
District Court for the Northern District of California. Both of these federal
class action lawsuits were brought against the same defendants as the six state
court class actions referred to above, except that the second federal class
action lawsuit also named as a defendant PwC, the Company's former independent
accountants. (The underwriters in the Company's initial public offering were
named as defendants in the first federal class action lawsuit but were
subsequently dismissed.) The class period for the first federal class action
lawsuit is from November 12, 1997 to June 1, 1998, and the class period in the
second class action lawsuit extends to June 17, 1998. The complaints in both
federal class action lawsuits claim that the Company and the other defendants
violated the anti-fraud provisions of the federal securities laws, on the basis
of allegations that are similar to those made by the plaintiffs in the state
class action lawsuits. The Company and the other defendants denied these charges
of wrongdoing.
In March 1999, the Company and the other parties (other than PwC) to the
state class action lawsuits and the federal class action lawsuits reached an
agreement in principle to settle the lawsuits. The agreement is subject to
the parties' entering into a binding stipulation of settlement and approval
by the U.S. District Court for the Northern District of California. Under the
agreement in principle, (i) the Company's insurers would pay $8.8 million on
the Company's behalf (and on behalf of the other officer and director
defendants), (ii) the Company would issue 3.0 million shares of Common Stock
to the plaintiffs (the number of shares would be increased proportionately to
the extent that there are more than 10.5 million shares of Common Stock
outstanding on the date of distribution so that, as of such date, the
plaintiffs would hold approximately 22.6% of all of the shares of the
Company's Common Stock that are then outstanding), (iii) if the Company is
acquired within nine months after March 9, 1999, the date of the agreement in
principle, then, in addition to the consideration referred to in (i) and
(ii), the Company would pay to the plaintiffs an amount equal to 10% of the
consideration received by the Company's stockholders in the acquisition. As a
result of the agreement in principle and a related agreement between the
Company and its insurers, it has paid, and will not be reimbursed by its
insurers for, $1.2 million in attorneys fees and other litigation expenses
that would otherwise be covered by its insurance, and the Company will not
have insurance coverage for the attorneys fees and expenses relating to the
settlement that it incurs in the future. As of December 31, 1998 the Company
has accrued $1,547,000 for the value of the 3,000,000 shares to be issued in
the settlement.
SEC INVESTIGATION
In October 1998, the Securities and Exchange Commission began a formal
investigation of the Company and unidentified individuals with respect to the
Company's financial statements and public disclosures. The Company has been
producing documents in response to the Securities and Exchange Commission's
subpoena and is cooperating with the investigation. A number of current and
former officers and employees and outside directors have testified or may
testify before the Securities and Exchange Commission's staff. The Company does
not believe, based on current information, that this investigation will have a
material adverse impact on the Company's financial statements.
PATENT LITIGATION
In January 1998, the Company brought a lawsuit in the U.S. District Court
for the Eastern District of Virginia against Com21, Inc. and Celestica, Inc. in
which the Company alleged that the defendants infringed the Company's patents.
In response to the Company's lawsuit, Com21 initiated a declaratory judgment
action six days later in the U.S. District Court for the Northern District of
California to obtain a declaration that the Company's patents are invalid and
unenforceable and that in any event Com21 did not infringe them. In February
1998, the action in the Eastern District of Virginia was transferred to the
Northern
52
<PAGE>
District of California, and the two actions were consolidated. Pre-trial
discovery continued in the consolidated action until September 1998 when the
parties agreed to stay the proceedings while they attempted to reach a
settlement.
In January 1999, the Company entered into a settlement agreement with
Com21, Inc. and Celestica, Inc. whereby the patent lawsuits were settled.
Pursuant to the agreements, the Company granted Com21 and Celestica a
nonexclusive license on the Company's patents under which they may be
required to pay royalties in the event that they sell certain products in the
future, subject to certain contingencies, and the Company granted to Com21 a
right of first refusal to purchase the patents in the event that the Company
should propose in the future to sell its patents (whether separately or
together with the Company's other assets to any third party). The Company has
agreed to pay its legal counsel in this action, as a partial contingency fee
(in return for such counsel's acceptance of reduced current legal fees), an
amount equal to 50% of any royalties that the Company receives from its
license with the defendants in the litigation (but not in excess of
$3,000,000). To date the Company has received virtually no royalties from the
license.
11. STOCKHOLDERS' EQUITY
REVERSE STOCK SPLIT
In September 1997, the Company's Board of Directors approved a 1-for-2.7
reverse split of the Company's common stock and a corresponding change in the
preferred stock conversion ratios. All common and preferred stock and per share
amounts in these financial statements have been adjusted retroactively to give
effect to the split. In addition, the Company's Board of Directors approved an
Amended and Restated Certificate of Incorporation which eliminated the existing
convertible preferred stock and changed the number of authorized shares of
preferred stock to 5,000,000 shares, $0.001 par value, and increased the shares
of common stock authorized to 100,000,000 shares. In October 1997, the
stockholders of the Company approved the 1- for -2.7 reverse split of the
Company's common stock and a corresponding change in the preferred stock
conversion ratios.
PREFERRED STOCK
The Board of Directors has authorized the issuance of up to 5,000,000
shares of undesignated preferred stock and the Board has the authority to issue
the undesignated preferred stock in one or more series and to fix the rights,
preferences, privileges and restrictions thereof. No preferred stock was
outstanding as of December 31, 1998
INITIAL PUBLIC OFFERING AND CONVERSION OF PREFERRED STOCK
In November 1997, the Company filed a registration statement with the
Securities and Exchange Commission permitting the Company to sell shares of its
common stock to the public. The offering was completed on November 12, 1997. In
connection with the Initial Public Offering, all outstanding shares of Preferred
Stock were converted into shares of common stock.
WARRANTS
The Company has historically issued warrants in connection with its various
rounds of financing, equipment lease lines, and transfers of technology.
Warrants have been valued using the Black-Scholes Option Pricing Model.
In connection with the issuance of Series G preferred stock in July 1996,
and the 1996 equipment lease line, the Company issued warrants to purchase
58,021 and 5,802 shares of common stock, respectively, at $10.34 per share.
These warrants are exercisable at any time and expire in July 2001 and August
2006,
53
<PAGE>
respectively. The Company has reserved 63,823 shares of common stock for
issuance upon exercise of these warrants.
In connection with the issuance of convertible promissory notes in June
1996, which were later converted into Series G preferred stock, the Company
issued warrants to purchase 167,037 shares of common stock at $4.73 per share.
In connection with the issuance of Series D preferred stock May 1995, the
Company issued warrants, at $.001 per warrant, to purchase 592,593 shares of
common stock at $4.73 per share. In December 1997, a warrant to purchase 132,225
shares was exercised for a net exercise of 99,850 shares of common stock. The
remaining warrants are exercisable at any time and expire in June 2001. The
Company has reserved 627,405 shares of common stock for issuance upon exercise
of these warrants.
During 1996, the Company issued warrants, at $.001 per warrant, to purchase
76,245 shares of Common stock at $4.73 per share. In connection with technology
transfered and the 1995 equipment lease line, the Company issued warrants to
purchase 169,259 and 8,466 shares of common stock, respectively, at $4.73 per
share. During 1996, a warrant to purchase 169,259 shares was exercised for a net
exercise of 91,921 shares of common stock. The remaining warrants are
exercisable at any time and expire in June 2001 and August 2005, respectively.
The Company has reserved 84,710 shares of common stock for issuance upon
exercise of these warrants.
In September 1997, the Company issued warrants to purchase 252,381 shares
of common stock in connection with the convertible subordinated notes payable,
at an exercise price of $10.91. In October 1997, the Company issued warrants to
purchase 2,659 shares of common stock in connection with obtaining a bank credit
facility at an exercise price of $10.91. These warrants are exercisable at any
time and expire in September and October 2002. In November 1997, warrants to
purchase 151,267 shares of common stock were exercised for a net exercise of
76,096 shares of common stock.
In November 1997, the Company issued a five year warrant to purchase
458,295 shares of common stock at an exercise price of $10.91 per share, in
connection with a technology support and development arrangement.
A summary of outstanding warrants as of December 31, 1998 follows:
<TABLE>
<CAPTION>
Number Exercise Expiration
Outstanding Price Date
----------- --------- ----------
<S> <C> <C>
703,629 $4.73 June 2001
58,021 10.34 July 2001
458,295 10.91 November 2002
103,764 10.91 July 2002
8,466 4.73 August 2005
5,802 10.34 August 2006
---------
1,337,977
---------
---------
</TABLE>
54
<PAGE>
STOCK OPTION PLANS
In September 1997, the Company adopted the 1997 Equity Incentive Plan and
reserved a total of 1,750,000 shares for issuance to employees, officers,
directors, consultants, independent contractors, and advisors. The number of
shares outstanding will increase automatically by 5% of the outstanding shares
each year unless waived by the Board of Directors. In addition, any shares that,
upon the effective date of the 1997 plan, were available for the grant of
options under earlier plans were rolled over and are available for issuance
under the 1997 plan; also, any shares that subsequently become available under
the earlier plans, roll over and become available for issuance under the 1997
plan. The 1997 Equity Incentive Plan expires in September 2007. Also in
September 1997, the Company adopted the 1997 Directors' Stock Option Plan under
which 100,000 shares of common stock have been reserved for issuance. The
Directors' Plan provides for the grant of nonstatutory stock options to
non-employee directors of the Company and expires in September 2007.
In December 1996, the Company adopted the 1996 Equity Incentive Plan and
reserved 185,185 shares of common stock for issuance to employees, officers,
directors, consultants, independent contractors and advisors. In June 1997, the
Company increased the number of shares reserved for issuance under the 1996
Equity Incentive Plan by 222,222. The 1996 Equity Incentive Plan expires in
December 2006.
In December 1995, the Company adopted the Executive Officer Incentive Plan
and reserved 370,370 shares of common stock for issuance to the Company's chief
executive officer and other senior executive officers. In 1996 and 1997, the
Company increased the number of shares reserved under this plan by 129,630 and
62,963, respectively. In the event of a merger, consolidation, liquidation or
similar change of control transaction as a result of which the participants'
responsibilities and position with the Company are materially diminished,
options granted under this plan become fully exercisable and remain so for one
year thereafter. This plan will expire in December 2005.
In October 1993, the Company adopted the 1993 Equity Incentive Plan, and
reserved 185,185 shares of common stock for issuance to employees, officers,
directors, consultants and advisors. In 1995, 1996 and 1997, the Company
increased the number of shares reserved for issuance under the 1993 Equity
Incentive Plan by 351,851, 425,925 and 66,340 shares, respectively. The 1993
Equity Incentive Plan expires in October 2003.
Options, under all of the above plans, may be granted at prices not less
than fair market value at the date of grant, as determined by the Board of
Directors, in case of incentive options (110% in certain instances), and not
less than 85% of fair market value at the date of grant, as determined by the
Board of Directors, in case of nonqualified options, restricted stock awards and
stock bonus awards (100% in certain instances). Options and stock awards
generally vest 12.5% six months from date of grant and 2.0833% per month
thereafter; stock options expire three months after termination of employment
and five years from date of grant.
55
<PAGE>
Activity under the Plans is set forth below (in thousands, except per share
data):
<TABLE>
<CAPTION>
Weighted
Value of Average
Shares Options Options Exercise
Available Outstanding Outstanding Price
--------- ----------- ----------- --------
<S> <C> <C> <C> <C>
Balances, January 1, 1996 696 309 $ 146 $ 0.47
Additional shares reserved 741 - - -
Options granted (1,267) 1,267 865 0.68
Stock repurchased 11 - - -
Options canceled 32 (32) (14) 0.44
Options exercised - (65) (34) 0.65
------ ----- -------
Balances, December 31, 1996 213 1,479 963 0.65
Additional shares reserved 2,409 - - -
Options granted (862) 862 5,332 6.19
Stock bonus awards (13) - - -
Stock repurchased 12 - - -
Options canceled 265 (265) (316) 1.19
Options exercised - (150) (94) 0.13
------ ----- -------
Balances, December 31, 1997 2,024 1,926 5,885 3.06
Options granted (1,445) 1,445 4,527 3.13
Stock bonus award (1) - - -
Options canceled 511 (511) (1,871) 3.66
Options exercised (125) (87) 0.70
------ ----- -------
Balances, December 31, 1998 1,089 2,735 $ 8,454 $ 3.09
------ ----- -------
------ ----- -------
</TABLE>
For the years ended December 31, 1998, 1997 and 1996, the weighted average
fair value of options granted was $2.34, $1.40 and $0.81 per share,
respectively.
56
<PAGE>
As of December 31, 1998, the stock options outstanding were as follows (in
thousands, except per share data):
<TABLE>
<CAPTION>
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life (Years) Price Exercisable Price
--------------- --------------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
$0.27 to $0.54 790 2.16 $ 0.54 558 $ 0.54
$1.08 to $2.19 1,136 4.52 2.08 72 1.34
$2.70 to $5.13 304 4.90 3.98 101 3.76
$5.31 to $9.75 283 3.89 7.04 111 6.72
$11.04 to $11.05 223 3.73 11.04 75 11.04
----------- --------
2,736 3.75 $ 3.09 917 $ 2.56
----------- --------
----------- --------
</TABLE>
As of December 31, 1997 and 1996, options to purchase 539,000 and 294,000
shares were exercisable at an average weighted exercise price of $0.76 and $0.54
per share, respectively.
The Company has elected to continue to follow the provisions of APB No.25,
"Accounting for Stock Issued to Employees," for financial reporting purposes and
has adopted the disclosure-only provisions of SFAS No.123 ("SFAS No.123").
Accordingly, no compensation cost has been recognized for the Company's stock
option plans. Had compensation cost for the Company's stock option plans been
determined based on the fair value at the grant date for awards in years ended
1998, 1997 and 1996 consistent with the provisions of SFAS No.123, the Company's
net loss and net loss per share for 1998, 1997, and 1996 would have been
increased to the pro forma amounts indicated below (in thousands, except per
share amounts):
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Net loss as reported $(24,625) $(21,602) $ (8,515)
-------- -------- --------
-------- -------- --------
Net loss - pro forma $(25,109) $(21,670) $ (8,548)
-------- -------- --------
-------- -------- --------
Net loss per share - as reported $ (2.37) $ (6.10) $ (3.36)
-------- -------- --------
-------- -------- --------
Net loss per share - pro forma $ (2.41) $ (6.12) $ (3.37)
-------- -------- --------
-------- -------- --------
</TABLE>
57
<PAGE>
The above pro forma disclosures are not necessarily representative of the
effects on reported net income or loss for future years.
In accordance with the provisions of SFAS No. 123, the fair value of each
option is estimated using the following weighted average assumptions for grants
during 1998, 1997 and 1996: dividend yield of 0%, volatility of 0% for options
issued prior to the Company's Initial Public Offering, 75% thereafter in 1997,
and 113% in 1998, risk-free interest rates of 5.5% to 6.7% at the date of grant
and an expected term of four years.
EMPLOYEE STOCK PURCHASE PLAN
In September 1997, the Company's Board of Directors approved an Employee Stock
Purchase Plan. Under this plan, employees of the Company can purchase Common
Stock through payroll deductions. A total of 225,000 shares have been reserved
for issuance under this plan. As of December 31, 1998, no shares had been
purchased and all employees have withdrawn from the plan.
12. INCOME TAXES
Temporary differences which gave rise to significant portions of deferred
tax assets are as follows (in thousands):
<TABLE>
<CAPTION>
December 31,
------------------------
1998 1997
---------- ----------
<S> <C> <C>
Current deferred assets:
Inventory reserves $ 1,307 $ 1,260
Unearned revenue 281 108
Accrued liabilities 1,355 500
-------- --------
Total current deferred assets 2,943 1,868
Valuation allowance (2,943) (1,868)
-------- --------
$ - $ -
-------- --------
-------- --------
Long-term deferred assets:
Net operating loss carryforwards $ 18,205 $ 10,027
Capitalized research expenditures 4,128 4,641
Tax credit carryforwards 1,905 1,365
Depreciation and amortization 411 (100)
-------- --------
Total long-term deferred assets 24,649 15,933
Valuation allowance (24,649) (15,933)
-------- --------
$ - $ -
-------- --------
-------- --------
</TABLE>
In accordance with generally accepted accounting principles, a valuation
allowance must be established for a deferred tax asset if it is uncertain that a
tax benefit may be realized from the asset in the future. Management believes
that, based on a number of factors, the available objective evidence creates
sufficient uncertainty regarding the realizability of the deferred tax assets
such that a full valuation allowance has
58
<PAGE>
been recorded. These factors include the Company's history of losses, recent
increases in expense levels, the fact that the market in which the Company
competes is intensely competitive and characterized by rapidly changing
technology, the lack of carry back capacity to realize deferred tax assets,
and the uncertainty regarding market acceptance of the Company's products.
The Company will continue to assess the realizability of the deferred tax
assets in future periods. The valuation allowance increased by $9,790,000,
and $9,285,000 in 1998 and 1997, respectively. The Company had federal and
state net operating loss carry forwards of approximately $47,030,000 and
$25,049,000, respectively, as of December 31, 1998 available to offset future
regular and alternative minimum taxable income. The Company's net operating
loss carry forwards expire in 1999 through 2018, if not utilized.
The Company has federal and state credit carryovers as follows:
<TABLE>
<CAPTION>
Tax Expiration
Reporting Dates
--------- ----------
<S> <C> <C>
Research and development credit $ 1,127 2007-2013
State research and development credit 656
</TABLE>
The Company's net operating loss and tax credit carry forwards may be
subject to limitation as a result of ownership changes, as defined by tax laws.
