<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 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.
------------------------------------------------------
(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
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 June 30, 1999: 10,544,365
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HYBRID NETWORKS, INC.
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE NO.
- ------------------------------ --------
<S> <C>
ITEM 1. FINANCIAL STATEMENTS
Unaudited Condensed Balance Sheets as
of June 30, 1999 and December 31, 1998 3
Unaudited Condensed Statements of Operations for the
Three and Six Months Ended June 30, 1999 and 1998 4
Unaudited Condensed Statements of Cash Flows for the
Six Months Ended June 30, 1999 and 1998 5
Notes to Unaudited Condensed Financial Statements 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS 10
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 29
SIGNATURES 30
</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.
2
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HYBRID NETWORKS, INC.
UNAUDITED CONDENSED BALANCE SHEETS
(in thousands, except per share data)
<TABLE>
<CAPTION>
June 30, Dec. 31,
1999 1998
ASSETS -------- --------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 2,065 $ 3,451
Restricted cash 515
Accounts receivable, net of allowance for doubtful accounts
of $200 in 1999 and 1998 698 1,433
Inventories 2,408 5,224
Prepaid expenses and other current assets 610 864
-------- --------
Total current assets 5,781 11,487
Property and equipment, net 2,806 3,438
Intangibles and other assets 441 495
-------- --------
Total assets $ 9,028 $ 15,420
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Convertible debenture $ 5,500 $ 5,500
Current portion of capital lease obligations 415 465
Accounts payable 1,685 2,063
Accrued liabilities and other 5,210 4,271
-------- --------
Total current liabilities 12,810 12,299
Capital lease obligations, less current portion 171 365
Other long-term liabilities 94 54
-------- --------
Total liabilities 13,075 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: 10,544 shares in 1999 and
10,473 shares in 1998 11 10
Additional paid-in capital 67,253 66,261
Accumulated deficit (71,311) (63,569)
-------- --------
Total stockholders' equity (deficit) (4,047) 2,702
-------- --------
Total liabilities and stockholders' equity (deficit) $ 9,028 $ 15,420
-------- --------
-------- --------
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements .
3
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HYBRID NETWORKS, INC.
UNAUDITED CONDENSED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
----------------------- -----------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales $ 3,004 $ 2,243 $ 7,127 $ 4,949
Cost of sales 4,349 2,730 8,612 6,068
-------- -------- -------- --------
Gross loss (1,345) (487) (1,485) (1,119)
-------- -------- -------- --------
Operating expenses:
Research and development 932 3,335 2,311 5,833
Sales and marketing 404 936 1,022 1,890
General and administrative 1,601 1,896 2,513 2,824
-------- -------- -------- --------
Total operating expenses 2,937 6,167 5,846 10,547
-------- -------- -------- --------
Loss from operations (4,282) (6,654) (7,331) (11,666)
Interest income and other expenses, net -- 256 4 658
Interest expense (207) (235) (415) (459)
-------- -------- -------- --------
NET LOSS (4,489) (6,633) (7,742) (11,467)
Other comprehensive loss:
Reclassification for gain included in net loss -- -- -- (92)
-------- -------- -------- --------
Total comprehensive loss $ (4,489) $ (6,633) $ (7,742) $(11,559)
-------- -------- -------- --------
-------- -------- -------- --------
Basic and diluted net loss per share $ (0.43) $ (0.64) $ (0.74) $ (1.10)
-------- -------- -------- --------
-------- -------- -------- --------
Shares used in basic and diluted per share calculation 10,507 10,395 10,492 10,378
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
4
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HYBRID NETWORKS, INC.
