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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
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/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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FOR THE YEAR ENDED DECEMBER 31, 1999, OR
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/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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FOR THE TRANSITION PERIOD FROM ______________ TO ______________.
COMMISSION FILE NUMBER: 0-23289
HYBRID NETWORKS, INC.
(Exact name of registrant as specified in its charter)
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DELAWARE 77-0252931
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
6409 GUADALUPE MINES ROAD 95120
SAN JOSE, CALIFORNIA (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE
OFFICES)
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REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (408) 323-6500
Securities registered pursuant to Section 12(b) of the Exchange Act: None
Securities registered pursuant to Section 12(g) of the Exchange Act: Common
Stock, par value $0.001 per share
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act during the past
12 months (or for such shorter period that the Registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-B is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K / /
As of February 16, 2000, there were outstanding 13,948,159 shares of the
Registrant's Common Stock, $0.001 par value per share. As of that date, the
aggregate market value of the shares of voting common stock held by
non-affiliates of the Registrant, based on the average bid and ask prices of
such stock as of such date on the pink sheets (although the Registrant disclaims
that such prices accurately reflect the fair market value of such stock), was
approximately $216,196,465. This excludes shares of common stock held by
directors, officers and stockholders whose ownership exceeded ten percent of the
shares outstanding. Exclusion of shares held by any person should not be
construed to indicate that such person possesses power, direct or indirect, to
direct or cause the direction of the management or policies of the Registrant,
or that such person is controlled by or is under common control with the
Registrant.
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TABLE OF CONTENTS
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PART I
ITEM 1 Business.................................................... 2
ITEM 2 Properties.................................................. 13
ITEM 3 Legal Proceedings........................................... 13
ITEM 4 Submission of Matters to a Vote of Security Holders......... 15
PART II
ITEM 5 Market for the Registrant's Common Equity and Related
Stockholder Matters......................................... 16
ITEM 6 Selected Financial Data..................................... 17
ITEM 7 Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 17
ITEM 7A Quantitative and Qualitative Disclosures About Market
Risk........................................................ 33
ITEM 8 Financial Statements........................................ 34
ITEM 9 Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure.................................... 59
PART III
ITEM 10 Directors and Executive Officers of the Company............. 60
ITEM 11 Executive Compensation...................................... 60
ITEM 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 60
ITEM 13 Certain Relationships and Related Transactions.............. 60
PART IV
ITEM 14 Exhibits, Financial Statement Schedules and Reports on Form
8-K......................................................... 60
Signatures.......................................................................... 63
Exhibits
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As used in this report on Form 10-K, unless the context otherwise requires,
the terms "we," "us," or, "the Company" and "Hybrid" refer to Hybrid
Networks, Inc., a Delaware corporation.
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PART I
THIS REPORT ON FORM 10-K CONTAINS FORWARD-LOOKING STATEMENTS RELATING TO
FUTURE EVENTS OR FINANCIAL RESULTS, SUCH STATEMENTS INDICATING THAT "WE
BELIEVE," "WE EXPECT," "WE ANTICIPATE" OR "WE INTEND" THAT CERTAIN EVENTS MAY
OCCUR OR CERTAIN TRENDS MAY CONTINUE. OTHER FORWARD-LOOKING STATEMENTS INCLUDE
STATEMENTS ABOUT THE FUTURE DEVELOPMENT OF PRODUCTS OR TECHNOLOGIES, MATTERS
RELATING TO OUR PROPRIETARY RIGHTS, YEAR 2000 COMPLIANCE, FACILITIES NEEDS, OUR
LIQUIDITY AND CAPITAL NEEDS AND OTHER STATEMENTS ABOUT FUTURE MATTERS. ALL THESE
FORWARD-LOOKING STATEMENTS INVOLVE RISKS AND UNCERTAINTIES. YOU SHOULD NOT RELY
TOO HEAVILY ON THESE STATEMENTS; ALTHOUGH THEY REFLECT THE GOOD FAITH JUDGMENT
OF OUR MANAGEMENT, THEY INVOLVE FUTURE EVENTS THAT MIGHT NOT OCCUR. WE CAN ONLY
BASE SUCH STATEMENTS ON FACTS AND FACTORS THAT WE CURRENTLY KNOW. OUR ACTUAL
RESULTS COULD DIFFER MATERIALLY FROM THOSE IN THESE FORWARD-LOOKING STATEMENTS
AS A RESULT OF VARIOUS FACTORS, INCLUDING THOSE SET FORTH UNDER "RISK FACTORS"
AND ELSEWHERE IN THIS FORM 10-K. WE DISCLAIM ANY OBLIGATION TO UPDATE THESE
FORWARD-LOOKING STATEMENTS AS A RESULT OF SUBSEQUENT EVENTS.
ITEM 1. BUSINESS
OVERVIEW
We design, develop, manufacture and market broadband access products,
primarily for wireless systems, that provide high speed access to the Internet
for business and consumers. Our customers are principally wireless system
operators and CATV (cable) operators. Our high speed access systems remove the
bottleneck in the connection to the end-user, thereby greatly accelerating the
response time for accessing bandwidth-intensive information on the Internet. We
provide a proven alternative to DSL and cable for high speed Internet access for
small businesses and residential subscribers.
Although we have provided our products to a number of cable operators, we
believe the principal market for our products will be for broadband wireless
applications. This is in part because the broadband wireless industry, which had
historically been under-capitalized, has had a substantial capital infusion.
During 1999, Sprint Corporation and MCI WorldCom acquired a majority of MMDS
wireless frequency licenses in the United States. In addition, we believe
Internet access through broadband wireless provides advantages over DSL and
cable applications in many areas. These advantages include:
- Rapid Deployment: Wireless systems may be deployed and installed more
rapidly than DSL and cable systems, in part because wireless systems do
not require laying wires for customer hookup.
- Low Set-Up and Maintenance Cost: Since wireless does not depend upon the
wire-based infrastructure required by DSL and cable, the cost to initiate
and maintain wireless systems is relatively low.
- Coverage: Wireless MMDS provides Internet access over a 35-mile radius
around a transmitter. Although wireless transmission requires a clear line
of sight to subscribers, it can fill gaps in DSL and cable coverage
(providing service to areas that would otherwise be inaccessible), and it
offers viable alternatives in markets accessible to all three
technologies.
- Costs to Acquire Spectrum: The cost on a per subscriber basis is often
lower for line-of-sight wireless transmission compared to cable
transmission.
The wireless broadband market is expected to grow substantially. Strategic
Group of Washington, D.C., a telecommunications research and consulting company,
announced its prediction that broadband wireless revenues, driven by local
telephone service and Internet usage, will reach $3.4 billion in 2003, compared
to 1999 revenues of $1.2 million.
Our proprietary technology includes technical innovations (including those
that increase spectrum utilization and decrease interference) which enhance the
performance of wireless systems. Our systems have been field tested and are
deployed in wireless applications in over 45 markets; we have developed
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experienced customer service and technical expertise; and we believe we have a
sound plan for supporting future voice and video developments in wireless
services. Moreover, the wireless industry has not adopted the Data Over Cable
System Interface Specification (DOCSIS), a standard to which our products do not
conform. While the DOCSIS standard has inhibited our sales to cable customers,
it has not affected our ability to market to wireless system operators. We
believe our products offer significant advantages to wireless customers,
providing an opportunity for growth as the wireless industry expands in the
future.
RECENT DEVELOPMENTS
In September 1999, Sprint invested $11.0 million and certain capital
investors invested $7.1 million in Hybrid in exchange for convertible
debentures, convertible at a conversion price of $2.85 per share (subject to
adjustment). In addition, Sprint agreed to purchase $10 million of our products
on terms that are to be negotiated. In connection with the equipment purchase
agreement, we issued warrants to purchase $8.4 million additional convertible
debentures. At December 31, 1999, the Sprint debentures were convertible, into
3,907,775 shares of our Common Stock (subject to adjustment) and the debentures
issuable upon exercise of the warrants would be convertible, at the same
conversion price, into 2,946,622 shares of our common stock. Assuming that as of
December 31, 1999 Sprint converted all its convertible debentures and exercised
all its warrants, it would own 6,854,397 shares of our Common Stock,
representing approximately 37.4% of the 18,335,847 shares of our Common Stock
that would then be outstanding (assuming no other security holders exercised
their options, warrants or conversion privileges). On a fully diluted basis,
assuming that as of December 31, 1999 all other security holders exercised their
options, warrants and conversion privileges as well as Sprint, Sprint would own
approximately 22.6% of the 30,323,156 fully diluted shares of our Common Stock
that would then be outstanding. Under the terms of Sprint's investment, Sprint
appointed two of our five directors and has substantial governance rights
(including veto rights over most material actions we might take, see Note 9 to
the Notes to Financial Statements below), has a right of first refusal if a
third party seeks to acquire us (which right of first refusal Sprint can assign
to a third party), and has substantial additional rights and privileges (as
described in Item 2 of our Quarterly Report on Form 10-Q for the quarter ended
September 30, 1999).
Following Sprint's investment, we responded to the request for proposal
(RFP) that Sprint sent us and other potential suppliers of broadband wireless
Internet access equipment, soliciting bids to supply Internet access equipment
for use in Sprint's proposed deployment of broadband wireless service in the
United States. The technically complex RFP process has continued for the last
six months and has included direct submission by us, by various competitors, and
systems integrators. Negotiations with Sprint are continuing, but Sprint has not
yet placed an order for any new market for our products or indicated that it
will select our products for the first phase of its wireless broadband system
roll out.
PRODUCTS, TECHNOLOGY AND SERVICES
Our Series 2000 products are an integral part of a full wireless or cable
high speed Internet access system. The Series 2000 includes head end routers,
network and subscriber management tools and a line of end-user routers and
modems.
Our head end products include downstream and upstream routers and management
systems. These products are used by broadband wireless and cable operators at
their base stations, or head ends, to connect Internet subscribers to the
operator's networks in order to give the subscribers high speed Internet access.
Our head end products provide management systems that allow the operators to
configure and manage their networks, to set systems alarms and to engineer
parameters for different priorities, and different levels of services and
charges, among end users. These parameters enable the operators to give priority
to premium-paying high-volume subscribers and allocate unused capacity to
lower-volume groups.
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The subscribers to the wireless operators' networks are typically
single-computer customers or local area networks (LANs) used by small businesses
and high-end residential customers. The operators use our end-user products to
connect subscribers to the wireless systems networks at the subscribers' sites.
We provide high speed two-way transmission systems for both wireless and
cable operators. We also support one-way high speed downstream transmission on
wireless and cable systems that use a telephone modem or router return. In
addition to enabling operators to use either two-way or one-way broadband
transmission systems, our products can be engineered to accommodate the
operators' other requirements as well, including their particular frequency
spectrum holdings and cable plants.
PRODUCTS
The following table outlines the primary components of the Company's
Series 2000:
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HEADEND EQUIPMENT (1) PRODUCT DESCRIPTION
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CyberManager 2000 (CMG-2000) Workstation with proprietary Hybrid software
that provides subscriber and network
management, allows the operator to set the
service levels or groups for business or
residential.
CyberMaster Downstream Router (CMD-2000) High speed downstream RF router that supports
up to 60 Mbps aggregate throughput in 12 MHz
of spectrum.
CyberMaster Upstream Router QPSK Return (CMU Upstream router and demodulator for two-way
2000-14C and QDC-030-2) operation with QPSK return.
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END-USER EQUIPMENT (1)
Multi-User Modem/Router (CCM-201, CCM-202) Client modem and router that can be used in
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CCM-231) either wireless or cable systems. Supports up
to 20 users.
Single-User Modem (N-201, N202) N-231) Similar to CCM-201, CCM-202 and CCM-231 but
restricted to a single user.
Wireless Broadband Router (WBR-60, WBR-20 Similar to CCM except it emphasizes the
(WBR-5) device is a router for privacy and not a
"bridge" modem such as often used in lower
priced systems. Serves 60, 20, or 5 users
respectively.
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(1) All products are available for use with wireless or cable systems.
Headend Equipment
CYBERMANAGER 2000. The CyberManager 2000 ("CMG-2000") is our proprietary
subscriber and network management workstation. The CMG-2000 uses our software to
provide the system administrator interface to the upstream and downstream
routers and end customer equipment. The
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CMG-2000 has a 10/100BaseT (Ethernet) interface to connect to a fast Ethernet
switch in the headend. Currently, CMG-2000's are operating with 6,000 modems in
the field with a limit of up to 20,000 modems.
CYBERMASTER DOWNSTREAM ROUTER. The CyberMaster Downstream Router
("CMD-2000") is a rack-mounted industrial microcomputer. It supports our
proprietary SIF and QAM cards, which are used for downstream routing and for
64-quadrature amplitude modulation ("64-QAM") downstream modulation. The
CMD-2000 has a 10/100BaseT interface to connect to a fast Ethernet switch within
the headend. The CMD-2000 supports up to six independent 10 Mbps downstream
channels normally feeding two TV channels or transmitters. Each 10 Mbps channel
occupies 2 MHz of either wireless or cable spectrum.
CYBERMASTER UPSTREAM ROUTER QPSK RETURN. The Cybermaster upstream router is
a rack mounted industrial microcomputer. The product houses dual Quadrature
phase-shift keying ("QPSK") receiver cards which demodulate upstream QPSK
signals. The CMU-2000-14C has a 10/100BaseT interface to connect to a fast
Ethernet switch at the headend. The CMU supports up to 28 upstream ports each
with a 256 Kbits per second (Kbps) to 5 Mbits per second (Mbps) data rate. It is
usually configured to support up to 2,400 wireless or cable modem subscribers
with 256 kbps channels.
End User Equipment
MULTI-USER MODEM/ROUTER. The Multi-User Modem/Router supports 10 Mbps,
64-QAM downstream data transmission on both wireless and cable systems and
upstream transmission via wireless or cable return, telephone modem or router.
The router family includes the CCM-201, a phone return with external modem, the
CCM-202 phone return with internal modem, and the CCM-231, for wireless, cable
or phone return. Each CCM includes routing capability to support up to 20
networked devices (PC, Macintosh or workstation), the WBR family extends this to
60. These units have a number of security features including system
authentication and user ID.
SINGLE-USER ROUTER. The Single-User Routers are similar to the Multi-User
Modem/ Routers (CCM-201, CCM-202 and CCM231, respectively) but support only one
client device which can be a PC, Macintosh or workstation.
WIRELESS BROADBAND ROUTER. The Wireless Broadband Router family is similar
to the CCM except it emphasizes the device is a router for privacy and not a
"bridge" modem often used in lower priced systems.
TECHNOLOGY
The Series 2000 product line is a proprietary, integrated broadband access
system. The Series 2000 is media independent, in that all the same system
components may be deployed in either wireless or cable systems. The Series 2000
supports asymmetric two-way transmission on either a wireless or cable system as
well as asymmetric telephone-return or router-return on either a wireless or
cable system, and the same wireless transmitter or downstream TV channel can be
used for any combination of two-way and telephone or router return
configurations.