13. EMPLOYEE BENEFIT PLAN
The Company adopted a defined contribution retirement plan (the "Plan"),
which qualifies under Section 401(k) of the Internal Revenue Code of 1986. The
Plan covers essentially all employees. Eligible employees may make voluntary
contributions to the Plan up to 15% of their annual compensation and the
employer is allowed to make discretionary contributions. In 1998, 1997, 1996,
the Company made no employer contributions.
14. RELATED PARTY TRANSACTIONS
The Company had net sales to two stockholders of $482,000 and $21,000,
respectively, for the year ended December 31, 1998. The Company had net sales of
$128,000 to one stockholder for the year ended December 31, 1997. The Company
had net sales to two stockholders of $1,163,000 and $568,000, respectively, for
the year ended December 31, 1996.
In September 1997, an executive officer of the Company contributed $500,000
or 7% of the proceeds received from the issuance of the $6,882,000 convertible
subordinated note payable as referred to at Note 6.
15. BUSINESS SEGMENT AND MAJOR CUSTOMERS
The Company operates in a single industry segment and primarily sells its
products to customers in the U.S. There were no international sales in 1998.
International sales accounted for 13.5% and 10.1% of net sales for the years
ended December 31, 1997 and 1996, respectively. International sales in any one
geographic area were insignificant.
59
<PAGE>
Individual customers that comprise 10% or more of the Company's net sales
are as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
RCN Corporation 25% 13% --
Knology Holdings, Inc. 13% -- --
Jones Intercable -- 12% --
AT&T Corporation -- -- 41%
Intel Corporation -- -- 21%
</TABLE>
16. SUBSEQUENT EVENTS
In March 1999, Pacific Monolithics, Inc. (which had filed a voluntary
petition under Chapter 11 of the U.S. Bankruptcy Code and is suing as
debtor-in-possession) filed a lawsuit in Santa Clara County Superior Court,
California against the Company, its five directors (one of whom is an
officer), a former director (who was subsequently dismissed), a former
officer and PwC. The lawsuit concerns an agreement which the Company entered
into in March 1998 to acquire Pacific Monolithics through a merger, which
acquisition was never consummated. The complaint alleges that the Company
induced Pacific Monolithics to enter into the agreement by providing it with
financial statements, and by making other representations concerning the
Company's financial condition and results of operations, which were false and
misleading, and further alleges that the Company wrongfully failed to
consummate the acquisition. The complaint claims the defendants committed
breach of contract and breach of implied covenant of good faith and fair
dealing, as well as fraud and negligent misrepresentation. The complaint
seeks compensatory and punitive damages according to proof, plus attorneys'
fees and costs. The Company does not believe, based on current information
(which is only preliminary, since discovery has not commenced in the
litigation), that the outcome of this litigation will have a material adverse
impact on the Company's financial statements.
In January 1999, the Company entered into retention agreements with
three executive officers (each of whom has since left the Company), and with
an officer who has since become an executive officer. Under the agreements,
as subsequently modified, each officer received an increase in salary and the
right to receive a bonus if the Company is sold and the officer continues
with the Company through the closing of such sale and for a short time
thereafter. The bonus would be from $50,000 to $200,000, depending on the
sale price. In addition, the officers received options to purchase 231,279,
262,152, 141,982 and 200,000 shares of Common Stock, respectively. Each
option has an exercise price of $0.50 per share and vests over four years,
except that vesting accelerates in the event of a sale of the Company. The
agreements also provide for three months' severance payment in the event that
an officer's employment is terminated by the Company without cause.
In March 1999, the Company entered into a severance agreement with an
executive officer whereby the Company paid him three months' severance pay upon
the termination of his employment, and the Company agreed that he would receive
the contingent bonus and accelerated vesting of stock options provided for in
his retention agreement (referred to above) if the Company was acquired prior to
April 1, 2000.
60
<PAGE>
In January 1999, the Company's Board of Directors adopted the 1999 Officer
Stock Option Plan (the "1999 Officer Plan") under which the Company may grant to
its officers options up to 1,000,000 shares of Common Stock in the aggregate. In
May 1999, the Board of Directors adopted the 1999 Stock Option Plan (the "1999
Employee Plan") under which the Company may grant its employees options to
purchase up to 1,500,000 shares of Common Stock in the aggregate. Options for
929,048 and 931,817 shares have been granted and are outstanding under the 1999
Officer Plan and the 1999 Employee Plan, respectively.
In May 1999, the Company granted to the executive officers additional
options to purchase 40,000 and 275,000 shares of Common Stock, respectively, at
$0.50 per share and vesting over four years, except that vesting accelerates in
the event of a sale of the Company.
61
<PAGE>
ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On June 17, 1998, PwC (then Coopers & Lybrand), our independent
accountants, notified us that its reports with respect to our financial
statements as of December 31, 1997 and for the year then ended, and as of
September 30, 1997 and for the nine months then ended, should no longer be
relied upon and that PwC's consent included with our Registration Statement on
Form S-4 filed with the Securities and Exchange Commission on May 7, 1998 in
connection with the pending acquisition by us of Pacific Monolithics, Inc. was
being withdrawn (the "Withdrawn Reports").
On July 9, 1998, PwC resigned as our independent auditors. PwC stated
that it was not specifying a reason for its resignation but informed us, for
the first time, that PwC was of the view that our 1997 financial statements
(which PwC had audited and reported upon) needed to be restated. PwC
indicated the restatement would relate to revenue recognition but did not
identify the items or quantify the amounts involved. PwC further informed us
that PwC believed it was not in the best interests of PwC or the Company for
PwC to continue to act as our independent auditors and that PwC would not
address any restatement of the Company's financial statements. PwC
acknowledged that we have cooperated fully with PwC in connection with its
review of our financial statements and that there were no disagreements
between PwC and us on any matter of our accounting principles or practices,
financial statement disclosure or auditing scope or procedure during the two
most recent fiscal years and through July 9, 1998. None of the Withdrawn
Reports on our financial statements contained an adverse opinion or a
disclaimer of opinion or was qualified or modified as to uncertainty, audit
scope or accounting principles.
On August 12, 1998, with the approval of the Board of Directors, we
engaged AA as our independent accountants to audit the financial statements
of the Company as of December 31, 1997 and for the year then ended and to act
as our independent accountants on a continuing basis. On November 24, 1998,
AA resigned as our independent public accountants for the Company. AA
informed us that, in AA's view, material weaknesses existed in our internal
controls of a nature that prevented AA from being able to form an opinion on
our conclusions as to the appropriate timing and amount of revenue
recognition for the purposes of our financial statements for the year ended
December 31, 1997.
During the course of its work, AA had notified us and discussed with our
audit committee AA's conclusion that (i) AA needed to expand significantly the
scope of its audit, which it did with our approval and cooperation, and (ii)
while AA did not complete an audit of our 1997 financial statements, those
financial statements were materially misstated. There were no disagreements
between AA and us on any matter of our accounting principles or practices,
financial statement disclosure, or auditing scope or procedure.
On December 22, 1998, with the approval of the Board of Directors, we
engaged Hein as our independent accountants to audit our financial statements
as of December 31, 1997 and for the year then ended and to act as our
independent accountants on a continuing basis, which engagement included
performing an audit of our financial statements as of December 31, 1998 and
for the year then ended.
Prior to hiring Hein, neither we nor anyone acting on our behalf consulted
Hein during our two most recent fiscal years or the subsequent interim periods.
62
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY.
The following table sets forth certain information regarding our
officers and directors as of June 1, 1999:
<TABLE>
<CAPTION>
Name Age Position
- --------- ----- --------------
<S> <C> <C>
Carl S. Ledbetter 50 Chief Executive Officer and
Chairman of the Board of
Directors (1)
Judson W. Goldsmith 60 President and Chief Operating Officer
Chief Financial Officer and Secretary (1)
Thara Edson 41 Corporate Controller (1)
Thomas Bissett 48 Vice President, Operations
Frederick Enns 48 Vice President and Chief
Technology Officer
John J. Wong 47 Vice President,
Engineering
James R. Flach (2) (3) 51 Director
Stephen E. Halprin (3) 61 Director
Gary M. Lauder 37 Director
Douglas M. Leone (2) 41 Director
</TABLE>
- ------------------------------------
(1) Executive Officers.
(2) Member of the Compensation Committee.
(3) Member of the Audit Committee.
(4) Mr. Strachman ceased being a Director in February 1998.
Carl S. Ledbetter joined the Company in January 1996 as its President and
Chief Executive Officer, and in August 1996, he became Chairman of the Board.
Prior to joining the Company, he served in various positions at AT&T from April
1993 to January 1996, most recently as President of Consumer Products. From 1991
until April 1993, Mr. Ledbetter was Vice President of Sun Microsystems and
General Manager of SunSelect, Sun's PC networking business. He is also a
director of Software Spectrum, Inc., a software distributor. Mr. Ledbetter holds
a B.S. in Mathematics from University of Redlands, an M.A. in Mathematics from
Brandeis University and a Ph.D. in Mathematics from Clark University.
Judson W. Goldsmith joined the Company in November 1998 as Vice President,
Finance and Administration, Chief Financial Officer and Secretary. In March
1999, he assumed the additional responsibilities of President and Chief
Operating Officer. Prior to joining the Company, Mr. Goldsmith was a manager and
a management consultant working with troubled technical and non-technical
companies. Mr. Goldsmith holds a B.A. in Economics from Dartmouth College and an
M.B.A. from the University of Washington.
Thara Edson joined the Company in August 1998 as its Controller and was
promoted to Corporate Controller in September 1998. Prior to joining the
Company, she served as Controller for Connectware LLC (an AMP Company) and
Compressent Corporation. From 1994 to January 1997, Ms. Edson served as Director
of Finance with Streamlogic Corporation, a storage systems company. Ms. Edson
received a
63
<PAGE>
B.Com. in Accounting from Madras University and an M.B.A. in Finance and
Accounting from the University of Nebraska. Ms. Edson is also a Certified
Management Accountant.
Thomas E. Bissett joined the Company in July 1996 as Director of Operations
and was promoted to Vice President of Operations March of 1999. From May 1991 to
July 1996, Mr. Bissett was Vice President of Operations and member of founding
team of Semaphore Communications Corporation, a company that designed and
manufactured network security products. Mr. Bissett holds a B.S. and M.E. in
Mechanical Engineering from the University of Utah and an M.B.A from San Jose
State University.
Frederick Enns joined the Company in September 1994 as Senior Architect and
has been Vice President and Chief Technology Officer since August 1996. From
November 1992 to September 1994, he served as Director of Hardware Engineering
of Hughes LAN Systems, a networking equipment manufacturer. Mr. Enns received a
B.S. in Physics from the University of California, San Diego, an M.S. in Physics
from the University of Washington and an M.S. in Electrical Engineering from
Stanford University.
John J. Wong joined the Company in August 1997 as Director of Hardware
Engineering and was recently promoted to Vice President of Engineering. Prior to
joining the Company, he worked for Mitsui Comtek as Director of Engineering,
where he developed Internet Appliance products. From July 1988 to February 1997,
Mr. Wong worked for the systems group of Macronix, Inc., which later became
Current Logic Systems, an OEM manufacturer of data/fax modem products, as Vice
President of Engineering and most recently as President and CEO. Mr. Wong
received a B.S. in EECS from University of California, Berkeley.
James R. Flach has been a director of the Company since May 1995, and he
served as acting Chief Executive Officer of the Company from November 1995 to
January 1996. Since September 1992, Mr. Flach has been an executive partner of
Accel Partners, a venture capital firm. Since September 1992, he has also been
the President of Flach & Associates, a Management Services firm, and since March
1997, he has been the Chief Executive Officer of Redback Networks, a network
products company. From May 1990 to August 1992, Mr. Flach was Vice President of
Intel, serving as the General Manager of Intel's Personal Computer Enhancement
Division. He holds a B.S. in Physics from Rensselaer Polytechnic Institute and
an M.S. in Applied Mathematics from The Rochester Institute of Technology.
Stephen E. Halprin has been a director of the Company since September 1992.
He has been a general partner of OSCCO Management Partners, a venture capital
firm since 1984 and a general partner of OSCCO Management Partners III since
1989. He currently serves as a director of Landec Corporation, a materials
science company. He holds a B.S. in Industrial Management from the Massachusetts
Institute of Technology and an M.B.A. from the Stanford University Graduate
School of Business.
Gary M. Lauder has been a director of the Company since October 1994. Since
1986 he has been the General Partner of Lauder Partners, a venture capital
partnership formed by Mr. Lauder that focuses on advanced technologies for the
cable TV marketplace. Since May 1995, Mr. Lauder has been Vice-Chairman of ICTV,
Inc., a developer of interactive cable television technology. Mr. Lauder holds a
B.A. in International Relations from the University of Pennsylvania, a B.S. in
Economics from the Wharton School and an M.B.A. from the Stanford University
Graduate School of Business.
Douglas M. Leone has been a director of the Company since May 1995. He has
been associated with Sequoia Capital, a venture capital firm, since June 1988
and has been a general partner of that firm since April 1993. He currently
serves as a director of Infinity Financial Technology, a client server software
company, and International Network Services, a networking services company. Mr.
Leone holds a B.S. from Cornell University, an M.S. from Columbia University and
an M.S. in Management from the Massachusetts Institute of Technology.
Each officer serves at the discretion of the Board of Directors. Our
certificate of incorporation and bylaws provide for a classified Board of
Directors. Accordingly, the terms of the office of the Board of Directors have
64
<PAGE>
been divided into three classes. Class I and II will expire at the annual
meeting of the stockholders to be held in 1999; and Class III will expire at the
annual meeting of the stockholders to be held in 2000. At each annual meeting of
the stockholders, beginning with the 1999 annual meeting, the successors to the
directors whose terms will then expire will be elected to serve from the time of
election and qualification until the third annual meeting following election and
until their successors were duly elected and qualified, or until their earlier
resignation or removal, if any. Messrs. Halprin and Leone were designated as
Class I directors; Mr. Flach was designated as a Class II director; and Messrs.
Lauder and Ledbetter were designated as Class III directors. To the extent that
there is an increase in the number of directors, additional directorships
resulting therefrom will be distributed among the three classes so that, as
nearly as possible, each class will consist of an equal number of directors.
BOARD COMMITTEES
The Audit Committee of the Board of Directors consists of Mr. Flach and Mr.
Halprin. The Audit Committee reviews our financial statements and accounting
practices, makes recommendations to the Board regarding the selection of
independent auditors and reviews the results and scope of the audit and other
services provided by our independent auditors. The Compensation Committee of the
Board consists of Mr. Flach and Mr. Leone. The Compensation Committee makes
recommendations to the Board concerning salaries and incentive compensation for
our officers and employees and administers our employee benefit plans.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires our directors and executive
officers and persons who own more than 10% of our Common Stock ("10%
Stockholders") to file with the Securities and Exchange Commission initial
reports of ownership on a Form 3 and reports of changes in ownership of our
Common Stock and other equity securities on a Form 4 or Form 5. Such executive
officers, directors and 10% Stockholders are required by SEC regulations to
furnish us with copies of all Section 16(a) forms they file. Based solely on its
reviews of the copies of such forms furnished to the Company and written
representations from the executive officers and directors, we believe that all
of the Company's directors, executive officers and 10% Stockholders made all the
necessary filings under Section 16(a) during 1998, except that Mr. Goldsmith had
a late filing of Form 3.
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<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth all compensation awarded to, earned by or
paid for services rendered to us in all capacities during 1998 by (i) our Chief
Executive Officer and (ii) our other executive officers (other than the Chief
Executive Officer) who were serving as executive officers at December 31, 1998
and had salary and bonus for 1998 of $100,000 or more (three persons) and (iii)
two additional individuals who were among the four most highly compensated
executive officers during 1998 (other than the Chief Executive Officer) but who
were not serving as executive officers at December 31, 1998 (collectively, the
"Named Executive Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARD
ANNUAL COMPENSATION -----------
--------------------------------------------------------- SECURITIES
OTHER ANNUAL UNDERLYING
NAME AND PRINCIPAL POSITIONS YEAR SALARY BONUS COMPENSATION OPTIONS (#)
- ---------------------------- ---- -------- --------- ------------ ----------
<S> <C> <C> <C> <C> <C>
Carl S Ledbetter 1998 $209,102 -- $ 59,231(1) --
Chief Executive Officer 1997 187,500 $ 36,853 $ 77,924(1)(2) 170,000
1996 175,000 -- 61,299(1) 487,919
Jane Zeletes (3 ) 1998 153,333 27,113(4) -- 88,139
Vice President, Marketing 1997 75,889 41,197(4) 750(5) 53,843
Vishwas Godbole (6) 1998 167,208 -- -- 124,186
Vice President, Engineering 1997 77,798 30,125 5,062(5) 137,976
Daniel E. Steimle (7) 1998 89,204 75,000 68,750(8) 6,250
Vice President, Finance and 1997 68,750 86,250 -- 111,111
Administration and Chief
Financial Officer
William Daniher (9 ) 1998 105,385 29,300 -- 231,279
Gustavo Ezcurra (10) 1998 101,677 57,263(11) -- 20,000
Vice President, Sales 1997 126,875 97,154(11) 1,129(2) 14,815
1996 17,625 12,835(11) -- 77,876
</TABLE>
- --------
(1) Includes temporary living expenses paid by the Company of $59,231, $72,000
and $61,299 to Mr. Ledbetter in 1998, 1997 and 1996, respectively.
