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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999
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.
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(Exact name of registrant as specified in its charter)
Delaware 77-0252931
------------------------- ------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6409 Guadalupe Mines Road, San Jose, California 95120
---------------------------------------------------------
(Address of principal executive offices)
(408) 323-6500
---------------------------------------------------------------
(Registrant's telephone number, including area code)
Not Applicable
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if
changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Sections 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such 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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Common shares outstanding at May 28, 1999: 10,517,399
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HYBRID NETWORKS, INC.
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE NO.
- --------------------------------------------------------------- --------
<S> <C>
ITEM 1. CONDENSED FINANCIAL STATEMENTS
Condensed Balance Sheets as of March 31, 1999
and December 31, 1998 (unaudited) 3
Condensed Statements of Operations for the Three Months
Ended March 31, 1999 and 1998 (unaudited) 4
Condensed Statements of Cash Flows for the Three Months
Ended March 31, 1999 and 1998 (unaudited) 5
Notes to Unaudited Condensed Financial Statements 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS 11
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK 25
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 26
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 28
SIGNATURES 29
</TABLE>
As used in this report on Form 10-Q, 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. CONDENSED FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HYBRID NETWORKS, INC.
CONDENSED BALANCE SHEETS (Unaudited)
(in thousands)
<TABLE>
<CAPTION>
March 31, Dec. 31,
1999 1998
ASSETS ----------- -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 2,837 $ 3,451
Restricted cash - 515
Accounts receivable, net of allowance for doubtful accounts
of $200 in 1999 and 1998 616 1,433
Inventories 3,064 5,224
Prepaid expenses and other current assets 1,212 864
----------- -----------
Total current assets 7,729 11,487
Property and equipment, net 3,114 3,438
Intangibles and other assets 467 495
----------- -----------
Total assets $ 11,310 $ 15,420
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Convertible debenture $ 5,500 $ 5,500
Current portion of capital lease obligations 440 465
Accounts payable 1,107 2,063
Accrued liabilities and other 4,477 4,271
----------- -----------
Total current liabilities 11,524 12,299
Capital lease obligations, less current portion 262 365
Other long-term liabilities 74 54
----------- -----------
Total liabilities 11,860 12,718
----------- -----------
Commitments and Contingencies
Stockholders' equity (deficit):
Convertible preferred stock, $.001 par value:
Authorized: 5,000 shares;
Issued and outstanding: no shares in 1999 or 1998 - -
Common stock, $.001 par value:
Authorized: 100,000 shares;
Issued and outstanding: 10,470 shares in 1999 and
10,473 shares in 1998 10 10
Additional paid-in capital 66,262 66,261
Accumulated deficit (66,822) (63,569)
----------- -----------
Total stockholders' equity (deficit) (550) 2,702
----------- -----------
Total liabilities and stockholders' equity (deficit) $ 11,310 $ 15,420
=========== ===========
</TABLE>
The accompanying notes are an integral part of these
condensed financial statements.
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HYBRID NETWORKS, INC.
CONDENSED STATEMENTS OF OPERATIONS (Unaudited)
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------------
1999 1998
----------- -----------
(restated)
<S> <C> <C>
Net sales $ 4,123 $ 2,706
Cost of sales 4,264 3,338
----------- -----------
Gross loss (141) (632)
----------- -----------
Operating expenses:
Research and development 1,379 2,498
Sales and marketing 618 954
General and administrative 912 928
----------- -----------
Total operating expenses 2,909 4,380
----------- -----------
Loss from operations (3,050) (5,012)
Interest income and other expenses, net 5 402
Interest expense (208) (224)
----------- -----------
NET LOSS (3,253) (4,834)
Other comprehensive loss:
Reclassification for gain included in net loss - (92)
----------- -----------
Total comprehensive loss $ (3,253) $ (4,926)
=========== ===========
Basic and diluted net loss per share $ (0.31) $ (0.47)
=========== ===========
Shares used in basic and diluted per share calculation 10,470 10,353
=========== ===========
</TABLE>
The accompanying notes are an integral part of these
condensed financial statements.
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HYBRID NETWORKS, INC.
CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)
(in thousands)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------------
1999 1998
----------- -----------
(restated)
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (3,253) $ (4,834)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 349 791
Provision for doubtful accounts - 50
Provision for excess and obsolete inventory - 17
Change in assets and liabilities:
Restricted cash 515 (501)
Accounts receivable 817 (734)
Inventories 2,160 (1,664)
Prepaid expenses and other assets (345) (160)
Accounts payable (956) (205)
Accrued liabilities and other 226 (176)
----------- -----------
Net cash used in operating activities (487) (7,416)
----------- -----------
Cash flows from investing activities:
Purchase of property and equipment - (54)
Purchase of short-term investments - (11,772)
----------- -----------
Net cash used in investing activities - (11,826)
----------- -----------
Cash flows from financing activities:
Repayment of capital lease obligations (128) (107)
Net proceeds from issuance of common stock 1 27
----------- -----------
Net cash used in financing activities (127) (80)
----------- -----------
Decrease in cash and cash equivalents (614) (19,322)
Cash and cash equivalents, beginning of period 3,451 26,158
----------- -----------
Cash and cash equivalents, end of period $ 2,837 $ 6,836
=========== ===========
SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING ACTIVITIES:
Property and equipment acquired under capital leases $ - $ (122)
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid $ 193 $ 189
Income taxes paid 1 1
</TABLE>
The accompanying notes are an integral part of these
condensed financial statements.
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HYBRID NETWORKS, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
BASIS OF PRESENTATION
The accompanying condensed financial statements of Hybrid Networks, Inc.
(the "Company" or "Hybrid") have been prepared in accordance with generally
accepted accounting principles for interim financial information and with the
instructions for Form 10-Q and Article 10 of Regulation S-X. The balance
sheet as of March 31, 1999, the statements of operations for the three months
ended March 31, 1999 and 1998 and the statements of cash flows for the three
month periods ended March 31, 1999 and 1998 are unaudited but include all
adjustments (consisting of normal recurring adjustments) which the Company
considers necessary for a fair presentation of the financial position at such
dates and the operating results and cash flows for those periods. Although
the Company believes that the disclosures in these financial statements are
adequate to make the information presented not misleading, certain
information normally included in financial statements and related footnotes
prepared in accordance with generally accepted accounting principles have
been condensed or omitted pursuant to the rules and regulations of the
Securities and Exchange Commission. The December 31, 1998 condensed balance
sheet data were derived from audited financial statements but do not include
all disclosures required by generally accepted accounting principles. The
accompanying financial statements should be read in conjunction with the
financial statements as contained in the Company's Annual Report on Form 10-K
for the year ended December 31, 1998.
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. During the
first quarter of 1999 and the years ended December 31,1998, 1997 and 1996,
the Company incurred net losses of $3,253,000, $24,625,000, $21,602,000 and
$8,515,000, respectively. Additionally, the Company had an accumulated
deficit of $66,822,000 as of March 31, 1999 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. 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.
Results for any interim period are not necessarily indicative of results
for any other interim period or for the entire year.
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
recognition of 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.
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As a result of the above, the statement of operations for the three
months ended March 31, 1998 has been restated as follows:
<TABLE>
<CAPTION>
Three Months Ended
March 31, 1998
-------------------------------
Previously
Restated Reported
------------ ----------
<S> <C> <C>
Net sales $ 2,706 $ 915
Cost of sales 3,338 1,181
------------ ----------
Gross loss (632) (266)
------------ ----------
Operating expenses:
Research and development 2,498 2,042
Sales and marketing 954 977
General and administrative 928 2,017
------------ ----------
Total operating expenses 4,380 5,036
------------ ----------
Loss from operations (5,012) (5,302)
Interest income and other
expenses, net 402 302
Interest expense (224) (224)
------------ ----------
Net loss $ (4,834) $ (5,224)
============ ==========
Basic and diluted loss per share $ (0.47) $ (0.51)
============ ==========
Shares used in basic and diluted
per share calculation 10,353 10,353
============ ==========
</TABLE>
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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.
INVENTORIES
Inventories comprise the following:
<TABLE>
<CAPTION>
March 31, Dec. 31,
1999 1998
----------- -----------
<S> <C> <C>
Raw materials $ 1,305 $ 1,371
Work in progress 325 386
Finished goods 1,434 3,467
----------- -----------
$ 3,064 $ 5,224
=========== ===========
</TABLE>
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 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.
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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
PricewaterhouseCoopers, LLP (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, the Company 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 our 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 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
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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.
LAWSUIT 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 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 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.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THE DISCUSSION IN THIS ITEM SHOULD BE READ IN CONJUNCTION WITH THE
CONDENSED FINANCIAL STATEMENTS AND THE NOTES THERETO INCLUDED IN ITEM 1 OF
THIS REPORT ON FORM 10-Q. THE DISCUSSION IN THIS ITEM 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-Q.
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.
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
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
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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.
Due to our diminishing capital resources (See "Liquidity and Capital
Resources"), during the first quarter of 1999 we reduced our expenditures for
research and development and sales and marketing. In February 1999, we
implemented a reduction in force. As of April 30, 1999, the number of our
full-time employees had been reduced to 32, from 87 full-time employees at
December 31, 1998
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, practices, financial statement disclosure or auditing
procedure, PwC would not continue as our independent auditors to address the
restatement.
In August 1998, we retained Arthur Andersen LLP ("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.
In December 1998, we engaged Hein + Associates LLP ("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 a result of the restatement, net sales for the first quarter of
1998 was increased from $915,000 to $2,706,000, gross loss was $632,000
rather than a gross loss of $266,000, and net loss was reduced to $4,834,000
from $5,224,000.
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 report on Form 10-K for 1998.
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Our inability to issue audited financial statements and quarterly
reports 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 1999 and
adversely affected the sales of our products and services.
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>
Three Months Ended
March 31,
------------------------
1999 1998
------------------------
<S> <C> <C>
Net Sales 100.0% 100.0%
Cost of sales 103.4% 123.4%
----------- -----------
Gross margin -3.4% -23.4%
----------- -----------
Operating expenses
Research and development 33.5% 92.3%
Sales and marketing 15.0% 35.2%
General and administrative 22.1% 34.3%
----------- -----------
Total operating expenses 70.6% 161.8%
----------- -----------
Loss from operations -74.0% -185.2%
Interest income and other expense, net 0.1% 14.9%
Interest expense -5.0% -8.3%
----------- -----------
Net loss -78.9% -178.6%
=========== ===========
</TABLE>
NET SALES. Our net sales increased by 52% to $4,123,000 for the
quarter ended March 31, 1999 from $2,706,000 for the quarter ended March 31,
1998. The increase is due to increased shipments to customers and to an
increase in average selling prices for modems.
For the three months ended March 31, 1999, broadband wireless systems
operators, cable system operators and ISPs accounted for 43%, 39% and 18% of
net sales, respectively. During the same period in 1998, ISPs accounted for
5% of net sales, broadband wireless system operators accounted for 52% of net
sales and cable system operators accounted for 43% of net sales. There were
no international sales in the first quarter of 1999 or 1998. The Company had
four customers that accounted for 20%, 19%, 17% and 10% of net sales during
the first quarter of 1999. The Company had three customers that accounted for
25%, 16% and 11% of net sales during the first quarter of 1998.
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GROSS MARGIN. Gross margin was a negative 3.4% and a negative 23.4% of
net sales for the quarters ended March 31, 1999 and 1998, respectively. The
improved gross margin was primarily a result of the aforementioned increase
in average selling prices.
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 its existing products. Research and
development expenses decreased 45% to $1,379,000 for the quarter ended
March 31, 1999 from $2,498,000 for the quarter ended March 31, 1998. Research
and development expenses as a percentage of net sales were 33.5% and 92.3%
for the first quarters of 1999 and 1998, respectively. Research and
development expenses decreased primarily due to reduced employee headcount
and related expenses.
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
decreased 35% to $618,000 for the quarter ended March 31, 1999 from $954,000
for the quarter ended March 31, 1998. Sales and marketing expenses as a
percentage of net sales were 15.0% and 35.2% for the first quarters of 1999
and 1998, respectively. Sales and marketing expenses decreased primarily due
to reduced employee headcount and related expenses and refocus of the
business to wireless products.
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 decreased 2% to $912,000 for the quarter ended
March 31, 1999 from $928,000 for the quarter ended March 31, 1998. General and
administrative expenses as a percentage of net sales were 22.1% and 34.3% for
the first quarters of 1999 and 1998, respectively. The general and
administrative expenses remained relatively constant as we were working on
getting our financial statements audited and settling the class action
litigation.
INTEREST INCOME (EXPENSE) AND OTHER EXPENSE, NET. We incurred net
interest expense of $203,000 and earned net interest income of $178,000
during the three months ended March 31, 1999 and 1998, respectively. In 1998,
we earned $402,000 in interest income against $5,000 in 1999 due to reduced
average cash balances.
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 March 31,
1999, our cash and cash equivalents had been reduced to $2,837,000 (from
$27,148,000 as of December 31, 1997 and $3,451,000 as of December 31, 1998),
our working capital was negative $3,795,000 and we were (and continue to be)
in default under the terms of the $5.5 million debenture.
Net cash used in operating activities was $487,000 and $7,416,000 during
the first quarters of 1999 and 1998, respectively. The net cash used in
operating activities in the first quarter of 1999 was primarily due to our
net loss of $3,253,000, partially offset by a reduction in inventories of
$2,160,000, a decrease in other net current assets related to operating
activities, and non-cash charges. Net cash used in operations in the first
quarter of 1998 was primarily the result of our net loss of $4,834,000 and an
increase of $3,440,000 in net current assets related to operating activities,
partially offset by non-cash charges of $858,000.
There were substantially no investing activities during the first
quarter of 1999. Net cash used in investing activities was $11,826,000 in the
first quarter of 1998, primarily as a result of the purchases of short-term
investments of $11,772,000. We have funded a substantial portion of our
property and equipment expenditures from direct vendor leasing programs and
third party
14
<PAGE>
commercial lease arrangements. At March 31, 1999, we had no material
commitments for capital expenditures.
Net cash used by financing activities of $127,000 and $80,000 in the
first quarters of 1999 and 1998, respectively, was primarily the result of
repayment of capital lease obligations, partially offset by net proceeds from
issuance of common stock, in each of these periods.
At March 31, 1999, our only source of liquidity consisted of cash and
cash equivalents of $2,837,000. 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
The Company does not believe that its business is seasonal or that it 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-Q 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. We will nonetheless 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 quarterly reports for
the second and third quarter of 1999 and 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.
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<PAGE>
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 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 $66,822,000 as of March 31, 1999 and
$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 1 "Legal Proceedings," there are a number of
lawsuits pending against us. The principal lawsuits are the class action
lawsuits referred to therein. 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 in Item 1 "Legal
Proceedings") 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.
The Pacific Monolithics litigation referred to in Item 1 "Legal
Proceedings" 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
16
<PAGE>
we separately or together with our other assets) to any third party. (See
Item 1 "Legal Proceedings.") Nonetheless, we may find it necessary to
institute further infringement litigation in the future, or whether third
parties will bring litigation against us challenging our patents.