The Series 2000 system is expandable from an entry-level system to large
systems that serve up to 20,000 modems. It has been successfully deployed by
wireless operators in systems that utilize multiple antennas at the head end to
increase capacity. Each of the multiple return antennas is pointed in a slightly
different direction, covering sectors of roughly 30 DEG., to increase the
capacity of the available return frequency spectrum.
We believe that our extensive field experience with fully operational
wireless systems in over 45 markets, wireless and cable, gives us a key
advantage in the design and delivery of wireless systems.
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Wireless Downstream Optimization
Our patented proprietary sub-channelization technology splits a standard 6
MHz channel into three 2 MHz slices for downstream transmission, providing
greater service flexibility and minimizing the effects of multipath interference
in wireless systems. Sub-channels mitigate the effects of interference between
transmitters and allow flexible sectorization in large installations. They can
also be loaded differently to provide different grades of service. Our patented
2 MHz sub-channelization allows our products to serve the newer wireless
communication services ("WCS") wireless bands, which are 5 and 10MHz wide. The
WCS bands are similar to MMDS except for bandwidth range of 2.305 GHz to 2.320
GHz and 2.345 GHz to @.360 GHz.
Upstream Optimization
Groups of subscribers share many 160 to 600 kHz bandwidth return channels.
This provides redundancy and resistance to the interference common in large
wireless installations, especially those with multiple return sectors. Narrow
channels allow smaller antennas and lower power transceivers than are needed for
conventional 2MHz TDMA channels.
The Series 2000 head end or base station automatically offsets the transmit
frequencies of the WBR or modems to correct for drift in the customer's
transceiver and optimize performance of the head end demodulators. The head end
levels the return transmit power so all signals arrive at the head end at the
same level. This optimizes demodulator performance and minimizes interference
between the multiple receive sectors used in large systems.
Software not only allows subscribers to share many return channels, but also
allows some to burst into a continuous transmission state to move large files
upstream. The operator can control the parameters to optimize performance for
business users yet still provide everyone access to capacity. It is usual to set
up two or three groups of return channels, often with different bandwidths so as
to provide different service levels or groups for business and residential
customers.
Alliances
Hybrid has developed long term alliances with all manufacturers of
transceivers, headend transmitters and headend downconverters necessary to
implement a full wireless system. These alliances allow us to concentrate on our
core technology while offering the appropriate complementary technology and
providing customers with choices among complementary offerings.
SERVICES
Our product support services include consulting, systems engineering,
systems integration, installation, training and technical support. Network
operations engineers, who combine radio frequency and TCP/IP networking
expertise, provide network consulting to support the sales force, assisting
sales representatives and customers in defining the specifications for the
system to be installed. Our network operations group also works with the
customer during site preparation to aid in systems engineering, system
integration, installation and acceptance testing for system start-up. Each
customer is required to enroll, for a fee, at least one person in our one-week
training course; enrollment for multiple employees from the customer
organization is encouraged and supported with a discounted fee schedule. These
training courses are tailored to specific implementations of our products and
cover the installation, operation and maintenance of our headend and client
modem products in a network operating environment. We typically provide a
one-year warranty on our hardware products that includes factory repair service.
Customer support also includes telephone support, maintenance releases and
technical bulletins covering all of our software and firmware products that
contain application code. We provide support after expiration of the warranty
period as a purchase option, including on-site field support.
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CUSTOMERS
Our customers include wireless system operators and cable system operators.
A small number of customers has traditionally accounted for a large portion of
our net sales. In 1999, RCN Corporation (a cable system operator) and wireless
operators now owned by Sprint accounted for 31% and 28% of our net sales,
respectively. In 1998, RCN Corporation and Knology Holdings, Inc. (another cable
system operator) accounted for 25% and 13% of our net sales, respectively.
During 1999 and 1998, 52% and 58% respectively, of our net sales were
attributable to cable system applications and the balance to wireless
applications. The trend to consolidation with fewer but larger and much better
capitalized companies is expected to continue.
WIRELESS CUSTOMERS
Sprint and MCI WorldCom have acquired over 60% of the prime MMDS wireless
spectrum.
As indicated in "Recent Developments" above, Sprint now holds $11 million of
our convertible debentures and warrants to purchase an additional $8.4 million
convertible debentures. These debentures, (including accrued interest) are
convertible into 6,854,397 shares of our Common Stock which, at December 31,
1999 would have constituted (37.4% on a beneficial ownership percentage and)
22.6% of our fully diluted outstanding shares of Common Stock. Sprint has
appointed two of our five directors and has substantial corporate governance
rights, has veto rights over most material actions we might take, has a right of
first refusal if a third party seeks to acquire us and has other substantial
rights and privileges.
Sprint has agreed to purchase at least $10 million of our products during
2000 on terms that are to be negotiated. We have been negotiating with Sprint
for six months a possible agreement whereby Sprint would purchase, or cause a
service provider to purchase our products for the first phase of Sprint's roll
out of broadband wireless Internet access service. As yet no agreement has been
reached with Sprint for the purchase of our products.
Our ability to expand sales of our products may depend to a significant
extent upon whether and to what extent Sprint elects to purchase our broadband
wireless Internet access products and upon the terms of any such purchases. We
believe that, in addition to our sales to Sprint (directly or through a service
provider), Sprint's decision regarding the purchase of our products may affect
our ability to sell our products to other wireless customers as well. We believe
other wireless customers have deferred significant purchases of high speed
Internet access equipment pending Sprint's decision.
CABLE CUSTOMERS
Although most of our sales have in the past been to cable customers, we
anticipate that those customers will represent a decreasing portion of our
future net sales. Because our products do not conform to the Data Over Cable
System Interface Specification ("DOCSIS") standard for cable modems, we are not
selling products to new cable customers and our sales to existing cable
customers have been limited to additions to their previously installed systems.
SALES, MARKETING AND DISTRIBUTION
We sell our products primarily in the United States. Sales are made through
our own field sales force and sales support organization. We also sell our
products through VARs. We have field sales offices in Atlanta, Georgia, Tinton
Falls, New Jersey and Littleton, Colorado.
Our direct sales force also sold to wireless operators in Mexico and Canada
in 1999. European interest in DOCSIS has made it unprofitable to pursue
international cable sales.
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The sale of our products typically involves a great deal of time and
expense. Customers usually engage in significant technical evaluation before
making a purchase commitment. There are 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 and is subject to a number of
significant risks. Any delay or loss of an order that is expected in a quarter
can have a major effect on our sales and operating results for that quarter. We
have substantially no backlog of orders. We believe this is not necessarily an
indication of our future sales.
Our marketing efforts are targeted at broadband wireless system operators,
many of whom are now part of Sprint or MCI WorldCom, and regional or smaller
wireless operators. Our cable efforts are concentrated on technically supporting
existing customers. Because we have elected to focus our sales efforts on
wireless operators, we have decided not to develop DOCSIS compatible cable
modems. We are not selling products to new cable customers, and our sales to
existing cable customers have been limited to additions to previously installed
systems.
The market for our products has historically experienced significant price
erosion, and we have experienced and expect to continue to experience pressure
on our selling prices. The cable industry's standardization on DOCSIS and the
deployment of DSL by telephone companies has increased pricing pressure. 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. Further, we anticipate that in the
future the sales mix of our products will be weighted toward lower-margin
single-user products, thereby adversely affecting our gross margins.
MANUFACTURING
Our manufacturing strategy is to perform assembly, testing and quality
inspection internally and to outsource the manufacturing of the product modules
to third parties. We maintain a limited in-house manufacturing capability for
performing assembling and testing on headend products and for reconfiguring
small quantities of routers at our headquarters in San Jose.
Our Series 2000 client routers 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 given the
quality of the Sharp product and our limited volumes. We plan to have our new
Wireless Broadband Router (WBR) manufactured in new packaging by Sharp. In order
for us to compete effectively in the sale of systems, we will need to reduce our
prices, and the underlying costs of our routers. As long as Sharp is the only
manufacturing source of our routers, our ability to reduce the manufacturing
costs may be limited.
We have subcontractors for the standard components and subassemblies for our
headend products. Standard components include the Sun Microsystems Sparc 5
workstation and its Sun Operating System (OS); and Intel's Ethernet cards and
Pentium-based PCI processor cards. Our CyberManager 2000 Router is built on the
Sparc 5/Sun OS platform by installing our proprietary network subscriber and
network management software, HybridWare. Our CyberMaster Downstream Router
("CMD") and CyberMaster Upstream Router ("CMU") are built on Intel's
Pentium-based PCI/ISA-based computer cards installed in standard rack-mounted
backplanes from Industrial Computer Source that are configured to our
specifications. Our proprietary software, Hybrid OS, is overlaid on a standard
Berkeley Systems operating system for the CMD and CMU.
We are dependent upon these and other key suppliers for a number of the
components for our 64-QAM products. For example, each new modem or WBR design
can use only one vendor for the 64-QAM demodulator semiconductors, and in past
periods these semiconductors have been in short supply. The CCM and N type
routers use Broadcom chip sets. Hitachi is the sole supplier of the processors
used in certain of our routers. The former Stanford Telecom, Telecom Component
Products
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Group (now acquired by Intel), is currently the sole supplier for certain
components used in our products. There can be no assurance that these and other
single-source components will continue to be available to us, or that deliveries
of them to us will not be interrupted or delayed (due to shortages or other
factors). Having single-source components also makes it more difficult for us to
reduce our costs for these components and makes us vulnerable to price increases
by the component manufacturer. Any significant interruption or delay in the
supply of components for our products or any increase in our costs for
components, or our inability to reduce component costs, could hurt our business.
Our products generally carry a one-year warranty for replacement of parts.
Although we have not experienced any significant product liability claims to
date, there can be no assurance that we will not be subjected to such claims in
the future.
RESEARCH AND DEVELOPMENT
As of December 31, 1999, our research and development staff consisted of 12
full-time employees, and 10 local consultants. To supplement our research and
development efforts, we have hired a consulting firm in India to work on various
projects. Our agreement with the firm is to provide up to 20 engineers as
consultants depending upon the project needs. Our total research and development
expenses for 1999, 1998 and 1997 were $4,191,000, $7,771,000 and $7,831,000,
respectively. Our research and development during 1999 was directed primarily
towards improving the performance of our 2-way wireless products and reducing
the cost of our routers. We enhanced our QPSK return product software in
cooperation with certain of our wireless customers to improve performance as the
customers introduce antenna sectorization to increase return path capacity. The
capacity of the manager was increased to 20,000 routers and the WBR-60-231
multi-user modem was extended to address 60 computers.
In 2000, we are continuing our efforts to reduce the cost of manufacturing
and improve the performance of client routers significantly through design and
engineering changes. In addition, we are engaged in the development of new CMD's
and CMU's with power supply redundancy. We are also working on Network
Management integration into ever larger networks and technology to serve
subscribers where the line of sight to the base station is marginal. There can
be no assurance that we will be successful in these development efforts.
The market for wireless high speed Internet access products is characterized
by rapidly changing and competing technologies, evolving industry standards and
frequent new product introductions leading to short product life cycles. There
can be no assurance that we will be able to keep up with these changes.
COMPETITION
The market for wireless broadband high speed Internet access products 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 (maintaining stable system
operation is a key requirement),
- integration with major operator's management and customer care systems
which may involve an integrator partner,
- price,
- evolution to marginal line of sight situations for wireless with lower
transmitter towers and transmit sectorization to conserve downstream
spectrum,
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- breadth of product line,
- sales and distribution capability,
- technical support and service,
- relationships with broadband wireless and cable system operators,
affiliates and ISPs,
- general industry and economic conditions.
While we believe our products and services are competitive with or superior
to those of our competitors, our product development was affected by lack of
resources, by disruptions resulting from management and personnel changes and
uncertainties caused by our financial reporting difficulties in 1998 and 1999.
Conditions in our market could change rapidly and significantly as a result of
technological changes, and the development and market acceptance of alternative
technologies could decrease the demand for our products or render them obsolete.
Similarly, the continued emergence or evolution of industry standards or
specifications may put us at a disadvantage in relation to our competitors.
There can be no assurance that we will be able to compete successfully in the
future.
In general, our competitors are producers of asymmetric routers 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 customers. Some of our present
partners are major systems integrators who could choose to develop their own
designs in-house for the wireless industry.
WIRELESS COMPETITORS
One of our principal competitors in the wireless market is Cisco Systems
(which has proprietary products under development due to its acquisition of
Clarity Wireless, Inc.). Cisco is promoting VOFDM, a competitive wireless
technology that Cisco claims will provide superior cost/benefit performance and
will operate successfully in adverse environments (around buildings, flat roofs
and water, for example). We believe that Cisco has not yet installed a
commercially operating VOFDM system. However, there is no assurance that in the
future such systems will not be installed and provide benefits superior to our
system.
Other principal wireless competitors include ADC, which is currently
offering the Vyyo (formerly Phasecom) product and has experience from its MMDS,
WCS and UHF transmitter division (formerly known as ITS Corp.); Com21, which is
attempting to adapt its proprietary cable systems for wireless; and Newbridge,
which acquired much of Stanford Telecom (a manufacturer of QPSK products). Other
vendors may be attracted by the 1999 investments by MCI Worldcom and Sprint in
wireless operations. Nortel and Lucent have indicated an interest in entering
the wireless market. While Hybrid has worked closely with Nortel and Lucent in
making proposals to Sprint, other or both of these companies might choose to
develop its own system to compete for Sprint deployments and to offer other
competing products and services.
We believe our products have been more widely accepted in the broadband
wireless market than in the cable market for two reasons:
1) The understanding we gained with our customers' help in understanding
the issues of deployment and in particular return path sectorization
(used to increase spectrum utilization) and return path interference,
2) The adoption of the DOCSIS standard has not had a significant effect on
wireless customers.
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We believe that products meeting or based on the present DOCSIS standard
does not perform well over wireless. This belief is based in part on the fact
that Hybrid's 2 MHz downstream sub-channelization technique provides triple the
resistance to multipath distortion by applying the full power of the WBR
adaptive equalizer to a 2 MHz channel rather than a 6 MHz channel used in
DOCSIS. In addition, we believe DOCSIS systems require higher power from the
transceiver on the return path and will face probable disruption of the TDMA
return path in the presence of multipath and noise. 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 modify the DOCSIS equipment to a proprietary
non-standard form to work over wireless. Vendors adapting DOCSIS are attempting
to achieve lower costs and prices but still preserving the customer benefit of
allowing other vendors DOCSIS modems to operate on their systems.