(2) Includes value of stock bonuses of $5,924 and $1,129 for Messrs. Ledbetter
and Ezcurra, respectively.
(3) Ms. Zeletes joined the Company in March 1997 and left in March 1999.
(4) Commissions paid in 1998 and 1997.
(5) Includes value of stock bonuses of $5,062 and $750 for Mr. Godbole and Ms.
Zeletes, respectively.
(6) Mr. Godbole joined the Company in May 1997 and left in April 1999.
(7) Mr. Steimle joined the Company in July 1997 and left in May 1998.
(8) Severance pay for Mr. Steimle.
(9) Mr. Daniher joined the Company in May 1998 and left in March 1999.
(10) Mr. Ezcurra joined the Company in September 1996 and left in July 1998.
(11) Includes commissions of $57,268 in 1988,$94,904 in 1997 and $12,835 in
1996.
66
<PAGE>
In November 1998, Mr. Goldsmith joined the Company as Vice President,
Finance and Chief Financial Officer. Under the terms of his employment, he
received a salary of $175,000 per annum and options to purchase 275,000 shares
of Common Stock at $2.19 per share and vesting over four years, and he will be
entitled to receive bonuses in 1999 if we meet certain corporate milestones,
including completing the audit of our financial statements, filing with the
Securities and Exchange Commission the annual and quarterly reports required
under the Exchange Act, holding an annual stockholders meeting, resumption of
trading on Nasdaq, resolving the class action lawsuits that have been brought
against us, obtaining certain financing and consummating the sale of the Company
within certain parameters. If all the milestones are met within the time period
specified, the aggregate amount of the bonuses could be approximately $220,000.
The following table sets forth further information regarding option grants
during 1998 pursuant to our Executive Officer Plan and our 1996 Equity Incentive
Plan to each of the Named Executive Officers. The table sets forth the
hypothetical gains or "option spreads" that would exist for the options at the
end of their respective five or ten year terms. These gains are based on assumed
rates of annual compound stock price appreciation of 5% and 10% from the date
the option was granted to the end of the option term:
OPTION GRANTS IN 1998
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
NUMBER OF PERCENTAGE OF VALUE AT ASSUMED
SECURITIES TOTAL OPTIONS ANNUAL RATES OF
UNDERLYING GRANTED TO EXERCISE STOCK PRICE APPRECIATION
OPTIONS EMPLOYEES PRICE EXPIRATION FOR OPTION TERM (2)
NAME GRANTED (1) IN 1998 PER SHARE DATE 5% 10%
- ---- ----------- ------------- ----------- ---------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Carl S. Ledbetter -- -- -- -- -- --
Jane Zeletes 10,000 0.67 $ 5.00 01/21/03 13,814 30,526
78,139 5.24 2.19 09/09/03 47,279 104,473
Vishwas Godbole 20,000 1.34 5.00 01/21/03 27,628 61,051
104,186 6.99 2.19 09/09/03 63,038 139,298
Daniel E. Steimle 6,250 0.42 5.00 01/21/03 8,634 19,078
William Daniher 75,000 5.03 6.00 05/07/03 124,326 274,729
156,643 10.50 2.19 09/09/03 94778 209,434
Gustavo Ezcurra 20,000 1.34 5.00 01/21/03 27,628 61,051
</TABLE>
- -----------------
(1) Options granted pursuant to the Executive Officer Plan and the 1996 Equity
Incentive Plan in 1998 generally have been incentive stock options or
non-qualified stock options that were granted at fair market value and vest
over a four-year period so long as the individual is employed by the
Company. Options granted to executive officers generally expire five years
from the date of grant.
(2) The 5% and 10% assumed annual rates of stock price appreciation are
mandated by the rules of the Securities and Exchange Commission and do not
represent the Company's estimate or projection of future common stock
prices.
67
<PAGE>
The following table sets forth the number of shares acquired upon the
exercise of stock options during 1998 and the number of shares covered by both
exercisable and unexercisable stock options held by each of the Named Executive
Officers as of December 31, 1998. Also reported are values of "in-the-money"
options, which represent the positive spread between the respective exercise
prices of outstanding stock options and the fair market value of our Common
Stock as of December 31, 1998 ($0.50) as determined by the Board of Directors.
AGGREGATED OPTION EXERCISES IN 1998 AND YEAR-END VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
SHARES OPTIONS AT YEAR-END AT YEAR-END
ACQUIRED ON VALUE -------------------------------- --------------------------
NAME EXERCISE(#) REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Carl S. Ledbetter -- -- 394,854 236,064 -- --
Jane Zeletes -- -- 21,158 120,685 -- --
Vishwas Godbole -- -- 58,823 202,392 -- --
Daniel E. Steimle -- -- 43,285 -- -- --
William Daniher -- -- 10,938 220,341 -- --
Gustavo Ezcurra 25,000 $27,750 -- -- -- --
</TABLE>
DIRECTOR COMPENSATION
Our directors do not receive cash compensation for their services as
directors but are reimbursed for their reasonable expenses in attending meetings
of the Board of Directors. Each director who is not an employee is eligible to
participate in our 1997 Directors Stock Option Plan (the "Directors Plan"). Each
eligible director who first becomes a director on or after our initial public
offering in November 1997 will initially be granted an option for 15,000 shares
(an "Initial Grant") on the later of the effective date of the initial public
offering or the date such director first becomes a director. At each annual
meeting of stockholders thereafter, each eligible director will automatically be
granted an additional option to purchase 5,000 shares if such director has
served continuously as a member of the Board of Directors since the date of such
director's Initial Grant (or since the effective date of the initial public
offering if such director did not receive an Initial Grant). All options issued
under the Directors Plan will vest as to 25% of the shares on each anniversary
of the date of grant, provided the optionee continues as a member of the Board
of Directors or as a consultant to the Company. The exercise price of all
options granted under the Directors Plan will be the fair market value of the
Common Stock on the date of grant. To date, no director has been eligible to
participate under the Director Plan.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
None of the members of the Compensation Committee of the Board of Directors
was an officer or employee of the Company during 1998. None of our executive
officers serves as a member of the board of directors or compensation committee
of any entity that has one or more executive officers serving on our Board of
Directors or Compensation Committee.
68
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information to the extent known by
us with respect to beneficial ownership of our Common Stock as of December 31,
1998 by (i) each stockholder known by the Company to be the beneficial owner of
more than 5% of the Company's Common Stock, (ii) each director of the Company,
(iii) each of the Named Executive Officers and (iv) all executive officers and
directors as a group.
<TABLE>
<CAPTION>
NUMBER OF SHARES PERCENTAGE OF SHARES
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED (1) BENEFICIALLY OWNED
- ------------------------ ---------------------- --------------------
<S> <C> <C>
Intel Corporation (2) 1,207,020 8.0%
James R. Flach
Accel Partners (3) 879,562 5.8
Douglas M. Leone
Sequoia Capital (4) 870,691 5.8
Strachman Family Revocable Trust (5) 834,210 5.5
Carl S. Ledbetter (6) 423,363 2.8
Gary M. Lauder (7) 276,049 1.8
Vishwas Godbole (8) 66,303 *
Gustavo Ezcurra (9) 25,000 *
Jane Zeletes (10) 23,950 *
William Daniher (11) 14,063 *
Stephen E. Halprin (12) 2,160 *
Danial E. Steimle -- *
All executive officers and directors
as a group (10 persons) (13) 2,580,215 17.1
</TABLE>
- ----------------
* Represents less than 1% of the Company's outstanding Common Stock.
(1) Unless otherwise indicated below, the persons and entities named in the
table have sole voting and sole investment power with respect to all shares
beneficially owned, subject to community property laws where applicable.
Shares of common stock subject to options or warrants that are currently
exercisable or exercisable within 60 days of December 31, 1998, are deemed
to be outstanding and to be beneficially owned by the person holding such
options warrants for the purpose of computing the percentage ownership of
such person but are not treated as outstanding for the purpose of computing
the percentage ownership of any other person.
(2) Intel's address is 2200 Mission College Boulevard, Santa Clara, CA 95052.
(3) Represents ownership by the following entities associated with Accel
Partners: 545,193 shares and 250,677 shares subject to warrants held by
Accel IV, L.P., 25,594 shares and 11,769 shares subject to warrants held by
Accel Investors '95 L.P., 13,095 shares and 6,022 shares subject to
warrants held by Ellmore C. Patterson Partners, 11,309 shares and 5,202
shares subject to warrants held by Accel Keiretsu L.P. Also includes 10,701
shares subject to options exercisable within 60 days of December 31, 1998
held by Mr. Flach granted in connection with services performed by Mr.
Flach for the Company. Mr. Flach, a director of the Company, is an
executive partner of Accel Partners and holds no voting or dispositive
power with respect to any of these shares. The address of Mr. Flach and the
Accel partnerships is 428 University Ave., Palo Alto, CA 94301.
(4) Represents 595,191 shares and 275,497 shares subject to warrants held by
Sequoia Capital VI, 29,761 shares and 13,776 shares subject to warrants
held by Sequoia Technology Partners VI, ("STP VI"), 16,932 shares and 440
shares subject to warrants held by Sequoia XXIV and 6,877 shares and 10,581
69
<PAGE>
shares subject to warrants held by Sequoia 1995. Mr. Leone, a director of
the Company, is a general partner of STP VI and of the general partner of
Sequoia Capital VI. The address of Mr. Leone and the Sequoia funds is 3000
Sand Hill Road, Menlo Park, CA 94025.
(5) Mr. Strachman, a trustee of the Strachman Family Revocable Trust, was a
co-founder of the Company and served as its President and Chief Executive
Officer from June 1990 until his resignation in July 1995. Mr. Strachman
resigned as a director in February 1998. Mr. Strachman's address is c/o
Ultracom Communications, Inc., 21580 Stevens Creek Blvd., Cupertino, CA
95014.
(6) Includes 422,266 shares subject to options exercisable within 60 days of
December 31, 1998. Mr. Ledbetter is the Chief Executive Officer and
Chairman of the Board of Directors of the Company.
(7) Mr. Lauder is a director of the Company.
(8) Includes 65,366 shares subject to options exercisable within 60 days of
December 31, 1998. Mr. Godbole was Vice President, Engineering. He left the
Company in April, 1999.
(9) Mr. Ezcurra was Vice President, Sales. He left the Company in July, 1998
(10) Includes 23,812 shares subject to options exercisable within 60 days of
December 31, 1998. Ms. Zeletes was Vice President, Engineering. She left
the Company in March, 1999.
(11) Represents shares subject to options exercisable within 60 days of December
31, 1998.
(12) Does not include 429,852 shares of Common Stock and 66,553 shares subject
to warrants held by OSCCO III, L.P., an entity which Mr.Halprin is
affiliated with. Mr. Halprin is a director of the Company.
(13) Includes 573,964 shares subject to warrants and 536,208 shares subject to
options exercisable within 60 days of December 31, 1998 held by executive
officers and directors of the Company.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
From January 1, 1998 to the present, there has been no (and there is no
currently proposed) transaction or series of similar transactions to which we
were (or are to be) a party in which the amount involved exceeds $60,000 and
in which any director, executive officer or holder of more than 5% of our
Common Stock (or any member of the immediate family of any of the foregoing
persons) had (or will have) a direct or indirect interest, (i) except for the
compensation arrangements, described in Item 11 and except for the
transactions described below.
In January 1999, we entered into retention agreements with three executive
officers, William Daniher, Vishwas Godbole and Jane Zeletes (each of whom has
since left the Company), and with Thara Edson, who has since become an executive
officer. Under the agreements, as subsequently modified, each officer received
an increase in salary and the right to receive a bonus if the Company is sold
and the officer continues with the Company through the closing of such sale and
for a short time thereafter. The bonus would be from $50,000 to $200,000,
depending on the sale price. In addition, Mr. Daniher, Mr. Godbole, Ms. Zeletes
and Ms. Edson received options to purchase 231,279, 262,152, 141,982 and 200,000
shares of Common Stock, respectively. Each option has an exercise price of $0.50
per share and vests over four years, except that vesting accelerates in the
event of a sale of the Company. The agreements also provide for three months'
severance payment in the event that an officer's employment is terminated by the
Company without cause.
70
<PAGE>
In March 1999, we entered into a severance agreement with Mr. Daniher
whereby we paid him three months' severance pay upon the termination of his
employment, and we agreed that he would receive the contingent bonus and
accelerated vesting of stock options provided for in his retention agreement
(referred to above) if we are acquired prior to April 1, 2000.
In May 1999, we granted to Mr. Goldsmith and Ms. Edson additional options
to purchase 275,000 and 40,000 shares of Common Stock, respectively, at $0.50
per share and vesting over four years, except that vesting accelerates in the
event of a sale of the Company.
ITEM 14. EXHIBITS FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Report:
1. FINANCIAL STATEMENTS -- See Index to Financial Statements and Financial
Statement Schedule at Item 8 on page 36 of this Report.
2. FINANCIAL STATEMENT SCHEDULES -- See Index to Financial Statements and
Financial Statement Schedule at Item 8 on page 36 of this Report.
3. EXHIBITS -- The following exhibits are filed as part of, or incorporated by
reference into, this report on Form 10-K:
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Title
------- -------------
<S> <C>
3.01 Registrant's Amended and Restated Certificate of
Incorporation. (1)
3.02 Registrant's Amended and Restated Bylaws. (2)
10.01 Amended and Restated Investors Rights Agreement, dated as of
September 18, 1997 between Registrant and certain investors, as
amended October 13, 1997 and as amended November 6, 1997. (3)
10.02 Registrant's 1993 Equity Incentive Plan. (3)(4)
10.03 Registrant's 1996 Equity Incentive Plan. (3)(4)
10.04 Registrant's Executive Officer Incentive Plan. (3)(4)
10.05 Registrant's 1997 Equity Incentive Plan. (3)(4)
10.06 Registrant's 1997 Directors Stock Option Plan. (3) (4)
10.07 Registrant's 1997 Employee Stock Purchase Plan. (3) (4)
10.08 Form of Indemnity Agreement entered into by Registrant with each
of its directors and officers. (3)
10.11 Employment Agreement between Registrant and Carl S. Ledbetter
dated January 15, 1996. (3)(4)
10.12 Senior Secured Convertible $5.5 Million Debenture Purchase
Agreement between Registrant and London Pacific Life & Annuity
Company dated April 30, 1997 and related Senior Secured
Convertible $5.5 Million Debenture Due 2002 and Security
Agreement and Senior Secured Convertible $5.5 Million
Debenture Due. (3)
10.15 Collaboration Agreement among Registrant, Sharp Corporation and
Itochu Corporation dated November 25, 1996 and Addendum No. 1
thereto dated November 25, 1996. (3)
</TABLE>
71
<PAGE>
<TABLE>
<S> <C>
10.16 Sales and Purchase Agreement between Registrant and Itochu
Corporation dated January 10, 1997. (3)(5)
10.21 Warrant Purchase Agreement by and between Registrant and Alcatel
dated as of November 3, 1997. (3)
10.22 Employment Letter between Registrant and Dan E. Steimle dated
July 27, 1997. (4)(6)
10.24 Separation Agreement and General Release between the Registrant
and Dan E. Steimle dated May 30, 1994. (4)
10.25 Sublease between the Rigistrant and Viking Freight, Inc. dated
February 9, 1998. (7)
10.26 Employment Letter from the Registrant to Judson Goldsmith dated
November 12, 1998. (4)
10.27 Product Purchase Agreement between the Registrant and RCN
Operating Services, Inc. dated June 30, 1997
23.01 Consent of Independent Auditors for 1998 and 1997
23.02 Consent of Independent Accountants for 1996
27.01 Financial Data Schedule.
27.02 Restated 1997 Financial Data Schedule.
</TABLE>
- -----------
(1) Incorporated by reference to Exhibit 3.03 to the Registrant's Registration
Statement on Form S-1, File No. 333-36001, declared effective by the SEC on
November 11, 1997 (the "Form S-1").
(2) Incorporated by reference to Exhibit 3.05 to the Form S-1.
(3) Incorporated by reference to the Exhibit with the same number in the Form
S-1.
(4) Represents a management contract or compensatory plan.
(5) Confidential treatment has been granted with respect to certain portions of
this agreement. Such portions have been omitted from the filing and have
been filed separately with the SEC.
(6) Incorporated by reference to Exhibit 10.21 to the Registrant's Annual
Report on Form 10-K for the Year Ended December 31, 1997.
(7) Incorporated by reference to Exhibit 10.24 to the Registrant's Registration
Statement on Form S-4, File No. 333-52083 (filed on May 7, 1998
(b) Reports on Form 8-K.
The following Current Reports on Form 8-K were filed by the Company during
the last three quarters of 1998:
1. On June 19, 1998, the Company reported under Item 5. "Other Events"
that Coopers & Lybrand, the Company's independent accountants at that
time, had notified the Company that their reports with respect to the
financial statements of the Company as of December 31, 1997, and for
the year then ended, and as of September 30, 1997, and for the nine
months then ended, should no longer be relied upon.
2. On July 16, 1998, the Company reported under Item 4. "Changes In
Registrant's Certifying Accountant" and Item 7. "Exhibits" that
PricewaterhouseCoopers LLP (successor entity to Coopers & Lybrand) had
resigned as the independent accountants of Hybrid Networks, Inc.
3. On August 17, 1998, the Company reported under Item 4. "Changes In
Registrant's Certifying Accountant" that the Company had engaged
Arthur Andersen LLP as the Company's independent
72
<PAGE>
accountants to audit the financial statements of the Company as of
December 31, 1997 and for the year then ended and to act as the
Company's independent accountants on a continuing basis.