RECENT REDUCTIONS IN OUR EXPENDITURES AND IN THE NUMBER OF OUR EMPLOYEES
COULD HURT OUR BUSINESS.
Commencing in the latter part of 1998 and continuing through the first
quarter of 1999, 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 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
17
<PAGE>
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 the 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,
- - 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
18
<PAGE>
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 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.
19
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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 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
20
<PAGE>
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 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. In the
first quarter of 1999, RCN Corporation, PCTV-Speedchoice, Bay Area Cable and
Knology holdings accounted for 20%, 19%, 17% and 10% of our net sales,
respectively. 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.
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,
Jones Intercable was sold to Comcast and ceased purchasing our products,
which adversely affected our business. There is no assurance that RCN,
Knology or our other principal customers will continue as our customers. The
loss of either of these customers or any of our other principal customers
would hurt our business.
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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.
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
1 "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.
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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 1 "Legal Proceedings" below.) Nonetheless, we may
find it necessary to institute further infringement litigation in the future.
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.
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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 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
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<PAGE>
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 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
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PART II. OTHER INFORMATION
II. OTHER INFORMATION
ITEM 1. 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 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
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<PAGE>
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.
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. We have agreed to pay our 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 we receive from our
license with the defendants in the litigation (but not in excess of
$3,000,000). To date, we have received virtually no royalties from the
license.
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.
27
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The following exhibits are filed as part of this report:
<TABLE>
<CAPTION>
Exhibit No. Description of Exhibit
----------- ----------------------
<S> <C>
10.24 Registrant's 1999 Officer Stock Option Plan. (1)
10.28 Registrant's 1999 Stock option Plan.
10.29 Modification of Retention Bonus Agreements dated
January 6, 1999 between the Registrant and (a) William
M. Daniher, (b) Thara M. Edson, (c) Vishwas Godbole and
(d) Jane Zeletes. (1)
10.30 Separation Agreement and General Release between the
Registrant and William M. Daniher dated March 17,
1999. (1)
27.01 Financial Data Schedule.
27.02 Restated Financial Data Schedule for the First
Quarter of 1998
</TABLE>
- ----------------
(1) Represents a mangement contract or compensatory plan or arrangement.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the first quarter of 1999.
28
<PAGE>
HYBRID NETWORKS, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: June __, 1999 HYBRID NETWORKS, INC.
/s/ Carl S. Ledbetter
----------------------------------
Carl S. Ledbetter
Chief Executive Officer
/s/ Judson W. Goldsmith
----------------------------------
Judson W. Goldsmith
President and
Chief Financial Officer
(Principal Financial Officer)
29
<PAGE>
HYBRID NETWORKS, INC.
1999 OFFICER STOCK OPTION PLAN
As Adopted January 26, 1999
1. PURPOSE. The purpose of this Plan is to provide incentives to
attract, retain and motivate eligible persons whose present and potential
contributions are important to the success of the Company by offering them an
opportunity to participate in the Company's future performance through awards
of Options. Capitalized terms not defined in the text are defined in Section
20 hereof.
2. SHARES SUBJECT TO THE PLAN.
2.1 NUMBER OF SHARES AVAILABLE. Subject to Sections 2.2 and 15
hereof, the total number of Shares reserved and available for grant and
issuance pursuant to this Plan will be 1,000,000 Shares. Subject to Sections
2.2 and 15 hereof, Shares will again be available for grant and issuance in
connection with future Awards under this Plan to the extent such Shares: (a)
cease to be subject to issuance upon exercise of an Option, other than due to
exercise of such Option; or (b) are subject to an Award that otherwise
terminates without Shares being issued. At all times the Company will
reserve and keep available a sufficient number of Shares as will be required
to satisfy the requirements of all Awards granted under this Plan.
2.2 ADJUSTMENT OF SHARES. In the event that the number of
outstanding shares of the Company's Common Stock is changed by a stock
dividend, recapitalization, stock split, reverse stock split, subdivision,
combination, reclassification or similar change in the capital structure of
the Company without consideration, then (a) the number of Shares reserved for
issuance under this Plan and (b) the Exercise Prices of and number of Shares
subject to outstanding Options, subject to any required action by the Board
or the stockholders of the Company and compliance with applicable securities
laws; provided, however, that fractions of a Share will not be issued but
will either be paid in cash at Fair Market Value of such fraction of a Share
or will be rounded down to the nearest whole Share, as determined by the
Committee.
3. ELIGIBILITY. Awards may be granted only to officers of the Company
or of a Parent or Subsidiary of the Company. A person may be granted more
than one Award under this Plan.
4. ADMINISTRATION.
4.1 COMMITTEE AUTHORITY. This Plan will be administered by the
Committee or the Board acting as the Committee. Subject to the general
purposes, terms and conditions of this Plan, and to the direction of the
Board, the Committee will have full power to implement and carry out this
Plan. Without limitation, the Committee will have the authority to:
(a) construe and interpret this Plan, any Stock Option Agreement
and any other agreement or document executed pursuant to this
Plan;
(b) prescribe, amend and rescind rules and regulations relating
to this Plan or any Award;
(c) select persons to receive Awards,
(d) determine the form and terms of Awards;
(e) determine the number of Shares or other consideration subject
to Awards;
(f) determine whether Awards will be granted singly, in
combination with, in tandem with, in replacement of, or as
alternatives to, other Awards under this Plan or awards under
any other incentive or compensation plan of the Company or
any Parent or Subsidiary of the Company;
<PAGE>
(g) grant waivers of Plan or Award conditions;
(h) determine the vesting, exercisability and payment of Awards;
(i) correct any defect, supply any omission, or reconcile any
inconsistency in this Plan, any Award, any Stock Option
Agreement or any Exercise Agreement; and
(j) make all other determinations necessary or advisable for the
administration of this Plan.
4.2 COMMITTEE DISCRETION. Any determination made by the
Committee with respect to any Award will be made in its sole discretion at
the time of grant of the Award or, unless in contravention of any express
term of this Plan or Award, and subject to Section 5.8 hereof, at any later
time, and such determination will be final and binding on the Company and on
all persons having an interest in any Award under this Plan. The Committee
may delegate to one or more officers of the Company the authority to grant an
Award under this Plan.
5. OPTIONS. The Committee may grant Options to eligible persons and
will determine whether such Options will be Incentive Stock Options within
the meaning of the Code ("ISOS") or Nonqualified Stock Options ("NQSOS"), the
number of Shares subject to the Option, the Exercise Price of the Option, the
period during which the Option may be exercised and all other terms and
conditions of the Option, subject to the following:
5.1 FORM OF OPTION GRANT. Each Option granted under this Plan
will be evidenced by a Stock Option Agreement which will expressly identify
the Option as an ISO or a NQSO and will be in such form and contain such
provisions (which need not be the same for each Participant) as the Committee
may from time to time approve, and which will comply with and be subject to
the terms and conditions of this Plan.
5.2 DATE OF GRANT. The date of grant of an Option will be the
date on which the Committee makes the determination to grant such Option,
unless otherwise specified by the Committee. The Stock Option Agreement and
a copy of this Plan will be delivered to the Participant within a reasonable
time after the granting of the Option.
5.3 EXERCISE PERIOD. Options may be exercisable within the
times or upon the events determined by the Committee as set forth in the
Stock Option Agreement governing such Option; provided, however, that no
Option will be exercisable after the expiration of ten years from the date
the Option is granted and provided further that no ISO granted to a person
who directly or by attribution owns more than 10% of the total combined
voting power of all classes of stock of the Company or any Parent or
Subsidiary of the Company ("TEN PERCENT STOCKHOLDER") will be exercisable
after the expiration of five years from the date the ISO is granted. The
Committee also may provide for Options to become exercisable at one time or
from time to time, periodically or otherwise, in such number of Shares or
percentage of Shares as the Committee determines.
5.4 EXERCISE PRICE. The Exercise Price of an Option will be
determined by the Committee when the Option is granted and may not be less
than 85% of the Fair Market Value of the Shares on the date of grant,
provided that: (i) the Exercise Price of an ISO will not be less than 100% of
the Fair Market Value of the Shares on the date of grant; and (ii) the
Exercise Price of any ISO granted to a Ten Percent Stockholder will not be
less than 110% of the Fair Market Value of the Shares on the date of grant.
Payment for the Shares purchased must be made in accordance with Section 6
hereof.
5.5 METHOD OF EXERCISE. Options may be exercised only by
delivery to the Company of a written stock option exercise agreement (the
"EXERCISE AGREEMENT") in a form approved by the Committee (which need not be
the same for each Participant), stating the number of Shares being purchased,
the restrictions imposed on the Shares purchased under such Exercise
Agreement, if any, and such representations and agreements regarding
Participant's investment intent and access to information and other matters,
if any, as may be required or desirable by the Company to comply with
applicable securities laws, together with payment in full of the Exercise
Price, and any applicable taxes, for the number of Shares being purchased.
5.6 TERMINATION. Subject to earlier termination pursuant to
Section 15 hereof and notwithstanding the exercise periods set forth in the
Stock Option Agreement, exercise of an Option will always be subject to the
following:
<PAGE>
(a) If the Participant is Terminated for any reason except
death, Disability or for Cause, then the Participant may
exercise such Participant's Options only to the extent that
such Options are exercisable upon the Termination Date and
such Options must be exercised by the Participant, if at
all, as to all or some of the Vested Shares calculated as
of the Termination Date, within three months after the
Termination Date (or within such shorter time period, not
less than 30 days, or within such longer time period, not
exceeding five years, as may be determined by the Committee,
with any exercise beyond three months after the Termination
Date deemed to be an ISO), but in any event no later than
the expiration date of the Options.
(b) If the Participant is Terminated because of Participant's
death or Disability (or the Participant dies within three
months after a Termination other than because of
Participant's death or Disability), then Participant's
Options may be exercised only to the extent that such
Options would have been exercisable by Participant on the
Termination Date and must be exercised by Participant (or
Participant's legal representative or authorized assignee),
no later than 12 months after the Termination Date (or
within such shorter time period, not less than six months,
or within such longer time period, not exceeding five
years, as may be determined by the Committee, with any such
exercise beyond (a) three months after the Termination Date
when the Termination is for any reason other than the
Participant's death or Disability or (b) 12 months after
the Termination Date when the Termination is for the
Participant's death or Disability, deemed to be an NQSO),
but in any event no later than the expiration date of the
Options.
(c) Notwithstanding the provisions in paragraph 5.6(a) above,
if a Participant is terminated for Cause, neither the
Participant, the Participant's estate nor such other person
who may then hold the Option shall be entitled to exercise
any Option with respect to any Shares whatsoever, after
termination of service, whether or not after termination of
service the Participant may receive payment from the
Company or Subsidiary for vacation pay, for services
rendered prior to termination, for services rendered for
the day on which termination occurs, for salary in lieu of
notice, or for any other benefits. In making such
determination, the Board shall give the Participant an
opportunity to present to the Board evidence on his behalf.
For the purpose of this paragraph, termination of service
shall be deemed to occur on the date when the Company
dispatches notice or advice to the Participant that his
service is terminated.
5.7 LIMITATIONS ON EXERCISE. The Committee may specify a
reasonable minimum number of Shares that may be purchased on any exercise of
an Option, provided that such minimum number will not prevent Participant
from exercising the Option for the full number of Shares for which it is then
exercisable.
5.8 LIMITATIONS ON ISOS. The aggregate Fair Market Value
(determined as of the date of grant) of Shares with respect to which ISOs are
exercisable for the first time by a Participant during any calendar year
(under this Plan or under any other incentive stock option plan of the
Company, Parent or Subsidiary of the Company) will not exceed $100,000. If
the Fair Market Value of Shares on the date of grant with respect to which
ISOs are exercisable for the first time by a Participant during any calendar
year exceeds $100,000, then the Options for the first $100,000 worth of
Shares to become exercisable in such calendar year will be ISOs and the
Options for the amount in excess of $100,000 that become exercisable in that
calendar year will be NQSOs. In the event that the Code or the regulations
promulgated thereunder are amended after the Effective Date of this Plan to
provide for a different limit on the Fair Market Value of Shares permitted to
be subject to ISOs, such different limit will be automatically incorporated
herein and will apply to any Options granted after the effective date of such
amendment.
5.9 MODIFICATION, EXTENSION OR REMOVAL. The Committee may
modify, extend or renew outstanding Options and authorize the grant of new
Options in substitution therefor, provided that any such action may not,
without the written consent of a Participant, impair any of such Participant's
rights under any Option previously granted. Any outstanding ISO that is
modified, extended, renewed or otherwise altered will be treated in
accordance with Section 424(h) of the Code. The Committee may reduce the
Exercise Price of outstanding Options without the consent of Participants
affected by a written notice to them; provided, however, that the Exercise
Price
<PAGE>
may not be reduced below the minimum Exercise Price that would be permitted
under Section 5.4 hereof for Options granted on the date the action is taken
to reduce the Exercise Price.
5.10 NO DISQUALIFICATION. Notwithstanding any other
provision in this Plan, no term of this Plan relating to an ISO will be
interpreted, amended or altered, nor will any discretion or authority
granted under this Plan be exercised, so as to disqualify this Plan under
Section 422 of the Code or, without the consent of the Participant affected,
to disqualify any ISO under Section 422 of the Code.
6. PAYMENT FOR SHARE PURCHASES.
6.1 PAYMENT. Payment for Shares purchased pursuant to
this Plan may be made in cash (by check) or, where expressly approved for the
Participant by the Committee and where permitted by law:
(a) by cancellation of indebtedness of the Company to the
Participant;
(b) by surrender of shares that: (i) either (A) have been
owned by Participant for more than six months and have
been paid for within the meaning of SEC Rule 144 (and,
if such shares were purchased from the Company by use
of a promissory note, such note has been fully paid
with respect to such shares) or (B) were obtained by
Participant in the public market and (ii) are clear of
all liens, claims, encumbrances or security interests.
(c) by tender of a full recourse promissory note having
such terms as may be approved by the Committee and
bearing interest at a rate sufficient to avoid
imputation of income under Sections 483 and 1274 of
the Code; provided, however, that the portion of the
Exercise Price equal to the par value of the Shares
must be paid in cash or other legal consideration
permitted by Delaware General Corporation Law;
(d) by waiver of compensation due or accrued to the
Participant for services rendered;
(e) with respect only to purchases upon exercise of an
Option, and provided that a public market for the
Company's stock exists:
(1) through a "same day sale" commitment from the
Participant and a broker-dealer that is a
member of the National Association of
Securities Dealers (an "NASD DEALER") whereby
the Participant irrevocably elects to exercise
the Option and to sell a portion of the Shares
so purchased to pay for the Exercise Price, and
whereby the NASD Dealer irrevocably commits upon
receipt of such Shares to forward the Exercise
Price directly to the Company; or
(2) through a "margin" commitment from the
Participant and an NASD Dealer whereby the
Participant irrevocably elects to exercise the
Option and to pledge the Shares so purchased
to the NASD Dealer in a margin account as
security for a loan from the NASD Dealer in
the amount of the Exercise Price, and whereby
the NASD Dealer irrevocably commits upon
receipt of such Shares to forward the Exercise
Price directly to the Company; or
(f) by any combination of the foregoing.