CABLE MODEM COMPETITORS
The adoption of the DOCSIS cable standard by large cable operators has
adversely affected our ability to sell to cable customers. Our decision not to
pursue the cable market and not to develop the DOCSIS products, has not helped
our existing and potential customers who wish to purchase broadband Internet
access products from multiple suppliers, These customers were forced to buy from
our competition because it provides them with multiple supplier option.
OTHER COMPETITION
The telephone companies are learning to deploy forms of DSL providing high
speed Internet access over the existing phone wires. They are also working with
computer vendors such as Dell Computer Corp. and Gateway Inc. to have DSL cards
ordered with PCs manufactured by those companies, thereby reducing the telephone
companies' distribution costs. The chief constraints on DSL are the type,
condition and length of cables out of the phone exchanges and the fact that more
distant subscribers are usually served by the carrier in street cabinets that
have to be enlarged or adapted for DSL. Although DSL poses a significant
competitive threat, in some instances the availability of DSL may be seen as
complementary to the use of our products. Some operators may use DSL service for
customers in those locations in which line-of-sight access may be difficult but
choose to provide wireless service where line-of-sight transmission is
uninterrupted.
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 802.16 standards. We must continue to develop
products with improved performance over two-way wireless transmission
facilities. There can be no assurance that we will meet these challenges.
INTELLECTUAL PROPERTY
PATENTS
We rely on a combination of patent, trade secret, copyright and trademark
laws and contractual restrictions to establish and protect proprietary rights in
our products. We have received 13 patents from the U.S. Patent and Trademark
Office. These patents are directed to various aspects of wireless and cable
modems and headend systems. In addition, the U.S. Patent and Trademark Office
has issued formal notices of allowances for pending patent applications which
are also directed to wireless and cable modems and headend systems, as well as
various modulation and transmission schemes used in wireless cable modem
systems. We have other patent applications pending before the U.S. Patent and
Trademark Office. We have patent applications pending in a number of foreign
jurisdictions as well. We do not know whether any pending or foreign patent
applications will result in the issuance of patents.
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We cannot be assured that our patents will not be challenged or invalidated,
or that the claims allowed in our patents will be of sufficient scope or
strength to provide meaningful protection or commercial advantage to us. We have
initiated one patent infringement litigation to enforce our patent rights, and
it resulted in a settlement in which we granted licenses to the defendants
containing certain terms that are in some respects favorable for them, including
a right of first refusal to purchase our patents that we granted to one
defendant (Com21, Inc.) in the event that in the future we propose to sell our
patents (separately or together with our other assets) to any third party (See
Item 3 "Legal Proceedings"). We do not know whether we will bring litigation in
the future in an effort to assert our patent rights, or whether other companies
will bring litigation challenging our patents. Any such litigation could be time
consuming and costly for us and could result in our patents being held invalid
or unenforceable. Furthermore, even if the patents are upheld or are not
challenged, third parties might be able to develop other technologies or
products without infringing any such patents.
SOFTWARE PROTECTION
We have entered into confidentiality and invention assignment agreements
with our employees, and we enter into non-disclosure agreements with certain of
our suppliers, distributors and customers, in order to limit access to and
disclosure of our proprietary information. There can be no assurance that these
contractual arrangements or the other steps we take to protect our intellectual
property will prove sufficient to prevent misappropriation of our technology or
deter independent third-party development of similar technologies. The laws of
certain foreign countries may not protect our products or intellectual property
rights to the same extent as do the laws of the United States.
INFRINGEMENT
We have in the past, received, and may in the future receive, notices from
third parties claiming that our products, software or asserted proprietary
rights infringe the proprietary rights of third parties. We expect that
developers of wireless and cable modems will be increasingly subject to
infringement claims as the number of products and competitors in our market
grows. While we are not currently subject to any such claim, any future claim,
with or without merit, could be time consuming, result in costly litigation,
cause product shipment delays or require us to enter into royalty or licensing
agreements. Such royalty or licensing agreements might not be available on terms
acceptable to us or at all.
In the future, we may also file lawsuits to enforce our intellectual
property rights, to protect our trade secrets or to determine the validity and
scope of the proprietary rights of others. Such litigation, whether successful
or not, could result in substantial costs and diversion of resources. As
indicated above, we were engaged during 1998 in an infringement lawsuit that we
brought against two third parties. In 1999, in order to stop the diversion of
resources caused by the litigation, we entered into a settlement pursuant to
which the defendants obtained licenses to our patents on terms that in certain
respects were favorable to the defendants (See "--Patents" above and Item 3
"Legal Proceedings" below). Nonetheless, we may find it necessary to institute
further infringement litigation in the future.
EMPLOYEES
As of December 31, 1999, we had 38 full-time employees. None of our
employees is represented by a collective bargaining unit with respect to his or
her employment, and we have never experienced an organized work stoppage. We
used consultants heavily to supplement our workforce and as of December 31, 1999
we had 16 local consultants in various areas.
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ITEM 2. PROPERTIES
We currently sublease approximately 55,000 square feet of office, research
and development and manufacturing space in San Jose, California. The sublease
expires in April 2004, and we have an option to extend the term of the lease
through October 2009. We also lease approximately 900 square feet of office
space in Tinton Falls, New Jersey and approximately 1,000 square feet of office
space in Atlanta, Georgia on a month-to-month basis. We believe that our San
Jose facilities will be sufficient to meet our anticipated growth in the near
term.
ITEM 3. LEGAL PROCEEDINGS
CLASS ACTION LITIGATION
In June 1998, five class action lawsuits were filed in San Mateo County
Superior Court, California against us, two of our directors, four former
directors and two former officers. 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 (the "State Actions") also named as defendants the underwriters in
our initial public offering, but the underwriters have since been dismissed from
the cases.
The complaints in the State Actions claimed that we and the other defendants
violated the anti-fraud provisions of the California securities laws, alleging
that the financial statements used in connection with our initial public
offering and the financial statements 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 alleged that we and the other defendants made these misrepresentations in
order to inflate the price of the Company's Common Stock for the initial public
offering and during the class period. We and the other defendants denied the
charges of wrongdoing.
In July and August 1998, two class action lawsuits were filed in the U.S.
District Court for the Northern District of California (the "Federal Actions").
Both of the Federal Actions were brought against the same defendants as the
State Actions, except that the second Federal Action also named as a defendant
Price Waterhouse Coopers, LLP ("PWC"), our former independent accountants. (The
underwriters in our initial public offering were named as defendants in the
first Federal Action but were subsequently dismissed.) The class period for the
first Federal Action is from November 12, 1997 to June 1, 1998, and the class
period in the second Federal Action extends to June 17, 1998. The complaints in
both Federal Actions claimed 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 Actions hurt our business during the
latter part of 1998 and in 1999, 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.
We and the other parties (other than PwC) to the State Actions and the
Federal Actions reached an agreement to settle the lawsuits in March 1999. The
agreement was approved by the U.S. District Court for the Northern District of
California in June 1999. In November 1999, the settlement of the State Actions
and the Federal Actions became final. The time to appeal from the Court's
approval of the settlement has expired. Under the settlement, (i) our insurers
paid $8.8 million on our behalf and
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on behalf of the other officer and director defendants, and (ii) we issued
3,057,459 shares of Common Stock to the plaintiffs and their counsel (750,000
shares were issued in November 1999 and the balance in February 2000),
representing 21.9% of all shares of our Common Stock that were outstanding at
the end of February 2000. As a result of the settlement 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 attorneys fees and other litigation expenses that
would otherwise be covered by our insurance, and we will not have insurance
coverage for the attorneys fees and expenses relating to the settlement that we
incurs in the future.
As of December 31, 1999, we had accrued $1,346,000 for the value of the
2,307,459 shares then remaining to be issued in the settlement.
SEC INVESTIGATION
In October 1998, the Securities and Exchange Commission began a formal
investigation of us and certain individuals with respect to our 1997 financial
statements and public disclosures. During 1999, we produced documents in
response to the Securities and Exchange Commission's subpoena and cooperated
with the investigation. A number of current and former officers and employees
and outside directors have testified before the Securities and Exchange
Commission's staff.
In November 1999, the SEC staff attorneys informed us in writing that the
staff intended to file a civil injunctive action and seek civil monetary
penalties against us for alleged violations of the federal securities laws.
Without admitting or denying any wrongdoing, we recently reached agreement with
the staff pursuant to which the staff will recommend entry of an order enjoining
us from violating the books and records and related provisions of the federal
securities laws. The recommended action would not include any monetary penalties
or an injunction against the violation of the antifraud provisions of the
securities laws. Resolution of this matter is subject to negotiation and
documentation of a final agreement with the SEC staff attorneys, the
Commission's acceptance of the staff's recommendation and approval by the
federal district court.
We do not believe, based on current information, that the proposed order
will have a material adverse effect on our business, financial condition or
future results of operations.
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 were 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 and the
actions were dismissed. Pursuant to the settlement, we granted Com21 and
Celestica a nonexclusive license to our patents under which they may be required
to pay royalties in the event that they sell certain products in the future,
subject to certain contingencies, and we granted Com21 a right of first refusal
to purchase our patents in the event that we propose in the future to sell our
patents (whether separately or together with our other assets) to any third
party. The Company has agreed to pay its legal counsel in this action, as a
partial contingency fee (in return for such counsel's acceptance of reduced
current legal fees), an amount equal to 50% of any royalties that the Company
receives from its license with
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the defendants in the litigation (but not in excess of $3,000,000). The Company
has received minimum royalties from the license.
PACIFIC MONOLITHICS LAWSUIT
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, two of our directors, four former directors (one of whom
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 alleged
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 alleged that we wrongfully failed to consummate the
acquisition. The complaint claimed 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 sought compensatory and punitive
damages according to proof, plus attorneys' fees and costs. In July 1999, the
court granted our motion to compel arbitration and to stay the lawsuit pending
the outcome of the arbitration. In October 1999, the plaintiff filed a demand
for arbitration against us and the individual defendants with the San Francisco
office of the American Arbitration Association. In the demand, the plaintiff
alleges claims for breach of contract, breach of implied covenant of good faith
and fair dealing, fraud and negligent misrepresentation arising out of the
proposed merger between the two companies. The demand seeks unspecified
compensatory and punitive damages, pre-judgement interest and attorneys' fees
and costs. In November 1999, we and the individual defendants answered the
demand by denying the claims and seeking an award of attorneys' fees and costs
pursuant to the agreement for the proposed merger. The arbitration hearing is
scheduled to be held in September 2000.
We do 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 effect on our business, financial
condition or future results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of our security holders during
1999.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
MARKET INFORMATION FOR COMMON STOCK
Our Common Stock was traded on the Nasdaq National Market under the symbol
"HYBR" during the period from our initial public offering on November 12, 1997
through June 16, 1998. On June 17, 1998, trading in our Common Stock was
suspended by the Nasdaq National Market, in response to our independent
auditors, PwC, withdrawing their reports to our 1997 financial statements. The
suspension continued until December 1, 1998, when our Common Stock was delisted
by the Nasdaq National Market due to continuing noncompliance with listing
requirements. Since December 1, 1998, our stock has been traded in the
over-the-counter market on the pink sheets. The table below shows the range of
high and low closing sale prices reported on the pink sheets for the periods
indicated. The table reflects inter-dealer prices without retail mark-up, mark
down or commission. On February 29, 2000, the closing price of our Common Stock
on the pink sheets was $16.56.
<TABLE>
<CAPTION>
HIGH LOW
-------- --------
<S> <C> <C>
First Quarter 1998.......................................... $13.00 $4.00
Second Quarter 1998......................................... $ 8.75 $2.13
Third Quarter 1998.......................................... Not Traded
Fourth Quarter 1998......................................... $ 0.75 $0.13
First Quarter 1999.......................................... $ 1.25 $0.13
Second Quarter 1999......................................... $ 2.88 $0.38
Third Quarter 1999.......................................... $ 9.03 $2.00
Fourth Quarter 1999......................................... $20.00 $4.75
</TABLE>
STOCKHOLDERS
As of December 31, 1999, there were approximately 184 holders of record of
our Common Stock
DIVIDENDS
We have not paid any cash dividends on our capital stock to date. We
currently anticipate that we will retain any future earnings for use in our
business and do not anticipate paying any dividends in the foreseeable future.
The terms our outstanding debentures and our agreement with Sprint prohibit us
from paying any cash dividends without the consent of the debenture holders and
Sprint.
RECENT SALES OF UNREGISTERED SECURITIES
During 1999, we sold without registration under the Securities Act 251,000
shares of Common Stock to current or former officers or employees, upon their
exercise of stock options previously granted to them, at exercise prices of from
$0.27 to $11.05 per share (the average exercise price was $1.42). These sales
were made in reliance on exemptions under Rule 701 or under Section 4(2) of the
Securities Act. We made no other sales of securities during 1999 that were not
registered under the Securities Act, except for sales previously reported in our
quarterly reports on Form 10-Q filed during the year.
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ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with the
Company's financial statements and related notes thereto and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere in this Form 10-K.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------------
1999 1998 1997(1) 1996 1995
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATION DATA:
Net sales.................................... $ 13,016 $ 12,418 $ 4,120 $ 2,962 $ 630
Cost of sales................................ 13,341 14,046 8,899 3,130 761
-------- -------- -------- ------- -------
Gross profit................................. (325) (1,628) (4,779) (168) (131)
Operating expenses:
Research and development................... 4,191 7,771 7,831 5,076 3,862
Sales and marketing........................ 1,740 3,642 4,678 1,786 390
General and administrative................. 7,660 8,933 2,964 1,714 748
Asset impairment charge.................... -- 1,250 -- -- --
Write off of technology license............ -- 1,283 -- -- --
-------- -------- -------- ------- -------
Total operating expenses................. 13,591 22,879 15,473 8,576 5,000
-------- -------- -------- ------- -------
Loss from operations................... (13,916) (24,507) (20,252) (8,744) (5,131)
Interest income and other expense, net....... 171 779 316 257 166
Interest expense............................. (8,447) (897) (1,666) (28) (304)
-------- -------- -------- ------- -------
Net loss..................................... $(22,192) $(24,625) $(21,602) $(8,515) $(5,269)
======== ======== ======== ======= =======
Basic and diluted net loss per share......... $ (2.08) $ (2.37) $ (6.10) $ (3.36) $ (2.37)
======== ======== ======== ======= =======
Shares used in basic and diluted per share
calculation(2)............................. 10,678 10,410 3,541 2,535 2,223
======== ======== ======== ======= =======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------
1999 1998 1997(1) 1996 1995
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents......................... $13,394 $3,966 $27,143 $3,886 $3,353
Working capital................................... 6,027 (812) 23,795 6,944 3,149
Total assets...................................... 21,152 15,420 39,065 10,539 4,586
Long-term debt.................................... 18,478 419 654 472 228
Total stockholders' equity (deficit).............. (9,820) 2,702 27,303 7,709 3,661
</TABLE>
- ------------------------
(1) All financial data in the table above as of and for the year ended
December 31, 1997 presented reflect the restated financial statement.