4. On November 17, 1998, the Company reported under Item 5. "Other
Events" that Judson W. Goldsmith had been appointed Vice President,
Finance and Chief Financial Officer.
5. On December 2, 1998, the Company reported under Item 4. "Changes In
Registrant's Certifying Accountant" and Item 7. "Exhibits" that Arthur
Andersen LLP had resigned as the independent accountants of Hybrid
Networks, Inc. Additionally, the Company reported under Item 5. "Other
Events" that the Company's securities would be delisted from the
NASDAQ Stock Market effective with the close of business December 1,
1998.
6. On December 23, 1998, the Company reported under Item 4. "Changes In
Registrant's Certifying Accountant" that the Company had engaged Hein
+ Associates LLP as the Company's independent accountants to audit the
financial statements of the Company as of December 31, 1997 and for
the year then ended and to act as the Company's independent
accountants on a continuing basis.
(c) Exhibits. See (a)(3) above.
(d) Financial Statement Schedules. See (a)(2) above.
73
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Exchange Act,
the Registrant caused this Report to be signed on its behalf by the undersigned,
thereunto duly authorized.
June 8, 1999 HYBRID NETWORKS, INC.
By: /s/ Carl S. Ledbetter
--------------------------
Carl S. Ledbetter
Chief Executive Officer
Pursuant to the requirements of the Exchange Act, this Report has been
signed below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
- --------- --------- --------
<S> <C> <C>
PRINCIPAL EXECUTIVE OFFICER:
/s/ Carl S. Ledbetter Chief Executive Officer June 8, 1999
- ---------------------------
Carl S. Ledbetter
PRINCIPAL FINANCIAL OFFICER AND
PRINCIPAL ACCOUNTING OFFICER:
/s/Judson W. Goldsmith President, Chief Operating June 8, 1999
- -------------------------------- Officer, Chief Financial Officer
Judson W. Goldsmith and Secretary
ADDITIONAL DIRECTORS:
/s/ James R. Flach Director June 8, 1999
- ------------------------
James R. Flach
/s/ Stephen E. Halprin Director June 8, 1999
- ------------------------------
Stephen E. Halprin
/s/ Gary M. Lauder Director June 8, 1999
- -------------------------
Gary M. Lauder
/s/ Douglas M. Leone Director June 8, 1999
- ----------------------------
Douglas M. Leone
</TABLE>
74
<PAGE>
INDEPENDENT AUDITORS REPORT
To the Stockholders and Board of Directors
Hybird Networks, Inc.
San Jose, California
Our report on the financial statements of Hybrid Networks, Inc. is included
on page 37 of this Form 10-K. In connection with our audits of such financial
statements, we have also audited the related financial statement schedule listed
in Item 14(a)(2) of this Form 10-K.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included therein.
/s/ HEIN + ASSOCIATES LLP
Orange, California
April 23, 1999
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors
Hybird Networks, Inc.
Our audit of the financial statements referred to in our report dated August
28, 1997, appearing on page 38 of this Form 10-K also included an audit of
the financial statement schedule listed in Item 14(a)(2) of this Form 10-K.
In our opinion, this financial statement schedule presents fairly, in all
material respects, the information set forth therein when read in conjunction
with the related financial statements.
PricewaterhouseCoopers LLP
San Jose, California
August 28, 1997
75
<PAGE>
HYBRID NETWORKS, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
ALLOWANCE FOR DOUBTFUL ACCOUNTS
<TABLE>
<CAPTION>
Additions Weighted
Balance at Charged Charged Balance
Beginning to Costs and to Other at End
For the year ended: of Period Expenses Accounts Deductions of Period
--------------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
December 31, 1998 - $ 200 - - $ 200
December 31, 1997 - - - - -
December 31, 1996 - - - - -
</TABLE>
INVENTORY RESERVES
<TABLE>
<CAPTION>
Additions Weighted
Balance at Charged Charged Balance
Beginning to Costs and to Other at End
For the year ended: of Period Expenses Accounts Deductions of Period
--------------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
December 31, 1998 $3,015 $1,691 - $(1,571) $3,135
December 31, 1997 256 2,759 - - 3,015
December 31, 1996 136 126 - (6) 256
</TABLE>
76
<PAGE>
SEPARATION AGREEMENT AND GENERAL RELEASE
This Agreement (this "AGREEMENT") is entered into as of May 30, 1998,
between Hybrid Networks, Inc., a Delaware corporation (the "Company"), and
Dan E. Steimle ("EMPLOYEE").
RECITALS
A. Whereas, the Company has employed Employee as its Vice President,
Finance and Administration, Chief Financial Officer and Secretary;
B. Whereas Employee wishes to end his employment relationship with the
Company as of May 31, 1998 (the "TERMINATION DATE"), and he and the Company
wish to provide for termination of that relationship by mutual agreement in a
way which will preserve the goodwill that exist between them.
Now, therefore, in consideration of the premises and mutual promises
herein contained, the parties agree as follows:
1. TERMS OF SEPARATION
A. Employee's employment ends as of the Termination Date. The
Company will deliver on the Termination Date to Employee a check based on the
gross amount set forth in part I of EXHIBIT A hereto for accrued salary,
reimbursable expenses, accrued but unused vacation pay and any other similar
payments due and owing to Employee up to the Termination Date, adjusted for
applicable withholding and deductions.
B. Upon completion of the Revocation Period described in Section
13, the Company will deliver to Employee a check based on the gross amount
set forth in part 2 of EXHIBIT A, representing severance pay.
C. On August 31, 1998, the Company will deliver to Employee a
check based on the gross amount set forth in part 3 of EXHIBIT A.
representing a bonus payment to Employee for his extraordinary efforts in
assisting the Company with its major transactions in the last four months of
1997 and in 1998, including, without limitation, its September 1997 bridge
financing, its initial public offering and the proposed business combination
with Pacific Monolithics, Inc.
D. The Company offers to extend the health insurance coverage it
currently provides Employee pursuant to the Consolidated Omnibus Budget
Reconciliation Act of 1985 ("COBRA") at Employee's expense. Employee will
have 60 days from the Termination Date to notify the Company in writing of
his election to continue coverage pursuant to COBRA.
E. The Company will continue to provide Employee, during the
period commencing with the Termination Date and ending December 31, 1998, the
following: (i) use of a lap top computer (Employee will return the lap top
computer on January 1, 1999); (ii) availability of access to the Company's
server for e-mail receipt and transmittal; and (iii)
<PAGE>
availability of a telephone extension in the Company's telephone system so
that Employee will be able to access voice mail. By signing below, Employee
warrants that he has returned to the Company any and all property and data of
the Company of any type whatsoever that was in his possession, custody, or
control, except for the lap top computer referred to above.
F. For six months commencing June 1, 1998 and ending November 30,
1998 (the "PERIOD OF CONSULTANCY"), Employee will serve as an on-call
consultant to the Company, performing such duties as the Chief Executive
Officer of the Company may from time to time direct; provided that, unless
both parties mutually agree otherwise, Employee will not be required to
provide more than 40 hours of such consulting services in any month during
the Period of Consultancy. In consideration for (i) the agreement of
Employee to make himself available to provide consulting services as set
forth herein and (ii) the rendering by Employee of up to 20 hours of such
services, to the extent requested by the Company, in any month during the
Period of Consultancy, the Company will pay to Employee, on the first of each
month during the Period of Consultancy, a check based on a gross amount
equal to 50% of Employee's current base monthly salary, as set forth in part
4 of EXHIBIT A. In addition, the Company will pay Employee $1,000 per day for
each day in which Employee actually provides consulting services to the
Company at the Company's request as provided herein in excess of 20 hours of
such consulting services in any month during the Period of Consultancy.
Employee will not be an employee of the Company for any purpose during the
Period of Consultancy. As provided in the existing terms of Employee's
options to purchase shares of the Company's Common Stock (constituting
options to purchase 141,111 shares in the aggregate) and under the existing
terms of the applicable stock option plans, such options will continue to
vest during the Period of Consultancy. Upon the termination of the Period of
Consultancy, Employee's status as a consultant to the Company will be
Terminated (as defined in the applicable stock option plans), and,
accordingly, the vesting of the stock options will then terminate and the
options will, to the extent then vested, be exercisable for a period of 90
days commencing with the date of such termination.
G. Employee agrees the payments he receives herewith pursuant to
Sections 1.A, 1.B and 1.C of this Agreement represent the total amount of
compensation, benefits and bonuses owed to him by the Company and that the
Company does not owe him any other amounts. Employee agrees that all other
payments and consideration he receives under this Agreement are in exchange
for the covenants and agreements he makes herein. Employee further agrees
and understands that any liability for state or federal income or other taxes
that may be assessed as a result of the transactions provided for herein is
Employee's sole responsibility, and he will not look to the Company for
payment or reimbursement of any taxes.
H. The parties acknowledge that Employee is bound by the
Proprietary Information and Inventions Agreement, which he signed when he
commenced employment with the Company, a copy of which is attached hereto as
EXHIBIT B (the "PII AGREEMENT"), and that Employee has had access to and has
become acquainted with various non-public, confidential or trade secret
information of the Company, including, but not limited to information
referred to in the PII Agreement as "Proprietary Information" and records of
the Company that are regularly used in the operation of the Company's
business, that affect the success, profitability and good will of the Company
and that are not known or available to persons outside the Company, and other
nonpublic, confidential or trade secret information of the Company
(collectively, the "PROPRIETARY INFORMATION"). With respect to such
Proprietary Information Employee agrees:
2
<PAGE>
(i) That all Proprietary Information and documents,
memoranda, reports, files, correspondence and records that relate to the
Company's business that Employee had contact with remain the Company's sole
property;
(ii) That Employee will continue to abide by the terms and
conditions of the attached PII Agreement to the extent that such terms and
conditions provide for continuing obligations after termination of his
employment;
(iii) That he will not directly or indirectly disclose any of
this Proprietary Information, or use it in any way, either during the term of
this Agreement or at any time thereafter, except as authorized in writing by
the Company;
(iv) That he has delivered and returned to the Company all
written or graphic records that he knows, suspects or should know contain
Proprietary Information.
2. MUTUAL RELEASE
Employee and his representatives, heirs, successors and assigns do
hereby completely release and forever discharge the Company, its affiliates,
present and former shareholders, officers, directors, agents, employees,
attorneys, successors and assigns from all claims, rights, demands, actions,
obligations, liabilities and causes of action he may have had or now have,
known or unknown, to pursue any remedies available to him whether based on
tort, contract (express or implied) or any federal, state or local law,
statute or regulation, including, but not limited to, matters that could have
been raised in a civil action, any employment laws, including but not limited
to, claims of unlawful discharge, breach of contract, breach of the covenant
of good faith and fair dealing, fraud, violation of public policy,
defamation, physical injury, emotional distress, claims under Title VII of
the 1964 Civil Rights Act, as amended, the California Fair Employment and
Housing Act, the Age Discrimination in Employment Act, the Older Worker
Benefit Protection Act and any other laws and/or regulations relating to
employment or employment discrimination. Notwithstanding the foregoing,
Employee does not release any claims based on obligations created by or
reaffirmed in the PII Agreement or this Agreement, whether or not such claims
have already arisen or arise after the date hereof.
The Company and its successors and assigns do hereby completely
release and forever discharge Employee and his representatives, heirs,
attorneys, successors and assigns from all claims, rights, demands, actions,
obligations, liabilities and causes of action the Company may have had or now
have, known or unknown, to pursue any remedies available to the Company
whether based on tort, contract (express or implied) or any federal, state or
local law, statute or regulation. including, but not limited to, matters that
could have been raised in a civil action, any employment laws, including but
not limited to, claims of breach of contract, breach of the covenant of good
faith and fair dealing, fraud, violation of public policy, defamation,
physical injury, emotional distress, claims under Title VII of the 1964 Civil
Rights Act, as amended, the California Fair Employment and Housing Act, the
Age Discrimination in Employment Act, the Older Worker Benefit Protection Act
and any other laws and/or regulations relating to employment. Notwithstanding
the foregoing, the Company and its successors and assigns do not release any
claims based on obligations created by or reaffirmed in the PII Agreement or
this Agreement, including, without limitation, the obligations referred to in
Section 1.H above, whether or not such claims have already arisen or arise
after the date hereof.
3
<PAGE>
3. SECTION 1542 WAIVER
Based on information currently available to the Company and
Employee, as applicable, (i) the Company is not aware that Employee has
committed any wrongdoing or has participated in the preparation and filing
with any government agency of any report or final prospectus or registration
statement that is incorrect or incomplete or in the preparation and issuance
of any public announcement or any filing with any government agency which at
the time thereof Employee knew or should have known to be incorrect or
incomplete, and (ii) Employee is not aware that the Company has committed any
wrongdoing or has prepared and filed with any government agency any report or
final prospectus or registration statement that is incorrect or incomplete or
in the preparation and issuance of any public announcement or any filing with
any government agency which at the time thereof the Company knew or should
have known to be incorrect or incomplete.
Notwithstanding the foregoing, each party understands that, except
for any claims referred to in the last sentence of the first paragraph
of Section 2 or in the last sentence of the second paragraph of Section 2
(the "EXCEPTED CLAIMS"), such party releases not only claims presently known
to such party, but also all unknown or unanticipated claims, rights, demands,
actions, obligations, liabilities and causes of action of every kind and
character that would otherwise come within the scope of the release and as
described in the preceding sections. Each party understands that such party
may hereafter discover facts different from what such party now believes to
be true, which if known, could have materially affected this Agreement, but
such party nevertheless waives any claims or rights based on different or
additional facts, other than any Excepted Claims. Except for the Excepted
Claims, each party knowingly and voluntarily waives any and all rights or
benefits that such party may now have, or in the future may have, under the
terms of section 1542 of the California Civil Code, which provides as follows:
A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES
NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING
THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED
HIS SETTLEMENT WITH THE DEBTOR.
4. CONFIDENTIALITY
Employee and the Company understand and agree that this Agreement
and each of its terms, and the negotiations surrounding it, are confidential
and will not be disclosed by Employee or the Company, to any entity or
person, for any reason, at any time, without the prior written consent of the
other party, except as required by law or to legal advisors for the parties
who will be informed of and will agree to be bound by this confidentiality
obligation.
5. PRESS RELEASE
Notwithstanding the provisions of Section 6, Employee acknowledges
that Hybrid will promptly issue a press release regarding Employee's
termination of his employment with the Company, and agrees that the Company
may do so. The Company agrees to make a copy of the press release available
to Employee in advance of issuance and to make reasonable efforts in good
faith to reach agreement with Employee regarding the wording of the press
release.
4
<PAGE>
6. NON-ADMISSION
The parties understand and agree that this Agreement is not and
will not be deemed or construed at any time or for any purpose as an
admission of liability by the Company or by Employee. The liability for any
and all claims is expressly denied by the Company and by Employee.
7. INTEGRATION
The parties understand and agree that the preceding sections recite
the sole consideration for this Agreement; that no representation or promise
has been made by Employee, the Company or any other party concerning the
subject matter of this Agreement, except as expressly set forth in this
Agreement or the PII Agreement; and that all agreements and understandings
between the parties concerning the subject matter of this Agreement are
embodied and expressed in this Agreement and the PII Agreement. This
Agreement and the PII Agreement will supersede all prior agreements and
understandings between Employee and the Company, whether written or oral,
express or implied, with respect to the engagement, employment, termination
and compensation of Employee.
8. AMENDMENTS; WAIVER
This Agreement may not be modified, amended, or terminated except
by an instrument in writing, signed by each of the parties. No failure to
exercise and no delay in exercising any right, remedy or power under this
Agreement will operate as a waiver thereof, and no single or partial exercise
of any right, remedy or power under this Agreement will preclude any other or
further exercise thereof, or the exercise of any other right, remedy or power
provided herein or by law or in equity.
9. ASSIGNMENT; SUCCESSORS AND ASSIGNS
This Agreement will be binding upon and will inure to the benefit
of the parties and their respective heirs, successors, attorneys and
permitted assigns. This Agreement will not benefit any other person or
entity except as specifically enumerated in this Agreement.
10. SEVERABILITY
If any provision of this Agreement, or its application to any
person, place or circumstances is held by an arbitrator or a court of
competent jurisdiction to be invalid, unenforceable or void, such provision
will be enforced to the greatest extent permitted by law, and the remainder
of this Agreement and provision as applied to other persons, places and
circumstances will remain in full force and effect.
11. GOVERNING LAW
This Agreement will be governed by and construed in accordance with
the law of the State of California.
5
<PAGE>
12. CONSIDERATION PERIOD
Employee acknowledges he has read and understands this Agreement
and that his signature below is completely voluntary. Employee also
acknowledges that the Company as offered him the opportunity to take up to 21
days to consider this Agreement but that he has elected to execute and
deliver this Agreement before such 21-day period has elapsed and that he
waives his rights to consider this Agreement for such 21-day period.
Employee further acknowledges that he has been told by the Company that he
has the right to consult with an attorney about this Agreement, that he was
encouraged by the Company to consult with an attorney of his own choosing
concerning the waivers contained in this Agreement, that he has done so and
that the waivers he has made are knowing, conscious and with full
appreciation that he may never pursue any of the rights he has waived.
13. REVOCATION PERIOD
Employee understands that for seven days after signing this
Agreement he has the right to revoke it and that this Agreement will not
become effective or enforceable until after those seven days (the "REVOCATION
PERIOD") have passed.