UNAUDITED CONDENSED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
-----------------------
1999 1998
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (7,742) $(11,467)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 687 1,085
Sales discounts recognized on issuance of warrants 407 --
Compensation recognized on issuance of stock and stock options 539 --
Provision for doubtful accounts -- 100
Provision for excess and obsolete inventory 529 --
Write off technology license -- 1,283
Change in assets and liabilities:
Restricted cash 515 (506)
Accounts receivable 735 (497)
Inventories 2,287 (2,533)
Prepaid expenses and other assets 254 (190)
Accounts payable (379) 917
Other long term liabilities 40 --
Accrued liabilities and other 939 (668)
-------- --------
Net cash used in operating activities (1,189) (12,476)
-------- --------
Cash flows from investing activities:
Purchase of property and equipment -- (2,938)
Disposal of property and equipment -- 17
Purchase of short-term investments -- (11,772)
Proceeds from disposal of short-term investments -- 11,166
-------- --------
Net cash used in investing activities -- (3,527)
-------- --------
Cash flows from financing activities:
Repayment of capital lease obligations (244) (160)
Net proceeds from issuance of common stock 47 53
-------- --------
Net cash used in financing activities (197) (107)
-------- --------
Decrease in cash and cash equivalents (1,386) (16,110)
Cash and cash equivalents, beginning of period 3,451 26,158
-------- --------
Cash and cash equivalents, end of period $ 2,065 $ 10,048
-------- --------
-------- --------
SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING ACTIVITIES:
Property and equipment acquired under capital leases $ -- $ 212
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid $ 415 $ 418
Income taxes paid 1 1
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
5
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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 June 30, 1999, the statements of operations for the three and six months
ended June 30, 1999 and 1998 and the statements of cash flows for the six month
periods ended June 30, 1999 and 1998 are unaudited but include all adjustments
(consisting only 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 the accompanying 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 included herein
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 half of 1999 and
the years ended December 31, 1998, 1997, and 1996, the Company incurred net
losses of $7,742,000, $24,625,000, $21,602,000, and $8,515,000, respectively.
The Company had an accumulated deficit of $71,311,000 as of June 30, 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.
6
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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>
June 30, Dec. 31,
1999 1998
------- -------
<S> <C> <C>
Raw materials $ 429 $1,371
Work in progress 442 386
Finished goods 1,537 3,467
------- -------
$ 2,408 $5,224
------- -------
------- -------
</TABLE>
CONTINGENCIES
CLASS ACTION LITIGATION
In June 1998, five class action lawsuits were filed in Santa Clara 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 the 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 made these
misrepresentations 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.
The parties have agreed to settle these lawsuits as discussed below.
7
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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 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 various 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 Pricewaterhouse Coopers(PwC))
reached an agreement in principle to settle the lawsuits. In June 1999, the
parties signed a formal stipulation of settlement and the court preliminarily
approved the settlement. Under the agreement, (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 prior to December 3, 1999, 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 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 its 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. The hearing on the court's final
approval of the settlement is to be held in August 1999.
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 have
testified or may testify before the Securities and Exchange Commission's staff.
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
8
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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 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 only small 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 from the suit), 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.
In July 1999, the court granted the Company's motion to compel arbitration
and to stay the lawsuit pending the outcome of the arbitration. As a result,
Pacific Monolithics must submit its claims against the Company and its
directors, former director and former officer and may not proceed with its
claims against PwC until the arbitration award is issued. To date, the Company
is unaware of any action by Pacific Monolithics to initiate the arbitration
proceeding.
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 the arbitration, if brought, will have a material adverse impact on
the Company's financial statements.
9
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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 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
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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
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 and continuing through the second
quarter, we reduced our expenditures for research and development and sales and
marketing. In February 1999, we implemented a reduction in force. As of June 30,
1999, the number of our full-time employees had been reduced to 33 from 87
full-time employees at December 31, 1998
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 Six Months Ended
June 30, June 30,
----------------- ------------------
1999 1998 1999 1998
----- ----- ----- -----
<S> <C> <C> <C> <C>
Net Sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 144.8% 121.7% 120.9% 122.6%
----- ----- ----- -----
Gross margin -44.8% -21.7% -20.9% -22.6%
----- ----- ----- -----
Operating expenses
Research and development 31.0% 148.7% 32.4% 117.9%
Sales and marketing 13.4% 41.7% 14.3% 38.2%
General and administrative 53.3% 84.5% 35.3% 57.0%
----- ----- ----- -----
Total operating expenses 97.7% 274.9% 82.0% 213.1%
----- ----- ----- -----
Loss from operations -142.5% -296.6% -102.9% -235.7%
Interest income and other expense, net 0.0% 11.4% 0.1% 13.3%
Interest expense -6.9% -10.5% -5.8% -9.3%
----- ----- ----- -----
Net loss -149.4% -295.7% -108.6% -231.7%
----- ----- ----- -----
----- ----- ----- -----
</TABLE>
NET SALES. Our net sales increased by 33.9% to $3,004,000 for the quarter
ended June 30, 1999 from $2,243,000 for the quarter ended June 30, 1998 and
increased by 44.0% to $7,127,000 for the six months ended June 30, 1999 from
$4,949,000 for the six months ended June 30, 1998. The increases are due to
increased modem shipments to customers and to a lesser extent to increases in
modem prices. We issued warrants to our two top customers to partially offset
the increases in modem prices. We recognized this as sales discounts on the
issuance of warrants to customers in the amount of $407,000.