(2) See Note 2 of Notes to Financial Statements for an explanation of the number
of shares used to compute basic and diluted net loss per share.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THE DISCUSSION BELOW SHOULD BE READ IN CONJUNCTION WITH THE FINANCIAL
STATEMENTS AND THE NOTES THERETO INCLUDED IN ITEM 8 OF THIS REPORT. THE
DISCUSSION 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
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EVENTS MAY OCCUR OR CERTAIN TRENDS MAY CONTINUE. OTHER FORWARD-LOOKING
STATEMENTS INCLUDE STATEMENTS ABOUT THE FUTURE DEVELOPMENT OF PRODUCTS OR
TECHNOLOGIES, MATTERS RELATING TO OUR PROPRIETARY RIGHTS, YEAR 2000 COMPLIANCE,
FACILITIES NEEDS, OUR LIQUIDITY AND CAPITAL NEEDS AND OTHER STATEMENTS ABOUT
FUTURE MATTERS. ALL THESE FORWARD-LOOKING STATEMENTS INVOLVE RISKS AND
UNCERTAINTIES. YOU SHOULD NOT RELY TOO HEAVILY ON THESE STATEMENTS; ALTHOUGH
THEY REFLECT THE GOOD FAITH JUDGMENT OF OUR MANAGEMENT, THEY INVOLVE FUTURE
EVENTS THAT MIGHT NOT OCCUR. WE CAN ONLY BASE SUCH STATEMENTS ON FACTS AND
FACTORS THAT WE CURRENTLY KNOW. OUR ACTUAL RESULTS COULD DIFFER MATERIALLY FROM
THOSE IN THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF VARIOUS FACTORS,
INCLUDING THOSE SET FORTH UNDER "RISK FACTORS" AND ELSEWHERE IN THIS REPORT ON
FORM 10-K.
OVERVIEW
GENERAL
We are a broadband access equipment company that designs, develops,
manufactures and markets wireless and cable systems that provide high speed
access to the Internet and corporate intranets for businesses and consumers. Our
products remove the bottleneck over the local connection to the end-user,
thereby greatly accelerating the response time for accessing bandwidth-intensive
information.
Since 1996, our principal product line has been the Hybrid Series 2000 which
consists of secure headend routers, wireless and cable routers and management
software for use with either wireless transmission or cable TV facilities. To
date, net sales include principally product sales and support and networking
services.
We sell our products primarily in the United States. Our customers include
primarily broadband wireless system operators and cable system operators. 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, and is subject to a number of significant risks, including
customers' budgetary constraints and internal acceptance reviews. Any delay or
loss of an order that is expected 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.
Because our products do not conform to the DOCSIS standard for cable modems, we
are not selling products to new cable customers and our sales to existing cable
customers have been limited to additions to previously installed systems. Our
ability to develop and offer competitive products on a timely basis could have a
material effect on our business. 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. Further, we
anticipate that in the future the sales mix of our products will be increasingly
weighted toward lower-margin products, thereby adversely affecting our gross
margins.
We believe our products are particularly well suited for use in broadband
wireless applications. Until this year, however, the wireless industry has
suffered from under capitalization and poor financial performance. During 1999,
the wireless industry has received a substantial infusion of capital,
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principally from investment by telephone companies. Sprint Corporation has
acquired PCTV-Speedchoice and other wireless operators (our principal wireless
customers). In September 1999, Sprint invested $11.0 million in our securities
(and we received an additional $7.1 million in investment from venture capital
sources), and Sprint committed to purchase at least $10 million of our products
for wireless applications. As part of the investment, Sprint acquired veto
rights with respect to most material corporate actions we might take as well as
other substantial rights and privileges. We anticipate that the success of our
future operations will depend to a substantial extent upon our relationship with
Sprint and whether Sprint selects our products for use in connection with
Sprint's wireless high speed Internet access services in the future.
Due to our diminished capital resources during the first three quarters of
1999 (see "--Liquidity and Capital Resources"), we reduced our expenditures for
research and development and sales and marketing during this period. In
February 1999, we implemented a reduction in force. As of December 31, 1999, we
had 38 full-time employees and 16 consultants compared to 87 full-time employees
and 18 consultants at December 31, 1998. Following the infusion of funds we
received in September 1999, as indicated above, we are seeking to hire new
employees and plan to increase our expenditures for research and development,
sales and marketing.
RESTATEMENT OF FINANCIAL STATEMENTS
In May and June 1998, we and PricewaterhouseCoopers LLP ("PwC"), our
independent auditors, engaged in a review of our financial statements for 1997
and the first quarter of 1998. In June 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. In July 1998, PwC resigned as our independent auditors, stating that
it believed our 1997 financial statements should be restated but that, although
there had been no disagreements between PwC and us on any matter of our
accounting principles, or practices, financial statement disclosure or auditing
procedure, PwC would not continue as our independent auditors to address the
restatement.
In August 1998, we retained Arthur Andersen ("AA") as our independent
auditors. After extensive work in examining our 1997 financial statements, AA
resigned as our independent auditors in November 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.
In June 1999, Hein completed its audit of our 1997 and 1998 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 1997 were reduced from $14,270,000 to $4,120,000 (resulting in gross loss of
$4,779,000 rather than gross profit of $2,012,000), net loss increased from
$13,590,000 to $21,602,000 and accumulated deficit increased from $30,932,000 to
$38,944,000. Our basic and diluted loss per share increased from $3.84 to $6.10.
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Our inability to reissue audited financial statements during the course of
events described above had serious consequences for our business. As a result,
the Nasdaq National Market suspended trading in our Common Stock from June 1998
and delisted our stock in December 1998. During 1998, primarily due to our
announcements regarding the need to restate our financial statements, a number
of class action litigations were filed and the Securities and Exchange
Commission initiated a formal investigation. We believe these actions hurt our
business, made it more difficult for us to attract and retain employees,
disrupted our management, sales and marketing, engineering and research and
development staffs and adversely affected the sales of our products.
REVENUE RECOGNITION
We normally ship our products based upon a bona fide purchase order and
volume purchase agreement. We generally recognize revenue at the time a
transaction is shipped and collection of the resulting account receivable is
probable. Shipments on customer orders with either acceptance criteria,
installation criteria or rights of return are recognized as revenue only when
the criteria are satisfied according to the contract. Revenue related to
shipments to distributors is normally recognized upon receipt of payment for
such transactions.
During 1999, we generally sold our software together with a three-year
commitment, for which we did not charge separately, to provide upgrades,
maintenance, system support and service. We recognized revenue attributed to the
software over the three-year period. (Recently, we changed our policy to charge
separately for maintenance and other software support after 90 days.) In those
instances in which we sold software and entered into a maintenance contract for
which we charged separately, we recognized revenue on the software sale without
reference to the maintenance contract, and we recognized revenue on the
maintenance contract over its term, generally on a straight line basis. Other
service revenue, primarily training and consulting, is generally recognized at
the time the service is performed.
WARRANTY COSTS
We accrue for estimated warranty costs when the related sales revenue is
recognized. Our modem manufacturer, Sharp Corporation, provides a 15 month
warranty on all cable routers manufactured by them. The warranty period begins
on the date the routers are completely assembled. We provide a 12 month warranty
on all headend equipment sold, and we typically provide a 90-day warranty on
software. Actual warranty costs incurred have not differed materially from those
estimated and accrued by the Company.
NET LOSSES
We incurred net losses for the years ended December 31, 1999, 1998 and 1997
of $22,192,000, $24,625,000 and $21,602,000, respectively. Our accumulated
deficit was $85,761,000 as of December 31, 1999. We expect to incur losses for
the foreseeable future.
DEFERRED TAXES
As of December 31, 1999, we had approximately $31.3 million in gross
deferred tax assets comprised primarily of net operating loss carry forwards and
capitalized research expenditures. We believe that we might not be able to
realize our deferred tax assets, due to uncertainties regarding our future, our
history of net losses and our lack of capital resources. In addition, the
utilization of net operating loss carry-forwards may be subject to a substantial
annual limitation due to the "change in ownership" provisions of the Internal
Revenue Code of 1986 and similar provisions of state tax laws. We will continue
to assess the realizability of the deferred tax assets based on actual and
forecasted operating results. See Note 10 of Notes to Financial Statements.
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RESULTS OF OPERATIONS
The following table sets forth the percentage of net sales represented by
the items in our statements of operations for the periods indicated:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Net sales................................................... 100.0% 100.0% 100.0%
Cost of sales............................................... 102.5% 113.1% 216.0%
------ ------ ------
Gross loss.................................................. (2.5)% (13.1)% (116.0)%
------ ------ ------
Operating expenses:
Research and development.................................. 32.2% 62.6% 190.1%
Sales and marketing....................................... 13.4% 29.3% 113.5%
General and administrative................................ 58.8% 71.9% 72.0%
Asset impairment charge................................... -- 10.1% --
Write-off of technology license........................... -- 10.3% --
------ ------ ------
Total operating expenses................................ 104.4% 184.2% 375.6%
------ ------ ------
Loss from operations.................................... (106.9)% (197.3)% (491.6)%
Interest income and other................................... 1.3% 6.2% 7.7%
Interest expense............................................ (64.9)% (7.2)% (40.4)%
------ ------ ------
Net loss................................................ (170.5)% (198.3)% (524.3)%
====== ====== ======
</TABLE>
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
NET SALES. Net sales for 1999 were $13,016,000, compared to net sales of
$12,418,000 for 1998, an increase of approximately 4.8%. In 1999, cable systems
operators accounted for approximately 52% of net sales, compared to
approximately 57% in 1998; and broadband wireless systems operators accounted
for 48% in 1999, compared to 43% in 1998. International sales accounted for
approximately 5% in 1999 compared to none in 1998. We had two customers that
individually accounted for 31% and 28% of net sales during 1999, compared to two
customers that accounted for 25% and 13% during 1998.
In September 1999, we issued Sprint warrants to purchase $8.4 million in
convertible debentures which are convertible to common stock at a conversion
price of $2.85 per share (subject to adjustment). The warrants will be
exercisable in 10% increments for each $1 million in orders Sprint submits to us
under an equipment purchase agreement to be negotiated between Sprint and us.
The fair value of these warrants, which will likely be substantial, will be
recognized as a discount on these sales to Sprint.
GROSS LOSS. Gross margin was negative 2.5% and negative 13.1% in 1999 and
1998, respectively. The $1,303,000 decrease (80%) in gross loss amount from 1998
to 1999 was primarily due to a favorable change in the product mix (increased
sales of multi-user modem/router compared to a single-user modem/router),
improved margin for headend routers and reduced costs attributable to
manufacturing overhead.
RESEARCH AND DEVELOPMENT. Research and development expenses consist
primarily of ongoing headend software and cable modem development expenses, as
well as design expenditures associated with programs to reduce the cost and
improve the manufacturability of our products. Research and development expenses
were $4,191,000 and $7,771,000 for 1999 and 1998, respectively, representing
32.2% and 62.6% of net sales, respectively. In 1999, research and development
expenses included noncash charges of $668,000 for compensation recognized on
stock options granted at exercise prices below fair market value to employees
and consultants engaged in research and development. No
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such charges were incurred in 1998. The decrease in research and development
expenses in 1999 as compared to 1998 (46%) was due to reduced staffing and
associated engineering costs. Since we were able to obtain additional financing
in September 1999, we are expecting to increase our investment in research and
development programs in future periods for the purpose of enhancing current
products and developing new ones.
SALES AND MARKETING. Sales and marketing expenses include primarily
salaries and related payroll costs for sales and marketing personnel,
commissions, advertising, promotions and travel. Sales and marketing expenses
were $1,740,000 and $3,642,000 during 1999 and 1998, respectively, or 13.4% and
29.3% of net sales, respectively. In 1999, sales and marketing expenses included
noncash charges of $88,000 for compensation recognized on stock options granted
at exercise prices below fair market value for employees and consultants engaged
in sales and marketing. No such charges were incurred in 1998. The decrease in
sales and marketing expenses in 1999 as compared to 1998 (52%) was due
principally to decreased headcount and related payroll costs and reduced
expenses for advertising, promotion and travel. We expect to increase our sales
and marketing expenses as we expand our sales and marketing efforts in future
periods.
GENERAL AND ADMINISTRATIVE. General and administrative expenses consist
mainly of salaries and benefits for administrative officers and support
personnel, travel expenses, legal, accounting and consulting fees. General and
administrative expenses were $7,660,000 and $8,933,000 during 1999 and 1998,
respectively, representing 58.8% and 71.9% of net sales, respectively. In 1999,
general and administrative expenses included noncash charges of $219,000 for
compensation recognized on stock options granted at exercise prices below fair
market value to employees and consultants engaged in providing general and
administrative services. No such charges were incurred in 1998. The decrease in
general and administrative expenses in 1999 as compared to 1998 (14%) was
primarily due to the decrease in general legal, audit and consulting fees offset
by slight increase in reserves in connection with the settlement of certain
class action litigation and with an SEC investigation, and costs incurred in the
restatement of our financial statements for 1997 (see Item 3 "Legal
Proceedings").
INTEREST INCOME (EXPENSE) AND OTHER. The Company incurred net interest
expense during 1999 of $8,276,000 compared to $118,000 in 1998. The increase in
net interest expense in 1999 was due to amortization of deemed discount of
approximately $7.4 million which results from the difference between the
conversion price ($2.85) of the $18.1 million of convertible debentures which we
agreed to issue on August 30, 1999 and the then market price of our Common Stock
($4.00). This deemed discount was amortized through December 31, 1999 (the date
on which the debentures became convertible).
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997.
NET SALES. Net sales for 1998 were $12,418,000, compared to net sales of
$4,120,000 for 1997. The growth in net sales was primarily due to increased unit
shipments of products offset in part by price declines on certain products in
connection with volume purchases. In 1998, cable systems operators accounted for
approximately 57% of net sales, compared to approximately 59% in 1997; broadband
wireless systems operators accounted for approximately 43% of net sales in 1998,
compared to 41% in 1997. There were no international sales in 1998.
International sales accounted for 13.5% of net sales in 1997. We had two
customers that individually accounted for 25% and 13% of net sales during 1998,
compared to two customers that accounted for 13% and 12% during 1997.
GROSS PROFIT. Gross margin was negative 13.1% and negative 116.0%, in 1998
and 1997, respectively. Gross margin in 1997 reflected an increase in the
inventory provision included in cost of sales by $2.6 million as compared to
1996, largely related to excess inventory levels and to shipments made during
1997 in transactions that were not recognized as sales (due to restatement of
our financial statements). Such a large inventory provision relative to sales
was not made in 1998. Excluding this
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nonrecurring inventory charge, gross margin for 1997 would have been a negative
40%. The remaining increase in gross margin from 1997 was primarily due to
efficiencies resulting from increased unit shipments and to decreased cost per
unit.