6.2 LOAN GUARANTEES. The Committee may help the
Participant pay for Shares purchased under this Plan by authorizing a
guarantee by the Company of a third-party loan to the Participant.
7. WITHHOLDING TAXES.
7.1 WITHHOLDING GENERALLY. Whenever Shares are to be
issued in satisfaction of Awards granted under this Plan, the Company may
require the Participant to remit to the Company an amount sufficient to
satisfy federal, state and local withholding tax requirements prior to the
delivery of any certificate or certificates for such Shares. Whenever, under
this Plan, payments in satisfaction of Awards are to be made in cash, such
payment will be net of an amount sufficient to satisfy federal, state, and
local withholding tax requirements.
<PAGE>
7.2 STOCK WITHHOLDING. When, under applicable tax laws,
a Participant incurs tax liability in connection with the exercise or vesting
of any Award that is subject to tax withholding and the Participant is
obligated to pay the Company the amount required to be withheld, the
Committee may in its sole discretion allow the Participant to satisfy the
minimum withholding tax obligation by electing to have the Company withhold
from the Shares to be issued that number of Shares having a Fair Market Value
equal to the minimum amount required to be withheld, determined on the date
that the amount of tax to be withheld is to be determined. All elections by
a Participant to have Shares withheld for this purpose will be made in
accordance with the requirements established by the Committee for such
elections and be in writing in a form acceptable to the Committee.
8. PRIVILEGES OF STOCK OWNERSHIP.
8.1 VOTING AND DIVIDENDS. No Participant will have any of
the rights of a stockholder with respect to any Shares until the Shares are
issued to the Participant. After Shares are issued to the Participant, the
Participant will be a stockholder and have all the rights of a stockholder
with respect to such Shares, including the right to vote and receive all
dividends or other distributions made or paid with respect to such Shares.
The Company will comply with Section 260.140.1 of Title 10 of the California
Code of Regulations with respect to the voting rights of Common Stock.
8.2 FINANCIAL STATEMENTS. The company will provide
financial statements to each Participant prior to such Participant's purchase
of Shares under this Plan, and to each Participant annually during the period
such Participant has Options outstanding, or as otherwise required under
Section 260.140.46 of Title 10 of the California Code of Regulations.
Notwithstanding the foregoing, the Company will not be required to provide
such financial statements to Participants when issuance is limited to
Participants whose services in connection with the Company assure them access
to equivalent information.
9. TRANSFERABILITY. Options granted under this Plan, and any
interest therein, will not be transferable or assignable by Participant, and
may not be made subject to execution, attachment or similar process,
otherwise than by will or by the laws of descent and distribution or as
determined by the Committee and set forth in the Stock Option Agreement with
respect to Options that are not ISOs. During the lifetime of the Participant
an Option will be exercisable only by the Participant or Participant's legal
representative, and any elections with respect to an Option may be made only
by the Participant or Participant's legal representative unless otherwise
determined by the Committee and set forth in the Stock Option Agreement with
respect to Options that are not ISOs.
10. CERTIFICATES. All certificates for Shares or other securities
delivered under this Plan will be subject to such stock transfer orders,
legends and other restrictions as the Committee may deem necessary or
advisable, including restrictions under any applicable federal, state or
foreign securities law, or any rules, regulations and other requirements of
the SEC or any stock exchange or automated quotation system upon which the
Shares may be listed or quoted.
11. ESCROW; PLEDGE OF SHARES. To enforce any restrictions on a
Participant's Shares, the Committee may require the Participant to deposit
all certificates representing Shares, together with stock powers or other
instruments of transfer approved by the Committee, appropriately endorsed in
blank, with the Company or an agent designated by the Company to hold in
escrow until such restrictions have lapsed or terminated, and the Committee
may cause a legend or legends referencing such restrictions to be placed on
the certificates. Any Participant who is permitted to execute a promissory
note as partial or full consideration for the purchase of Shares under this
Plan will be required to pledge and deposit with the Company all or part of
the Shares so purchased as collateral to secure the payment of Participant's
obligation to the Company under the promissory note; provided, however, that
the Committee may require or accept other or additional forms of collateral to
secure the payment of such obligation and, in any event, the Company will
have full recourse against the Participant under the promissory note
notwithstanding any pledge of the Participant's Shares or other collateral.
In connection with any pledge of the Shares, Participant will be required to
execute and deliver a written pledge agreement in such form as the Committee
will from time to time approve. The Shares purchased with the promissory
note may be released from the pledge on a pro rata basis as the promissory
note is paid.
12. EXCHANGE AND BUYOUT OF AWARDS. The Committee may, at any time
or from time to time, authorize the Company, with the consent of the
respective Participants, to issue new Awards in exchange for the
<PAGE>
surrender and cancellation of any or all outstanding Awards. The Committee
may at any time buy from a Participant an Award previously granted with
payment in cash, shares of Common Stock of the Company or other
consideration, based on such terms and conditions as the Committee and the
Participant may agree.
13. SECURITIES LAW AND OTHER REGULATORY COMPLIANCE. An Award will
not be effective unless such Award is in compliance with all applicable
federal and state securities laws, rules and regulations of any governmental
body, and the requirements of any stock exchange or automated quotation
system upon which the Shares may then be listed or quoted, as they are in
effect on the date of grant of the Award and also on the date of exercise or
other issuance. Notwithstanding any other provision in this Plan, the
Company will have no obligation to issue or deliver certificates for Shares
under this Plan prior to (a) obtaining any approvals from governmental
agencies that the Company determines are necessary or advisable, and/or (b)
compliance with any exemption, completion of any registration or other
qualification of such Shares under any state or federal law or ruling of any
governmental body that the Company determines to be necessary or advisable.
The Company will be under no obligation to register the Shares with the SEC
or to effect compliance with the exemption, registration, qualification or
listing requirements of any state securities laws, stock exchange or
automated quotation system, and the Company will have no liability for any
inability or failure to do so.
14. NO OBLIGATION TO EMPLOY. Nothing in this Plan or any Award
granted under this Plan will confer or be deemed to confer on any Participant
any right to continue in the employ of, or to continue any other relationship
with, the Company or any Parent or Subsidiary of the Company or limit in any
way the right of the Company or any Parent or Subsidiary of the Company to
terminate Participant's employment or other relationship at any time, with or
without Cause.
15. CORPORATE TRANSACTIONS.
15.1 ASSUMPTION OR REPLACEMENT OF AWARDS BY SUCCESSOR OR
ACQUIRING CORPORATION. In the event of (a) a dissolution or liquidation of
the Company, (b) a merger or consolidation in which the Company is not the
surviving corporation (other than a merger or consolidation with a
wholly-owned subsidiary, a reincorporation of the Company in a different
jurisdiction, or other transaction in which there is no substantial change in
the stockholders of the Company or their relative stock holdings and the
Awards granted under this Plan are assumed, converted or replaced by the
successor or acquiring corporation, which assumption, conversion or
replacement will be binding on all Participants), (c) a merger in which the
Company is the surviving corporation but after which the stockholders of the
Company immediately prior to such merger (other than any stockholder which
merges with the Company in such merger, or which owns or controls another
corporation which merges, with the Company in such merger) cease to own their
shares or other equity interests in the Company, (d) the sale of all or
substantially all of the assets of the Company or (e) the acquisition, sale
or transfer of more than 50% of the outstanding shares of the Company by
tender offer or similar transaction, any or all outstanding Awards may be
assumed, converted or replaced by the successor or acquiring corporation (if
any), which assumption, conversion or replacement will be binding on all
Participants. In the alternative, the successor or acquiring corporation may
substitute equivalent Awards or provide substantially similar consideration
to Participants as was provided to stockholders (after taking into account
the existing provisions of the Awards). The successor or acquiring
corporation may also issue, in place of outstanding Shares of the Company
held by the Participant, substantially similar shares or other property
subject to repurchase restrictions and other provisions no less favorable to
the Participant than those which applied to such outstanding Shares
immediately prior to such transaction described in this Section 15.1. In the
event such successor or acquiring corporation (if any) refuses to assume or
substitute Awards, as provided above, pursuant to a transaction described in
this Section 15.1, then notwithstanding any other provision in this Plan to
the contrary, such Awards will expire on such transaction at such time and on
such conditions as the Board will determine; provided, however, that the
Committee may, in its sole discretion, provide that the vesting of any or all
Awards granted pursuant to this Plan will accelerate. If the Committee
exercises such discretion with respect to Options, such Options will become
exercisable in full prior to the consummation of such event at such time and
on such conditions as the Committee determines, and if such Options are not
exercised prior to the consummation of the corporate transaction, they shall
terminate at such time as determined by the Committee.
15.2 OTHER TREATMENT OF AWARDS. Subject to any greater
rights granted to Participants under the foregoing provisions of this Section
15, in the event of the occurrence of any transaction described in Section
15.1
<PAGE>
hereof, any outstanding Awards will be treated as provided in the applicable
agreement or plan of merger, consolidation, dissolution, liquidation or sale
of assets.
15.3 ASSUMPTION OF AWARDS BY THE COMPANY. The Company,
from time to time, also may substitute or assume outstanding awards granted
by another company, whether in connection with an acquisition of such other
company or otherwise, by either (a) granting an Award under this Plan in
substitution of such other company's award or (b) assuming such award as if
it had been granted under this Plan if the terms of such assumed award could
be applied to an Award granted under this Plan. Such substitution or
assumption will be permissible if the holder of the substituted or assumed
award would have been eligible to be granted an Award under this Plan if the
other company had applied the rules of this Plan to such grant. In the event
the Company assumes an award granted by another company, the terms and
conditions of such award will remain unchanged (except that the exercise
price and the number and nature of shares issuable upon exercise of any such
option will be adjusted appropriately pursuant to Section 424(a) of the
Code). In the event the Company elects to grant a new Option rather than
assuming an existing option, such new Option may be granted with a similarly
adjusted Exercise Price.
16. ADOPTION OF PLAN. This Plan will become effective on the
date that it is adopted by the Board (the "EFFECTIVE DATE"). If any Options
are ISOs, this Plan will be approved by the stockholders of the Company
(excluding Shares issued pursuant to this Plan), consistent with applicable
laws, within 12 months after the Plan is adopted by the Board (if such
approval is not obtained, the Options will be NQSOs). Upon the Effective
Date, the Committee may grant Options pursuant to this Plan; provided,
however, that the following requirements will be met for any Option that is
an ISO (otherwise the Option will be an NQSO): (a) the Option may not be
exercised prior to initial stockholder approval of this Plan, and (b) any
Option granted pursuant to an increase in the number of Shares subject to
this Plan approved by the Board may not be exercised prior to approval of
such increase by the stockholders of the Company.
17. TERM OF PLAN/GOVERNING LAW. Unless earlier terminated as
provided herein, this Plan will terminate ten years from the Effective Date
or, if earlier, the date of stockholder approval. This Plan and all
agreements hereunder shall be governed by and construed in accordance with
the laws of the State of California excluding that body of law pertaining to
conflict of laws.
18. AMENDMENT OR TERMINATION OF PLAN. The Board may at any
time terminate or amend this Plan in any respect, including without
limitation amendment of any form of Stock Option Agreement or instrument to
be executed pursuant to this Plan; provided, however, that the Board will
not, without the approval of the stockholders of the Company, amend this Plan
in any manner that requires such stockholder approval.
19. NONEXCLUSIVITY OF THE PLAN. Neither the adoption of this
Plan by the Board nor any provision of this Plan will be construed as
creating any limitations on the power of the Board to adopt such additional
compensation arrangements as it may deem desirable, including, without
limitation, the granting of stock options and other equity awards otherwise
than under this Plan, and such arrangements may be either generally
applicable or applicable only in specific cases.
20. DEFINITIONS. As used in this Plan, the following terms
will have the following meanings:
"AWARD" means any Award of Options under this Plan.
"BOARD" means the Board of Directors of the Company.
"CAUSE" means Termination because of (i) any willful
material violation by the Participant of any law or regulation applicable to
to the business of the Company or a Parent or Subsidiary of the Company, the
Participant's conviction for, or guilty plea to, a felony or a crime
involving moral turpitude, any willful perpetration by the Participant of a
common law fraud, (ii) the Participant's commission of an act of personal
dishonesty which involves personal profit in connection with the Company or
any other entity having a business relationship with the Company, (iii) any
material breach by the Participant of any provision of any agreement or
understanding between the Company or any Parent or Subsidiary of the Company
and the Participant regarding the terms of the Participant's service as an
employee, director or consultant to the Company, or a Parent or Subsidiary of
the Company, including without limitation, the willful and continued failure
or refusal of the Participant to perform the material duties required of such
Participant as an employee, director or consultant of the Company or a Parent
or Subsidiary of the
<PAGE>
Company, other than as a result of having a Disability, or a breach of any
applicable invention assignment and confidentiality agreement or similar
agreement between the Company and the Participant, (iv) Participant's
disregard of the policies of the Company or any Parent or Subsidiary of the
Company so as to cause loss, damage or injury to the property, reputation or
employees of the Company or a Parent or Subsidiary of the Company, or (v) any
other misconduct by the Participant which is materially injurious to the
financial condition or business reputation of, or is otherwise materially
injurious to, the Company or a Parent or Subsidiary of the Company.
"CODE" means the Internal Revenue Code of 1986, as amended.
"COMMITTEE" means the committee appointed by the Board to
administer this Plan, or if no committee is appointed, the Board.
"COMPANY" means Hybrid Networks, Inc., or any successor
corporation.
"DISABILITY" means a disability, whether temporary or
permanent, partial or total, as determined by the Committee.
"EXERCISE PRICE" means the price at which a holder of an
Option may purchase the Shares issuable upon exercise of the Option.
"FAIR MARKET VALUE" means, as of any date, the value of a
share of the Company's Common Stock determined as follows.
(a) if such Common Stock is then quoted on the Nasdaq
National Market, its closing price on the Nasdaq National Market on the date
of determination as reported in THE WALL STREET JOURNAL;
(b) if such Common Stock is publicly traded and is
then listed on a national securities exchange, its closing price on the date
of determination on the principal national securities exchange on which the
Common Stock is listed or admitted to trading as reported in THE WALL STREET
JOURNAL;
(c) if such Common Stock is publicly traded but is
not quoted on the Nasdaq National Market nor listed or admitted to trading on
a national securities exchange, the closing bid price on the date of
determination as reported by THE WALL STREET JOURNAL (or, if not so reported,
as otherwise reported by any newspaper or other source as the Board may
determine); or
(d) if none of the foregoing is applicable, by the
Committee in good faith.