11
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For the three months ended June 30, 1999, broadband wireless systems
operators, cable system operators and ISPs accounted for 32%, 68% and 0% of net
sales, respectively. For the three months ended June 30, 1998 wireless system
operator, cable system operators, and ISPs accounted for 51%, 42%, and 7%, of
net sales, respectively. International sales accounted for 1% of net sales
during the three months ended June 30, 1999 and 0% for the comparable period in
1998. We had three customers that accounted for 41%, 28%, and 25% of net sales
during the second quarter of 1999. We had three customers that accounted for
21%, 14% and 10% of net sales during the comparable period in 1998.
GROSS MARGIN. Gross margin was a negative 44.8% and a negative 21.7% of net
sales for the quarters ended June 30, 1999 and June 30, 1998, respectively. For
the six months ended June 30, 1999 and June 30, 1998, gross margin was a
negative 20.9% and a negative 22.6%, respectively. The decreases in gross
margin are primarily attributed to changes in product mix from period to period
and to a lesser extent related to lower of cost or market reserves for ending
modem inventory at June 30, 1999.
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 programs for
improving manufacturability of our existing products. Research and development
expenses decreased 72.0% to $932,000 for the quarter ended June 30, 1999 from
$3,335,000 for the quarter ended June 30, 1998. For the six months ended June
30, 1999, research and development expenses decreased 60.4% to $2,311,000 from
$5,833,000 for the six months ended June 30, 1998. Research and development
expenses as a percentage of net sales were 31.0% and 148.7% for the second
quarters of 1999 and 1998, respectively, and were 32.4% and 117.9% for the first
half of 1999 and 1998. Research and development expenses decreased primarily due
to reduced employee headcount and related expenses due to diminishing capital
resources. During the three months ended June 30, 1999, compensation was
recognized on the issuance of stock options for employees engaged in research
and development amounted to $371,000 for the period.
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 56.8% to $404,000 for the quarter ended June 30, 1999 from $936,000
for the quarter ended June 30, 1998. For the six months ended June 30, 1999,
sales and marketing expenses decreased 45.9% to $1,022,000 from $1,890,000
for the six months ended June 30, 1998. Sales and marketing expenses as a
percentage of net sales were 13.4 % and 41.7% for the second quarters of 1999
and 1998, respectively, and 14.3% and 38.2% for the first half of 1999 and
1998, respectively. Sales and marketing expenses decreased primarily due to
reduced employee headcount and related expenses (resulting from our
diminishing capital resources) and the refocusing of the business to wireless
products. During the three months ended June 30, 1999, compensation was
recognized on the issuance of stock options for employees engaged in sales
and marketing amounted to $58,000 for the period.
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 15.6% to $1,601,000 for the quarter ended June
30, 1999 from $1,896,000 for the quarter ended June 30, 1998. For the six months
ended June 30, 1999, general and administrative expenses decreased 11.0% to
$2,513,000 from $2,824,000 for the six months ended June 30, 1998. General and
administrative expenses as a percentage of net sales were 53.3% and 84.5% for
the second quarters of 1999 and 1998, respectively, and 35.3% and 57.0% for the
first six months of 1999 and 1998, respectively. The general and
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administrative expenses remained relatively high in absolute dollars due to
continued work on getting our financial statements audited and work in
achieving a settlement of the class action litigation. During the three
months ended June 30, 1999, compensation was recognized on the issuance of
stock options for employees engaged in administration amounted to $98,000 for
the period.