IN WITNESS WHEREOF, the parties have executed and delivered as of
the first date set forth above.
Employee: The Company:
HYBRID NETWORKS, INC.
/s/ Dan E. Steimle
- ---------------------------------
Dan E. Steimle
By: /s/ Carl S. Ledbetter
---------------------------------
Carl S. Ledbetter
Chief Executive Officer
6
<PAGE>
EXHIBIT A
Gross amount paid to Employee for accrued salary, reimbursable expenses
and accrued but unused vacation pay through May 31, 1998: $17,469.74
2. Gross severance pay to Employee: $27,500 (an amount equal to two
months' base salary, to be paid on May 31, 1998).
3. Gross bonus pay to Employee: $75,000 (to be paid on August 31,1998).
4. Gross fixed payments during Period of Consultancy: $6,875 per month
commencing June 1, 1998 and ending November 1, 1998 (an amount equal to 50% of
base monthly salary); a total of $41,250 over the six months' consulting period
(ending November 30, 1998).
<PAGE>
November 12, 1998
Mr. Judson Goldsmith
1010 Corporation Way
Suite 200
Palo Alto, CA 94303
(650) 938-1701
Dear Judson:
I am delighted to offer you the exempt position of Vice President, Finance,
and Chief Financial Officer of Hybrid Networks, Inc. at a base monthly
salary of $14,583.33 ($175,000.00 annualized). This position reports
directly to the CEO and is subject to the direction of the Audit Committee
of the Board of Directors of the Company. In addition to your base salary
you will be eligible for an Executive Bonus Plan based on meeting the
objectives outlined in the attached Exhibit A. This plan provides for an
amount equal to 40% of your yearly base salary if the target objectives are
met and has provisions for higher amounts for greater levels of
achievement.
A recommendation will be made to the Board of Directors of Hybrid Networks,
Inc. that you be granted an Incentive Stock Option to purchase 275,000
shares of common stock in Hybrid under the terms of the Company's 1996
Equity Incentive Plan. The purchase price of these shares will be either
the price of the stock on the NASDAQ at the close of business on your first
day of work at the Company or, if the stock is not trading on that day, the
price set by the Board of Directors for common stock in the Company at the
next Board of Directors meeting immediately following your first day of
work at the Company; the last options under this plan were priced at
$2 3/16 per share in September, 1998.
As a full-time employee of Hybrid, you will be eligible to participate in
all Company-sponsored benefits. These include medical, dental and life
insurance, LTD insurance, Personal Time Off, Company recognized Holidays,
our 401(k) Plan and our Section 125 Cafeteria Plan.
Employment with the Company is not for a specific term and can be
terminated by you or by the Company at any time for any reason, with or
without cause. Any contrary representations that may have been made or
that may be made to you are superseded by this offer. This is the entire
agreement regarding the terms of your employment with the Company and all
future modifications have to be agreed upon in writing by both parties.
Your employment pursuant to this offer is contingent upon:
- - completion of the Employment Application
- - executing our standard Proprietary Information and Inventions
Agreement
- - providing the Company with legally required proof of your identity and
authorization to work in the United States.
- - successful completion of a background and security check satisfactory
to the Company
<PAGE>
Carl Ledbetter to Judson Goldsmith 11/12/98 Page 2
Please return to me a signed copy of this letter if you accept the
above-described offer. THIS OFFER, IF NOT ACCEPTED, WILL EXPIRE ON 20
NOVEMBER, 1998. If you have any questions, please call me at (408) 342-4255.
1 am looking forward to having you join our team as we build toward success.
Sincerely,
/s/ Carl Ledbetter
CARL LEDBETTER
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
/s/ Judson Goldsmith 11/13/98 11/16/98
- -------------------- ---------------- ----------------------
JUDSON GOLDSMITH Acceptance Date Proposed Starting Date
<PAGE>
Carl Ledbetter to Judson Goldsmith 1 1 /1 2/98 Page 3
EXHIBIT A
Executive Bonus Plan
For
Judson Goldsmith
OBJECTIVES, ACTIONS, MEASUREMENTS, AND BONUS CONSIDERATION:
Bonus percentages indicated are percentages of the Target Bonus Amount, which is
40% of Base Salary ($175,000 at the start, so that the Target Bonus Amount is
set at $70,000)
All activities and bonuses in this section are for the period commencing with
the first day of work at the Company as a full-time employee and ending December
31, 1999, unless other dates are specifically indicated. After December 31,
1999, all bonus provisions not already paid out under this plan are cancelled.
1. Publication of 10K for 1997:15% if completed by 31 December, 1998 [i.e.,
15% of 40% of $175,000.00, or $10,500.00, if completed]; 10% if completed
by 31 January, 1999; 5% if completed after 31 January [$10,500 or $7,000
if completed]. Completing this item will require the securing of consent,
at the time of the publication of the 10K for 1997, from
PricewaterhouseCoopers to rely upon the audits completed by Coopers &
Lybrand of the 10Ks already published by the Company for 1995 and 1996,
or, alternatively, the completion of new audits and the publication of
revised 10Ks for 1995 and 1996, or 1996 and 1998.)
2. Publication of the 10Qs for Q1, Q2 and Q3 1998: 15% if completed by 31
December, 1998; or 10% if completed by 31 January, 1999; or 5% if completed
after 31 January, 1999 [$10,500, $7,000, or $3,500].
3. Publication of the 10K for 1998 by February 28, 1999: 5% [$3,500 if
completed].
4. The holding of an Annual Stockholders' Meeting for the Company: 10% if
completed by 1 April, 1999; or 5% if completed by 15 May, 1999 [$7,000 or
$3500 if completed].
5. Resumption of trading on the NASDAQ: 10% if on or before December 31, 1998,
or, alternately, 5% if trading resumed thereafter [$7,000 or $3,500 if
completed].
6. Resolution and dismissal of the class action lawsuits: 15% if on or before
March 31, 1999; 25% if on or before December 31, 1998 [$10,500 or $17,500,
if completed].
7. Financing of the Company by the sale of equity in the Company in the
indicated amounts through one of the following means
a) An equity investment of at least $12 million from a
strategic partner at a price per share of at least
$3: 30% (of the Bonus Target of 40% of
<PAGE>
Carl Ledbetter to Judson Goldsmith 11/12/98 Page 4
Base Salary) [$21,000] on or before 30 June, 1999,
For an equity investment of at least $8M, but less
than $12M, at a price of at least $2 3/16 per
share on or before 30 June, 1999, the bonus payment
will be 15% of the Bonus Target, or $10,500.
In addition to the payments above, the Company will
also pay 1% of Base Salary for each $1M of equity
raised above $12M at a price per share of $4 or more,
2% per $1M above $12M for a price of $5 or more,
3% per $1M above $12M for a price of $6 or more,
etc., up to a maximum of 10% of Base Salary per
$1M of equity raised above $12M for a price of
$13/share or more, on or before June 30, 1999. [For
example, if $18M is invested at $6/share in March,
1999, the bonus amount under this provision would be
$52,500 -- 30% of the Target Bonus of 40% of Base
Salary, which is 12% of Base Salary, for securing
the investment, plus an additional 3% of Base Salary
(because the price is $6/share) for each of the
additional $6M raised above $12M, or an additional
18% of Base Salary, for a total of 30% of Base
Salary.]
b) Any acquisition of the Company: 30% of Target Bonus,
plus 0.5% of the amount in cash or liquid securities
in excess of $45M but less than $55M immediately
distributed to the Hybrid Networks' stockholders, plus
1.0% of any such amount in excess of $55M but less
than $65M, plus 1.5% of any amount in excess of $65M.
[Example: if the Company were to be acquired for $67M
in cash and securities of a stock traded on the
NASDAQ, and from that paid $2M in investment fees,
$5M to creditors, and held back as part of the deal an
escrow or other contingency fund of $3M, the amount
immediately distributed to shareholders would be $57M.
The bonus payment would be 30% of 40% of $175,000, or
$21,000, plus 0.5% of $10M ($50,000] and 1.0% of $2M
[$20,000] (since $57M is $12M above the target of
$45M), for a total of $91,000.1
c) If an acquisition which qualifies under 8b) above is
finalized prior to May 15, 1999, the total payout for
the portion of the bonus related to section 8b will
not be less than $125,000.
d) If an equity investment which qualifies under 8a)
above is completed and the bonus under that
provision paid, but this event is followed within
1 year by an acquisition which qualifies under 8b)
above, the total bonus payment under the provisions
of this section 8 will be limited to the greater of
the bonuses provided for under sections 8a and 8b.
<PAGE>
HYBRID
Networks, Inc.
PRODUCT PURCHASE AGREEMENT
THIS AGREEMENT ("Agreement") is made this 30th h of June, 1997 ("effective
date") by and between HYBRID NETWORKS, INC., "a California corporation";
("Hybrid") having its principal place of business at 10161 Bubb Road,
Cupertino, CA 95014 and RCN Operating Services, Inc., a New Jersey
corporation having its principal place of business at 105 Carnegie Center,
Princeton, New Jersey 08540("RCN")".
RECITALS
Hybrid designs, develops, manufactures and distributes certain equipment
relating to high speed modem/routers for use in wireless and cable environments.
B. RCN is a provider of communications and telecommunications services" in
multiple markets in the United States, and has both mechanical and business
expertise to make use of Hybrid products for the purpose of distributing
data over "certain frequencies".
C. RCN desires to purchase certain equipment from Hybrid, and Hybrid is
willing to sell such equipment to RCN, on and subject to the terms set
forth below.
Now, therefore, in consideration of the mutual agreements and covenants herein
contained, the parties, intending to be legally bound, agree as follows:
1. SALE AND PURCHASE
A. On and subject to the terms and conditions hereof, RCN intends to purchase
from Hybrid, and Hybrid agrees to sell to RCN, a minimum of 25,000 units
(the "Units") consisting of either Hybrid's model CCM-201/221 wireless and
cable client cable modem/router (multi-user (which modems shall be capable
of serving at least 20 users)) or N-201/221 modem (single user), or any
combination thereof (the "Purchase Plan"). The Purchase Plan per-Unit
price for the CCM-201/221 are identified in Addendum B (less the volume
purchase agreement identified in Addendum C for the modems) RCN purchases
are contingent on Hybrid's ability to provide products that are technically
& price competitive, reliable, and can be delivered to meet RCN needs.
B. RCN agrees to purchase from Hybrid by year end 12/31/97, and Hybrid
agrees to sell to RCN a minimum of one thousand (1,000) Units and three
(3) head-end sites plus an option for two (2) additional sites, at
designated prices per Addendum A. Purchase Plan includes all equipment
purchased by AT&T that is installed in RCN systems, and all equipment
purchased by Cable Michigan or Commonwealth Telephone.
C. At the end of 1997, an additional discount or credit will be applied
towards RCN's purchases for that year. The discount is as follows:
PAGE 1
<PAGE>
$0-$500,000 = $15,000 credit
$501,000-$750,000 = $30,000 credit
$751,000 $1,000,000 = $45,000 credit
>$1,000,000 = $50,000 credit
D. RCN shall also have the right, but not the obligation to purchase
additional equipment, identified on Addendum B, at its sole discretion.
The purchase price for additional items (which are not included in the
Purchase Plan) is contained in Addendum B (the Units and other items
contained on Addenda A and B and the Software (as herein defined) are
sometimes collectively referred to herein as the "Products"). Payment
shall be made in accordance with Section 4 set forth below. RCN shall be
permitted to order either the CCM-201/221 or the N-201/221 with (i)
encryption support (model numbers CCM-201/221-S and N-201/221-S) which will
increase the per Unit price for each such Unit ordered by $100, and (ii) an
internal telephone modem (currently in development), which will increase
the per Unit price for each such Unit ordered by approximately $50 per
Unit. Hybrid shall notify RCN of the actual amount of the price increase
prior to RCN placing any order for Units so configured.
E. RCN agrees to take delivery of the Purchase Plan over a thirty-six month
period, commencing on the Effective Date, and the parties agree to use
their best efforts to develop a mutually agreed-upon forecasted delivery
schedule not later than July 15, 1997 which schedule shall be revised on a
quarterly basis not later than the 10th business days of each new quarter.
F. RCN shall order Products by issuing written purchase orders to Hybrid.
Such purchase orders will be subject to written acceptance by Hybrid, and
upon acceptance, will constitute a binding agreement between Hybrid and RCN
with respect to the Products identified herein on the term and conditions
included herein. All purchase orders submitted by RCN to Hybrid shall be
in English. The terms and conditions of this Agreement will prevail over
any inconsistent wording on purchase order forms. Hybrid shall make best
efforts to meet the quantities and shipping dates specified by RCN in each
purchase order; however, Hybrid shall notify RCN within two (2) days
following receipt of an order by Hybrid when quantities or shipping dates
differ from those specified by RCN. Hybrid's standard lead times of
released products is 45 days after receipt of order. Expedite requests
will be handled on a case-by-case basis, Hybrid will make best effort to
met RCN expedite requirements at no additional charge.
G. Orders placed by RCN for Products will be accepted by Hybrid provided that:
i) order is signed by RCN authorized representative
ii) the order is received and accepted by Hybrid during the Term
iii) the value of any single order is not less than $500 and
iv) the order specifies the Products ordered, purchase price(s), exact
"ship-to" and "bill-to" address and requested delivery schedule.
2. TERM OF AGREEMENT
This Agreement shall come into force on the date first written above ("Effective
Date") and shall remain valid for orders placed and delivered during the period
of 36 months beginning on the Effective Date (the "term").
PAGE 2
<PAGE>
3. PRICES/TAXES
All purchase prices are exclusive of shipping and insurance charges which shall
be billed separately. Installation and related charges are only included if
stated on the face of the order or quotation. Installation and related charges
are subject to change due to RCN failure to complete site readiness as stated,
non-standard site conditions, force majeure events or RCN caused delays. RCN
agrees to pay all such additional charges as invoiced by Hybrid only upon prior
written approval of RCN.
All prices are exclusive of all sales, use, excise, and other taxes, duties or
charges. Unless evidence of tax exempt status is provided by RCN. RCN shall
pay, or upon receipt of invoice from Hybrid, shall reimburse Hybrid for all such
taxes or charges levied or imposed on RCN, or required to be collected by
Hybrid, resulting from the Purchase Plan or any part thereof.
All prices are FOB Hybrid' Factory Cupertino, California, U.S.A. Unless
instructed otherwise. Hybrid will arrange for insurance and standard commercial
shipping, the costs of which will be invoiced to the RCN.
RCN will be entitled to Preferred Customer status. If, during the Term hereof,
Hybrid sells CCM-201/221 modem/router or N-201/221 single user modem (or the
encrypted version of either model) under similar or less advantageous (from
Hybrid's standpoint) terms and conditions to those paid by RCN, then the price
paid by RCN for all CCM Modem/routers that are on order to be delivered or any
future orders during the term of this agreement hereunder will be adjusted
downward to be equal to or below the lowest price at which Hybrid has sold said
Products. Preferred Customer status only remains valid as long as RCN
procurements remain consistent with Purchase Plan over the Term hereof. If
during the term hereof RCN chooses to purchase additional equipment above and
beyond the Purchase Plan, this Agreement will be amended accordingly based on
mutually agreed to terms and conditions provided. that such terms are no less
favorable than the terms set forth herein.
Prior to delivery, Hybrid reserves the right to make substitutions,
modifications and improvements to the Products, provided that such substitution,
modification or improvement shall not adversely affect performance in the
application originally agreed to with RCN, including, without limitation, any
substitution, modification or improvement that adversely affects a Product's
compatibility with the current Series 2000 system.
4. PAYMENT/FINANCING
Terms of payment will be Net 30 days from date of shipment from Hybrid's
factory. All amounts are payable to Hybrid Networks, Inc. at the address set
forth on the invoice. RCN has a period of twenty (20) days after receipt of
Product within which to notify Hybrid in writing of any discrepancies in the
shipment that may give RCN the right to reject such shipment.
If RCN fails to satisfy Hybrid on payment arrangements, Hybrid may refuse to
accept an order or may allow RCN to make other arrangements satisfactory to
Hybrid prior to shipment.
5. EQUIPMENT WARRANTY
PAGE 3
<PAGE>
Hybrid warrants that all Hybrid manufactured equipment including any equipment
subcontracted by Hybrid that carries the Hybrid logo[ will be free from defects
of material and workmanship and [(] conform to manufacturer's published
specifications for a period of eighteen (18) months from the date of delivery
under normal operating conditions, which specifications are attached hereto as
Addendum H and incorporated herein by this reference. Hybrid agrees to notify
RCN of any modification of any specifications relating to the Products, and
further agrees not to modify any such specifications in a manner that would
adversely affect the performance of the Products without prior written consent
of RCN. Hybrid will assist RCN in any warranty matters with equipment not
manufactured for or by Hybrid Technologies but provided to RCN by Hybrid.
Should a product fail within this warranty period, Hybrid will repair or
replace, at its discretion, the defective product when it is returned to
Hybrid, shipping prepaid. Replacement products may be refurbished or contain
refurbished materials. Proof of date of delivery of the returned product is
required. Hybrid' sole obligation shall be to repair, replace, or refund the
purchase price, at its option. Replacement Equipment may be new, refurbished
or remanufactured: provided, however, that any Replacement Equipment provided
by Hybrid to replace failed equipment upon initial installation thereof shall
be new. Returned replaced Equipment shall become Hybrid' property.