RESEARCH AND DEVELOPMENT. Research and development expenses include ongoing
headend, software and cable modem development expenses, as well as design
expenditures associated with programs to reduce the cost and improve the
manufacturability of our products. Research and development expenses were
$7,771,000 and $7,831,000 during 1998 and 1997, respectively, representing 62.6%
and 190.1% of net sales, respectively.
SALES AND MARKETING. Sales and marketing expenses consist primarily of
salaries and related payroll costs of sales and marketing personnel,
commissions, advertising, promotions and travel. Sales and marketing expenses
were $3,642,000 and $4,678,000 during 1998 and 1997, respectively, representing
29.3% and 113.5% of net sales, respectively. The decrease in sales and marketing
expenses in absolute dollars was principally due to (i) decreased headcount and
related payroll costs, (ii) unusually high sales commission costs during 1997 as
a result of commissions being paid on shipments that were not recognized as
sales (due to the restatement of our financial statements) until 1998 and
(iii) marketing and promotion costs incurred in 1997 in connection with our
Series 2000 product line.
GENERAL AND ADMINISTRATIVE. General and administrative expenses consist
primarily of executive personnel salaries, provision for doubtful accounts,
travel expenses, legal fees and costs of outside services. General and
administrative expenses were $8,933,000 and $2,964,000 during 1998 and 1997,
respectively, representing 71.9% and 72.0% of net sales, respectively. The
increase in absolute dollars in 1998 was due to increased legal costs and
reserves in connection with the various legal proceedings in which we were
engaged during 1998, including the SEC investigation and the accrual of
$1,547,000 related to the class action settlement (see Item 3 "Legal
Proceedings"), and in connection with our patent program, increased headcount
and related payroll costs and increased expenses for professional and other fees
required of a publicly traded company and to support the aforementioned
restatement of our financial statements.
OTHER CHARGES. Due to the under utilization of our San Jose headquarters,
operating expenses include a fourth quarter charge of $1,250,000 reflecting the
impairment of leasehold improvements and office furniture and fixtures.
Operating expenses also include a nonrecurring charge of $1,283,000 relating to
the write off of the rights to certain technology acquired in November 1997.
INTEREST INCOME (EXPENSE) AND OTHER. The Company incurred net interest
expense during 1998 and 1997 of $118,000 and $1,350,000, respectively. Net
interest expense incurred in 1998 decreased in comparison to 1997 due (i) to
interest income on increased average cash and cash equivalents resulting
primarily from our initial public offering of Common Stock in November 1997, and
(ii) to non-cash interest expense of $870,000 incurred in the fourth quarter of
1997 related to issuance of warrants with respect to certain loans obtained in
September 1997.
LIQUIDITY AND CAPITAL RESOURCES
We have historically financed our operations primarily through a combination
of debt, equity and equipment lease financing. In 1997, we raised $42.5 million
in net proceeds through our initial public offering (in November 1997) and other
debt and equity financing. By September 1999, our cash and cash equivalents had
been virtually exhausted. In September 1999, we raised $18.1 million through the
issuance and sale of convertible debentures to Sprint (in the amount of
$11.0 million) and certain venture capital sources (in the amount of
$7.1 million). The debentures are due in September 2009 and bear interest at 4%
per annum, compounded monthly (accrued interest is automatically added to
principal quarterly). The debentures will be convertible into Common Stock at
the option of the respective holders at any time after December 31, 1999 and
will be convertible into Common Stock at
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<PAGE>
our option at any time after 2000. The conversion price is $2.85 per share,
subjected to anti-dilution adjustment (ratchet anti-dilution adjustment for the
first six months, and weighted average anti-dilution thereafter). At
December 31, 1999, the debentures, including accrued interest added to the
principal, would be convertible into 3,907,775 shares of Common Stock at the
current conversion price of $2.85.
Additionally, Sprint acquired warrants to purchase up to $8.4 million of
additional convertible debentures, which debentures were convertible at
December 31, 1999 into 2,946,622 shares of Common Stock, on the same terms as
the convertible debentures referred to above. The warrants were issued in
consideration for Sprint's obligation to purchase at least $10 million of our
products on terms that are to be negotiated, and the exercisability of the
warrants is tied to Sprint's submission of purchase orders for our products (10%
of the warrants become exercisable for each $1 million of purchase orders
submitted).
Assuming that as of December 31, 1999 Sprint converted all its convertible
debentures and exercised all its warrants, it would own 6,854,397 shares of our
Common Stock, representing approximately 37.4% of the 18,335,847 shares of our
Common Stock that would then be outstanding (assuming no other security holders
exercised their options, warrants or conversion privileges). On a fullydiluted
basis, assuming that as of December 31, 1999 all other security holders
exercised their options, warrants and conversion privileges as well as Sprint,
Sprint would own approximately 22.6% of the 30,323,156 fully diluted shares of
our Common Stock that would then be outstanding. Under the terms of Sprint's
investment, Sprint appointed two of our five directors and has substantial
corporate governance rights (including veto rights over most material actions we
might take, see Note 9 of the notes to our financial statements below), has a
right of first refusal if a third party seeks to acquire us (which right of
first refusal Sprint can assign to a third party) and has substantial additional
rights and privileges (as described in Item 2 of our Quarterly Report on
Form 10-Q for the quarter ended September 30, 1999).
In addition to the $18.1 million of convertible debentures referred to
above, we have outstanding a senior secured convertible debenture in the face
amount of $5.5 million due in April 2002 and bearing interest at 12% per annum,
payable quarterly. The conversion price is subject to weighted average
antidilution provisions whereby, if we issue shares in the future for
consideration below the existing conversion price, then (with certain
exceptions) the conversion price will automatically be decreased, allowing the
holder of the debenture to receive additional shares of Common Stock upon
conversion.
During 1999, we issued certain securities which triggered antidilution
adjustments to the conversion price of the $5.5 million debenture. These
issuances included:
(i) Warrants issued to customers to purchase 210,000 shares of common stock at
$0.50 per share,
(ii) Grants of options under our stock option plans to purchase up to 1,321,907
shares of common stock at $0.50 per share (which was less than the fair
market value of the stock on the date of grant),
(iii) Issuance of $18.1 million in convertible debentures convertible into
common stock at a conversion price of $2.85 per share (subject to
adjustment), and
(iv) Commitment to issue 3,057,459 shares of common stock in settlement of the
Class Action litigation.
As a result of these issuances, the conversion price of the $5.5 million
debenture decreased to $6.64 (and the total number of shares issuable upon
conversion increased to 828,454).
Net cash used in operating activities were $8,017,000, $19,302,000, and
$21,677 during 1999, 1998 and 1997 respectively. The net cash used in operating
activities in 1999 was primarily the result of our net loss of $22,192,000,
partially offset by noncash charges attributable to the amortization of the
deemed discount on the debentures referred to above amounting to $7,394,000,
depreciation and
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<PAGE>
amortization charges of $1,323,000, noncash compensation charges of $1,031,000
recognized on the grant of stock and stock options to employees and consultants
at exercise prices which were lower than fair market on the date of grant, and a
reduction in current operating assets of $3,158,000. Net cash used in operating
activities in 1998 was primarily due to our net loss of $24,625,000, partially
offset by noncash charges of $6,336,000 and a decrease in net current assets
related to operating activities of $1,013,000. Net cash used in operation in
1997 was primarily the result of our net loss of $21,602,000.
Net cash used in investing activities was $21,000, $3,014,000, and
$1,559,000 in 1999, 1998, and 1997, respectively. Aggregate capital expenditures
for property and equipment (primarily computers, leasehold improvements,
furniture, fixtures and engineering test equipment) were $21,000, $3,907,000 and
$629,000 in 1999, 1998 and 1997, respectively. The significant increase in
capital expenditures in 1998 as compared to 1997 was primarily due to
expenditures for leasehold improvements offset by proceeds from short term
investments of cash reserves. In the past, we have funded a substantial portion
of our property and equipment expenditures from direct vendor leasing programs
and third party commercial lease arrangements. At December 31, 1999, we did not
have any material commitments for capital expenditures.
Net cash provided by financing activities of $17,981,000 in 1999 was
primarily due from proceeds from issuance of convertible debentures and related
common stock warrants and from issuance of common stock for $18,446,000, offset
by repayment of capital lease obligations amounting to $465,000. Net cash used
in financing activities was $391,000 in 1998 primarily as a result of payment of
$478,000 on capital lease obligations, partially offset by net proceeds of
$87,000 from the exercise of stock options. Net cash provided by financing
activities in 1997 was $42,508,000 primarily due to our initial public offering
in November 1997 and the proceeds of our issuance of a convertible debenture and
certain preferred stock earlier in the year, partially offset by repayment of
$320,000 in capital lease obligations.
At December 31, 1999, our liquidity consisted of cash and cash equivalents
of $13,394,000 and working capital of $6,027,000. We had no available line of
credit or other source of borrowings or financing. Our principal indebtedness
consisted of the $23.8 million of convertible debentures referred to above, of
which only $5.5 million is subject to call within the next 12 months. We believe
that, with respect to our current operations, our cash balance, plus revenues
from operations and non-operating cash receipts, will be sufficient to meet our
working capital and expenditure needs for the next 12 months. We may seek
additional financing during 2000 through debt, equity or equipment lease
financing, or through a combination of financing vehicles. There is no assurance
that additional financing will be available to us on acceptable terms, or at
all, when we require it.
SEASONALITY AND INFLATION
We do not believe that our business is seasonal or is impacted by inflation.
RISK FACTORS
AN INVESTMENT IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD
CAREFULLY CONSIDER THE RISKS described BELOW AND THE OTHER INFORMATION IN THIS
REPORT ON FORM 10-K BEFORE INVESTING IN OUR COMMON STOCK. THE RISKS DESCRIBED
BELOW ARE NOT THE ONLY ONES WE FACE. ADDITIONAL RISKS THAT WE ARE AWARE OF OR
THAT WE CURRENTLY BELIEVE ARE IMMATERIAL MAY BECOME IMPORTANT FACTORS THAT
AFFECT OUR BUSINESS. IF ANY OF THE FOLLOWING RISKS OCCUR, OR IF OTHERS OCCUR,
OUR BUSINESS, OPERATING RESULTS AND FINANCIAL CONDITION COULD BE SERIOUSLY
HARMED AND THE PRICE OF OUR COMMON STOCK COULD DECLINE.
WE WILL NEED ADDITIONAL CAPITAL.
Although we raised over $35 million in net proceeds from our initial public
offering in November 1997, our capital resources were virtually exhausted by
September 1999. In September, we
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<PAGE>
raised $18.1 million from the issuance and sale of convertible debentures, but
we are losing money at a rate that will require us to raise additional capital
to stay in business. While we believe we have sufficient capital to continue
operations over the next 12 months, we may be required to cut back substantially
on our expenditures if we do not raise additional capital this year. Our ability
to raise additional capital may be limited by a number of factors, including
(i) Sprint's veto rights, right of first refusal and other substantial rights
and privileges, (ii) our dependence upon Sprint's business (which is not
assured) and, to a lesser extent, the business of a few other customers,
(iii) possible continuing uncertainties and concerns as a result of our past
financial reporting difficulties, class action litigation and related issues,
(iv) our need to increase our work force quickly and effectively and to reduce
the cost of our existing products and develop new products, (v) our Common Stock
being delisted from the Nasdaq National Market, (vi) uncertainty regarding our
financial condition and results of operations, (vii) our history of heavy losses
and (viii) the other risk factors referred to below. We can give no assurance
that we will be able to raise the additional capital we will need in the future
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.
WE ARE LARGELY DEPENDENT ON SPRINT.
In September 1999, Sprint invested $11 million in purchasing convertible
debentures from us and acquired warrants to purchase additional convertible
debentures. The warrants are in consideration for a commitment by Sprint to
purchase $10 million of our products by the end of 2000, but the terms of those
purchases are subject to negotiation. We have not yet agreed upon terms after
six months of negotiations. Sprint has acquired our principal wireless
customers, and we expect that our future business will come primarily from
wireless customers. Accordingly, our future business will probably be
substantially dependent upon orders from Sprint or from companies selling to
Sprint. Sprint is considering using our products in connection with the first
phase of its roll-out of wireless Internet access services, but it has made no
commitment to do so and there can be no assurance that it will do so. We have
only a small number of other customers. In 1999, RCN Corporation (a cable system
operator) accounted for 31% of our net sales, and wireless operators now owned
by Sprint accounted for 28%. In 1998, RCN and Knology Holdings, Inc. (another
cable customer) accounted for 25% and 13% of our net sales, respectively. RCN
has announced that it will no longer purchase our product for installations in
new markets, and we expect our future sales to other cable customers to be
sharply reduced as well. Since our customer base is highly concentrated, the
loss of any customer could significantly hurt our business.
In connection with Sprint's investment in us, Sprint obtained substantial
corporate governance rights. Two of our five directors are Sprint designees, and
if Sprint exercised all its warrants and conversion privileges (and if no one
else did so), Sprint would own as of December 31, 1999 approximately 37.4% of
our common stock on a beneficial ownership basis and 22.6% of our Common Stockon
a fully diluted basis (as discussed in Item 1 above). Under the terms of our
agreements with Sprint, we cannot issue any securities or, in most cases, take
material corporate action without Sprint's approval. Sprint has other rights and
privileges, including pre-emptive rights and a right of first refusal in the
case of any proposed change of control transaction. As a result, Sprint will
have a great deal of influence on us in the future. We have no assurance that
Sprint will exercise this influence in our best interests, as Sprint's interests
are in many respects different than ours (e.g., in deciding whether to purchase
our products, in negotiating the price and other terms of any of those purchases
and in deciding whether or not to support any future investment in us or any
future strategic partnering or sale opportunity).
WE HAVE NOT BEEN PROFITABLE TO DATE, AND WE MAY NEVER BE PROFITABLE. WE
EXPECT CONTINUING LOSSES FOR THE FORESEEABLE FUTURE.
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<PAGE>
We have not been profitable to date, and we cannot assure you that we will
ever achieve or sustain profitability. We were organized in 1990 and have had
operating losses each year since then. Our accumulated deficit was $85,761,000
as of December 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 prior
periods and the price pressures on sales of our products continues. We expect to
incur losses for the foreseeable future.
WE ARE LARGELY DEPENDENT ON THE WIRELESS MARKET, AN EMERGING MARKET SUBJECT
TO UNCERTAINTIES.
While in the past over half our sales have been to cable customers, we have
been essentially shut out of the market for new installations by cable customers
(primarily because our products do not meet the cable DOCSIS standard), and we
are now largely dependent on sales to broadband wireless system operators. 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, but this could change in the future as a result of
modifications in the DOCSIS TDMA protocol, improvements in technology or other
developments. The emergence of industry standards or specifications in the
wireless industry in the future could hurt our ability to sell our products in
the wireless market.