INTEREST INCOME (EXPENSE) AND OTHER EXPENSE, NET. We incurred net interest
expense of $207,000 for the three months ended June 30, 1999 and we earned net
interest income of $21,000 during the three months ended June 30, 1998. For the
six months ended June 30, 1999, we incurred net interest expense of $411,000
compared to net interest income of $199,000 during the six months ended June 30,
1998. The reduction in net interest income was due to the reduction in short
term investments.
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 June 30, 1999, our cash and
cash equivalents had been reduced to $2,065,000 (from $26,158,000 as of December
31, 1997 and $3,451,000 as of December 31, 1998), our working capital was
negative $7,028,000, and we were (and continue to be) in default under the terms
of the $5.5 million senior secured convertible debenture which we issued in 1997
(the "$5.5 Million Debenture").
Net cash used in operating activities was $1,189,000 and $12,476,000 during
the first half 1999 and 1998, respectively. The net cash used in operating
activities in the first half of 1999 was primarily the result of our net loss of
$7,742,000, partially offset by a reduction in inventories of $2,287,000 and an
increase in non-cash charges. Net cash used in operations in the first half of
1998 was primarily the result of our net loss of $11,467,000.
There were substantially no investing activities during the first half of
1999. Net cash used in investing activities was $3,527,000 for the first half of
1998, primarily as a result of the purchase of property and equipment of
$2,938,000. We have funded a substantial portion of our property and equipment
expenditures from direct vendor leasing programs and third party commercial
lease arrangements. At June 30, 1999, we did not have any material commitments
for capital expenditures.
Net cash used by financing activities of $196,000 and $107,000 in the first
half 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 June 30, 1999, our only source of liquidity consisted of cash and cash
equivalents of $2,065,000. 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, but has not done so. 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, and there is no assurance that we will be able
to do so.
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.
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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 and we believe most products that could be
affected have been withdrawn from service.
We have completed our plan, except for contingency planning, with respect
to the current versions of all of our products to assure that they are Year 2000
compliant. As a result of our readiness plan, we believe 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 hardware
telecommunications technology). With respect to Mission Critical internal
systems, we believe we are currently 100% Year 2000 compliant.
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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 currently not 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.
SEASONALITY AND INFLATION.
The Company does not believe that its business is seasonal or that it is
impacted by inflation.
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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 until June 1999 audited
financial statements for 1997 or 1998 or a quarterly report for the first
quarter of 1999 until June 14, 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 to settle the class action litigation, that agreement has not yet
received final court approval), (v) uncertainty which the foregoing have caused
regarding our financial condition and results of operations, (vi) the adverse
effect which the foregoing have 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 we will be able to raise the additional
capital that we need within a short period of time or that any financing we may
be able to obtain will not be on terms that are detrimental to our business and
our ability to raise additional capital.
IT IS NOT CLEAR THAT WE WILL BE ABLE TO RECOVER FROM THE ADVERSE EFFECTS OF
HAVING TO RESTATE OUR FINANCIAL STATEMENTS.
The adverse effects of having to restate our financial statements have been
severe, and there can be no assurance that we will not suffer additional adverse
consequences in the future. The restatement and related issues have resulted in
the resignation of two successive audit firms that were hired by us, in our
continuing for 12 months as a public company without having audited financial
statements, in the multiple class action lawsuits, the Securities and Exchange
Commission investigation and the Pacific Monolithics litigation referred to in
Part II, Item 1 "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 $71,311,000 as of June 30, 1999 and
$63,569,000 as of December 31, 1998. The revenue
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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 to settle these
lawsuits, the agreement is subject to final court approval in a court hearing at
which any persons opposing the settlement will have an opportunity to be heard,
and this hearing has not yet occurred and the approval has not yet been
received. 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 Part II, Item 1 "Legal
Proceedings") will be. Responding to the investigation has been, and probably
will continue to be, expensive and time-consuming for us. We do not know whether
the results of the investigation will be damaging for us.
The potential Pacific Monolithics arbitration referred to in Part II, Item
1 "Legal Proceedings" is difficult for us to evaluate at this point.