Replacement Equipment shall be warranted for the unexpired portion of the
returned Equipment's warranty. The warranty provided under this section,
shall not apply to any item of the equipment which has been altered or
modified including any change, addition, or improvement. Hybrids' sole
warranty liability to RCN with respect to equipment manufactured by a third
party that does not reside in Hybrid's current price list (in Addendum B).
and incorporated into Hybrid equipment shall be to pass through to RCN such
original equipment manufacturer's available product warranty. The warranty
provided herein does not cover damage, defects, malfunctions or service
failures caused by:
a) RCN's failure to follow Hybrid' environmental, installation, operation or
maintenance specifications or instructions:
b) Modifications, alterations or repairs made other than by Hybrid:
c) RCN's mishandling, abuse, misuse, negligence, or improper storage,
servicing or operation of the Equipment (including without limitation use
with incompatible equipment). Addendum I includes a written list of
compatible equipment to the Hybrid PoP equipment, which list will be
updated by Hybrid from time to time. : or
d) Power failures, surges, fire, flood, accident, actions of third parties or
other like events outside Hybrid' control. Repairs necessitated during the
warranty period by any of the foregoing causes may be made by Hybrid, and
the RCN shall pay Hybrid' standard charges for time and materials, together
with all shipping and handling charges arising from such repairs.
THIS WARRANTY CONSTITUTES HYBRIDS' SOLE AND EXCLUSIVE LIABILITY HEREUNDER. AND
RCN'S SOLE AND EXCLUSIVE REMEDY FOR DEFECTIVE OR NONCONFORMING ITEMS AND IS IN
LIEU OF ALL OTHER WARRANTIES, EXPRESS, IMPLIED OR STATUTORY (INCLUDING THE
WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE).
6. SOFTWARE
PAGE 4
<PAGE>
(a) LICENSE. In connection with the purchase of the Units, Hybrid with its
requisite power and authority, grants to RCN a non-exclusive,
non-transferable, license to use the software and related documentation
("Software") based on the following conditions:
I. for up to 500 subscribers per PoP purchased by CUSTOMER pursuant to
Section 1(F) is included in the original system purchase price
II. for total number of subscribers ranging from 501-3,000, RCN will pay
$10 per subscriber or a one time fee of $25,000
III. Once RCN has reached the 3,000 subscriber level per PoP, no
additional software fees will charged.
Please note that the Software may include software and documentation that are
owned by third parties and distributed by Hybrid under license from the owner.
(b) COPIES. RCN shall not make any copies of the Software, except for a single
archival copy solely for internal purposes.
(c) CONFIDENTIALITY. RCN shall maintain the confidentiality of the Software
and shall not sublicense, sell, rent, disclose, make available,
disassemble, or otherwise communicate the Software to any other person, or
use the Software except as expressly authorized in writing by Hybrid.
(d) TITLE. The Software and all copies thereof will at all times remain the
sole and exclusive property of Hybrid or its licensor, as applicable, and
RCN shall obtain no title to the Software.
(e) COPYRIGHT. RCN shall reproduce all copyright notices and any other
proprietary legends on any copy of the Software made by RCN.
(f) ALTERATION. RCN shall not modify, disassemble, or decompile the Software.
(g) WARRANTY. Hybrid does not warrant that the operation of the Software will
be error free. Hybrid will use reasonable efforts to correct any defects
reported to Hybrid in writing within 90 days of the date of shipment,
exclusive of defects caused by physical defects in Software disks due to
mishandling, operator error or interfacing other systems not approved by
Hybrid.
(h) Maintenance and enhancement releases occurring during the Term of this
Agreement will automatically be sent to RCN at no additional charge.
"Hybrid warrants that is has full power and authority to lawfully grant the
rights granted by this Agreement, without the consent of any other person,
entity or governmental authority, and that, TO THE BEST OF HYBRID'S KNOWLEDGE
the use by Customer of the Software (including the copying thereof) and the
Products shall not in any way constitute an infringement or other violation
of any copyright, trade secret, trademark, patent, proprietary information,
nondisclosure, intellectual property or other rights of any party. Hybrid
shall indemnify, defend, and hold harmless RCN, its affiliates and
subsidiaries and all officers, directors, employees, and agents of such
corporations from and against any and all claims, actions, losses,
liabilities, damages, costs, and expenses, including attorney fees, arising
out of or relating to any breach of the representations and warranties of
this subsection, PROVIDED THAT HYBRID SHALL BE GIVEN (i)
PAGE 5
<PAGE>
EXPRESS, IMPLIED OR STATUTORY (INCLUDING THE WARRANTIES OF MERCHANTABILITY OR
FITNESS FOR A PARTICULAR PURPOSE).
7. TRAINING
RCN will receive two (2) "free" slots for initial training for each PoP
purchased with annual updates as required. Accumulation of free training slots
only remains valid so long as this Agreement remains in effect.
8. RIGHTS OF THE PARTIES
HYBRID RIGHTS-RCN AGREES TO:
a) Issue a national scale press release announcing its purchase of Hybrid
equipment. RCN agrees to issue a national press release announcing the
commercial data delivery service in each city using Hybrid as soon as
practicable after launch of such service. In addition, RCN agrees to
issue periodic press release promoting the development of its commercially
available data service using Hybrid equipment. During the installation
period, both Hybrid and RCN will have the right of review and approval,
which will not be unreasonably withheld, of any press release that the
other party proposes to issue describing the service and equipment.
B) Permit Hybrid to visit each cities facility in the RCN system where Hybrid
equipment (listed in ADDENDUM A) is located and showcase the technology and
business model for other prospective customers, investors or partnering
prospects selected by Hybrid. RCN will be given reasonable advance notice
of these visits and they will occur only during normal business hours.
Hybrid agrees to indemnify and hold RCN harmless for any claim, loss or
liability incurred or made or asserted against RCN (including reasonable
fees and disbursements of counsel defending itself against such claims,
losses of liabilities) in connection with the rights granted to Hybrid
pursuant to this Section: provided, however, there shall be no obligation
of Hybrid to so indemnify RCN hereunder if the claim, loss or liability
arises solely out of the gross negligence or willful misconduct of RCN.
c) Hybrid and RCN will meet quarterly to review status of Purchase Plan and to
forecast upcoming shipments. CCM commitments are for unit purchases only
and that RCN has the right to manage unit orders among the CCM models
contracted. If Hybrid introduces new CCM models during the terms of this
Agreement, RCN has the right to apply the new models against volume
commitments based on mutually agreed to discounts.
d) RCN will receive two (2) Single User CCMs free of charge for every new
Hybrid PoP that is purchased.
e) Hybrid will develop and support software tools that will allow for network
monitoring and simplified installation ("Golden Install"). These tools
will be phased into Hybrid's system beginning with the next software
release, Hybridware release 4.2.
RCN RIGHTS - HYBRID AGREES TO:
a) Upgrade all FSK modems (P/N CCM-221 and N-221) to QPSK immediately upon
general release.
PAGE 6
<PAGE>
b) RCN will receive preferential treatment in regards to advance releases of
software for the purpose of jointly testing and evaluating said software.
Hybrid will make best efforts to keep RCN informed of future releases. In
return, RCN will report system errors and problems on a timely basis to
Hybrid.
c) A joint marketing effort - for every one-hundred (100) Hybrid modems
purchased by RCN, Hybrid will Donate one (1) modem (model to be agreed to
by both parties)to a designated educational institution.
d) RCN has the right to "co-label" Hybrid modems and will be responsible for
all expenses associated.
9. SYSTEM/SOFTWARE SUPPORT
RCN will receive free of charge "System support" as outlined in ADDENDUM D, for
all head end location sites during the first six (6) months following the
delivery of the units in these markets. After this period, an "Annual System
Support Contract" may be purchased by RCN at the rate set forth in Addendum D.
Hybrid will support the Series 2000 product line with Technical Support and
spare parts for the Term hereof.
Hybrid will follow the "Trouble ticket Process & Clearing" as outlined in
ADDENDUM E. If these procedures are changed, Hybrid will notify RCN in writing
prior to the effective date of such change.
Hybrid will follow the "Escalation Procedures" as outlined in ADDENDUM F. If
these procedures are changed, Hybrid will notify RCN in writing prior to the
effective date of such change.
10. TECHNICAL SPECIFICATIONS
System functionality is limited to the published "Hybrid Series 2000 - System
Description". A copy of said manual has been forwarded to RCN.
Hybrid shall complete the installation services in accordance with Hybrids'
normal installation practices. Hybrid shall perform its standard acceptance
testing as outlined on ADDENDUM G, on the installed Equipment and RCN agrees to
monitor said testing. Upon completion of installation, as described above,
Hybrid shall notify RCN that the Equipment has been installed and operates in
accordance with applicable test and performance specifications. The date of
such notification shall be the installation cutover date. Hybrid may at its
sole discretion use subcontractors to provide installation services.
11. EXCUSABLE DELAY
Notwithstanding anything contained in this Agreement to the contrary, neither
party shall be liable to the other for failure to perform any obligation under
this Agreement (nor shall any charge or payments be made in respect thereof) if
prevented from doing so by reason of acts of God, strikes, labor unrest,
embargoes, civil commotion, rationing or other
governmental orders or requirements, acts of civil or military authorities,
or other contingencies if and to the extent such cause is beyond the
reasonable control of such party
PAGE 7
<PAGE>
and all requirements as to notice, another performance required hereunder within
a specified period, shall be automatically extended to accommodate the period of
any such cause which shall interfere with such performance.
12. CHANGE, CANCELLATION, AND TERMINATION
In the event that either party breaches any provision of this Agreement and
fails to cure such breach within thirty (30) days after written notice from
the other party, the breaching party shall be in default and the
non-breaching party shall have the right, but not the obligation, to
terminate this Agreement by providing written notice to the breaching party
at least thirty (30) days prior to the date of termination. Any subsequent
cure of the breach that resulted in the termination notice will not affect
the validity of the termination notice, unless such notice is withdrawn by
the non-breaching party.
13. ASSIGNMENT
Neither party may assign this Agreement in whole or in part without the prior
written consent signed by an officer of the other party, which consent shall not
be unreasonably withheld; provided, however, that RCN shall be permitted to
assign this Agreement, in whole or in part, with notice, but without the
necessity of consent, to any of its affiliates (defined in Rule 12b-2 of the
Security Exchange Act of 1934, as amended).
14. GOVERNING LAW, VENUE, AND JURISDICTION
This Agreement will be governed by and construed in accordance with the laws of
the "State of New Jersey", "State of New York", "State of Michigan",
"Commonwealth of Pennsylvania", or "Commonwealth of Massachusetts". Reasonable
attorney fees shall be reimbursed, with respect to the foregoing, to the party
who prevails on the merits.
15. ENFORCEABILITY
If any provision of this Agreement shall be held to be invalid, illegal or
unenforceable, the validity, legality or enforceability of the remaining
provisions shall in no way be affected or impaired.
16. NOTICES
Any notice required to be given by either party to the other party shall be in
writing and shall be deemed given if personally delivered, if sent by facsimile
(with receipt acknowledged) to the facsimile number the other party set forth
below or if mailed postage prepaid, to:
Hybrid Networks, Inc. RCN Telecom Services, Inc.
10161 Bubb Road 105 Carnegie Center
Cupertino, CA 95014 Princeton, New Jersey 08540
Attention: Jeff Gates Attention: Mark Haverkate
Fax no. 408/725-2439 Fax no. 609-734-7521
or such other address as the party to which the notice is sent shall have
provided to the other party by written notice in accordance with this
Section.
PAGE 8
<PAGE>
17. LIMITATION OF LIABILITY
NOTWITHSTANDING ANY OTHER PROVISIONS OF THIS CONTRACT, UNDER NO CIRCUMSTANCES
SHALL either party BE LIABLE TO the other party OR ANY THIRD PARTY FOR SPECIAL,
INCIDENTAL, INDIRECT OR CONSEQUENTIAL DAMAGES, AS A RESULT OF A BREACH OF ANY
PROVISION OF THIS CONTRACT. Each party (the "Indemnifying Party") HEREBY
INDEMNIFIES the other party (the "Indemnified Party") AGAINST ALL LOSS OR
LIABILITY FROM CLAIMS ARISING OUT OF OR RELATING TO THE INSTALLATION, OPERATION,
OR USE OF THE EQUIPMENT, WHETHER ON ACCOUNT OF NEGLIGENCE OR OTHERWISE;
PROVIDED, HOWEVER, the Indemnifying Party shall have no obligation to indemnify
the Indemnified Party for any loss of liability arising out of Indemnified
Party's GROSS NEGLIGENCE OR WILLFUL MISCONDUCT.
18. ENTIRE AGREEMENT
This Agreement supersedes all previous communications, transactions, and
understandings, whether oral, or written, and constitutes the sole and entire
agreement between the parties pertaining to the subject matter hereof. No
modification or deletion of, or addition to these terms shall be binding on
either party unless made in writing and signed by a duly authorized
representative of both parties.
19. "CONFIDENTIAL INFORMATION
Hybrid hereby acknowledges that during the course of performing the services
under this Agreement, it may come into possession of confidential information
which may not be disclosed to any third party. Further, Hybrid agrees not to
disclose said information to any person other than on a need-to-know basis.
Confidential information shall include, but is not limited to, any
information concerning RCN's business and affairs, inventory, improvements,
process, techniques, contracts with third party and other trade secrets
obtained during the term of this Agreement. INFORMATION WILL NOT BE SUBJECT
TO THIS PROVISION IF IT IS OR BECOMES A MATTER OF PUBLIC KNOWLEDGE WITHOUT
THE FAULT OF HYBRID, IF IT WAS A MATTER OF WRITTEN RECORD IN HYBRID'S FILES
PRIOR TO DISCLOSURE BY RCN, OR IF IT WAS RECEIVED BY HYBRID FROM A THIRD
PERSON UNDER CIRCUMSTANCES PERMITTING ITS DISCLOSURE BY HYBRID The terms of
this subsection shall survive the termination of this Agreement
FOR A PERIOD OF THREE YEARS."
In Witness Whereof, duly authorized representatives of the Parties, hereto have
executed this Agreement as of the day and year first above written.