The market for broadband Internet access products has only recently begun to
develop. In the past, the broadband wireless industry has been adversely
affected by chronic undercapitalization. The weak financial condition of many
existing and potential customers has made them reluctant to undertake the
substantial capital commitments necessary to introduce and market Internet
access products and services. A number of wireless customers have been unable to
pay for the products we shipped to them. Recent investments by Sprint and MCI in
wireless operators is expected to have a significant effect upon the industry.
One effect has been to attract major competitors. Cisco has announced that it is
developing high speed Internet access products for wireless applications using a
new technology that Cisco claims will replace existing technologies, including
ours. We face other major competition in the wireless market as well. Our
principal reliance is on Sprint's future business, but Sprint has not yet
purchased our products for new installations or chosen them for the first phase
of its wireless service roll out.
The wireless industry itself competes with other technologies for providing
high speed Internet access, including cable and DSL. Cable companies providing
Internet access and telephone companies providing Internet access through DSL
are expanding into areas that were primarily considered commercially reachable
only by wireless service. 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. Physical interruptions such as buildings,
trees or uneven terrain can interfere with reception, thus limiting broadband
wireless system operators' customer bases. In addition, wireless customers face
a number of licensing and regulatory restrictions.
Conditions in the wireless 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. There can be no assurance that the wireless industry market will
grow or that our products will be accepted in the emerging market.
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<PAGE>
WE FACE SIGNIFICANT COMPETITION, INCLUDING COMPETITION FROM LARGE COMPANIES.
Our market is intensely competitive, and we expect even more competition in
the future. 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. One of our principal competitors in the wireless market in Cisco, which
has recently announced that it has a competitive wireless technology that will
provide superior cost/benefit performance and will operate successfully in
environments in which it is difficult to obtain a clear line of sight as well as
environments with multipath interference (around buildings, flat roofs and
water, for example). Although we believe Cisco has not yet installed a
commercially operating system using this technology, we cannot assure you that
it will not do so or that Cisco's system will not provide benefits superior to
ours.
Other principal competitors include ADC, which is currently offering the
Phasecom (Vyyo) product and has creditability from its MMDS, WCS and UHF
transmitter division (formerly known as ITS Corp.); COM21, which is attempting
to adapt its proprietary cable system for wireless; and Newbridge, which
acquired much of Stanford Telecom, a manufacturer of QPSK products. Other
competitors may be attracted by the recent capital infusion in the industry by
Sprint and MCI. Some of our partners are major system integrators who could
choose to develop their own designs in-house. Nortel and Lucent have shown an
interest in entering the industry.
Telephone companies are learning to deploy forms of DSL to provide high
speed Internet access over existing telephone wires. They are also working with
computer vendors to have DSL cards installed when the computers are
manufactured, thereby reducing the telephone companies' distribution costs. DSL
and cable Internet access companies are continuing to expand the reach of their
services, thereby providing direct competition for wireless even in areas that
were previously considered too remote for economical access via DSL or cable.
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 cable operators or 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.
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.
WE FACE LITIGATION RISKS.
Although the class action lawsuits against us have been settled and we have
tentatively settled potential litigation with the SEC, we continue to face
litigation with Pacific Monolithics (see Item 3
28
<PAGE>
"Legal Proceedings"). It is difficult for us to evaluate what the outcome of the
Pacific Monolithics litigation will be. It is possible that we may be exposed to
further litigation in the future. 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. 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.
REDUCTION IN OUR EXPENDITURES AND IN THE NUMBER OF OUR EMPLOYEES HAVE HURT
OUR BUSINESS. WE PLAN TO INCREASE EXPENDITURES IN THE FUTURE, BUT WE MIGHT
NOT BE ABLE TO DO SO EFFECTIVELY.
Commencing in the latter part of 1998 and continuing through the first three
quarters 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.
While we believe these reductions were necessary to conserve our 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 have hurt us
competitively and may continue to harm our business in the future. In
September 1999, we raised $18.1 million and we are now attempting to hire
additional personnel on an expedited basis in order to achieve our product
development goals. We operate in an extremely competitive environment for
technical and other qualified personnel, and there can be no assurance that we
will be able to achieve our hiring and product development goals.
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. 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
been negative until the fourth quarter of 1999 and which must substantially
improve in order for us to operate profitably.
29
<PAGE>
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 routers. In
the past the sales mix has been weighted toward our lower-margin routers, and we
anticipate that this will continue.
WE RELY ON A SINGLE MANUFACTURER FOR OUR END-USER PRODUCTS AND ON
SINGLE-SOURCE COMPONENTS.
Our Series 2000 client routers are manufactured only by Sharp, and we plan
to have Sharp manufacture our new Wireless Broadband Router as well. 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 products, we will need to further reduce our prices,
and the underlying costs. As long as Sharp is the only manufacturing source of
our routers, our ability to reduce the manufacturing costs may be limited.
We have subcontractors for the standard components and subassemblies for our
headend products. Standard components include the Sun Microsystems Sparc 5
workstation and its Sun Operating System (OS); and Intel's Ethernet cards and
Pentium-based PCI processor cards. Our CyberManager 2000 Router is built on the
Sparc 5/Sun OS platform by installing our proprietary network subscriber and
network management software, HybridWare. Our CyberMaster Downstream Router
("CMD") and CyberMaster Upstream Router ("CMU") are built on Intel's
Pentium-based PCI/ISA-based computer cards installed in standard rack-mounted
backplans from Industrial Computer Source that are configured to our
specifications. Our proprietary software, Hybrid OS, is overlaid on a standard
Berkeley Systems operating system for the CMD and CMU.
We are dependent upon these and other key suppliers for a number of the
components for our 64-QAM products. There is only one vendor for the 64-QAM
demodulator semiconductors used in each of our new modem and WBR designs, and in
past periods these semiconductors have been in short supply. The CCM and N type
routers use BroadCom chip sets. Hitachi is the sole supplier of the processors
used in certain of our routers. The former Telecom Component Products Group of
Standard Telecom (now part of Intel) is currently the sole supplier for certain
components used in our products. There can be no assurance that these and other
single-source components will continue to be available to us, or that deliveries
to us will not be interrupted or delayed (due to shortages or other factors).
Having single-source components also makes it more difficult for us to
reduce our cost for these components and makes us vulnerable to price increases
by the component manufacturer. Any significant interruption or delay in the
supply of components for our products or any increase in our costs for
components, or our inability to reduce component costs, could hurt our business.
OUR LONG SALES CYCLE MAKES IT DIFFICULT FOR US TO FORECAST REVENUES,
REQUIRES US TO INCUR HIGH SALES COSTS AND AGGRAVATES FLUCTUATIONS IN
QUARTERLY OPERATING RESULTS.
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 our
customers' internal procedures to approve the large capital expenditures that
are typically involved in purchasing our products. This makes it difficult for
us to predict revenue. In addition, since we incur sales costs before we make a
sale or recognize related revenues, the length and uncertainty of our sales
cycle increases the volatility of our operating results because we may have high
costs without offsetting revenues.
30
<PAGE>
These factors, together with the small number of our customers and 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 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. We do not know whether we will bring litigation in the future
in an effort to assert our patent rights, or whether other companies will bring
litigation challenging our patents. Any such litigation could be time consuming
and costly for us and could result in our patents being held invalid or
unenforceable. Furthermore, even if the patents are upheld or are not
challenged, third parties might be able to develop other technologies or
products without infringing any such patents.
We have entered into confidentiality and invention assignment agreements
with our employees, and we enter into non-disclosure agreements with certain of
our suppliers, distributors and customers, in order to limit access to and
disclosure of our proprietary information. There can be no assurance that these
contractual arrangements or the other steps we take to protect our intellectual
property will prove sufficient to prevent misappropriation of our technology or
deter independent third-party development of similar technologies. The laws of
certain foreign countries may not protect our products or intellectual property
rights to the same extent as do the laws of the United States.
We have in the past, received, and may in the future receive, notices from
third parties claiming that our products, software or asserted proprietary
rights infringe the proprietary rights of third parties. We expect that
developers of wireless and cable modems will be increasingly subject to
infringement claims as the number of products and competitors in our market
grows. While we are not currently subject to any such claim, any future claim,
with or without merit, could be time consuming, result in costly litigation,
cause product shipment delays or require us to enter into royalty or licensing
agreements. Such royalty or licensing agreements might not be available on terms
acceptable to us or at all.
In the future, we may also file lawsuits to enforce our intellectual
property rights, to protect our trade secrets or to determine the validity and
scope of the proprietary rights of others. Such litigation,
31
<PAGE>
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. 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.
Changes in previous decisions (filing window for 2-way licenses) by FCC to
open up MMDS spectrum brand full flexible use for upstream and downstream will
adversely affect our future growth. There can be no assurance that the FCC will
or will not change its decisions on opening the MMDS spectrum for full
utilization which could limit the future growth of the wireless industry.
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 had 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.
IMPACT OF YEAR 2000
Even though we have not experienced any immediate adverse impact from the
transition to the year 2000, we cannot provide any assurance that our suppliers
and customers have not been affected in a manner that is not yet apparent. In
addition, some computer programs which may function properly at the beginning of
the year 2000 may not have been programmed to process the year 2000 as a leap
year, and any negative effects of this failure remain unknown. As a result, we
will continue to monitor our year 2000 compliance and the year 2000 compliance
of our suppliers and customers.
32
<PAGE>
The year 2000 poses issues for business and consumer computing, particularly
the functionality of software for two-digit storage of dates and special
meanings for dates such as 9/9/99. The problem exists for many kinds of
software, including software for mainframes, personal computers and embedded
systems.
In assessing the effect of the year 2000 problem, we determined that there
existed three general areas that needed to be evaluated:
- Software applications in products sold to customers;
- Internal infrastructure; and
- Supplier/third party relationships.
A discussion of the various activities related to assessment and actions
resulting from those evaluations is below.
SOFTWARE APPLICATIONS IN PRODUCTS SOLD TO CUSTOMERS
We did not distribute any software applications or any hardware that were
not declared to be year 2000 compliant. If, however, the computer systems that
view or utilize our applications are not year 2000 compliant, the application
may not function properly. Given the variability of definitions of compliance
with year 2000 issues and the many different combinations of software, firmware
and hardware that may use our applications, we cannot estimate at this time what
year 2000 deficiencies may exist or what difficulties they may cause, including
any product liability costs for our customers and adverse effects on our
business.
INTERNAL INFRASTRUCTURE
We have required that all purchased technology be year 2000 compliant.The
costs related to these efforts were not material to our business.
SUPPLIERS/THIRD PARTY RELATIONSHIPS
We rely on outside vendors for water, electrical and telecommunications
services as well as climate control and other infrastructure services. We did
not independently evaluate the year 2000 compliance of the systems utilized to
supply these services. However, we have received assurance of compliance from
the providers of these services. Any failure of these third parties to resolve
year 2000 problems with their systems could have a material adverse effect on
our business.
CONTINGENCY PLANS
Based on these actions, we have not developed a formal plan to be
implemented as part of our efforts to identify and correct year 2000 problems
affecting our internal systems. However, if we believe it is necessary, we may
take the following actions:
- Short to medium term use of backup equipment and software; and
- Increased work hours for our personnel.
If we are required to implement any of these contingency plans, the plans
could have a material adverse effect on our business. Based on the actions taken
to date, and the lack of any problems to date, we are reasonably certain that we
have identified and resolved all year 2000 problems that could hurt our
business.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
33
<PAGE>
ITEM 8. FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Independent Auditor's Report................................ 35
Balance Sheets as of December 31, 1999 and 1998............. 36
Statements of Operations for the Years Ended December 31,
1999, 1998 and 1997....................................... 37
Statement of Stockholders' Equity (Deficit) for the Years
Ended December 31, 1999,
1998 and 1997............................................. 38
Statements of Cash Flows for the Years Ended December 31,
1999, 1998 and 1997....................................... 39
Notes to Financial Statements............................... 40
</TABLE>
34
<PAGE>
INDEPENDENT AUDITOR'S REPORT
The Stockholders and Board of Directors
Hybrid Networks, Inc.
San Jose, California
We have audited the accompanying balance sheets of Hybrid Networks, Inc. as
of December 31, 1999 and 1998, and the related statements of operations,
stockholders' equity (deficit), and cash flows for each of the years in the
three year period ended December 31, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Hybrid Networks, Inc. as of
December 31, 1999 and 1998, and the results of its operations and its cash flows
for each of the years in the three year period ended December 31, 1999, in
conformity with generally accepted accounting principles.
/s/ HEIN + ASSOCIATES LLP
HEIN + ASSOCIATES LLP
Certified Public Accountants
Orange, California
February 10, 2000
35
<PAGE>
HYBRID NETWORKS, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1999 1998
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $13,394 $ 3,451
Restricted cash........................................... -- 515
Accounts receivable, net of allowance for doubtful
accounts of $200 in 1999 and 1998....................... 1,138 1,433
Inventories............................................... 3,755 5,224
Prepaid expenses and other current assets................. 234 864
------- -------
Total current assets.................................... 18,521 11,487
Property and equipment, net................................. 2,244 3,438
Intangibles and other assets................................ 387 495
------- -------
Total assets............................................ $21,152 $15,420
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Convertible debenture..................................... $ 5,500 $ 5,500
Current portion of capital lease obligations.............. 336 465
Accounts payable.......................................... 2,035 2,063
Accrued liabilities and other............................. 4,623 4,271
------- -------
Total current liabilities............................... 12,494 12,299
Convertible debentures--long term........................... 18,327 --
Capital lease obligations, less current portion............. 29 365
Other long-term liabilities................................. 122 54
------- -------
Total liabilities....................................... 30,972 12,718
------- -------
Commitments and contingencies (Notes 2, 5, 7, 8 and 9)
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: 11,481 shares in 1999 and 10,473
shares in 1998........................................ 11 10
Additional paid-in capital................................ 75,823 66,261
Unrealized gain on available-for-sale securities.......... 107 --
Accumulated deficit....................................... (85,761) (63,569)
------- -------
Total stockholders' equity (deficit).................... (9,820) 2,702
------- -------
Total liabilities and stockholders' equity (deficit).... $21,152 $15,420
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
36
<PAGE>
HYBRID NETWORKS, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Net sales................................................... $ 13,016 $ 12,418 $ 4,120
Cost of sales............................................... 13,341 14,046 8,899
-------- -------- --------
Gross loss.................................................. (325) (1,628) (4,779)
-------- -------- --------
Operating expenses:
Research and development.................................. 4,191 7,771 7,831
Sales and marketing....................................... 1,740 3,642 4,678
General and administrative................................ 7,660 8,933 2,964
Asset impairment charge................................... -- 1,250 --
Write off of technology license........................... -- 1,283 --
-------- -------- --------
Total operating expenses................................ 13,591 22,879 15,473
-------- -------- --------
Loss from operations.................................. (13,916) (24,507) (20,252)
Interest income and other................................... 171 779 316
Interest expense............................................ (8,447) (897) (1,666)
-------- -------- --------
Net loss.............................................. $(22,192) $(24,625) $(21,602)
======== ======== ========
Basic and diluted loss per share............................ $ (2.08) $ (2.37) $ (6.10)
======== ======== ========
Shares used in basic and diluted per share calculation...... 10,678 10,410 3,541
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
37
<PAGE>
HYBRID NETWORKS, INC.