It is possible that we may be exposed to further litigation in the future,
particularly in light of the restatement of our financial statements, and the
adverse developments that have occurred partly as a result of the restatement
(see the two risk factors immediately above). In addition, litigation may be
necessary in the future to enforce our intellectual property rights or to
determine the validity and scope of our patents or of the proprietary rights of
others. Such litigation might result in substantial costs and diversion of
resources and management attention. Furthermore, our business activities may
infringe upon the proprietary rights of others, and in the past third parties
have claimed, and may in the future claim, infringement by our software or
products. Any such claims, with or without merit, could result in significant
litigation costs and diversion of management attention, and could require us to
enter into royalty and license agreements that may be disadvantageous to us or
suffer other harm to our business. If litigation is successful against us, it
could result in invalidation of our proprietary rights and liability for
damages, which could have a harmful effect on our business. We initiated one
patent infringement litigation to enforce our patent rights, and it resulted in
a settlement in which we granted licenses to the defendants containing terms
that are in some respects favorable to them, including a right of first refusal
to purchase our patents that we granted to one defendant (Com21, Inc.) in the
event that we propose in the future to sell our patents (whether we separately
or together with our other assets) to any third party. (See Part II, 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 REDUCTION 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 second
quarter of 1999, we reduced our expenditures on research and development and on
other aspects of our business. We also reduced 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 of March 31, 1999 (33 as of
June 30, 1999), as compared to 87 full-time employees at December 31, 1998. We
used consultants heavily to supplement our workforce and as of June 30, 1999 we
had 15 consultants in
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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 modems.
WE RELY ON A SINGLE MANUFACTURER FOR OUR MODEMS AND ON SINGLE-SOURCE
COMPONENTS.
Our Series 2000 client modems are manufactured by Sharp Corporation through
an agreement we have had since early 1997 with Sharp and its distributor, Itochu
Corporation. We have not developed an alternative manufacturing source. Our
inability to develop alternative manufacturing sources has adversely affected
our ability to reduce the manufacturing costs of our modems despite competitive
pressures that have caused us to reduce our selling prices. We expect downward
pressure on the prices of our products to continue. In order for us to compete
effectively in the sale of modems, we will need to reduce our prices, and the
underlying costs, of our modems. As long as Sharp is the only manufacturing
source of our modems, our ability to reduce the manufacturing costs of our
modems may be limited.
We are dependent upon certain key suppliers for a number of the components
for our 64QAM products. For example, we have only one vendor, BroadCom
Corporation, for the 64QAM demodulator semiconductors that are used in our
client modem products, and in past periods these semiconductors have been in
short supply. In 1997, BroadCom announced a program whereby certain of its
technological and product enhancements may be made available to certain of our
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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 our costs for components, or our inability to reduce
component costs, could hurt our business.
WE ARE IN AN INTENSELY COMPETITIVE MARKET, AND WE COMPETE WITH MUCH LARGER
COMPANIES.
Our market is intensely competitive, and we expect even more competition in
the future. The principal competitive factors in this market include:
- - product performance and features including both downstream and upstream
transmission capabilities,
- - reliability and stability of operation,
- - breadth of product line,
- - sales and distribution capability,
- - technical support and service,
- - relationships with cable and broadband wireless system operators and ISPs,
- - 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 Excite@Home.
Although our products have been particularly well received in the broadband
wireless market, financial difficulties among our wireless customers have
limited our sales to and collections from these customers until recently. In
addition, conditions in our market could change rapidly and significantly as a
result of technological changes, and the development and market acceptance of
alternative technologies could decrease the demand for our products or render
them obsolete. Similarly, the continued emergence or evolution of industry
standards or specifications may put us at a disadvantage in relation to its
competitors. There can be no assurance that we will be able to compete
successfully in the future.
In general, our competitors are producers of asymmetric cable modems and
other types of cable modems and other broadband access products. Most of our
competitors are substantially larger and have greater financial, technical,
marketing, distribution, customer support and other resources, as well as
greater name recognition and access to customers, than we have. Many of our
competitors are in a better position to withstand any significant reduction in
capital spending by cable or broadband wireless system operators.
CABLE MODEM COMPETITORS. Our competitors in the cable modem market include
Cisco Systems, Com21, Terayon, Nortel Networks, Motorola, General Instrument,
ADC, 3Com and its
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subsidiary U.S. Robotics. Other cable modem competitors include Phasecom,
Scientific-Atlanta, Stanford telecom, Adaptive Broadband, 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
Excite@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 Excite@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, telephone companies ("telcos"), and ISPs, including Excite@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 they 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, 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, Adaptive Broadband, Harris, 3Com, General
Instrument, Motorola, Lucent, Newbridge Networks 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 data and 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
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of ADSL service. Further, if any competing architecture or technology were to
limit or halt the deployment of coaxial or HFC systems, our business could be
materially adversely affected.