Hybrid Networks, Inc. RCN:
By: /s/ [ILLEGIBLE] By: /s/ [ILLEGIBLE]
------------------------ ------------------------
Title: Chm & CEO Title: EVP
--------------------- --------------------
Date: 5 Aug 1997 Date: July 31, 1997
---------------------- ---------------------
PAGE 9
<PAGE>
ADDENDUM A
FIRST FIVE SITES - 1997 SHIPMENTS
ALLENTOWN SITE
SERIES 2000 - CABLE DOWN (64QAM), TELEPHONE AND ROUTER
RETURN
<TABLE>
<CAPTION>
===================================================================================================================================
PRODUCT CONFIGURATION PRICE QUANTITY
-------------------------
CODE COMPONENT MIN MAX (US$)
===================================================================================================================================
HYBRID PoP EQUIPMENT, SOFTWARE LICENSES AND SPARE PARTS
<C> <S> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------------
CMG-2000 CyberManager 2000 with HybridWare + SW for 500 Subcribers 1 1 25,000 1 XXX
- -----------------------------------------------------------------------------------------------------------------------------------
SNL-0500 Subscriber 500 Network License (see Note 1) As Required 5,000 XXX
- -----------------------------------------------------------------------------------------------------------------------------------
SNL-2500 Subscriber 2500 Network License (see Note 1) As Required 25,000 XXX
- -----------------------------------------------------------------------------------------------------------------------------------
CMD-2000 CM Downstream Router with HybridWare + SW 1 As Required 18,170 1 XXX
- -----------------------------------------------------------------------------------------------------------------------------------
SEC-010 Secure Encryption Card (DES) 895 1 XXX
- -----------------------------------------------------------------------------------------------------------------------------------
SQC-200-3 SIF (QAM) Card, 3-channel (each 10 Mbps) 1 2 per CMD 4,150 2 XXX
- -----------------------------------------------------------------------------------------------------------------------------------
QMC-200-3 64 QAM Modulator Card w/Filter & Combiner, 3 Channel 1 2 per CMD 4,820 2 XXX
- -----------------------------------------------------------------------------------------------------------------------------------
HFL-2220 IF Filter (standalone, special purpose) NOTE 2 2 per CMD POA XXX
- -----------------------------------------------------------------------------------------------------------------------------------
CMU-2000-8T CM Upstream Router with HybridWare + SW 1 As Required 18,285 XXX
- -----------------------------------------------------------------------------------------------------------------------------------
TDC-001-8 Phone Demodulator Card, 8 lines per card 1 8 per CMU 3,095 XXX
- -----------------------------------------------------------------------------------------------------------------------------------
COMMERCIAL PoP EQUIPMENT ALSO AVAILABLE FROM HYBRID
(TYPICAL PRICES, NO DISCOUNTS, PRICES MAY CHANGE WITHOUT
NOTICE)
- -----------------------------------------------------------------------------------------------------------------------------------
OFS-200 Fast Ethernet Switch (Cisco Catalyst 2900) 1 17,500 $ XXX
- -----------------------------------------------------------------------------------------------------------------------------------
OCM-160 C6M Modulator/Upconverter (USA Spec) 1 NOTE 3 2,140 XXX
- -----------------------------------------------------------------------------------------------------------------------------------
OCM-165 C6MP Modulator/Upconverter (USA Spec) 1 NOTE 3,4 2,950 XXX
- -----------------------------------------------------------------------------------------------------------------------------------
OCM-260 C6U Modulator/Upconverter (USA and International) 1 NOTE 3 2,950 XXX
- -----------------------------------------------------------------------------------------------------------------------------------
APONET BANDWIDTH MANAGER (MODEL 10) 5,000 1 XXX
- -----------------------------------------------------------------------------------------------------------------------------------
OCM-400 IP Gateway Router (Cisco 7206) 13,000 1 $ XXX
- -----------------------------------------------------------------------------------------------------------------------------------
OCM-401 TI DSU (Generic Internet Connection) 1,250 1 XXX
- -----------------------------------------------------------------------------------------------------------------------------------
ORK-719 7-foot, 19-inch rack 1 940 XXX
- -----------------------------------------------------------------------------------------------------------------------------------
CKT-201 Baseline One-Way Cable/Telephone System Cabling Kit 1 (or equiv) 100 XXX
- -----------------------------------------------------------------------------------------------------------------------------------
DKT-030 Monitor and Keyboard (both rackmount for CMD and CMU) 1 As Required 925 1 XXX
- -----------------------------------------------------------------------------------------------------------------------------------
OPS-030 Power Strip As Required 130 XXX
- -----------------------------------------------------------------------------------------------------------------------------------
PAGE 10
<PAGE>
SPARE PARTS
- -----------------------------------------------------------------------------------------------------------------------------------
LAC-010 10/100 BaseT LAN Interface Card 690 XXX
- -----------------------------------------------------------------------------------------------------------------------------------
HYBRID CLIENT CABLE MODEMS
- -----------------------------------------------------------------------------------------------------------------------------------
CCM-201 Client Cable Modem (multi-user) As Required 540 100 XXX
- -----------------------------------------------------------------------------------------------------------------------------------
CCM-201-S Client Cable Modem (multi-user), encryption support (DES) As Required 640 XXX
- -----------------------------------------------------------------------------------------------------------------------------------
N-201 Client Cable Modem (single-user) As Required 295 100 $ XXX
- -----------------------------------------------------------------------------------------------------------------------------------
N-201-S Client Cable Modem (single-user), encryption support (DES) As Required 395 XXX
- -----------------------------------------------------------------------------------------------------------------------------------
COMMERCIAL CABLE MODEM ACCESSORIES
(TYPICAL PRICES, NO DISCOUNTS, PRICES MAY CHANGE WITHOUT
NOTICE, RECOMMEND LOCAL PURCHASE)
- -----------------------------------------------------------------------------------------------------------------------------------
OTM-001 V.34 28.6 Phone Modem (typically US Robotics) As Required 125 200 $ XXX
- -----------------------------------------------------------------------------------------------------------------------------------
CBL-001 RS-232 Modem Cable (see Note 5) As Required 8 200 XXX
- -----------------------------------------------------------------------------------------------------------------------------------
OEH-005 Ethernet Hub (5-port support for five computers) As Required 80 0 XXX
- -----------------------------------------------------------------------------------------------------------------------------------
HYBRID TECHNICAL SUPPORT AND TRAINING (SEE NOTE 6)
- -----------------------------------------------------------------------------------------------------------------------------------
TRN-201-4C One-Way Cable (64QAM) Training Program 1 REQUIRED N/C 2 XXX
- -----------------------------------------------------------------------------------------------------------------------------------
TRN-201-1C One-Way Cable (64QAM) Training Program/Per Student As Required 1,500 XXX
- -----------------------------------------------------------------------------------------------------------------------------------
SRV-100 System Integration per Day As Required 1,500 XXX
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL: $20X
===================================================================================================================================
</TABLE>
Notes:
1 Price as listed when purchased with the CMG-2000
2 Standalone filter may be required in remote fiber links using a
channel translator
3 One c6m is required per downstream carrier frequency; one
C6U is required per 2 downstream
carrier frequencies
4 Special order from General Instruments
5 RS-232 modem cables are bulk shipped, used to connect cable
modem and telephone modem.
6 Training program prices are for Cupertino Training; additional
costs apply to on-site training.
PAGE 11
<PAGE>
BOSTON SITE
SERIES 2000 - CABLE DOWN (64QAM), TELEPHONE AND ROUTER
RETURN
<TABLE>
<CAPTION>
===================================================================================================================================
PRODUCT CONFIGURATION PRICE QUANTITY
-------------------------
CODE COMPONENT MIN MAX (US$)
===================================================================================================================================
HYBRID PoP EQUIPMENT, SOFTWARE LICENSES AND SPARE PARTS
<C> <S> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------------
CMG-2000 CyberManager 2000 with HybridWare + SW for 500 Subscribers 1 1 25,000 1 XXX
- -----------------------------------------------------------------------------------------------------------------------------------
SNL-0500 Subscriber 500 Network License (see Note 1) As Required 5,000 XXX
- -----------------------------------------------------------------------------------------------------------------------------------
SNL-2500 Subscriber 2500 Network License (see Note 1) As Required 25,000 XXX
- -----------------------------------------------------------------------------------------------------------------------------------
CMD-2000 CM Downstream Router with HybridWare + SW 1 As Required 18,170 1 XXX
- -----------------------------------------------------------------------------------------------------------------------------------
SEC-010 Secure Encryption Card (DES) 895 1 XXX
- -----------------------------------------------------------------------------------------------------------------------------------
SQC-200-3 SIF (QAM) Card, 3-channel (each 10 Mbps) 1 2 per CMD 4,150 2 XXX
- -----------------------------------------------------------------------------------------------------------------------------------
QMC-200-3 64 QAM Modulator Card w/Filter & Combiner, 3 Channel 1 2 per CMD 4,820 2 XXX
- -----------------------------------------------------------------------------------------------------------------------------------
HFL-2220 IF Filter (standalone, special purpose) NOTE 2 2 per CMD POA XXX
- -----------------------------------------------------------------------------------------------------------------------------------
CMU-2000-8T CM Upstream Router with HybridWare + SW 1 As Required 18,285 XXX
- -----------------------------------------------------------------------------------------------------------------------------------
TDC-001-8 Phone Demodulator Card, 8 lines per card 1 8 per CMU 3,095 XXX
- -----------------------------------------------------------------------------------------------------------------------------------
COMMERCIAL PoP EQUIPMENT ALSO AVAILABLE FROM HYBRID
(TYPICAL PRICES, NO DISCOUNTS, PRICES MAY CHANGE WITHOUT
NOTICE)
- -----------------------------------------------------------------------------------------------------------------------------------
OFS-200 Fast Ethernet Switch (Cisco Catalyst 2900) 1 17,500 1 $ XXX
- -----------------------------------------------------------------------------------------------------------------------------------
OCM-160 C6M Modulator/Upconverter (USA Spec) 1 NOTE 3 2,140 XXX
- -----------------------------------------------------------------------------------------------------------------------------------
OCM-165 C6MP Modulator/Upconverter (USA Spec) 1 NOTE 3,4 2,950 XXX
- -----------------------------------------------------------------------------------------------------------------------------------
OCM-260 C6U Modulator/Upconverter (USA and International) 1 NOTE 3 2,950 XXX
- -----------------------------------------------------------------------------------------------------------------------------------
Aponet Bandwidth Manager (Model 10) 5,000 1 XXX
- -----------------------------------------------------------------------------------------------------------------------------------
OCM-400 IP Gateway Router (CISCO 7206) 13,000 1 $ XXX
- -----------------------------------------------------------------------------------------------------------------------------------
OCM-401 TI DSU (generic internet connection) 1,250 1 XXX
- -----------------------------------------------------------------------------------------------------------------------------------
ORK-719 7-foot, 19-inch rack 1 940 XXX
- -----------------------------------------------------------------------------------------------------------------------------------
CKT-201 Baseline One-Way Cable/Telephone System Cabling Kit 1 (or equiv) 100 XXX
- -----------------------------------------------------------------------------------------------------------------------------------
DKT-030 Monitor and Keyboard (both rackmount for CMD and CMU) 1 As Required 925 1 XXX
- -----------------------------------------------------------------------------------------------------------------------------------
OPS-030 Power Strip As Required 130 XXX
- -----------------------------------------------------------------------------------------------------------------------------------
SPARE PARTS
- -----------------------------------------------------------------------------------------------------------------------------------
LAC-010 10/100 BaseT LAN Interface Card 690 XXX
- -----------------------------------------------------------------------------------------------------------------------------------
PAGE 12
<PAGE>
HYBRID CLIENT CABLE MODEMS
- -----------------------------------------------------------------------------------------------------------------------------------
CCM-201 Client Cable Modem (multi-user) As Required 540 100 XXX
- -----------------------------------------------------------------------------------------------------------------------------------
CCM-201-S Client Cable Modem (multi-user), encryption support (DES) As Required 640 XXX
- -----------------------------------------------------------------------------------------------------------------------------------
N-201 Client Cable Modem (single-user) As Required 295 100 XXX
- -----------------------------------------------------------------------------------------------------------------------------------
N-201-S Client Cable Modem (single-user), encryption support (DES) As Required 395 XXX
- -----------------------------------------------------------------------------------------------------------------------------------
COMMERCIAL CABLE MODEM ACCESSORIES
(TYPICAL PRICES, NO DISCOUNTS, PRICES MAY CHANGE WITHOUT
NOTICE, RECOMMEND LOCAL PURCHASE)
- -----------------------------------------------------------------------------------------------------------------------------------
OTM-001 V.34 28.8 Phone Modem (typically US Robotics) As Required 125 200 XXX
- -----------------------------------------------------------------------------------------------------------------------------------
CBL-001 RS-232 Modem Cable (see Note 5) As Required 8 200 XXX
- -----------------------------------------------------------------------------------------------------------------------------------
OEH-005 Ethernet Hub (5-port support for five computers) As Required 80 0 XXX
- -----------------------------------------------------------------------------------------------------------------------------------
HYBRID TECHNICAL SUPPORT AND TRAINING (SEE NOTE 6)
- -----------------------------------------------------------------------------------------------------------------------------------
TRN-201-4C One-Way Cable (64QAM) Training Program 1 Required N/C 2 XXX
- -----------------------------------------------------------------------------------------------------------------------------------
TRN-201-1C One-Way Cable (64QAM) Training Program/Per Student As Required 1,500 XXX
- -----------------------------------------------------------------------------------------------------------------------------------
SRV-100 System Integration per day As Required 1,500 XXX
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL: $2XX
===================================================================================================================================
</TABLE>
Notes:
1 Price as listed when purchased with the CMG-2000.
2 Standalone filter may be required in remote fiber links using a
channel translator.
3 One C6M is required per downstream carrier frequency; one
C6U is required per 2 downstream
carrier frequencies.
4 Special order from General Instruments.
5 RS-232 modem cables are bulk shipped, used to connect cable
modem and telephone modem.
6 Training program prices are for Cupertino Training; additional
costs apply to on-site training.
PAGE 13
<PAGE>
Series 2000 - Cable (64QAM) Down, Cable (FSK) Return - Manhattan, N.Y.
(To be completed pending AT&T participation)
PAGE 14
<PAGE>
Series 2000 - Cable (64QAM) Down, Cable (FSK) Return - Carmel, N.Y.
(To be completed pending AT&T participation)
PAGE 15
<PAGE>
Series 2000 - Cable (64QAM) Down, Cable (FSK) Return - Princeton, N.J.
(To be completed pending AT&T participation)
PAGE 16
<PAGE>
ADDENDUM B
GLOBAL PRICE LIST
<TABLE>
<CAPTION>
PoP EQUIPMENT
<S> <C> <C>
- ----------------------------------------------------------------------------------------------
CMG-2000 CyberMngr 2000 w\HybridWare + SW for 500 Subs. $25,000
- ----------------------------------------------------------------------------------------------
SNL-0500 Subscriber 500 Network License $5,000
- ----------------------------------------------------------------------------------------------
SNL-2500 Subscriber 2500 Network License $25,000
- ----------------------------------------------------------------------------------------------
CMD-2000 CM Downstream Router with Hybridware + SW $18,170
- ----------------------------------------------------------------------------------------------
SEC-010 Secure Encryption Card (DES) $895
- ----------------------------------------------------------------------------------------------
SQC-200-3 SIF (QAM) Card, 3-channel (each 10 Mbps) $4,150
- ----------------------------------------------------------------------------------------------
SVC-100 4VSB 3-Ch SIF Card $4,150
- ----------------------------------------------------------------------------------------------
HEM-2004 Encoder/Modulator (4-VSB) $3,200
- ----------------------------------------------------------------------------------------------
QMC-200-3 64 QAM Modulator Card w/ Filter & Combiner, 3 channel $4,820
- ----------------------------------------------------------------------------------------------
QMC-200-3C 64 QAM Modulator Card w/ Combiner, 3 channel $4,820
- ----------------------------------------------------------------------------------------------
HEM-2004-B Baseband Transmitter (IF-to BB) $2,600
- ----------------------------------------------------------------------------------------------
HEM-2004-I Baseband Receiver (BB to IF) $3,400
- ----------------------------------------------------------------------------------------------
HEM-2004-B Encoder-Baseband (64 QAM) $2,600
- ----------------------------------------------------------------------------------------------
HEM-2204-I Modulator-IF (64-QAM) $3,400
- ----------------------------------------------------------------------------------------------
HFL-2220 IF Filter (standalone, special purpose) POA
- ----------------------------------------------------------------------------------------------
CMU-2000-8T CM Upstream Router with HybridWare + SW $18,285
- ----------------------------------------------------------------------------------------------
CMU-2000-14C CM Upstream Router with HybridWare + SW $18,860
- ----------------------------------------------------------------------------------------------
VDC-010-2 4-VSB Demodulator Card, 2 channels per card $2,595
- ----------------------------------------------------------------------------------------------
VBU-010-x Hybrid Block Upconverter $3,200
- ----------------------------------------------------------------------------------------------
CKT-201 Baseline One-Way System Cabling Kit $100
- ----------------------------------------------------------------------------------------------
TDC-001-8 Phone Modem Card, 8 lines per card $3,095
- ----------------------------------------------------------------------------------------------
CSM-2000 CyberSecure 2000, includes HybridWare + SW $15,000
- ----------------------------------------------------------------------------------------------
SUG-2000 Software Upgrade from Series 2000 ELS to full Series 2000 $500
- ----------------------------------------------------------------------------------------------
<CAPTION>
COMMERCIAL PoP EQUIP. AVAILABLE FROM HYBRID
<S> <C> <C>
- ----------------------------------------------------------------------------------------------
OFS-200 Fast Ethernet Switch (Cisco Catalyst 2800) $8,700
- ----------------------------------------------------------------------------------------------
OCM-160 C6M Modulator/Upconverter (USA Spec) $2,140
- ----------------------------------------------------------------------------------------------
OCM-165 C6MP Modulator/Upconverter (USA Spec) $2,950
- ----------------------------------------------------------------------------------------------
OCM-260 C6U Modulator/Upconverter (USA and International) $2,950
- ----------------------------------------------------------------------------------------------
ORK-719 7-foot, 19-inch rack $940
- ----------------------------------------------------------------------------------------------
CKT-201 Baseline One-Way Cable/Telephone System Cabling Kit $100
- ----------------------------------------------------------------------------------------------
CKT-221 Baseline Two-Way Cable (FSK) System Cabling Kit $200
- ----------------------------------------------------------------------------------------------
DKT-030 Monitor and Keyboard (both rackmount for CMD AND CMU) $925
- ----------------------------------------------------------------------------------------------
OCS-016 16-way Splitter $0
- ----------------------------------------------------------------------------------------------
ODF-260 Diplex Filter $0
- ----------------------------------------------------------------------------------------------
PAGE 17
<PAGE>
- ----------------------------------------------------------------------------------------------
OPS-030 Power Strip $130
- ----------------------------------------------------------------------------------------------
OLP-330 Termianl Server (Portmaster) 30 Port $3,700
- ----------------------------------------------------------------------------------------------
OEX-020-7 Upstream Demodulator Shelf (supports 7 FSK cards) $2,200
- ----------------------------------------------------------------------------------------------
OEC-021 FSK Upstream Demodulator Card $965
- ----------------------------------------------------------------------------------------------
<CAPTION>
SPARE PART
<S> <C> <C>
- ----------------------------------------------------------------------------------------------
LAC-010 10/100 BaseT LAN Interface Card $690
- ----------------------------------------------------------------------------------------------
HSB-210-S Secure Encryption Card (SBUS) $895
- ----------------------------------------------------------------------------------------------
<CAPTION>
HYBRID CLIENT CABLE MODEMS* - MAYBE SUPERCEDED BY VPA
<S> <C> <C>
- ----------------------------------------------------------------------------------------------
CCM-101 Client Cable Modem $995
- ----------------------------------------------------------------------------------------------
CCM-101-S Client Cable Modem, encryption support (DES) $1,095
- ----------------------------------------------------------------------------------------------
CCM-161 CCM (4-VSB), ELS (Series 2000 compatible) $995
- ----------------------------------------------------------------------------------------------
CCM-161-S CCM (4-VSB), ELS encryption support (DES) $1,095
- ----------------------------------------------------------------------------------------------
CCM-201 Client Cable Modem (multi-user) $795
- ----------------------------------------------------------------------------------------------
CCM-201-S Client Cable Modem (multi-user), encryption support (DES) $895
- ----------------------------------------------------------------------------------------------
CCM-221 Client Cable Modem $845
- ----------------------------------------------------------------------------------------------
CCM-221-S Client Cable Modem, encryption support (DES) $945
- ----------------------------------------------------------------------------------------------
N-201 Client Cable Modem (single-user) $440
- ----------------------------------------------------------------------------------------------
N-201-S Client Cable Modem (single-user), encryption support (DES) $540
- ----------------------------------------------------------------------------------------------
N-221 Client Cable Modem (single-user) $495
- ----------------------------------------------------------------------------------------------
N-221-S Client Cable Modem (single-user), encryption support (DES) $595
- ----------------------------------------------------------------------------------------------
<CAPTION>
COMMERICAL CABLE MODEM ACCESSORIES
<S> <C> <C>
- ----------------------------------------------------------------------------------------------
OTM-001 V.34 28.8 Phone Modem (typically US Robotics) $125
- ----------------------------------------------------------------------------------------------
OEH-005 Ethernet Hub (5-port support for five computers) $80
- ----------------------------------------------------------------------------------------------
CBL-001 RS-232 Modem Cable (see Note 5) $8
- ----------------------------------------------------------------------------------------------
<CAPTION>
HYBRID TECHNICAL SUPPORT AND TRAINING
<S> <C> <C>
- ----------------------------------------------------------------------------------------------
TRN-201-4 One-Way Cable (640AM) Training Program $6,000
- ----------------------------------------------------------------------------------------------
TRN-201-1 One-Way Cable (640AM) Training Program/Per Student $1,500
- ----------------------------------------------------------------------------------------------
TRN-221-4 Two-Way Cable (640AM) Training Program $7,500
- ----------------------------------------------------------------------------------------------
TRN-221-1 Two-Way Cable (640AM) Training Program/Per Student $1,875
- ----------------------------------------------------------------------------------------------
TRN-240-4 Secure Router Training Program $3,000
- ----------------------------------------------------------------------------------------------
TRN-240-1 Secure Router Training Program/Per Student $750
- ----------------------------------------------------------------------------------------------
SRV-100 System Integration per day $1,500
- ----------------------------------------------------------------------------------------------
</TABLE>
PAGE 18
<PAGE>
ADDENDUM C
VOLUME DISCOUNT LEVELS
ALL PRICE IN U.S. DOLLARS
<TABLE>
<CAPTION>
MULTIPLE PC MODEM PRICES - TELEPHONE RETURN
-------------------------------------------
LEVEL CABLE MODEM QTY PRICE
- ----- ----------- --- -----
<S> <C> <C> <C>
1 CCM-201 0-1,000 $795
2 CCM-201 1,001-3,000 $745
3 CCM-201 3,001-5,000 $695
4 CCM-201 5,001-10,000 $595
5 CCM-201 10,001-25,000 $570
6 CCM-201 25,001 AND GREATER $540
NOTE: for DES encryption add $100 per modem
<CAPTION>
SINGLE PC MODEM PRICES - TELEPHONE RETURN
-----------------------------------------
LEVEL CABLE MODEM QTY PRICE
- ----- ----------- --- -----
<S> <C> <C> <C>
1 N-201 0-1,000 $440
2 N-201 1,001-3,000 $395
3 N-201 3,001-5,000 $375
4 N-201 5,001-10,000 $345
5 N-201 10,001-25,000 $320
6 N-201 25,001 AND GREATER $295
NOTE: - for internal phone modem add $50.00 per modem (future release)
- for DES encryption add $100 per modem
<CAPTION>
MULTIPLE PC MODEM PRICES - CABLE RETURN
-----------------------------------------
LEVEL CABLE MODEM QTY PRICE
- ----- ----------- --- -----
<S> <C> <C> <C>
1 CCM-221 0-1,000 $845
2 CCM-221 1,001-3,000 $795
3 CCM-221 3,001-5,000 $745
4 CCM-221 5,001-10,000 $645
5 CCM-221 10,001-25,000 $620
6 CCM-221 25,001 AND GREATER $595
NOTE: for DES encryption add $100 per modem
PAGE 19
<PAGE>
<CAPTION>
SINGLE PC MODEM PRICES - CABLE RETURN
-------------------------------------
LEVEL CABLE MODEM QTY PRICE
- ----- ----------- --- -----
<S> <C> <C> <C>
1 N-221 0-1,000 $495
2 N-221 1,001-3,000 $470
3 N-221 3,001-5,000 $440
4 N-221 5,001-10,000 $420
5 N-221 10,001-25,000 $370
6 N-221 25,001 AND GREATER $345
NOTE: - for internal phone modem add $50.00 per modem (future release)
- for DES encryption add $100 per modem
</TABLE>
* UPON THE EXECUTION OF THIS AGREEMENT, RCN WILL QUALIFYFOR THE LEVEL 6
PRICING AS LONG AS RCN PROCUREMENTS REMAIN CONSISTENT WITH PURCHASE
PLAN OVER TERM HEREOF.