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS)
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK ADDITIONAL
------------------- ------------------- PAID-IN COMPREHENSIVE
SHARES AMOUNT SHARES AMOUNT CAPITAL INCOME (LOSS)
-------- -------- -------- -------- ---------- --------------
<S> <C> <C> <C> <C> <C> <C>
Balances, January 1, 1997...................... 12,069 $ 12 2,520 $ 2 $25,037 $ --
Exercise of common stock options............. -- -- 150 -- 94 --
Repurchase of common stock................... -- -- (12) -- (7) --
Grant of stock bonus awards.................. -- -- 13 -- 26 --
Issuance of common stock for services
rendered................................... -- -- 9 -- 181 --
Issuance of Series H preferred stock......... 494 1 1,999 --
Issuance of warrants in connection with
convertible subordinated notes............. -- -- -- -- 870 --
Issuance of warrants in connection with
technology support and development
agreement.................................. -- -- -- -- 2,200 --
Issuance of common stock, net of issuance
costs of $1,185............................ -- -- 2,836 3 35,737 --
Conversion of preferred stock to common
stock...................................... (12,563) (13) 4,653 5 8 --
Issuance of common stock upon net exercise of
warrants................................... -- -- 176 -- -- --
Unrealized gain on investments............... -- -- -- -- -- 92
Net loss..................................... -- -- -- -- -- --
Comprehensive loss........................... -- -- -- -- -- --
------- ---- ------ ---- ------- ----
Balances, December 31, 1997.................... -- -- 10,345 10 66,145 92
Exercise of common stock options............. -- -- 127 -- 87 --
Grant of stock bonus awards.................. -- -- 1 5 --
Charge due to acceleration of options........ -- -- -- -- 24 --
Reclassification for gains included in net
loss....................................... -- -- -- -- -- (92)
Net loss..................................... -- -- -- -- -- --
Comprehensive loss........................... -- -- -- -- -- --
------- ---- ------ ---- ------- ----
Balances, December 31, 1998.................... -- -- 10,473 10 66,261 --
Exercise of common stock options............. -- -- 251 -- 345 --
Stock issued for services.................... -- -- 7 -- 56 --
Sales discount recognized on issuance of
warrants to customers...................... -- -- -- -- 407 --
Compensation recognized on issuance of stock
options.................................... -- -- -- -- 975 --
Class action settlement stock issued......... -- -- 750 1 385 --
Discount related to beneficial conversion of
debentures................................. -- -- -- -- 7,394 --
Unrealized gain on investments............... -- -- -- -- 107
Net loss..................................... -- -- -- -- -- --
Comprehensive loss........................... -- -- -- -- -- --
------- ---- ------ ---- ------- ----
Balances, December 31, 1999.................... -- $ -- 11,481 $ 11 $75,823 $107
======= ==== ====== ==== ======= ====
<CAPTION>
ACCUMULATED COMPREHENSIVE
DEFICIT TOTAL LOSS
------------ -------- --------------
<S> <C> <C> <C>
Balances, January 1, 1997...................... $(17,342) $ 7,709
Exercise of common stock options............. -- 94
Repurchase of common stock................... -- (7)
Grant of stock bonus awards.................. -- 26
Issuance of common stock for services
rendered................................... -- 181
Issuance of Series H preferred stock......... -- 2,000
Issuance of warrants in connection with
convertible subordinated notes............. -- 870
Issuance of warrants in connection with
technology support and development
agreement.................................. -- 2,200
Issuance of common stock, net of issuance
costs of $1,185............................ -- 35,740
Conversion of preferred stock to common
stock...................................... -- --
Issuance of common stock upon net exercise of
warrants................................... -- --
Unrealized gain on investments............... -- 92 $ 92
Net loss..................................... (21,602) (21,602) (21,602)
--------
Comprehensive loss........................... -- -- $(21,510)
-------- -------- ========
Balances, December 31, 1997.................... (38,944) 27,303
Exercise of common stock options............. -- 87
Grant of stock bonus awards.................. -- 5
Charge due to acceleration of options........ -- 24
Reclassification for gains included in net
loss....................................... -- (92) $ (92)
Net loss..................................... (24,625) (24,625) (24,625)
--------
Comprehensive loss........................... -- -- $(24,717)
-------- -------- ========
Balances, December 31, 1998.................... (63,569) 2,702
Exercise of common stock options............. -- 345
Stock issued for services.................... -- 56
Sales discount recognized on issuance of
warrants to customers...................... -- 407
Compensation recognized on issuance of stock
options.................................... -- 975
Class action settlement stock issued......... -- 386
Discount related to beneficial conversion of
debentures................................. -- 7,394
Unrealized gain on investments............... -- 107 $ 107
Net loss..................................... (22,192) (22,192) (22,192)
--------
Comprehensive loss........................... -- -- $(22,085)
-------- -------- ========
Balances, December 31, 1999.................... $(85,761) $ (9,820)
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
38
<PAGE>
HYBRID NETWORKS, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $(22,192) $(24,625) $(21,602)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization........................... 1,323 1,883 1,130
Amortization of discount related to beneficial
conversion feature..................................... 7,394 -- --
Asset impairment charge................................. -- 1,250 --
Provision for doubtful accounts......................... -- 200 --
Provision for excess and obsolete inventory............. 529 1,691 2,759
Compensation recognized upon issuance of stock and stock
options................................................ 1,031 -- 181
Sales discounts recognized on issuance of warrants...... 407 -- --
Stock bonus............................................. -- 5 26
Charge for accelerated vesting of options............... -- 24 --
Interest added to principal of convertible debentures... 226 -- --
Interest related to issuance of warrant in connection
with convertible subordinated note..................... -- -- 870
Gain on available for sale of securities................ 107 --
Write off technology license............................ -- 1,283 --
Changes in assets and liabilities:
Restricted cash....................................... 515 (515) --
Accounts receivable................................... 295 (505) 220
Inventories........................................... 940 (645) (8,086)
Prepaid expenses and other current assets............. 630 (502) (237)
Accounts payable...................................... (28) (222) 861
Other long-term liabilities........................... 68 -- --
Accrued liabilities and other......................... 738 1,376 2,201
-------- -------- --------
Net cash used in operating activities................. (8,017) (19,302) (21,677)
-------- -------- --------
Cash flows from investing activities:
Purchase of property and equipment........................ (21) (3,907) (629)
Disposal of property and equipment........................ -- 74 --
Change in other assets.................................... -- (74) (37)
Purchase of short-term investments........................ -- (11,772) (893)
Proceeds from disposal of short-term investments.......... -- 12,665 --
-------- -------- --------
Net cash used in investing activities................. (21) (3,014) (1,559)
-------- -------- --------
Cash flows from financing activities:
Repayment of capital lease obligations.................... (465) (478) (320)
Net proceeds from issuance of preferred stock............. -- -- 2,000
Net proceeds from issuance of common stock................ 345 87 35,835
Repurchase of common stock................................ -- -- (7)
Proceeds from issuance of convertible debentures and
related common stock warrants........................... 18,101 -- 6,882
Repayment of convertible subordinated note payable and
related common stock warrants........................... -- -- (6,882)
Net proceeds from issuance of convertible debenture....... -- -- 5,000
-------- -------- --------
Net cash provided by (used in) financing activities... 17,981 (391) 42,508
-------- -------- --------
Increase (Decrease) in cash and cash equivalents............ 9,943 (22,707) 19,272
Cash and cash equivalents, beginning of period.............. 3,451 26,158 6,886
-------- -------- --------
Cash and cash equivalents, end of period.................... $ 13,394 $ 3,451 $ 26,158
======== ======== ========
SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING ACTIVITIES:
Common stock issued to settle class action liability...... $ 386 $ -- $ --
Property and equipment acquired under capital leases...... -- 280 688
Issuance of warrants in connection with technology support
and development agreement............................... -- -- 2,200
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid............................................. 710 802 718
Income taxes paid......................................... 1 1 1
</TABLE>
The accompanying notes are an integral part of these financial statements.
39
<PAGE>
HYBRID NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS
1. FORMATION AND BUSINESS OF THE COMPANY
The Company, which was incorporated in Delaware on June 6, 1990, is a
broadband access equipment company that designs, develops, manufactures and
markets wireless and cable systems that provide high speed access to the
Internet and corporate intranets for both businesses and consumers. The
Company's products remove the bottleneck over the local connection to the end
user which causes slow response time for those accessing bandwidth intensive
information.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The Company was organized in 1990 and has had operating losses since then.
The Company's accumulated deficit was $85,761,000 as of December 31, 1999 and
$63,569,000 as of December 31, 1998. Although the Company has raised large sums
of capital in the past, including over $35 million in net proceeds from its
initial public offering in November 1997 and over $18 million from the issuance
and sale of convertible debentures in September 1999, the Company is losing
money at a rate that will require it to raise additional capital in the future.
Management has taken steps to increase sales, including negotiating an
equipment purchase agreement with Sprint Corporation (as discussed in Note 5).
Additionally, the Company may seek additional financing during 2000 through
debt, equity or equipment lease financing or through a combination of financing
vehicles (including the possible exercise of warrants issued to Sprint as
discussed in Note 5). The Company's ability to continue as a going concern is
dependent on obtaining additional financing to fund its current operations and,
ultimately, generating sufficient revenues to obtain profitable operations.
There is no assurance that the Company will be successful in these efforts.
At December 31, 1999, the Company's liquidity consisted of cash and cash
equivalents of $13,394,000 and working capital of $6,027,000. The Company's
principal indebtedness consisted of $23.8 million in convertible debentures, of
which only $5.5 million was due within the next 12 months. The Company believes
that its cash balance, plus anticipated revenues from operations, and non-
operating cash receipts will be sufficient to meet the Company's working capital
and expenditure needs for the next 12 months.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
The Company's financial statements are based upon a number of significant
estimates, including the estimated useful lives selected for property and
equipment, accrued liabilities related to product warranties and litigation, and
valuation allowances for accounts receivable, inventory and property and
equipment. Due to uncertainties inherent in the estimation process, it is at
least reasonably possible that these estimates will be further revised in the
near term and such revisions could be material.
40
<PAGE>
HYBRID NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values for financial instruments under SFAS No. 107
"Disclosures About Fair Value of Financial Instruments," are determined at
discrete points in time based on relevant market information. These estimates
involve uncertainties and cannot be determined with precision. The fair value of
available-for-sale securities is based on market prices for the securities and
is equivalent to its carrying value. The fair values of capital leases and
convertible debentures are based upon borrowing rates that are available to the
Company for obligations with similar terms, collateral, and maturity. At
December 31, 1999, the estimated fair value of these liabilities approximate
their carrying values.
BUSINESS RISKS AND CREDIT CONCENTRATION
The Company sells its products primarily to broadband wireless system
operators and cable system operators, principally in North America. The Company
performs ongoing credit evaluations of its customers and does not require
collateral. The Company also maintains allowances for potential losses on
collectability of accounts receivable, as needed, and such losses have been
within management's expectations.
The Company operates in the intensely competitive and rapidly changing
communications industry which has been characterized by rapid technological
change, evolving industry standards and federal, state and local regulation
which may impede the Company's penetration of certain markets.
The Company currently operates in one industry segment with one product
line. The Company's future success depends upon its ability to develop,
introduce and market new products, its ability to obtain components from key
suppliers, obtaining sufficient manufacturing capacity, and the success of the
broadband access business. The Company may experience future fluctuations in
operating results and declines in selling prices.
Credit risk represents the accounting loss that would be recognized at the
reporting date if counter parties failed completely to perform as contracted.
Concentrations of credit risk (whether on or off balance sheet) that arise from
financial instruments exist for groups of customers or groups of counter parties
when they have similar economic characteristics that would cause their ability
to meet contractual obligations to be similarly effected by changes in economic
or other conditions. In accordance with SFAS No. 105, "Disclosure of Information
about Financial Instruments with Off-Balance-Sheet Risk and Financial
Instruments with Concentrations of Credit Risk," financial instruments that
subject the Company to credit risk consist of cash balances maintained in excess
of federal depository insurance limits, investments in commercial paper (which
are classified as cash equivalents), and accounts receivable, which have no
collateral or security. See Note 13 for business concentrations and major
customers.
CASH AND CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
Cash equivalents consist of highly liquid investment instruments with a
maturity at the time of purchase of three months or less. Instruments with a
maturity at the time of purchase of greater than three months but less than one
year from the date of purchase are included in short-term investments. The
Company's cash and cash equivalents as of December 31, 1999 included $12,031,000
of corporate commercial paper which was classified as available for sale. No
available for sale securities were classified as cash equivalents at
December 31, 1998.
41
<PAGE>
HYBRID NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out basis) or
market.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation is computed on a
straight-line basis over the estimated useful lives of two to five years.
Leasehold improvements are amortized over the lesser of their estimated useful
lives or the lease term. The cost of normal maintenance and repairs is charged
to operations as incurred. Material expenditures which increase the life of an
asset are capitalized and depreciated over the estimated remaining useful life
of the asset. The cost of fixed assets sold, or otherwise disposed of, and the
related accumulated depreciation or amortization is removed from the accounts,
and any gains or losses are reflected in current operations.
INTANGIBLES AND OTHER ASSETS
At December 31, 1999 and 1998, intangibles and other assets included
deferred financing costs relating to fees incurred in connection with the
issuance of a senior convertible debenture in April 1997. The deferred financing
costs are amortized over the five year life of the debenture (see Note 5). Total
accumulated amortization of deferred financing costs as of December 31, 1999 and
1998 was $285,000 and $178,000, respectively. At December 31, 1997, intangibles
also included the value assigned to the purchase of certain technologies
relating to a technology support and development agreement signed in
November 1997. In connection with entering into the technology support and
development agreement, the Company issued a five-year warrant to purchase
458,295 shares of Common Stock at an exercise price of $10.91 per share. The
amount attributed to the value of the warrants was $2,200,000. The Company
periodically assesses the recoverability of intangible assets by determining
whether the amortization of the asset balance over the remaining life can be
recovered through undiscounted future operating cash flows. The amount of
impairment, if any, is measured based on projected discounted future operating
cash flows and is recognized as a write down of the asset to a net realizable
value. The unamortized value of the technologies of approximately $1,283,000 was
charged to expense in the second quarter of 1998 as it was determined to be of
no further value to the Company.