"OPTION" means an award of an option to purchase Shares
pursuant to Section 5 hereof.
"PARENT" means any corporation (other than the Company)
in an unbroken chain of corporations ending with the Company if each of such
corporations other than the Company owns stock possessing 50% or more of the
total combined voting power of all classes of stock in one of the other
corporations in such chain.
"PARTICIPANT" means a person who receives an Award under
this Plan.
"PLAN" means this Hybrid Networks, Inc. 1999 Officer
Stock Option Plan, as amended from time to time.
"SEC" means the Securities and Exchange Commission.
"SECURITIES ACT" means the Securities Act of 1933, as
amended.
"SHARES" means shares of the Company's Common Stock
reserved for issuance under this Plan, as adjusted pursuant to Sections 2 and
15 hereof, and any successor security.
<PAGE>
"STOCK OPTION AGREEMENT" means, with respect to each
Option, the signed written agreement between the Company and the Participant
setting forth the terms and conditions of the Award.
"SUBSIDIARY" means any corporation (other than the
Company) in an unbroken chain of corporations beginning with the Company if
each of the corporations other than the last corporation in the unbroken
chain owns stock possessing 50% or more of the total combined voting power of
all classes of stock in one of the other corporations in such chain.
"TERMINATION" or "TERMINATED" means, for purposes of this
Plan with respect to a Participant, that the Participant has for any reason
ceased to provide substantial services as (i) an employee, officer, director,
consultant or independent contractor to the Company or a Parent or Subsidiary
or affiliate of the Company, or (ii) as a consultant, independent contractor
or advisor to the Board of Directors of the Company. A Participant will not
be deemed to have ceased to provide services in the case of (i) sick leave,
(ii) military leave, or (iii) any other leave of absence approved by the
Committee, provided that such leave is for a period of not more than 90 days
unless reinstatement upon the expiration of such leave is guaranteed by
contract or statute, or unless provided otherwise pursuant to formal policy
adopted from time to time by the Company and issued and promulgated in
writing. In the case of any Participant on (i) sick leave, (ii) military
leave or (iii) an approved leave of absence, the Committee may make such
provisions respecting suspension of vesting of the Award while on leave from
the Company or a Parent or Subsidiary of the Company as it may deem
appropriate, except that in no event may an Option be exercised after the
expiration of the term set forth in the Stock Option Agreement. The
Committee will have sole discretion to determine whether a Participant has
ceased to provide services and the effective date on which the Participant
ceased to provide services (the "TERMINATION DATE").
<PAGE>
HYBRID NETWORKS, INC.
1999 STOCK OPTION PLAN
AS ADOPTED AS OF MAY 5, 1999
1. PURPOSE. The purpose of this Plan is to provide incentives to
attract, retain and motivate eligible persons whose present and potential
contributions are important to the success of the Company by offering them an
opportunity to participate in the Company's future performance through awards
of Options. CAPITALIZED TERMS NOT DEFINED IN THE TEXT ARE DEFINED IN SECTION
20 HEREOF.
2. SHARES SUBJECT TO THE PLAN.
2.1 NUMBER OF SHARES AVAILABLE. Subject to Sections 2.2 and
15 hereof, the total number of Shares reserved and available for grant and
issuance pursuant to this Plan will be 1,500,000 Shares. Subject to Sections
2.2 and 15 hereof, Shares will again be available for grant and issuance in
connection with future Awards under this Plan to the extent such Shares: (a)
cease to be subject to issuance upon exercise of an Option, other than due to
exercise of such Option; or (b) are subject to an Award that otherwise
terminates without Shares being issued. At all times the Company will
reserve and keep available a sufficient number of Shares as will be required
to satisfy the requirements of all Awards granted under this Plan.
2.2 ADJUSTMENT OF SHARES. In the event that the number of
outstanding shares of the Company's Common Stock is changed by a stock
dividend, recapitalization, stock split, reverse stock split, subdivision,
combination, reclassification or similar change in the capital structure of
the Company without consideration, then (a) the number of Shares reserved for
issuance under this Plan and (b) the Exercise Prices of and number of Shares
subject to outstanding Options, subject to any required action by the Board
or the stockholders of the Company and compliance with applicable securities
laws; provided, however, that fractions of a Share will not be issued but
will either be paid in cash at Fair Market Value of such fraction of a Share
or will be rounded down to the nearest whole Share, as determined by the
Committee.
3. ELIGIBILITY. Awards may be granted only to employees (including
officers and directors who are also employees) of the Company or of a Parent or
Subsidiary of the Company who meet the suitability standards set forth below
in this Section 3. A person may be granted more than one Award under this
Plan. To be eligible to receive options under this Plan, a person must meet
the following suitability standards: Such person must either (a) be an
officer or director of the Company, (b) have a pre-existing personal or
business relationship with the Company or any of its officers, directors or
controlling persons or (c) by reason of such person's business or financial
experience or the business or financial experience of such person's
professional advisor who is unaffiliated with and who is not compensated by
the Company or any affiliate or selling agent of the Company, directly or
indirectly, could be reasonably assumed to protect such person's own
interests in connection with the Options. The foregoing suitability
standards are intended to comply, and shall be interpreted in a manner
consistent with, the excemption from qualification under the California
securities laws provided by Section 25102(f) of the California Corporations
Code and the regulations thereunder.
4. ADMINISTRATION.
4.1 COMMITTEE AUTHORITY. This Plan will be administered by
the Committee or by the Board acting as the Committee. Subject to the
general purposes, terms and conditions of this Plan, and to the direction of
the Board, the Committee will have full power to implement and carry out this
Plan. Without limitation, the Committee will have the authority to:
(a) construe and interpret this Plan, any Stock Option
Agreement and any other agreement or document executed
pursuant to this Plan;
<PAGE>
(b) prescribe, amend and rescind rules and regulations relating
to this Plan or any Award;
(c) select persons to receive Awards;
(d) determine the form and terms of Awards;
(e) determine the number of Shares or other consideration
subject to Awards;
(f) determine whether Awards will be granted singly, in
combination with, in tandem with, in replacement of, or as
alternatives to, other Awards under this Plan or awards
under any other incentive or compensation plan of the
Company or any Parent or Subsidiary of the Company;
(g) grant waivers of Plan or Award conditions;
(h) determine the vesting, exercisability and payment of
Awards;
(i) correct any defect, supply any omission, or reconcile any
inconsistency in this Plan, any Award, any Stock Option
Agreement or any Exercise Agreement; and
(j) make all other determinations necessary or advisable for
the administration of this Plan.
4.2 COMMITTEE DISCRETION. Any determination made by the
Committee with respect to any Award will be made in its sole discretion at
the time of grant of the Award or, unless in contravention of any express
term of this Plan or Award, and subject to Section 5.8 hereof, at any later
time, and such determination will be final and binding on the Company and on
all persons having an interest in any Award under this Plan. The Committee
may delegate to one or more officers of the Company the authority to grant an
Award under this Plan.
5. OPTIONS. The Committee may grant Options to eligible persons
and will determine whether such Options will be Incentive Stock Options
within the meaning of the Code ("ISOS") or Nonqualified Stock Options
("NQSOS"), the number of Shares subject to the Option, the Exercise Price of
the Option, the period during which the Option may be exercised and all other
terms and conditions of the Option, subject to the following:
5.1 FORM OF OPTION GRANT. Each Option granted under this
Plan will be evidenced by a Stock Option Agreement which will expressly
identify the Option as an ISO or an NQSO and will be in such form and contain
such provisions (which need not be the same for each Participant) as the
Committee may from time to time approve, and which will comply with and be
subject to the terms and conditions of this Plan.
5.2 DATE OF GRANT. The date of grant of an Option will be
the date on which the Committee makes the determination to grant such Option,
unless otherwise specified by the Committee. The Stock Option Agreement and
a copy of this Plan will be delivered to the Participant within a reasonable
time after the granting of the Option.
5.3 EXERCISE PERIOD. Options may be exercisable within the
times or upon the events determined by the Committee as set forth in the
Stock Option Agreement governing such Option; provided, however, that no
Option will be exercisable after the expiration of ten years from the date
the Option is granted and provided further that no ISO granted to a person
who directly or by attribution owns more than 10% of the total combined
voting power of all classes of stock of the Company or any Parent or
Subsidiary of the Company ("TEN PERCENT STOCKHOLDER") will be exercisable
after the expiration of five years from the date the ISO is granted. The
Committee also may provide for Options to become exercisable at one time or
from time to time, periodically or otherwise, in such number of Shares or
percentage of Shares as the Committee determines. Notwithstanding the
foregoing, Options to Participants who are not officers, directors or
consultants of the Company, or of any Parent or Subsidiary of the Company,
must become exercisable at a rate of at least 20% per year over five years
from the date the Option is granted, subject to earlier termination of the
Option pursuant to Sections 5.6 and 15.
5.4 EXERCISE PRICE. The Exercise Price of an Option will be
determined by the Committee when the Option is granted, provided that: (i)
the Exercise Price of an ISO will not be less than 100% of the Fair Market
Value of the Shares on the date of grant; and (ii) the Exercise Price of any
Option granted to a Ten Percent
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Stockholder will not be less than 110% of the Fair Market Value of the
Shares on the date of grant. Payment for the Shares purchased must be made
in accordance with Section 6 hereof.
5.5 METHOD OF EXERCISE. Options may be exercised only by
delivery to the Company of a written stock option exercise agreement (the
"EXERCISE AGREEMENT") in a form approved by the Committee (which need not be
the same for each Participant), stating the number of Shares being purchased,
the restrictions imposed on the Shares purchased under such Exercise
Agreement, if any, and such representations and agreements regarding
Participant's investment intent and access to information and other matters,
if any, as may be required or desirable by the Company to comply with
applicable securities laws, together with payment in full of the Exercise
Price, and any applicable taxes, for the number of Shares being purchased.
5.6 TERMINATION. Subject to earlier termination pursuant to
Section 15 hereof and notwithstanding the exercise periods set forth in the
Stock Option Agreement, exercise of an Option will always be subject to the
following:
(a) If the Participant is Terminated for any reason except
death, Disability or for Cause, then the Participant may
exercise such Participant's Options only to the extent that
such Options are exercisable upon the Termination Date and
such Options must be exercised by the Participant, if at
all, as to all or some of the Vested Shares calculated as
of the Termination Date, within three months after the
Termination Date (or within such shorter time period, not
less than 30 days, or within such longer time period, not
exceeding five years, as may be determined by the
Committee, with any exercise beyond three months after the
Termination Date deemed to be an ISO), but in any event no
later than the expiration date of the Options.
(b) If the Participant is Terminated because of Participant's
death or Disability (or the Participant dies within three
months after a Termination other than because of
Participant's death or Disability), then Participant's
Options may be exercised only to the extent that such
Options would have been exercisable by Participant on the
Termination Date and must be exercised by Participant (or
Participant's legal representative or authorized assignee),
no later than 12 months after the Termination Date (or
within such shorter time period, not less than six months,
or within such longer time period, not exceeding five
years, as may be determined by the Committee, with any
such exercise beyond (i) three months after the Termination
Date when the Termination is for any reason other than the
Participant's death or Disability or (ii) 12 months after
the Termination Date when the Termination is for the
Participant's death or Disability, deemed to be an NQSO),
but in any event no later than the expiration date of the
Options.
(c) Notwithstanding the provisions in paragraph 5.6(a) above,
if a Participant is terminated for Cause, neither the
Participant, the Participant's estate nor such other person
who may then hold the Option shall be entitled to exercise
any Option with respect to any Shares whatsoever, after
termination of service, whether or not after termination of
service the Participant may receive payment from the
Company or Subsidiary for vacation pay, for services
rendered prior to termination, for services rendered for
the day on which termination occurs, for salary in lieu of
notice, or for any other benefits. In making such
determination, the Board shall give the Participant an
opportunity to present to the Board evidence on his behalf.
For the purpose of this paragraph, termination of service
shall be deemed to occur on the date when the Company
dispatches notice or advice to the Participant that his
service is terminated.
5.7 LIMITATIONS ON EXERCISE. The Committee may specify a
reasonable minimum number of Shares that may be purchased on any exercise of
an Option, provided that such minimum number will not prevent Participant
from exercising the Option for the full number of Shares for which it is then
exercisable.
5.8 LIMITATIONS ON ISOS. The aggregate Fair Market Value
(determined as of the date of grant) of Shares with respect to which ISOs are
exercisable for the first time by a Participant during any calendar year
(under
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this Plan or under any other incentive stock option plan of the Company,
Parent or Subsidiary of the Company) will not exceed $100,000. If the Fair
Market Value of Shares on the date of grant with respect to which ISOs are
exercisable for the first time by a Participant during any calendar year
exceeds $100,000, then the Options for the first $100,000 worth of Shares
to become exercisable in such calendar year will be ISOs and the Options for
the amount in excess of $100,000 that become exercisable in that calendar
year will be NQSOs. In the event that the Code or the regulations
promulgated thereunder are amended after the Effective Date of this Plan to
provide for a different limit on the Fair Market Value of Shares permitted to
be subject to ISOs, such different limit will be automatically incorporated
herein and will apply to any Options granted after the effective date of such
amendment.
5.9 MODIFICATION, EXTENSION OR RENEWAL. The Committee may
modify, extend or renew outstanding Options and authorize the grant of new
Options in substitution therefor, provided that any such action may not,
without the written consent of a Participant, impair any of such
Participant's rights under any Option previously granted. Any outstanding
ISO that is modified, extended, renewed or otherwise altered will be treated
in accordance with Section 424(h) of the Code. The Committee may reduce the
Exercise Price of outstanding Options without the consent of Participants
affected by a written notice to them; provided, however, that the Exercise
Price may not be reduced below the minimum Exercise Price that would be
permitted under Section 5.4 hereof for Options granted on the date the action
is taken to reduce the Exercise Price.
5.10 NO DISQUALIFICATION. Notwithstanding any other
provision in this Plan, no term of this Plan relating to an ISO will be
interpreted, amended or altered, nor will any discretion or authority granted
under this Plan be exercised, so as to disqualify this Plan under Section 422
of the Code or, without the consent of the Participant affected, to
disqualify any ISO under Section 422 of the Code.