To be successful, we must respond promptly and effectively to the
challenges of new competitive products and tactics, alternate technologies,
technological changes and evolving industry standards. We must continue to
develop products with improved performance over two-way wireless transmission
facilities. There can be no assurance that we will meet these challenges.
EVOLVING INDUSTRY STANDARDS, COMPETING TECHNOLOGIES AND TECHNOLOGICAL
CHANGES MAY HURT OUR BUSINESS.
Our products are not in compliance with the DOCSIS standard that has been
adopted by a number of large cable operators, and this has adversely affected
our ability to sell to cable customers, particularly new customers. Further, our
products are not compatible with headend equipment and modems of other suppliers
of broadband Internet access products, including DOCSIS products, and, as a
result, potential customers who wish to purchase broadband Internet access
products from multiple suppliers may be reluctant to purchase our products. Our
products are not in compliance with the DAVIC specifications that are supported
in Europe. The emergence of these standards has hurt our business, and the
adoption of other industry standards in the future could have a further adverse
effect.
There are a number of competing technologies for providing high speed
internet access. Alternative high speed connectivity technologies include wired
technologies such as xDSL and ISDN. As indicated in "Competition" above, several
large companies have announced the formation of a group to accelerate the pace
of ADSL service. To the extent that customers view these or other alternative
technologies as providing faster access or greater reliability or 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 Excite@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 Excite@Home, further limiting our ability to sell products to penetrate the
market. The cable industry has undergone evolution and
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reorganization which has adversely affected certain of our customer
relationships. Moreover, the extent to which (and the manner in which) cable
system operators will commit to providing broadband Internet access remains
uncertain. Cable system operators have a limited number of programming channels
over which they can offer services, and there can be no assurance that they will
choose to provide Internet access. Cable service operators have little
experience in providing Internet networks or launching, marketing and supporting
Internet services, and providing such services will involve substantial capital
expenditures. To the extent that cable service operators elect to provide
Internet access, there is no assurance that they will choose to do so through
our cable modem systems.
We have become increasingly dependent on sales to broadband wireless system
operators and distributors. Our net sales to customers in the broadband wireless
industry increased from $2.4 million in 1997 to $4.7 million in 1998 and to $2.8
million for the six months ended June 30, 1999. 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 frequently 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. We have refined and are continuing to develop our
products so as to satisfy the two-way transmission needs of broadband wireless
system operators, and our customers have fourteen 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'
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headend equipment or modems, and, as a result, we are typically the sole source
provider to our customers. In the second quarter of 1999, RCN Corporation,
PCTV-Speedchoice, and Knology Holdings Inc. accounted for, in the aggregate, 94%
of our net sales (41%, 28%, and 25% of our net sales, respectively. In 1998, RCN
Corporation and Knology Holdings, Inc. accounted for 25% and 13% 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, PCTV or Knology will continue as our customers. The loss of any of these
customers or any of our other principal customers would hurt our business.
THE SALES CYCLE FOR OUR PRODUCTS IS LENGTHY AND UNCERTAIN AND OUR OPERATING
RESULTS FLUCTUATE WIDELY.
In the past, the sale of our products typically involved a great deal of time
and expense. Customers usually want to engage in significant technical
evaluation before making a purchase commitment. Currently, due to our
diminishing capital resources, our sales have been primarily limited to a few
customers. There are often delays associated with our customers' internal
procedures to approve the large capital expenditures that are typically involved
in purchasing our products. 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, copyright 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 Part II, 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
23
<PAGE>
other companies will bring litigation challenging our patents. Any such
litigation could be time consuming and costly for us and could result in our
patents being held invalid or unenforceable. Furthermore, even if the patents
are upheld or are not challenged, third parties might be able to develop other
technologies or products without infringing any such patents.