PAGE 20
<PAGE>
ADDENDUM D
SYSTEM & SOFTWARE SUPPORT
MEDIA WARRANTY
Hybrid Networks warrants that the media on which the Hybrid Networks product
is recorded will be free from defects in material and workmanship under
normal use and service for a period of 90 days from shipment. Defective
media will be replaced through the Hybrid Networks RMA process.
INITIAL 180 DAY SYSTEM SUPPORT
Initial 180-day support for all head ends "launched", telephone support,
maintenance releases, enhancement releases, system monitoring, technical
bulletins, and access to the electronic bulletin board.
SOFTWARE SUPPORT
For each site initial software support period begins from the date of Hybrid
Networks shipment of the first application software purchase of a particular
product type for each site.
The support period also applies to all Hybrid Networks software and firmware
products containing application code.
For the duration of the contract, Hybrid will provide the following software
support:
Definitions
When used in this booklet:
a. "Site or Site Location" - refers to physical customer location usually
associated with a single address, including the floors of a single
building or adjoining buildings, and which has a single network
administrative authority.
b. "Software" - refers to those computer program products, including
Maintenance Releases, in object code form which the customer has
licensed from Hybrid Networks.
c. "Maintenance Release" - refers to new version levels of software,
periodically distributed for the purpose of correcting problems in
previous releases.
PAGE 21
<PAGE>
d. "Enhancement Release" - is defined as new versions of the product
which include significant changes and/or additions to functionality.
Software Support coverage will be provided free of charge for the duration of
the contract and is renewable on an annual basis at a price of $1,000 per
CyberManager-TM- per month. The coverage provides for telephone support
through the Hybrid Networks Support Center and for active software products;
maintenance releases and enhancement releases occurring during the contract
term. All software support customers will receive all relevant Technical
Bulletins that are released during their contract term and access to the WWW
on-line support.
Telephone support will consist of access to the Hybrid Networks Solution
Center during the normal Hybrid Networks hours of coverage (6am - 5pm Pacific
Time, Monday through Friday, excluding Hybrid Networks observed holidays).
The support group will provide responses to software related issues such as
installations, configuration and problem solving.
Maintenance releases and enhancement releases occurring during the contract
period will be automatically sent to contract customers at no additional
charge. The release quantities will be shipped in the same manner as the
contract was purchased. For example, single unit contracts will receive a
"one-for-one" update kit and site contracts will receive one master update
kit per site. The classification of a given release as "maintenance" or
"enhancement" is solely at Hybrid Networks discretion. Both types of releases
will be issued on standard media and will include all relevant technical
documentation.
New software that comprises a new product model, versus an enhancement of an
existing model, will require a separate software support agreement. The
distinction between new product models and enhancements of existing models is
at Hybrid Networks' discretion.
For customers whose initial support or contract term has lapsed without
renewal, telephone support and new releases will be available on a
chargeable, per incident basis. In general, these charges will amount to
substantially more than an annual support contract. Those wishing to
initiate or reinstate their contract status must first be running the current
released software version prior to the effective date of the contract. This
prerequisite may require the purchase of a maintenance or enhancement release.
PAGE 22
<PAGE>
ADDENDUM E
TROUBLE TICKET PROCESS & CLEARING
STEP 1: SERVICE REQUEST (IR) PROCESS
- Call placed to Hybrid Support Center (800)516-9315 or (408)342-4299
- 7am - 6pm Pacific Time
- Call Logged using Customer Severity Level
- IR is created or updated normally
- Escalating an IR is initiated by entering date and time
- Current and pending status will be updated daily
STEP 2: RETURN MATERIAL AUTHORIZATION (RMA) PROCESS
- Call placed to Hybrid Support Center (800)516-9315 or (408)342-4299
- 7am - 6pm Pacific Time
- Customer Provide Information to Hybrid
- Name, Company, address, and telephone number
- Model and serial number of equipment
- Detail statement giving the reason for replacement and/or repair (also
sent with returned equipment)
- Warranty returns will be repaired with a 10-business day turnaround
- Products diagnosed by the Support Center as "our-of-the-box" failures, or
which fail within the first 30 days of usage at the customer site, will
generally be replaced by the next business day
PAGE 23
<PAGE>
ADDENDUM F
ESCALATION PROCEDURES
NET CPS ESCALATION PROCEDURE CHART:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
1 2 3 Escalated Escalated Other
Emergency Significant Limited by to Advisories
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Dir Eng
Escalation level: I- Net Ops Director Dir/Net Ops
Net Ops Tech TO + 4 hrs TO + 8 hrs TO + 5 days Salesman
Support Staff Net Ops
Tech. Support
--------------------------------------------------------------------------------------------------
TO + 48 hrs TO + 96 hrs TO + 14 days Director Net Ops
2 - Net Ops Director Director VP Operations
Team/Operations VP Eng
Net Ops Eng. VP Sales
Salesman
--------------------------------------------------------------------------------------------------
3 - Engineering TO + 5 days TO + 14 days TO + 30 days Eng Exec
VP Staff
--------------------------------------------------------------------------------------------------
4 - Exec Staff - Emergency meeting for decision and
contingency planning n/a n/a n/a
--------------------------------------------------------------------------------------------------
</TABLE>
- - Times indicated are total elapsed clock hours from initial call
- - Times apply equally to domestic and international calls
- - TO Times for Headquarters Technical Support Engineers include one hour
telephone response time
- - Action plan supersedes the time frames
- - Times are flexible in that escalation can occur faster
- - Net Ops owns the "problem" and escalation tracking
- - Escalation table incidents are not limited to hardware and software bugs, but
can include enhancements for marketing or quality issues for manufacturing
- - Escalation for severity 1 & 2 which go past Net Ops level will be raised at
the weekly bug status meeting
- - Action plan supersedes the time frames
PAGE 24
<PAGE>
ADDENDUM G
ACCEPTANCE TEST PROCEDURES
ACCEPTANCE TEST PROCEDURES
SCOPE OF ACCEPTANCE TEST
This acceptance test is designed to determine the functional status of the
equipment which Hybrid Networks has proposed, trained and has assisted with
installation. The test will demonstrate that the system meets requirements
as specified in the Hybrid Networks' specifications. All findings of the
test will be reported to the customer upon completion of testing.
CONNECTIVITY TEST:
Customer will randomly select one (1) Client Cable Modem (CCM) on the
Customer's network. Workstation (PC with Windows 95 End Node) to System's
network connectivity will be established and verified by a user's CCM being
logged onto the network.
PING TEST:
Once the user is network attached, the Customer and Hybrid will conduct
Ping testing. See Windows 95 DOS Ping command listed below.
LOCAL PING TEST:
With the Ping command, you can send a ping request to the local CCM to
verify that it is receiving information. Enter the IP address of the
CCM in the destination-list field. From the Windows 95 DOS prompt enter
"ping < CCM IP Address >".
REMOTE PING TEST:
With the Ping command, you can send a ping request to the Hybrid
CyberManager to verify that it is receiving information. Enter the IP
address of the CyberManager in the destination-list field. From the
Windows 95 DOS prompt enter "ping < CyberManager IP Address >". This
step will verify the complete network operation of the Hybrid Networks'
System and the CCM.
CYBERMANAGER FTP TEST:
Once the user is network attached, the Customer and Hybrid will conduct FTP
testing. Using Hybrid's CableTest, run the FTP test to the CyberManager.
File transfer ability will be proven.
WWW TEST: (OPTIONAL)
Access the World Wide Web (WWW) using Microsoft Internet Explorer 3.0 (or
better), Netscape, Mosaic or equivalent. This test can only be performed
if the Customer has provide an Internet Access which has been configured.
PAGE 25
<PAGE>
TEST REPORT
A complete test report detailing how the above tests were performed, the
exact configuration of the network, and the results of the tests will be
generated. This test report will be presented to Customer at test
completion.
NOTES
1. Failure of Customer to accept or reject the Network within a period of
thirty (30) days of notification of certification as provided for herein
shall be deemed System Acceptance.
2. If Customer uses any portion of the Hybrid System for production purposes,
the System shall be deemed accepted by Customer.
3. Windows 95 DOS Ping Command Syntax.
---------------------------------------------------------------------------
WINDOWS 95 DOS PING COMMAND:
C:\WINDOWS>ping
Usage: ping [-t] [-a] [-n count] [-l size] [-f] [-i TTL] [-v TOS]
[-r count] [-s count] [[-j host-list] | [-k host-list]]
[-w timeout] destination-list
Options:
-t Ping the specified host until interrupted.
-a Resolve addresses to hostnames.
-n count Number of echo requests to send.
-l size Send buffer size.
-f Set Don't Fragment flag in packet.
-i TTL Time To Live.
-v TOS Type Of Service.
-r count Record route for count hops.
-s count Timestamp for count hops.
-j host-list Loose source route along host-list.
-k host-list Strict source route along host-list.
-w timeout Timeout in milliseconds to wait for each reply.
---------------------------------------------------------------------------
PAGE 26
<PAGE>
CERTIFICATION
OF
ACCEPTANCE
Customer Name: ____________________
Contract Number: __________________
Contract Date: ____________________
Site Location: ____________________
Scope of Work:
______________________________________________________
______________________________________________________
______________________________________________________
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
TEST COMPLETED
- --------------------------------------------------------------------------------
<S> <C>
CONNECTIVITY TEST: / /
- --------------------------------------------------------------------------------
PING TEST: / /
- --------------------------------------------------------------------------------
LOCAL PING TEST: / /
- --------------------------------------------------------------------------------
REMOTE PING TEST: / /
- --------------------------------------------------------------------------------
CYBERMANAGER FTP TEST: / /
- --------------------------------------------------------------------------------
WWW TEST: (Optional) / /
- --------------------------------------------------------------------------------
(Only if Internet Access is configured)
- --------------------------------------------------------------------------------
</TABLE>
I hereby certify that the work represented by the contract described above
has been completed by Hybrid Networks and was given final inspection and
acceptance on _________________.
____________________________ ____________________
Sign - Customer Date
____________________________
Print
____________________________ ____________________
Sign - Hybrid Networks Date
____________________________
Print
PAGE 27
<PAGE>
APPENDUM H
SYSTEM DESCRIPTION
See "Hybrid Series 2000 System Description" document number 018-00003-01
PAGE 28
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement
(333-40027) on Form S-8 of Hybrid Networks, Inc. of our reports dated April
23, 1999 except for the last two paragraphs of Note 16 which are as of May 5,
1999, relating to the balance sheets, and the related statements of
operations, stockholders' equity and cash flows and financial statement
schedule for the years then ended, which reports appears in the December 31,
1998 annual report on Form 10-K of Hybrid Networks, Inc.
/s/ HEIN + ASSOCIATES LLP
HEIN + ASSOCIATES LLP
Certified Public Accountants
Orange, California
June 9, 1999
77
<PAGE>
Exhibit 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in this registration statement
of Hybrid Networks Incorporated on Form S-8 (File No. 333-40027) of our report
dated August 28, 1997 on our audit of the financial statements and financial
statement schedule of Hybrid Networks, as of December 31, 1996 and for the year
then ended, which reports are included in this Annual Report on Form 10-K.
PricewaterhouseCoopers LLP
San Jose, California
June 9, 1999
78
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE 12/31/98
BALANCE SHEET AND THE STATEMENT OF OPERATIONS FOR THE TWELVE MONTHS THEN ENDED
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 3451
<SECURITIES> 0
<RECEIVABLES> 1633
<ALLOWANCES> 200
<INVENTORY> 5224
<CURRENT-ASSETS> 11487
<PP&E> 5699
<DEPRECIATION> 2261
<TOTAL-ASSETS> 15420
<CURRENT-LIABILITIES> 12299
<BONDS> 0
0
0
<COMMON> 10
<OTHER-SE> 2692
<TOTAL-LIABILITY-AND-EQUITY> 15420
<SALES> 12418
<TOTAL-REVENUES> 12418
<CGS> 14046
<TOTAL-COSTS> 14046
<OTHER-EXPENSES> 22879
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 897
<INCOME-PRETAX> (24625)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (24625)
<EPS-BASIC> (2.37)
<EPS-DILUTED> (2.37)
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE 12/31/97
BALANCE SHEET AND THE STATEMENT OF OPERATIONS FOR THE TWELVE MONTHS THEN ENDED
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 26158
<SECURITIES> 985
<RECEIVABLES> 1128
<ALLOWANCES> 0
<INVENTORY> 6270
<CURRENT-ASSETS> 34903
<PP&E> 3054
<DEPRECIATION> 1246
<TOTAL-ASSETS> 39065
<CURRENT-LIABILITIES> 11108
<BONDS> 0
0
0
<COMMON> 10
<OTHER-SE> 27293
<TOTAL-LIABILITY-AND-EQUITY> 39065
<SALES> 4120
<TOTAL-REVENUES> 4120
<CGS> 8899
<TOTAL-COSTS> 8899
<OTHER-EXPENSES> 15473
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1666
<INCOME-PRETAX> (21602)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (21602)
<EPS-BASIC> (6.10)
<EPS-DILUTED> (6.10)
</TABLE>