6. PAYMENT FOR SHARE PURCHASES.
6.1 PAYMENT. Payment for Shares purchased pursuant to this
Plan may be made in cash (by check) or, where expressly approved for the
Participant by the Committee and, where permitted by law, by any of the means
set forth below:
(a) by cancellation of indebtedness of the Company to the
Participant;
(b) by surrender of shares that: (i) either (A) have been owned
by Participant for more than six months and have been paid
for within the meaning of SEC Rule 144 (and, if such shares
were purchased from the Company by use of a promissory
note, such note has been fully paid with respect to such
shares) or (B) were obtained by Participant in the public
market and (ii) are clear of all liens, claims,
encumbrances or security interests;
(c) by tender of a full recourse promissory note having such
terms as may be approved by the Committee and bearing
interest at a rate sufficient to avoid imputation of income
under Sections 483 and 1274 of the Code; provided, however,
that the portion of the Exercise Price equal to the par
value of the Shares must be paid in cash or other legal
consideration permitted by Delaware General Corporation Law
(Participants who are not employees or directors of the
Company will not be entitled to purchase Shares with a
promissory note unless the note is adequately secured by
collateral other than the Shares);
(d) by waiver of compensation due or accrued to the Participant
for services rendered;
(e) with respect only to purchases upon exercise of an Option,
and provided that a public market for the Company's stock
exists:
(1) through a "same day sale" commitment from the
Participant and a broker-dealer that is a member of
the National Association of Securities Dealers (an
"NASD DEALER") whereby the Participant irrevocably
elects to exercise the Option and to sell a portion
of the Shares so purchased to pay for the Exercise
Price, and whereby the NASD Dealer irrevocably
commits upon receipt of such Shares to forward the
Exercise Price directly to the Company; or
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(2) through a "margin" commitment from the Participant
and an NASD Dealer whereby the Participant
irrevocably elects to exercise the Option and to
pledge the Shares so purchased to the NASD Dealer in
a margin account as security for a loan from the
NASD Dealer in the amount of the Exercise Price,
and whereby the NASD Dealer irrevocably commits
upon receipt of such Shares to forward the Exercise
Price directly to the Company; or
(f) by any combination of the foregoing.
6.2 LOAN GUARANTEES. The Committee may help the Participant
pay for Shares purchased under this Plan by authorizing a guarantee by the
Company of a third-party loan to the Participant.
7. WITHHOLDING TAXES.
7.1 WITHHOLDING GENERALLY. Whenever Shares are to be
issued in satisfaction of Awards granted under this Plan, the Company may
require the Participant to remit to the Company an amount sufficient to
satisfy federal, state and local withholding tax requirements prior to the
delivery of any certificate or certificates for such Shares. Whenever, under
this Plan, payments in satisfaction of Awards are to be made in cash, such
payment will be net of an amount sufficient to satisfy federal, state, and
local withholding tax requirements.
7.2 STOCK WITHHOLDING. When, under applicable tax laws, a
Participant incurs tax liability in connection with the exercise or vesting
of any Award that is subject to tax withholding and the Participant is
obligated to pay the Company the amount required to be withheld, the
Committee may in its sole discretion allow the Participant to satisfy the
minimum withholding tax obligation by electing to have the Company withhold
from the Shares to be issued that number of Shares having a Fair Market Value
equal to the minimum amount required to be withheld, determined on the date
that the amount of tax to be withheld is to be determined. All elections by
a Participant to have Shares withheld for this purpose will be made in
accordance with the requirements established by the Committee for such
elections and be in writing in a form acceptable to the Committee.
8. PRIVILEGES OF STOCK OWNERSHIP.
8.1 VOTING AND DIVIDENDS. No Participant will have any of
the rights of a stockholder with respect to any Shares until the Shares are
issued to the Participant. After Shares are issued to the Participant, the
Participant will be a stockholder and have all the rights of a stockholder
with respect to such Shares, including the right to vote and receive all
dividends or other distributions made or paid with respect to such Shares.
The Company will comply with Section 260.140.1 of Title 10 of the California
Code of Regulations with respect to the voting rights of Common Stock.
8.2 FINANCIAL STATEMENTS. The Company will provide
financial statements to each Participant prior to such Participant's purchase
of Shares under this Plan, and to each Participant annually during the period
such Participant has Options outstanding, or as otherwise required under
Section 260.140.46 of Title 10 of the California Code of Regulations.
Notwithstanding the foregoing, the Company will not be required to provide
such financial statements to Participants when issuance is limited to
Participants whose services in connection with the Company assure them access
to equivalent information.
9. TRANSFERABILITY. Options granted under this Plan, and any
interest therein, will not be transferable or assignable by Participant, and
may not be made subject to execution, attachment or similar process,
otherwise than by will or by the laws of descent and distribution or as
determined by the Committee and set forth in the Stock Option Agreement with
respect to Options that are not ISOs. During the lifetime of the Participant
an Option will be exercisable only by the Participant or Participant's legal
representative, and any elections with respect to an Option may be made only
by the Participant or Participant's legal representative unless otherwise
determined by the Committee and set forth in the Stock Option Agreement with
respect to Options that are not ISOs.
10. CERTIFICATES. All certificates for Shares or other securities
delivered under this Plan will be subject to such stock transfer orders,
legends and other restrictions as the Committee may deem necessary or
advisable, including restrictions under any applicable federal, state or
foreign securities law, or any rules, regulations
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and other requirements of the SEC or any stock exchange or automated
quotation system upon which the Shares may be listed or quoted.
11. ESCROW; PLEDGE OF SHARES. To enforce any restrictions on a
Participant's Shares, the Committee may require the Participant to deposit
all certificates representing Shares, together with stock powers or other
instruments of transfer approved by the Committee, appropriately endorsed in
blank, with the Company or an agent designated by the Company to hold in
escrow until such restrictions have lapsed or terminated, and the Committee
may cause a legend or legends referencing such restrictions to be placed on
the certificates. Any Participant who is permitted to execute a promissory
note as partial or full consideration for the purchase of Shares under this
Plan will be required to pledge and deposit with the Company all or part of
the Shares so purchased as collateral to secure the payment of Participant's
obligation to the Company under the promissory note; provided, however, that
the Committee may require or accept other or additional forms of collateral
to secure the payment of such obligation and, in any event, the Company will
have full recourse against the Participant under the promissory note
notwithstanding any pledge of the Participant's Shares or other collateral.
In connection with any pledge of the Shares, Participant will be required to
execute and deliver a written pledge agreement in such form as the Committee
will from time to time approve. The Shares purchased with the promissory
note may be released from the pledge on a pro rata basis as the promissory
note is paid.
12. EXCHANGE AND BUYOUT OF AWARDS. The Committee may, at any time
or from time to time, authorize the Company, with the consent of the
respective Participants, to issue new Awards in exchange for the surrender
and cancellation of any or all outstanding Awards. The Committee may at any
time buy from a Participant an Award previously granted with payment in cash,
shares of Common Stock of the Company or other consideration, based on such
terms and conditions as the Committee and the Participant may agree.
13. SECURITIES LAW AND OTHER REGULATORY COMPLIANCE. An Award will
not be effective unless such Award is in compliance with all applicable
federal and state securities laws, rules and regulations of any governmental
body, and the requirements of any stock exchange or automated quotation
system upon which the Shares may then be listed or quoted, as they are in
effect on the date of grant of the Award and also on the date of exercise or
other issuance. Notwithstanding any other provision in this Plan, the Company
will have no obligation to issue or deliver certificates for Shares under
this Plan prior to (a) obtaining any approvals from governmental agencies
that the Company determines are necessary or advisable, and/or (b) compliance
with any exemption, completion of any registration or other qualification of
such Shares under any state or federal law or ruling of any governmental body
that the Company determines to be necessary or advisable. The Company will
be under no obligation to register the Shares with the SEC or to effect
compliance with the exemption, registration, qualification or listing
requirements of any state securities laws, stock exchange or automated
quotation system, and the Company will have no liability for any inability or
failure to do so.
14. NO OBLIGATION TO EMPLOY. Nothing in this Plan or any Award
granted under this Plan will confer or be deemed to confer on any Participant
any right to continue in the employ of, or to continue any other relationship
with, the Company or any Parent or Subsidiary of the Company or limit in any
way the right of the Company or any Parent or Subsidiary of the Company to
terminate Participant's employment or other relationship at any time, with or
without Cause.
15. CORPORATE TRANSACTIONS.
15.1 ASSUMPTION OR REPLACEMENT OF AWARDS BY SUCCESSOR OR
ACQUIRING CORPORATION. In the event of (a) a dissolution or liquidation of
the Company, (b) a merger or consolidation in which the Company is not the
surviving corporation (other than a merger or consolidation with a
wholly-owned subsidiary, a reincorporation of the Compahy in a different
jurisdiction, or other transaction in which there is no substantial change in
the stockholders of the Company or their relative stock holdings and the
Awards granted under this Plan are assumed, converted or replaced by the
successor or acquiring corporation, which assumption, conversion
or replacement will be binding on all Participants), (c) a merger in which
the Company is the surviving corporation but after which the stockholders of
the Company immediately prior to such merger (other than any stockholder
which merges with the Company in such merger, or which owns or controls
another corporation which merges, with the Company in such merger) cease to
own their shares or other equity interests in the Company, (d) the sale of
all or substantially all of the assets of the Company or (e) the acquisition,
sale or transfer of more than 50% of the outstanding shares of the
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Company by tender offer or similar transaction, any or all outstanding Awards
may be assumed, converted or replaced by the successor or acquiring
corporation (if any), which assumption, conversion or replacement will be
binding on all Participants. In the alternative, the successor or acquiring
corporation may substitute equivalent Awards or provide substantially similar
consideration to Participants as was provided to stockholders (after taking
into account the existing provisions of the Awards). The successor or
acquiring corporation may also issue, in place of outstanding Shares of the
Company held by the Participant, substantially similar shares or other
property subject to repurchase restrictions and other provisions no less
favorable to the Participant than those which applied to such outstanding
Shares immediately prior to such transaction described in this Section 15.1.
In the event such successor or acquiring corporation (if any) refuses to
assume or substitute Awards, as provided above, pursuant to a transaction
described in this Section 15.1, then notwithstanding any other provision in
this Plan to the contrary, such Awards will expire on such transaction at
such time and on such conditions as the Board will determine; provided,
however, that the Committee may, in its sole discretion, provide that the
vesting of any or all Awards granted pursuant to this Plan will accelerate.
If the Committee exercises such discretion with respect to Options, such
Options will become exercisable in full prior to the consummation of such
event at such time and on such conditions as the Committee determines, and if
such Options are not exercised prior to the consummation of the corporate
transaction, they shall terminate at such time as determined by the
Committee.
15.2 OTHER TREATMENT OF AWARDS. Subject to any greater
rights granted to Participants under the foregoing provisions of this Section
15, in the event of the occurrence of any transaction described in Section
15.1 hereof, any outstanding Awards will be treated as provided in the
applicable agreement or plan of merger, consolidation, dissolution,
liquidation or sale of assets.
15.3 ASSUMPTION OF AWARDS BY THE COMPANY. The Company, from
time to time, also may substitute or assume outstanding awards granted by
another company, whether in connection with an acquisition of such other
company or otherwise, by either (a) granting an Award under this Plan in
substitution of such other company's award or (b) assuming such award as if
it had been granted under this Plan if the terms of such assumed award could
be applied to an Award granted under this Plan. Such substitution or
assumption will be permissible if the holder of the substituted or assumed
award would have been eligible to be granted an Award under this Plan if the
other company had applied the rules of this Plan to such grant. In the event
the Company assumes an award granted by another company, the terms and
conditions of such award will remain unchanged (except that the exercise
price and the number and nature of shares issuable upon exercise of any such
option will be adjusted appropriately pursuant to Section 424(a) of the
Code). In the event the Company elects to grant a new Option rather than
assuming an existing option, such new Option may be granted with a similarly
adjusted Exercise Price.
16. ADOPTION OF PLAN. This Plan will become effective on the date
that it is adopted by the Board (the "EFFECTIVE DATE"). If any Options are
ISOs, this Plan will be approved by the stockholders of the Company
(excluding Shares issued pursuant to this Plan), consistent with applicable
laws, within 12 months after the Plan is adopted by the Board (if such
approval is not obtained, the Options will be NQSOs). Upon the Effective
Date, the Committee may grant Options pursuant to this Plan; provided,
however, that the following requirements will be met for any Option that is
an ISO (otherwise the Option will be an NQSO): (a) the Option may not be
exercised prior to initial stockholder approval of this Plan, and (b) any
Option granted pursuant to an increase in the number of Shares subject to
this Plan approved by the Board may not be exercised prior to approval of
such increase by the stockholders of the Company.
17. TERM OF PLAN/GOVERNING LAW. Unless earlier terminated as
provided herein, this Plan will terminate ten years from the Effective Date
or, if earlier, the date of stockholder approval. This Plan and all
agreements hereunder shall be governed by and construed in accordance with
the laws of the State of California excluding that body of law pertaining to
conflict of laws.
18. AMENDMENT OR TERMINATION OF PLAN. The Board may at any time
terminate or amend this Plan in any respect, including without limitation
amendment of any form of Stock Option Agreement or instrument to be executed
pursuant to this Plan; provided, however, that the Board will not, without
the approval of the stockholders of the Company, amend this Plan in any
manner that requires such stockholder approval.
19. NONEXCLUSIVITY OF THE PLAN. Neither the adoption of this Plan
by the Board, the submission of this Plan to the stockholders of the Company
for approval, nor any provision of this Plan will be
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construed as creating any limitations on the power of the Board to adopt such
additional compensation arrangements as it may deem desirable, including,
without limitation, the granting of stock options and other equity awards
otherwise than under this Plan, and such arrangements may be either generally
applicable or applicable only in specific cases.
20. DEFINITIONS. As used in this Plan, the following terms will
have the following meanings:
"AWARD" means any award of Options under this Plan.
"BOARD" means the Board of Directors of the Company.
"CAUSE" means Termination because of (a) any willful material
violation by the Participant of any law or regulation applicable to the
business of the Company or a Parent or Subsidiary of the Company, the
Participant's conviction for, or guilty plea to, a felony or a crime
involving moral turpitude, any willful perpetration by the Participant of a
common law fraud, (b) the Participant's commission of an act of personal
dishonesty which involves personal profit in connection with the Company or
any other entity having a business relationship with the Company, (c) any
material breach by the Participant of any provision of any agreement or
understanding between the Company or any Parent or Subsidiary of the Company
and the Participant regarding the terms of the Participant's service as an
employee, director or consultant to the Company or a Parent or Subsidiary of
the Company, including without limitation, the willful and continued failure
or refusal of the Participant to perform the material duties required of
such Participant as an employee, director or consultant of the Company or a
Parent or Subsidiary of the Company, other than as a result of having a
Disability, or a breach of any applicable invention assignment and
confidentiality agreement or similar agreement between the Company and the
Participant, (d) Participant's disregard of the policies of the Company or
any Parent or Subsidiary of the Company so as to cause loss, damage or injury
to the property, reputation or employees of the Company or a Parent or
Subsidiary of the Company or (e) any other misconduct by the Participant
which is materially injurious to the financial condition or business
reputation of, or is otherwise materially injurious to, the Company or a
Parent or Subsidiary of the Company.
"CODE" means the Internal Revenue Code of 1986, as amended.
"COMMITTEE" means the committee appointed by the Board to
administer this Plan, or if no committee is appointed, the Board.
"COMPANY" means Hybrid Networks, Inc., or any successor
corporation.
"DISABILITY" means a disability, whether temporary or
permanent, partial or total, within the meaning of Section 22(e)(3) of the
Code, as determined by the Committee.