We have entered into confidentiality and invention assignment agreements
with our employees, and we enter into non-disclosure agreements with certain of
our suppliers, distributors and customers, in order to limit access to and
disclosure of our proprietary information. There can be no assurance that these
contractual arrangements or the other steps we take to protect our intellectual
property will prove sufficient to prevent misappropriation of our technology or
deter independent third-party development of similar technologies. The laws of
certain foreign countries may not protect our products or intellectual property
rights to the same extent as do the laws of the United States.
We have in the past, received, and may in the future receive, notices from
third parties claiming that our products, software or asserted proprietary
rights infringe the proprietary rights of third parties. We expect that
developers of wireless and cable modems will be increasingly subject to
infringement claims as the number of products and competitors in our market
grows. While we are not currently subject to any such claim, any future claim,
with or without merit, could be time consuming, result in costly litigation,
cause product shipment delays or require us to enter into royalty or licensing
agreements. Such royalty or licensing agreements might not be available on terms
acceptable to us or at all.
In the future, we may also file lawsuits to enforce our intellectual
property rights, to protect our trade secrets or to determine the validity and
scope of the proprietary rights of others. Such litigation, whether successful
or not, could result in substantial costs and diversion of resources. As
indicated above we were engaged during 1998 in an infringement lawsuit that we
brought against two third parties. In 1999, in order to stop the diversion of
resources caused by the litigation, we entered into a settlement pursuant to
which the defendants obtained licenses to our products on terms that in certain
respects were favorable to the defendants. (See Part II, 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.
24
<PAGE>
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 June 1999, there has not been
current information regarding our business and financial condition for over one
year, and our previous financial statements have been restated. The market price
of our Common Stock has fluctuated in the past and is likely to fluctuate in the
future.
INTERNATIONAL SALES COULD INVOLVE GREATER RISKS.
To date, sales of our products outside of the United States have
represented an insignificant portion of our net sales. To the extent that we
sell our products internationally, such sales will be subject to a number of
risks, including longer payment cycles, export and import restrictions, foreign
regulatory requirements, greater difficulty in accounts receivable collection,
potentially adverse tax consequences, currency fluctuations and political and
economic instability.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
25
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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 Santa Clara 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 the
Company's 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 made these misrepresentations 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.
The parties have agreed to settle these lawsuits as discussed 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 various 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. In June 1999, the parties signed a formal
stipulation of settlement and the court preliminarily approved the settlement.
Under the agreement, (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
26
<PAGE>
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 prior to December 3, 1999, 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 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 its 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. The hearing on the court's final approval of the settlement is to be
held in August 1999.
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 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 only small
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 the Company, its five directors (one of whom is an officer),
a former director (who was subsequently dismissed from the suit), 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
27
<PAGE>
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.
In July 1999, the court granted the company's motion to compel arbitration
and to stay the lawsuit pending the outcome of the arbitration. As a result,
Pacific Monolithics must submit its claims against the Company and its
directors, former director and former officer and may not proceed with its
claims against PwC until the arbitration award is issued. To date, the Company
is unaware of any action by Pacific Monolithics to initiate the arbitration
proceeding.
The Company does not believe, based on current information (which is only
preliminary, since discovery has not commenced), that the outcome of the
arbitration, if brought, will have a material adverse impact on the Company's
financial statements.
28
<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>
27.01 Financial Data Schedule.
</TABLE>
- ---------------
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the second quarter of 1999.
29
<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: August 11, 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
/s/ Thara Edson
-----------------------------------
Corporate Controller
(Principal Accounting Officer)
30
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE 6/30/99
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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> APR-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 2,065
<SECURITIES> 0
<RECEIVABLES> 898
<ALLOWANCES> 200
<INVENTORY> 2,408
<CURRENT-ASSETS> 5,781
<PP&E> 5,699
<DEPRECIATION> 2,893
<TOTAL-ASSETS> 9,028
<CURRENT-LIABILITIES> 12,810
<BONDS> 0
0
0
<COMMON> 11
<OTHER-SE> (4,058)
<TOTAL-LIABILITY-AND-EQUITY> 9,028
<SALES> 7,127
<TOTAL-REVENUES> 7,127
<CGS> 8,612
<TOTAL-COSTS> 8,612
<OTHER-EXPENSES> 5,846
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 415
<INCOME-PRETAX> (7,742)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,742)
<EPS-BASIC> (0.74)
<EPS-DILUTED> (0.74)
</TABLE>