"EXERCISE PRICE" means the price at which a holder of an Option
may purchase the Shares issuable upon exercise of the Option.
"FAIR MARKET VALUE" means, as of any date, the value of a share
of the Company's Common Stock determined as follows:
(a) if such Common Stock is then quoted on the Nasdaq National
Market, its closing price on the Nasdaq National Market on
the date of determination as reported in THE WALL STREET
JOURNAL;
(b) if such Common Stock is publicly traded and is then listed
on a national securities exchange, its closing price on the
date of determination on the principal national securities
exchange on which the Common Stock is listed or admitted
to trading as reported in THE WALL STREET JOURNAL;
(c) if such Common Stock is publicly traded but is not quoted
on the Nasdaq National Market nor listed or admitted to
trading on a national securities exchange, and if current
information about the Company is publicly available so as
to comply with SEC Rule 144(c), the average of the closing
bid and asked prices on the date of determination as
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reported by THE WALL STREET JOURNAL (or, if not so
reported, as otherwise reported by any newspaper or other
source as the Board may determine); or
(d) if none of the foregoing is applicable, by the Committee in
good faith.
"OPTION" means an award of an option to purchase Shares
pursuant to Section 5 hereof.
"PARENT" means any corporation (other than the Company) in an
unbroken chain of corporations ending with the Company if each of such
corporations other than the Company owns stock possessing 50% or more of the
total combined voting power of all classes of stock in one of the other
corporations in such chain
"PARTICIPANT" means a person who receives an Award under this
Plan
"PLAN" means this Hybrid Networks, Inc. 1999 Stock Option Plan,
as amended from time to time.
"SEC" means the Securities and Exchange Commission.
"SECURITIES ACT" means the Securities Act of 193 3, as amended.
"SHARES" means shares of the Company's Common Stock reserved
for issuance under this Plan, as adjusted pursuant to Sections 2 and 15
hereof, and any successor security.
"STOCK OPTION AGREEMENT" means, with respect to each Option,
the signed written agreement between the Company and the Participant setting
forth the terms and conditions of the Award.
"SUBSIDIARY" means any corporation (other than the Company) in
an unbroken chain of corporations beginning with the Company if each of the
corporations other than the last corporation in the unbroken chain owns stock
possessing 50% or more of the total combined voting power of all classes of
stock in one of the other corporations in such chain.
"TERMINATION" OR "TERMINATED" means, for purposes of this Plan
with respect to a Participant, that the Participant has for any reason ceased
to provide substantial services as (a) an employee, officer, director,
consultant or independent contractor to the Company or a Parent or Subsidiary
or affiliate of the Company, or (b) as a consultant, independent contractor
or advisor to the Board of Directors of the Company. A Participant will not
be deemed to have ceased to provide services in the case of (i) sick leave,
(ii) military leave, or (iii) any other leave of absence approved by the
Committee, provided that such leave is for a period of not more than 90 days
unless reinstatement upon the expiration of such leave is guaranteed by
contract or statute, or unless provided otherwise pursuant to formal policy
adopted from time to time by the Company and issued and promulgated in
writing. In the case of any Participant on (i) sick leave, (ii) military
leave or (iii) an approved leave of absence, the Committee may make such
provisions respecting suspension of vesting of the Award while on leave from
the Company or a Parent or Subsidiary of the Company as it may deem
appropriate, except that in no event may an Option be exercised after the
expiration of the term set forth in the Stock Option Agreement. The
Committee will have sole discretion to determine whether a Participant has
ceased to provide services and the effective date on which the Participant
ceased to provide services (the "TERMINATION DATE").
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MODIFICATION OF
RETENTION BONUS AGREEMENT
This Modification of Retention Bonus Agreement (this "Modification")
is made to the original Retention Bonus Agreement (the "Agreement") dated as
of January 6, 1999 (the "Effective Date"), between Hybrid Networks, Inc., a
Delaware corporation (the "Company"), and THARA M. EDSON ("Executive").
WHEREAS, the purpose of the original Agreement was to provide an
incentive for Executive to continue to perform services for the Company, and
WHEREAS, the parties agree that the severance payment described in the
Agreement is not the best method of encouraging Executive retention,
NOW, THEREFORE, pursuant to the modification provision, paragraph 5 of
the Agreement, and in consideration of the promises and covenants set forth
below, it is mutually agreed to modify the Agreement as follows and that this
Modification shall entirely replace and supersede the Agreement:
1. EXECUTIVE'S CONSIDERATION. Executive agrees to remain an
employee of the Company at least through the earlier of the following events:
A. Executive's termination of employment by the Company,
its successors and/or assigns.
B. Fourteen calendar days after the closing date of a
Change of Control of the Company. A "Change of Control" means the sale or
other disposition of all or substantially all of the Company's assets, and/or
the sale or other transfer (as a result of a tender offer, merger,
consolidation or otherwise) of a controlling share (50% or more) of the
Common Stock of the Company.
2. THE COMPANY'S CONSIDERATION. The parties agree that the
following is sufficient and new consideration for this Modification of the
original Agreement. In consideration of Executive's commitment to remain an
employee of the Company through the above-stated events, the Company agrees
to:
A. SALARY BONUS. Effective February 15, 1999, a salary
bonus of 50% of salary.
B. ADDITIONAL STOCK OPTIONS. Grant Executive options,
pursuant to the Company's 1999 Officer Stock Option Plan and the Stock Option
Agreement to be entered into between the Company and Executive pursuant
thereto, to purchase up to 200,000 shares of the Company's Common Stock at
an exercise price of $.50 per share and with the following vesting: (a) no
option will be exercisable until the six-month anniversary date of the
Effective Date, (b) each option will then become exercisable as to 12.5% of
the shares and (c) thereafter, the option will become exercisable ratably
over the next 42 months, at the end of each succeeding month, at the rate of
2.0833% per month; notwithstanding the foregoing, the options will become
fully
<PAGE>
vested 14 calendar days after the closing date of a Change of Control of the
Company, as defined above, provided that Executive has remained an employee
of the Company to that date.
C. RETENTION BONUS. Fourteen calendar days after the
closing date of a Change of Control of the Company, as defined above, and if
Executive has remained an employee of the Company to that date, the Company
will pay Executive a retention bonus according to the following schedule:
<TABLE>
<CAPTION>
Value of Sale of Assets or Stock Bonus
<S> <C>
$0 to 7 million $50,000
$7 to 15 million $80,000
$15 to 20 million $120,000
$20 to 25 million $140,000
$25 to 30 million $160,000
$Over 30 million $200,000
</TABLE>
If Executive's employment with the Company terminated prior to a Change of
Control and the expiration of such 14-day period, (a) the retention bonus
will NOT be payable, and the acceleration of vesting of the options granted
pursuant to Section 2.B above will not occur, in the event that the
employment termination was (i) initiated by Executive, (ii) initiated by the
Company for Cause as determined by the Company's Board of Directors or (iii)
was because of Executive's death or disability as determined by the
Company's Board of Directors, but (b) such bonus will be payable and such
acceleration will occur upon a subsequent Change of Control and expiration
of such 14-day period in the event that the employment termination was
initiated by the Company without Cause as determined by the Company's Board
of Directors. As used herein, "Cause" means:
(a) An act of moral turpitude by Executive, including but
not limited to theft, embezzlement, fraud, dishonesty, commission of a felony
or a crime involving moral turpitude, misappropriation of property of the
Company or other such conduct which adversely affects Executive's
performance, or ability to perform, Executive's job.
(b) Executive's failure to physically report for work for a
period of three consecutive work days for other than authorized absences,
vacation days, sick days, holidays or leaves of absence.
(c) Willful violation of law, willful malfeasance or gross
negligence by Executive.
(d) Material failure by Executive to perform the job duties,
or the substantial neglect by Executive of the duties assigned to Executive.
(v) Executive's material breach of any agreement with the
Company or disregard of the Company's policies.
(e) Other misconduct of Executive which is injurious to the
Company.
D. SEVERANCE. If before Executive becomes eligible to receive the
retention bonus provided for in 2.C above Executive's employment with the
Company is terminated by the
<PAGE>
Company other than for Cause and other than because of Executive's death or
disability, the Company will pay to Executive, as severance pay, an amount
based on three months' salary and not including bonus.
3. Executive agrees that in the event of a Change of Control or
the termination of Executive's employment with the Company, Executive will be
entitled to no payments or other compensation except as provided for therein
(other than, in the case of termination, accrued salary, reimbursable
expenses and accrued and unused vacation) and that the compensation Executive
receives pursuant to this Agreement represents the total amount of
compensation, benefits and bonuses that the Company will be obligated to pay
to Executive and that the Company does and will not owe Executive any other
amounts. Executive further agrees and understands that any liability for
state or federal income taxes that may be assessed as a result of the
transactions provided for herein is Executive's sole responsibility, and
Executive will not look to the Company for payment or reimbursement of any
taxes.
4. AT WILL DISCLAIMER. Executive understands and agrees that this
Modification is not a contract of employment for a definite term, and that his
employment may be terminated by Executive or the Company at will, with or
without cause.
5. MODIFICATION. This Modification may be further modified only
by mutual agreement of the parties provided that any further modification
must be reduced to writing and signed by Executive and an authorized
representative of the Company.
6. SAVINGS. Any terms or provisions of this Agreement which prove
to be invalid, void or illegal shall in no way affect, impair or invalidate
any other term or provision herein and such remaining terms and provisions
shall remain in full force and effect.
7. COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall be deemed an original and all of which
taken together constitutes one and the same instrument and in making proof
hereof it shall not be necessary to produce or account for more than one such
counterpart.
8. ENTIRE AGREEMENT. The parties hereto acknowledge that each has
read this Agreement, understands it, and agrees to be bound by its terms.
The parties further agree that this Agreement constitutes the complete and
exclusive statement of the agreement between the parties and supersedes all
proposals (oral or written), understandings, representations, conditions,
covenants, and all other communications between the parties relating to the
subject matter hereof.
9. GOVERNING LAW. This Agreement shall be governed by the law of
the State of California.
IN WITNESS WHEREOF, the parties have executed this Agreement on the
date first above written.
<PAGE>
HYBRID NETWORKS, INC. EXECUTIVE
By: /s/ Carl S. Ledbetter /s/ Thara M. Edson
----------------------------------- ----------------------------
Carl S. Ledbetter Thara M. Edson
Chairman & Chief Executive Officer
<PAGE>
MODIFICATION OF
RETENTION BONUS AGREEMENT
This Modification of Retention Bonus Agreement (this "Modification")
is made to the original Retention Bonus Agreement (the "Agreement") dated as
of January 6, 1999 (the "Effective Date"), between Hybrid Networks, Inc., a
Delaware corporation (the "Company"), and Vishwas R. (Victor) Godbole
("Executive").
WHEREAS, the purpose of the original Agreement was to provide an
incentive for Executive to continue to perform services for the Company, and
WHEREAS, the parties agree that the severance payment described in the
Agreement is not the best method of encouraging Executive retention,
NOW, THEREFORE, pursuant to the modification provision, paragraph 5 of
the Agreement, and in consideration of the promises and covenants set forth
below, it is mutually agreed to modify the Agreement as follows and that this
Modification shall entirely replace and supersede the Agreement:
1. EXECUTIVE'S CONSIDERATION. Executive agrees to remain an
employee of the Company at least through the earlier of the following events:
A. Executive's termination of employment by the Company,
its successors and/or assigns.
B. Fourteen calendar days after the closing date of a
Change of Control of the Company. A "Change of Control" means the sale or
other disposition of all or substantially all of the Company's assets, and/or
the sale or other transfer (as a result of a tender offer, merger,
consolidation or otherwise) of a controlling share (50% or more) of the
Common Stock of the Company.
2. THE COMPANY'S CONSIDERATION. The parties agree that the
following is sufficient and new consideration for this Modification of the
original Agreement. In consideration of Executive's commitment to remain an
employee of the Company through the above-stated events, the Company agrees
to:
A. SALARY BONUS. Effective February 15, 1999, a salary
bonus of 50% of salary.
B. ADDITIONAL STOCK OPTIONS. Grant Executive options,
pursuant to the Company's 1999 Officer Stock Option Plan and the Stock Option
Agreement to be entered into between the Company and Executive pursuant
thereto , to purchase up to 262,152 shares of the Company's Common Stock at
an exercise price of $.50 per share and with the following vesting: (a) no
option will be exercisable until the six-month anniversary date of the
Effective Date, (b) each option will then become exercisable as to 12.5% of
the shares and (c) thereafter, the option will become exercisable ratably
over the next 42 months, at the end of each succeeding month, at the rate of
2.0833% per month; notwithstanding the foregoing, the options will become
fully
<PAGE>
vested 14 calendar days after the closing date of a Change of Control of the
Company, as defined above, provided that Executive has remained an employee
of the Company to that date.
C. RETENTION BONUS. Fourteen calendar days after the closing date
of a Change of Control of the Company, as defined above, and if Executive has
remained an employee of the Company to that date, the Company will pay
Executive a retention bonus according to the following schedule:
<TABLE>
<CAPTION>
Value of Sale of Assets or Stock Bonus
<S> <C>
$0 to 7 million $50,000
$7 to 15 million $80,000
$15 to 20 million $120,000
$20 to 25 million $140,000
$25 to 30 million $160,000
$Over 30 million $200,000
</TABLE>
If Executive's employment with the Company terminated prior to a Change of
Control and the expiration of such 14-day period, (a) the retention bonus
will NOT be payable, and the acceleration of vesting of the options granted
pursuant to Section 2.B above will not occur, in the event that the
employment termination was (i) initiated by Executive, (ii) initiated by the
Company for Cause as determined by the Company's Board of Directors or (iii)
was because of Executive's death or disability as determined by the Company's
Board of Directors, but (b) such bonus will be payable and such acceleration
will occur upon a subsequent Change of Control and expiration of such 14-day
period in the event that the employment termination was initiated by the
Company without Cause as determined by the Company's Board of Directors. As
used herein, "Cause" means:
(a) An act of moral turpitude by Executive, including but
not limited to theft, embezzlement, fraud, dishonesty, commission of a felony
or a crime involving moral turpitude, misappropriation of property of the
Company or other such conduct which adversely affects Executive's
performance, or ability to perform, Executive's job.
(b) Executive's failure to physically report for work for a
period of three consecutive work days for other than authorized absences,
vacation days, sick days, holidays or leaves of absence.
(c) Willful violation of law, willful malfeasance or gross
negligence by Executive.
(d) Material failure by Executive to perform the job duties,
or the substantial neglect by Executive of the duties assigned to Executive.
(v) Executive's material breach of any agreement with the
Company or disregard of the Company's policies.
(e) Other misconduct of Executive which is injurious to the
Company.
D. SEVERANCE. If before Executive becomes eligible to receive the
retention bonus provided for in 2.C above Executive's employment with the
Company is terminated by the
<PAGE>
Company other than for Cause and other than because of Executive's death or
disability, the Company will pay to Executive, as severance pay, an amount
based on three months' salary and not including bonus.
3. Executive agrees that in the event of a Change of Control or
the termination of Executive's employment with the Company, Executive will be
entitled to no payments or other compensation except as provided for therein
(other than, in the case of termination, accrued salary, reimbursable
expenses and accrued and unused vacation) and that the compensation Executive
receives pursuant to this Agreement represents the total amount of
compensation, benefits and bonuses that the Company will be obligated to pay
to Executive and that the Company does and will not owe Executive any other
amounts. Executive further agrees and understands that any liability for
state or federal income taxes that may be assessed as a result of the
transactions provided for herein is Executive's sole responsibility, and
Executive will not look to the Company for payment or reimbursement of any
taxes.
4. AT WILL DISCLAIMER. Executive understands and agrees that this
Modification is not a contract of employment for a definite term, and that
his employment may be terminated by Executive or the Company at will, with
or without cause.
5. MODIFICATION. This Modification may be further modified
only by mutual agreement of the parties provided that any further
modification must be reduced to writing and signed by Executive and an
authorized representative of the Company.
6. SAVINGS. Any terms or provisions of this Agreement which prove
to be invalid, void or illegal shall in no way affect, impair or invalidate
any other term or provision herein and such remaining terms and provisions
shall remain in full force and effect.
7. COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall be deemed an original and all of which
taken together constitutes one and the same instrument and in making proof
hereof it shall not be necessary to produce or account for more than one such
counterpart.
8. ENTIRE AGREEMENT. The parties hereto acknowledge that each has
read this Agreement, understands it, and agrees to be bound by its terms.
The parties further agree that this Agreement constitutes the complete and
exclusive statement of the agreement between the parties and supersedes all
proposals (oral or written), understandings, representations, conditions,
covenants, and all other communications between the parties relating to the
subject matter hereof.
9. GOVERNING LAW. This Agreement shall be governed by the law of
the State of California.
IN WITNESS WHEREOF, the parties have executed this Agreement on the
date first above written.
<PAGE>
HYBRID NETWORKS, INC. EXECUTIVE
By: /s/ Carl S. Ledbetter /s/ Vishwas R. (Victor) Godbole
---------------------------------------- --------------------------------
Carl S. Ledbetter Vishwas R. (Victor) Godbole
Chairman & Chief Executive Officer
<PAGE>
MODIFICATION OF
RETENTION BONUS AGREEMENT
This Modification of Retention Bonus Agreement (this "Modification")
is made to the original Retention Bonus Agreement (the "Agreement") dated as
of January 6, 1999 (the "Effective Date"), between Hybrid Networks, Inc., a
Delaware corporation (the "Company"), and Jane S. Zeletes ("Executive").
WHEREAS, the purpose of the original Agreement was to provide an
incentive for Executive to continue to perform services for the Company, and
WHEREAS, the parties agree that the severance payment described in the
Agreement is not the best method of encouraging Executive retention,
NOW, THEREFORE, pursuant to the modification provision, paragraph 5 of
the Agreement, and in consideration of the promises and covenants set forth
below, it is mutually agreed to modify the Agreement as follows and that this
Modification shall entirely replace and supersede the Agreement:
1. EXECUTIVE'S CONSIDERATION. Executive agrees to remain an
employee of the Company at least through the earlier of the following events:
A. Executive's termination of employment by the Company,
its successors and/or assigns.
B. Fourteen calendar days after the closing date of a
Change of Control of the Company. A "Change of Control" means the sale or
other disposition of all or substantially all of the Company's assets, and/or
the sale or other transfer (as a result of a tender offer, merger,
consolidation or otherwise) of a controlling share (50% or more) of the
Common Stock of the Company.
2. THE COMPANY'S CONSIDERATION. The parties agree that the
following is sufficient and new consideration for this Modification of the
original Agreement. In consideration of Executive's commitment to remain an
employee of the Company through the above-stated events, the Company agrees
to:
A. SALARY BONUS. Qualifies for 1999 Sales Incentive Plan.
B. ADDITIONAL STOCK OPTIONS. Grant Executive options,
pursuant to the Company's 1999 Officer Stock Option Plan and the Stock Option
Agreement to be entered into between the Company and Executive pursuant thereto,
to purchase up to 141,982 shares of the Company's Common Stock at an exercise
price of $.50 per share and with the following vesting: (a) no option will be
exercisable until the six-month anniversary date of the Effective Date, (b) each
option will then become exercisable as to 12.5% of the shares and (c)
thereafter, the option will become exercisable ratably over the next 42 months,
at the end of each succeeding month, at the rate of 2.0833% per month;
notwithstanding the foregoing, the options will become fully vested 14 calendar
days after the closing date of a Change of Control of the Company, as defined
above, provided that Executive has remained an employee of the Company to that
date.
<PAGE>
C. RETENTION BONUS. Fourteen calendar days after the closing
date of a Change of Control of the Company, as defined above, and if Executive
has remained an employee of the Company to that date, the Company will pay
Executive a retention bonus according to the following schedule:
<TABLE>
<CAPTION>
Value of Sale of Assets or Stock Bonus
<S> <C>
$0 to 7 million $50,000
$7 to 15 million $80,000
$15 to 20 million $120,000
$20 to 25 million $140,000
$25 to 30 million $160,000
$Over 30 million $200,000
</TABLE>
If Executive's employment with the Company terminated prior to a Change of
Control and the expiration of such 14-day period, (a) the retention bonus
will NOT be payable, and the acceleration of vesting of the options granted
pursuant to Section 2.B above will not occur, in the event that the
employment termination was (i) initiated by Executive, (ii) initiated by the
Company for Cause as determined by the Company's Board of Directors or (iii)
was because of Executive's death or disability as determined by the Company's
Board of Directors, but (b) such bonus will be payable and such acceleration
will occur upon a subsequent Change of Control and expiration of such 14-day
period in the event that the employment termination was initiated by the
Company without Cause as determined by the Company's Board of Directors. As
used herein, "Cause" means:
(a) An act of moral turpitude by Executive, including but
not limited to theft, embezzlement, fraud, dishonesty, commission of a felony
or a crime involving moral turpitude, misappropriation of property of the
Company or other such conduct which adversely affects Executive's
performance, or ability to perform, Executive's job.
(b) Executive's failure to physically report for work for a
period of three consecutive work days for other than authorized absences,
vacation days, sick days, holidays or leaves of absence.
(c) Willful violation of law, willful malfeasance or gross
negligence by Executive.
(d) Material failure by Executive to perform the job duties,
or the substantial neglect by Executive of the duties assigned to Executive.
(v) Executive's material breach of any agreement with the
Company or disregard of the Company's policies.
(e) Other misconduct of Executive which is injurious to the
Company.
D. SEVERANCE. If before Executive becomes eligible to receive the
retention bonus provided for in 2.C above Executive's employment with the
Company is terminated by the Company other than for Cause and other than
because of Executive's death or disability, the Company will pay to
Executive, as severance pay, an amount based on three months' salary not
including bonus.
<PAGE>
3. Executive agrees that in the event of a Change of Control or
the termination of Executive's employment with the Company, Executive will be
entitled to no payments or other compensation except as provided for therein
(other than, in the case of termination, accrued salary, reimbursable
expenses and accrued and unused vacation) and that the compensation Executive
receives pursuant to this Agreement represents the total amount of
compensation, benefits and bonuses that the Company will be obligated to pay
to Executive and that the Company does and will not owe Executive any other
amounts. Executive further agrees and understands that any liability for
state or federal income taxes that may be assessed as a result of the
transactions provided for herein is Executive's sole responsibility, and
Executive will not look to the Company for payment or reimbursement of any
taxes.
4. AT WILL DISCLAIMER. Executive understands and agrees that this
Modification is not a contract of employment for a definite term, and that
his employment may be terminated by Executive or the Company at will, with or
without cause.
5. MODIFICATION. This Modification may be further modified only
by mutual agreement of the parties provided that any further modification
must be reduced to writing and signed by Executive and an authorized
representative of the Company.
6. SAVINGS. Any terms or provisions of this Agreement which prove
to be invalid, void or illegal shall in no way affect, impair or invalidate
any other term or provision herein and such remaining terms and provisions
shall remain in full force and effect.
7. COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall be deemed an original and all of which
taken together constitutes one and the same instrument and in making proof
hereof it shall not be necessary to produce or account for more than one such
counterpart.
8. ENTIRE AGREEMENT. The parties hereto acknowledge that each has
read this Agreement, understands it, and agrees to be bound by its terms.
The parties further agree that this Agreement constitutes the complete and
exclusive statement of the agreement between the parties and supersedes all
proposals (oral or written), understandings, representations, conditions,
covenants, and all other communications between the parties relating to the
subject matter hereof.
9. GOVERNING LAW. This Agreement shall be governed by the law of
the State of California.
IN WITNESS WHEREOF, the parties have executed this Agreement on the
date first above written.
<PAGE>
HYBRID NETWORKS, INC. EXECUTIVE
By: /s/ Carl S. Ledbetter /s/ Jane S. Zeletes
-------------------------------------- -----------------------------
Carl S. Ledbetter Jane S. Zeletes
Chairman & Chief Executive Officer
<PAGE>
MODIFICATION OF
RETENTION BONUS AGREEMENT
This Modification of Retention Bonus Agreement (this "Modification")
is made to the original Retention Bonus Agreement (the "Agreement") dated as
of January 6, 1999 (the "Effective Date"), between Hybrid Networks, Inc., a
Delaware corporation (the "Company"), and William M. Daniher ("Executive").
WHEREAS, the purpose of the original Agreement was to provide an
incentive for Executive to continue to perform services for the Company, and
WHEREAS, the parties agree that the severance payment described in
the Agreement is not the best method of encouraging Executive retention,
NOW, THEREFORE, pursuant to the modification provision, paragraph 5 of
the Agreement, and in consideration of the promises and covenants set forth
below, it is mutually agreed to modify the Agreement as follows and that this
Modification shall entirely replace and supersede the Agreement:
1. EXECUTIVE'S CONSIDERATION. Executive agrees to remain an
employee of the Company at least through the earlier of the following events:
A. Executive's termination of employment by the Company,
its successors and/or assigns.
B. Fourteen calendar days after the closing date of a Change
of Control of the Company. A "Change of Control" means the sale or other
disposition of all or substantially all of the Company's assets, and/or the
sale or other transfer (as a result of a tender offer, merger, consolidation
or otherwise) of a controlling share (50% or more) of the Common Stock of the
Company.
2. THE COMPANY'S CONSIDERATION. The parties agree that the
following is sufficient and new consideration for this Modification of the
original Agreement. In consideration of Executive's commitment to remain an
employee of the Company through the above-stated events, the Company agrees
to:
A. SALARY BONUS. Effective February 15, 1999, a salary
bonus of 50% of salary.
B. ADDITIONAL STOCK OPTIONS. Grant Executive options,
pursuant to the Company's 1999 Officer Stock Option Plan and the Stock Option
Agreement to be entered into between the Company and Executive pursuant
thereto , to purchase up to 231,279 shares of the Company's Common Stock at
an exercise price of $.50 per share and with the following vesting: (a) no
option will be exercisable until the six-month anniversary date of the
Effective Date, (b) each option will then become exercisable as to 12.5% of
the shares and (c) thereafter, the option will become exercisable ratably
over the next 42 months, at the end of each succeeding month, at the rate of
2.0833% per month; notwithstanding the foregoing, the options will become
fully
<PAGE>
vested 14 calendar days after the closing date of a Change of Control of the
Company, as defined above, provided that Executive has remained an employee
of the Company to that date.
C. RETENTION BONUS. Fourteen calendar days after the
closing date of a Change of Control of the Company, as defined above, and if
Executive has remained an employee of the Company to that date, the Company
will pay Executive a retention bonus according to the following schedule:
<TABLE>
<CAPTION>
Value of Sale of Assets or Stock Bonus
<S> <C>
$0 to 7 million $50,000
$7 to 15 million $80,000
$15 to 20 million $120,000
$20 to 25 million $140,000
$25 to 30 million $160,000
$Over 30 million $200,000
</TABLE>
If Executive's employment with the Company terminated prior to a Change of
Control and the expiration of such 14-day period, (a) the retention bonus
will NOT be payable, and the acceleration of vesting of the options granted
pursuant to Section 2.B above will not occur, in the event that the
employment termination was (i) initiated by Executive, (ii) initiated by the
Company for Cause as determined by the Company's Board of Directors or (iii)
was because of Executive's death or disability as determined by the Company's
Board of Directors, but (b) such bonus will be payable and such acceleration
will occur upon a subsequent Change of Control and expiration of such 14-day
period in the event that the employment termination was initiated by the
Company without Cause as determined by the Company's Board of Directors. As
used herein, "Cause" means:
(a) An act of moral turpitude by Executive, including but
not limited to theft, embezzlement, fraud, dishonesty, commission of a felony
or a crime involving moral turpitude, misappropriation of property of the
Company or other such conduct which adversely affects Executive's
performance, or ability to perform, Executive's job.
(b) Executive's failure to physically report for work for a
period of three consecutive work days for other than authorized absences,
vacation days, sick days, holidays or leaves of absence.
(c) Willful violation of law, willful malfeasance or gross
negligence by Executive.
(d) Material failure by Executive to perform the job duties,
or the substantial neglect by Executive of the duties assigned to Executive.
(v) Executive's material breach of any agreement with the
Company or disregard of the Company's policies.
(e) Other misconduct of Executive which is injurious to the
Company.
D. SEVERANCE. If before Executive becomes eligible to receive the
retention bonus provided for in 2.C above Executive's employment with the
Company is terminated by the
2
<PAGE>
Company other than for Cause and other than because of Executive's death or
disability, the Company will pay to Executive, as severance pay, an amount
based on three months' salary not including bonus.
3. Executive agrees that in the event of a Change of Control or
the termination of Executive's employment with the Company, Executive will be
entitled to no payments or other compensation except as provided for therein
(other than, in the case of termination, accrued salary, reimbursable
expenses and accrued and unused vacation) and that the compensation Executive
receives pursuant to this Agreement represents the total amount of
compensation, benefits and bonuses that the Company will be obligated to pay
to Executive and that the Company does and will not owe Executive any other
amounts. Executive further agrees and understands that any liability for
state or federal income taxes that may be assessed as a result of the
transactions provided for herein is Executive's sole responsibility, and
Executive will not look to the Company for payment or reimbursement of any
taxes.
4. AT WILL DISCLAIMER. Executive understands and agrees that this
Modification is not a contract of employment for a definite term, and that his
employment may be terminated by Executive or the Company at will, with or
without cause.
5. MODIFICATION. This Modification may be further modified only
by mutual agreement of the parties provided that any further modification
must be reduced to writing and signed by Executive and an authorized
representative of the Company.
6. SAVINGS. Any terms or provisions of this Agreement which prove
to be invalid, void or illegal shall in no way affect, impair or invalidate
any other term or provision herein and such remaining terms and provisions
shall remain in full force and effect.
7. COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall be deemed an original and all of which
taken together constitutes one and the same instrument and in making proof
hereof it shall not be necessary to produce or account for more than one such
counterpart.
8. ENTIRE AGREEMENT. The parties hereto acknowledge that each has
read this Agreement, understands it, and agrees to be bound by its terms.
The parties further agree that this Agreement constitutes the complete and
exclusive statement of the agreement between the parties and supersedes all
proposals (oral or written), understandings, representations, conditions,
covenants, and all other communications between the parties relating to the
subject matter hereof.
9. GOVERNING LAW. This Agreement shall be governed by the law of
the State of California.
IN WITNESS WHEREOF, the parties have executed this Agreement on the
date first above written.
3
<PAGE>
HYBRID NETWORKS, INC. EXECUTIVE
By: /s/ Carl S. Ledbetter /s/ William M. Daniher
-------------------------------------- ----------------------------
Carl S. Ledbetter William M. Daniher
Chairman & Chief Executive Officer
4
<PAGE>
[LOGO]
SEPARATION AGREEMENT AND GENERAL RELEASE
This Agreement (this "AGREEMENT") is entered into as of March 17,
1999, between Hybrid Networks, Inc., a Delaware corporation (the "COMPANY"),
and William M. Daniher ("EMPLOYEE").
RECITALS
A. Whereas, the Company has employed Employee as its President and
COO;
B. Whereas Employee wishes to end his employment relationship with
the Company as of March 31, 1999 (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 March 17, 1999, to Employee a check based
on the gross amount set forth in part 1 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. ON March 17, 1999, the Company will deliver to Employee a
check based on the gross amount set forth in part 2 of
EXHIBIT A as agreed upon in the Modification of Retention
Bonus Agreement 2D representing severance pay.
C. Employee will have 90 days after the Termination Date to
exercise Employee's vested options. Employee's vested
options are those options that have vested as of the
Termination Date. The vesting of Employee's options will
cease as of the Termination Date, except as indicated below
in this Sections 1.C. If the company is successful in
selling itself or its assets prior to April 1, 2000,
Employee will receive the full bonus as provided for under
paragraph 2C in the Modification of Retention Bonus
Agreement. If the Company is successful in selling itself
or its assets prior to April 1, 2000, vesting of the
Additional Stock Options referred to in paragraph 2B of the
Modification of Retention Bonus Agreement will accelerate
and Employee will be able to exercise those options within
60 days after the sale.
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
<PAGE>
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E. The Company will continue to provide Employee, during the
period commencing on the Termination date and ending
June 30, 1999, access to the Company's server for e-mail
receipt and transmittal. 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.
F. The parties acknowledge that Employee is bound by the
Proprietary Information and Inventions Agreement, which he
signed when he commenced employment with the Company, 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:
(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
<PAGE>
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release any claims based on obligations created by or reaffirmed in the Pll
Agreement, the Indemnity Agreement entered into between the Company and
Employee (the "INDEMNITY AGREEMENT") or this Agreement, including, without
limitation, the obligations of the Company under the Indemnity Agreement to
provide indemnification and a defense for Employee as set forth therein,
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, the Indemnity Agreement or this Agreement, including, without
limitation, the obligations referred to in Section 1.F above, whether or not
such claims have already arisen or arise after the date hereof.
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:
<PAGE>
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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 (i) as required by law or regulatory
authority (including governmental taxing agencies and the company's
disclosure obligations, as reasonably interpreted by the company) or by
lawful process (provided that Employee will give written notice to the
Company of any such process sufficiently in advance of disclosure that the
Company will have the reasonable opportunity to contest the disclosure) or
(ii) to the parties' respective legal advisors, accountants or tax advisors
(or, in the case of Employee, spouse), provided that such person be informed
of and agree to be bound by this confidentiality obligation.
5. 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.
6. 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.
7. 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.
8. ASSIGNMENT; SUCCESSORS AND ASSIGNS
<PAGE>
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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.
9. SEVERABILITY
If any provision of this Agreement, or its application to any
person, place or circumstance, 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.
10. GOVERNING LAW
This Agreement will be governed by and construed in accordance
with the law of the State of California.
11. 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 has 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.
<PAGE>
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IN WITNESS WHEREOF, the parties have executed and delivered as of the
first date set forth above.
Employee: The Company:
HYBRID NETWORKS, INC.
/s/ William M. Daniher
- -----------------------------
William M. Daniher By:
---------------------------------------
Carl S. Ledbetter
Chairman & Chief Executive Officer
<PAGE>
EXHIBIT A
1. Gross amount paid to Employee: $9184.18 and amount for accrued salary,
reimbursable expenses and accrued but unused vacation pay through
March 31, 1999.
2. Gross severance pay to Employee: $42,499.98, an amount equal to 3 months'
base salary, not including bonus.
<PAGE>
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EMPLOYEE CONFIDENTIALITY AND INVENTIONS AGREEMENT
In consideration of and as part of the terms of my employment or
continued employment by Hybrid Networks, Inc. ("Hybrid"), I agree as follows:
1. PURPOSE OF AGREEMENT. I understand that Hybrid is engaged in a
continuous program of research, development, marketing and other activities
in connection with its business. I further understand and agree that Hybrid
has a critical interest in preserving and protecting its proprietary
information, its rights in inventions and in all related intellectual
property. Accordingly, I am entering into this Employee Confidentiality and
Inventions Agreement ("Agreement") as a condition of my employment or
continued employment by Hybrid.
2. NON-DISCLOSURE OF CONFIDENTIAL OR PROPRIETARY INFORMATION. I
acknowledge and agree that while employed by Hybrid I will have access to
confidential or proprietary information relating to the business and
operations of Hybrid. Such confidential or proprietary information consists
of all business information (1) that is not generally known to, and cannot be
readily ascertained by others, (2) that has actual or potential economic
value to Hybrid, and (3) that is treated as confidential by Hybrid. By way
of illustration, confidential or proprietary information includes, but is not
limited to, written and unwritten information concerning present and
prospective products, services, sales and marketing concepts and methods,
customer lists, costs, profits, market studies, and matters of a technical
nature including know-how, methods, techniques, computer programs, computer
hardware, computer software and documentation, research projects and studies,
compilations, and personnel data about employees of Hybrid, including
salaries, and other information of a similar nature. Confidential or
proprietary information also includes any information belonging to third
parties, including customers and suppliers of Hybrid, who may have disclosed
confidential information to me during my employment with Hybrid.
I will at all times, both during my employment and thereafter, keep
and hold all such confidential or proprietary information in strictest
confidence and trust. I will not at any time use or disclose any such
information without the prior written consent of Hybrid, except as may be
necessary to perform my duties for the benefit of Hybrid.
3. RETURN OF CONFIDENTIAL OR PROPRIETARY INFORMATION AND OTHER
MATERIALS. Upon termination of my employment with Hybrid, or at the request
of Hybrid at any time prior to termination of my employment, I will promptly
deliver to Hybrid all documents and materials of any nature relating to my
work with Hybrid. Further, I will not take with me or keep any documents,
materials or copies containing any Hybrid confidential or proprietary
information.
<PAGE>
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4a. NON-COMPETITION DURING EMPLOYMENT. While employed by Hybrid, I
agree not to engage in any employment, consulting, or business activity,
other than for Hybrid, relating to any line of business in which Hybrid is
engaged or which would otherwise conflict with my obligations to Hybrid.
5. NO SOLICITATION DURING EMPLOYMENT. I agree that during my
employment with Hybrid I will not, directly or indirectly, either for myself
or any other person or entity, induce or influence any person who is engaged
as an employee, agent, independent contractor, or otherwise by Hybrid to
terminate his or her employment or engagement with Hybrid. I further agree
that during my employment with Hybrid I will not approach or solicit in any
manner, either for myself or any other person or entity, any customer of
Hybrid to cease doing business with Hybrid or to do business with me or with
any other person or entity.
6. NO SOLICITATION AFTER EMPLOYMENT. I agree that for a period of
one year following the termination of my employment with Hybrid, for whatever
reason, I will not directly or indirectly solicit any person employed or
otherwise engaged by Hybrid to terminate his or her employment or engagement
with Hybrid. I further agree that for a reasonable period of time after the
termination of my employment, which I agree is a period of one year, I will
not directly or indirectly solicit any customer of Hybrid to the extent the
identity of the customer constitutes a trade secret or is proprietary or
confidential information as defined in Paragraph 2 of this Agreement.
7. DISCLOSURE AND OWNERSHIP OF INVENTIONS. For purposes of this
Agreement the term "inventions" means any and all creations, artworks,
discoveries, improvements, technical developments, or inventions whether or
not patentable, and all related know-how, designs, mask works, trademarks,
formulae, processes, manufacturing techniques, ideas, artworks, software or
trade secrets. I agree to promptly disclose in confidence to Hybrid all
inventions that I make or conceive, either alone or jointly with others,
during the period of my employment, whether or not in the course of my
employment, and whether or not such inventions are patentable, copyrightable
or protectable as trade secrets.
I acknowledge that all inventions that (1) are developed using
equipment, supplies, facilities or trade secrets of Hybrid, (2) result from
work performed by me for Hybrid, or (3) relate to Hybrid's business or
current or anticipated research and development, will be the sole and
exclusive property of Hybrid. I hereby irrevocably assign any and all rights
I may claim to any such inventions to Hybrid. I acknowledge and agree that
any copyrightable works prepared by me within the scope of my employment are
"works for hire" under the Copyright Act and that Hybrid will be considered
the author and owner of such copyrightable works. I agree to execute
documents and take all other appropriate actions to assist Hybrid in
obtaining and enforcing any patents, copyrights, mask work rights, trade
secret rights, and other legal protections for Hybrid's inventions or
confidential or proprietary information.
<PAGE>
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8. LABOR CODE SECTION 2870 NOTICE. Notwithstanding Paragraph 8,
above, I understand and acknowledge that I will not be required to assign to
Hybrid the rights to any inventions that are developed entirely on my own
time, without using Hybrid's equipment, supplies, facilities or trade secret
information, and that otherwise fully qualify under the provisions of
California Labor Code Section 2870. I understand and agree, however, that I
will be required in all events to disclose all inventions made solely or
jointly with others during the term of my employment with Hybrid, in
accordance with California Labor Code Section 2871. I acknowledge that a copy
of California Labor Code Sections 2870, 2871 and 2872 are attached to this
Agreement.
9. NON-DISCLOSURE OF FORMER EMPLOYER'S CONFIDENTIAL INFORMATION. I
certify that my performance of the terms of this Agreement, and of my duties
as an employee of Hybrid, will not breach any existing agreement I may have
with any former employer or other party. I certify that I will not bring
with me to Hybrid or use in the performance of my duties for Hybrid any trade
secret or proprietary information belonging to any former employer or other
party.
10. NOTIFICATION. I authorize Hybrid to notify my past, present or
future employers of the terms of this Agreement and my responsibilities under
this Agreement.
11. INJUNCTIVE RELIEF. I acknowledge and agree that while employed
by Hybrid I will have access to confidential or proprietary information and I
will render personal services of a special, unique and extraordinary
character. I agree that the restrictive covenants set forth in this
Agreement are reasonable and necessary for the adequate protection of the
affairs and business of Hybrid, that a breach of a covenant could affect the
successful conduct of Hybrid's business and its goodwill, and that it would
be difficult or impossible to determine adequate or appropriate monetary
damages in the event of any breach of these obligations. In recognition of
these facts, I consent and agree that if I violate any of these restrictive
covenants, Hybrid is entitled to injunctive relief, restraining me from
committing or continuing any violation of these covenants. Such injunctive
relief will be in addition to any other rights and remedies that are
available to Hybrid under this Agreement or otherwise.
12. SEVERABILITY. If any part of this Agreement is determined to be
invalid or unenforceable, that part will be amended to achieve as nearly as
possible the same effect as the original provision, and the remainder of this
Agreement will remain in full force and effect.
13. GOVERNING LAW. This Agreement will be governed by and construed
in accordance with the laws of the Unites States and the State of California
as applied to agreements entered into and performed entirely within
California between California residents.
<PAGE>
[LOGO]
14. ENTIRE AGREEMENT. This Agreement constitutes the entire
agreement between the parties relating to the covered subject matters and
supersedes all prior or simultaneous representations, discussions,
negotiations and agreements, whether written or oral. This Agreement may be
modified only in writing and only with the written consent of both parties.
DATED: APR 16, 1999 /s/ William M. Daniher
------------------------------ -----------------------------
[SIGNATURE]
WILLIAM M. DANIHER
-----------------------------
[TYPE OR PRINT EMPLOYEE'S NAME]
DATED: APRIL 16, 1999 HYBRID NETWORKS, INC.
------------------------------
By /s/ Judson W. Goldsmith
---------------------------
[SIGNATURE]
Vice President, Finance
-----------------------------
[TYPE OR PRINT EMPLOYEE'S NAME]
JUDSON W. GOLDSMITH
VICE PRESIDENT, FINANCE
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE 3/31/99
BALANCE SHEET AND THE STATEMENT OF OPERATIONS FOR THE THREE MONTHS THEN ENDED
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 2,837
<SECURITIES> 0
<RECEIVABLES> 816
<ALLOWANCES> 200
<INVENTORY> 3,064
<CURRENT-ASSETS> 7,729
<PP&E> 5,699
<DEPRECIATION> 2,585
<TOTAL-ASSETS> 11,310
<CURRENT-LIABILITIES> 11,524
<BONDS> 0
0
0
<COMMON> 10
<OTHER-SE> (560)
<TOTAL-LIABILITY-AND-EQUITY> 11,310
<SALES> 4,123
<TOTAL-REVENUES> 4,123
<CGS> 4,264
<TOTAL-COSTS> 4,264
<OTHER-EXPENSES> 2,909
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 208
<INCOME-PRETAX> (3,253)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,253)
<EPS-BASIC> (0.31)
<EPS-DILUTED> (0.31)
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE 3/31/98
BALANCE SHEET AND THE STATEMETN OF OPERATIONS FOR THE THREE MONTHS THEN ENDED
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 7,337
<SECURITIES> 12,665
<RECEIVABLES> 1,862
<ALLOWANCES> 50
<INVENTORY> 7,917
<CURRENT-ASSETS> 30,099
<PP&E> 3,229
<DEPRECIATION> 1,461
<TOTAL-ASSETS> 33,799
<CURRENT-LIABILITIES> 10,808
<BONDS> 0
0
0
<COMMON> 10
<OTHER-SE> 22,394
<TOTAL-LIABILITY-AND-EQUITY> 33,799
<SALES> 2,706
<TOTAL-REVENUES> 2,706
<CGS> 3,338
<TOTAL-COSTS> 3,338
<OTHER-EXPENSES> 4,380
<LOSS-PROVISION> 50
<INTEREST-EXPENSE> 224
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<INCOME-TAX> 0
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<CHANGES> 0
<NET-INCOME> (4,834)
<EPS-BASIC> (0.47)
<EPS-DILUTED> (0.47)
</TABLE>