REVENUE RECOGNITION
The Company normally ships its products based upon a bona fide purchase
order and volume purchase agreement. The Company generally recognizes revenue at
the time a transaction is shipped and collection of the resulting account
receivable is probable. Shipments on customer orders with either acceptance
criteria, installation criteria or rights of return are recognized as revenue
only when the criteria are satisfied according to the contract. Revenue related
to shipments to distributors is normally recognized upon receipt of payment for
such transactions.
For Cybermanager 2000, the hardware and software sales are generally bundled
with upgrade, software maintenance, system support and service and sold for a
period of three years. Revenue attributed to hardware is recognized upon
shipment. Revenue attributed to software is recognized over the three year
maintenance, system support and service period. When a maintenance system
support and service contract is sold separately, the revenue is recognized
ratably over the term of the
42
<PAGE>
HYBRID NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
maintenance system support and service contract, generally on a straight-line
basis. Where maintenance system support and service revenue is not separately
invoiced, it is unbundled from hardware and software license revenue and
deferred for revenue recognition purposes. Other service revenue, primarily
training and consulting, is generally recognized at the time the service is
performed.
The Company accrues for estimated warranty costs when the related sales
revenue is recognized. The Company's third party manufacturer provides a
15 month warranty period on all cable modems manufactured by it. The warranty
period begins on the date the modems are completely assembled. The Company
provides a 12 month warranty on all head end equipment and modems sold. The
software warranty period is 90 days from the date of delivery to customers.
Actual warranty costs incurred have not differed materially from those estimated
and accrued by the Company.
PRODUCT DEVELOPMENT COSTS
Costs related to research, design and development of products are charged to
research and development expenses as incurred. Software development costs are
included in research and development and are expensed as incurred. Statement of
Financial Accounting Standards No. 86 (SFAS 86) requires the capitalization of
certain software development costs from when technological feasibility is
established, which the Company defines as completion of a working model and to
when the software is available for sale to the Company's customers. The
capitalized cost is then amortized on a straight-line basis over the estimated
product life, or on the ratio of current revenues to total projected product
revenues, whichever is greater. To date, the period between achieving
technological feasibility and the general availability of such software has been
short and software development costs qualifying for capitalization have been
insignificant. Accordingly, the Company has not capitalized any software
development costs.
STOCK-BASED COMPENSATION
The Company has elected to follow Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and related
interpretations in accounting for its employee stock options. In accordance with
Statement of Financial Accounting Standards No. 123 (SFAS 123), "Accounting for
Stock-Based Compensation," the Company will disclose the impact of adopting the
fair value accounting of employee stock options. Transactions in equity
instruments with non-employees for goods or services have been accounted for
using the fair value method prescribed by SFAS 123.
INCOME TAXES
The Company accounts for income taxes under the liability method, which
requires recognition of deferred tax assets and liabilities for the expected
future tax consequences of events that have been included in the financial
statements or tax returns. Under this method, deferred tax assets and
liabilities are determined based on the difference between the financial
statements and tax bases of assets and liabilities using enacted tax rates in
effect for the year in which the difference are expected to reverse.
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
43
<PAGE>
HYBRID NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
period. Diluted earnings per share reflects the potential dilution that could
occur if securities or other contracts to issue common stock were exercised or
converted into common stock or resulted in the issuance of common stock that
then shared in the earnings of the entity. All such securities or other
contracts were anti-dilutive for all periods presented and, therefore, excluded
from the computation of earnings per share.
COMPREHENSIVE INCOME (LOSS)
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130 (SFAS 130), "Reporting Comprehensive Income."
SFAS 130 requires that all items recognized under accounting standards as
comprehensive income be reported in an annual financial statement that is
displayed with the same prominence as other annual financial statements.
Comprehensive income (loss) includes all changes in equity (net assets) during a
period from non-owner sources. Examples of items to be included in comprehensive
income,which are excluded from net income (loss), include foreign currency
translation adjustments and unrealized gain/loss on available-for-sale
securities. The Company has presented comprehensive income (loss) for each
period presented within the Statement of Stockholder's Equity.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" (SFAS 133). The new standard requires companies to
record derivatives on the balance sheet as assets or liabilities, measured at
fair value. Under SFAS 133, gains or losses resulting from changes in the values
of derivatives are to be reported in the statement of operations or as a
deferred item, depending on the use of the derivatives and whether they qualify
for hedge accounting. The key criterion for hedge accounting is that the
derivative must be highly effective in achieving offsetting changes in fair
value or cash flows of the hedged items during the term of the hedge. This
statement was amended by SFAS 137, issued in June 1999, such that it is
effective for the Company's financial statements for the year ended
December 31, 2001. The Company currently transacts substantially all of its
revenues and costs in U.S. dollars and to date has not entered into any material
amounts of derivative instruments. Accordingly, management does not currently
expect adoption of this new standard to have a significant impact on the
Company.
RECLASSIFICATION
Certain reclassifications have been made to the 1998 and 1997 financial
statements in order to conform to the 1999 presentation. Such reclassifications
had no effect on the previously reported net loss.
44
<PAGE>
HYBRID NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. INVENTORIES
Inventories are comprised of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1999 1998
-------- --------
<S> <C> <C>
Raw materials............................................... $2,251 $1,371
Work in progress............................................ 190 386
Finished goods.............................................. 1,314 3,467
------ ------
$3,755 $5,224
====== ======
</TABLE>
The allowance for excess and obsolete inventory was $2,842,000 and
$3,135,000 at December 31, 1999 and 1998, respectively. The provision for excess
and obsolete inventory included in cost of sales was $529,000, $1,691,000 and
$2,759,000 for the years ended December 31, 1999, 1998 and 1997, respectively.
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1999 1998
-------- --------
<S> <C> <C>
Machinery and equipment................................... $ 3,059 $ 3,048
Office furniture and fixtures............................. 747 737
Leasehold improvements.................................... 1,914 1,914
------- -------
5,720 5,699
Less accumulated depreciation and amortization............ (3,476) (2,261)
------- -------
$ 2,244 $ 3,438
======= =======
</TABLE>
Furniture and equipment under capital leases included in the above table
total $1,687,000 and $1,691,000, less accumulated amortization of $1,422,000 and
$1,005,000 as of December 31, 1999 and 1998, respectively. Depreciation and
amortization expense related to property and equipment was $1,215,000,
$1,233,000 and $687,000 for the years ended December 31, 1999, 1998, and 1997,
respectively.
Due to the under utilization of the Company's San Jose headquarters, the
1998 financial statements include a fourth quarter charge of $1,250,000
reflecting the impairment of leasehold improvements and office furniture and
fixtures.
5. CONVERTIBLE DEBENTURES
In 1997, the Company issued a senior convertible secured debenture in the
amount of $5,500,000, bearing interest at 12% per annum, payable quarterly, and
maturing on April 30, 2002. An arrangement fee of $500,000 was paid by the
Company. If the Company issues any shares (with certain exceptions for employee
stock options and the like) for consideration less than the current conversion
price, any such issuance would be subject to certain "weighted average"
antidilution provisions.
45
<PAGE>
HYBRID NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. CONVERTIBLE DEBENTURES (CONTINUED)
During 1999, the Company issued certain securities which triggered
antidilution adjustments to the conversion price of the $5.5 million debenture.
These issuances included:
(i) Warrants issued to customers to purchase 210,000 shares of common stock
at $0.50 per share,
(ii) Grants of options under the Company's stock option plans to purchase up
to 1,321,907 shares of common stock at $0.50 per share (which was less
than the fair market value of the stock on the date of grant),
(iii) Issuance of $18.1 million in convertible debentures convertible into
common stock at a conversion price of $2.85 per share (subject to
adjustment), and
(iv) Commitment to issue 3,057,459 shares of common stock in settlement of
the Class Action litigation.
As a result of these issuances, the conversion price of the $5.5 million
debenture decreased to $6.64 (and the total number of shares issuable upon
conversion increased to 828,454).
The debenture is collateralized by substantially all of the Company's
assets. The Company is prohibited from making plant or fixed capital
expenditures in excess of $5,500,000 and $11,000,000 during the 12 months ending
March 31, 2000 and 2001, respectively. Additionally, the Company is prohibited
from, among other things, declaring dividends, retiring any subordinated debt
other than in accordance with the debenture's terms, or distributing its assets
to any stockholder as long as the debenture remains outstanding.
The Company's capital expenditures exceeded the maximum capital expenditures
allowed for the 12 months ending March 31, 1999. Consequently, the debt has been
classified as a current liability in the accompanying financial statements as
the holder has the right to declare a default under the convertible debenture at
any time.
ISSUANCES OF SECURITIES TO SPRINT CORPORATION
In September 1999, the Company issued to Sprint Corporation ("Sprint") a
convertible debenture in the face amount of $11 million due in 2009 and bearing
interest at 4% per annum, compounded monthly (accrued interest is automatically
added to principal quarterly)(the "Sprint Debenture"). The Sprint Debenture is
convertible at any time after December 31, 1999, at Sprint's option, into
3,907,775 shares of the Company's common stock (as of December 31, 1999) at a
conversion price of $2.85 per share (including accrued interest) (subject to
adjustment). At any time after December 31, 2000, the Company may require the
conversion of the Sprint Debenture. The Company also issued to Sprint in
September 1999 a $1,000 debenture due in 2009 which is convertible by Sprint at
any time into a newly created Series J preferred stock of the Company. Under the
purchase agreement for the debentures and under the terms of the Series J
preferred stock, Sprint has the right to elect two directors to the Company's
board of directors and Sprint's approval will be required for many types of
decisions involving corporate governance (including veto rights over most
material actions the Company might take, see Note 9 below). In addition, Sprint
has certain rights of first refusal and preemptive rights in respect of certain
issuances of securities by the Company and other rights, including a right of
first refusal with respect to any change of control agreement (as defined),
which right of first refusal it can assign to third parties.
46
<PAGE>
HYBRID NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. CONVERTIBLE DEBENTURES (CONTINUED)
The Company also issued to Sprint in September 1999 warrants to purchase up
to $8,397,873 in face amount (subject to adjustment) of convertible debentures
having substantially the same terms as the Sprint Debenture (as of December 31,
1999 they would be convertible into 2,946,622 shares of the Company's common
stock, subject to adjustment, at $2.85 per share, subject to adjustment). The
warrants will become vested and therefore exercisable only after Sprint has
submitted purchase orders to the Company for at least $1 million of the
Company's products on terms that are to be negotiated. With each $1 million of
purchase orders, Sprint will be entitled to exercise 10% of the warrants.
In consideration for the debentures and warrants, Sprint paid $11,001,000 to
the Company and agreed to purchase $10 million of the Company's products on
terms that are to be negotiated. Certain terms of the proposed product purchase
agreement were specified in the September 1999 securities purchase agreement,
and the parties have agreed to resolve the open terms through negotiation or,
failing that, through arbitration.
ISSUANCES OF DEBENTURES TO OTHER INVESTORS
Concurrently with the issuance of the foregoing securities to Sprint, the
Company issued to certain other investors for $7.1 million convertible
debentures in the face amount of $7.1 million due in 2009 and bearing interest
at 4% per annum, compounded monthly (accrued interest is automatically added to
principal quarterly). These debentures have substantially the same terms as the
Sprint Debenture. Like the Sprint Debenture, these debentures are exercisable by
the holders at any time after December 31, 1999, at their option, into 2,522,291
shares of the Company's common stock (subject to adjustment and including
accrued interest). At any time after December 31, 2000, the Company may require
the conversion of the debentures. The investors that purchased the debentures
are (i) partnerships associated with a firm of which a director of the Company
is an executive partner; (ii) a partnership managed by a firm of which a former
director (who was a director at the time of the investment) is a general
partner; and (iii) an individual who is a director of the Company.
At December 31, 1999, the balance due on the convertible debentures issued
to Sprint and other investors included the original principal of $18,101,000
plus accrued interest added to the principal of $226,000 (convertible to an
additional 79,189 shares of common stock).
At the time convertible debentures were issued to Sprint and other
investors, the fair value of the Company's common stock was $4.00 per share,
creating a beneficial conversion element valued at $7,394,000, which has been
amortized to interest expense through the period ending December 31, 1999.
47
<PAGE>
HYBRID NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. ACCRUED LIABILITIES AND OTHER
Accrued liabilities and other consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1999 1998
-------- --------
<S> <C> <C>
Accrued payroll and related accruals........................ $ 173 $ 385
Accrued class action settlement and related legal
expenses.................................................. 2,946 1,946
Deferred revenue and customer deposits...................... 797 1,381
Other liabilities........................................... 707 559
------ ------
$4,623 $4,271
====== ======
</TABLE>
7. COMMITMENTS
LEASE OBLIGATIONS
The Company entered into certain non-cancelable operating and capital lease
commitments which expire at various dates through April 2004. Capital leases
bear interest at rates ranging from 7.6% to 10.1%. Future minimum lease payments
under all non-cancelable leases are as follows (in thousands):
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
-------- ---------
<S> <C> <C>
2000....................................................... $ 352 $ 922
2001....................................................... 30 899
2002....................................................... -- 950
2003....................................................... -- 975
2004....................................................... -- 406
----- ------
382 $4,152
======
Less amount representing interest.......................... (17)
-----
365
Less current portion....................................... (336)
-----
$ 29
=====
</TABLE>
Rent expense for 1999, 1998 and 1997 was approximately $1,064,000, $955,000
and $494,000, respectively.
The Company's only long-term operating lease is for approximately 55,000
square feet of office, research and development and manufacturing space in
San Jose, CA. This sublease expires in April 2004.
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with three officers and
retention agreements with two others. The agreements provide for aggregate
annual salaries of $1,065,000 until the employee voluntarily terminates or
renegotiates the agreement. The agreements may be canceled at any time for
cause. If the Company terminates the agreements for reasons other than cause,
aggregate severance due under the agreements would be $1,065,000.
48
<PAGE>
HYBRID NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. CONTINGENCIES
CLASS ACTION LITIGATION
In June 1998, five class action lawsuits were filed in San Mateo County
Superior Court, California against the Company, two of its directors, four
former directors and two former officers. 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 (the "State Actions") 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 the State Actions claimed 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 alleged that the Company and the other
defendants made these misrepresentations in order to inflate the price of the
Company's Common Stock for the initial public offering and during the class
period. The Company and the other defendants denied the charges of wrongdoing.
In July and August 1998, two class action lawsuits were filed in the
U.S. District Court for the Northern District of California (the "Federal
Actions"). Both of the Federal Actions were brought against the same defendants
as the State Actions, except that the second Federal Action also named as a
defendant Price Waterhouse Coopers, 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 Action lawsuit but were
subsequently dismissed.) The class period for the first Federal Action is from
November 12, 1997 to June 1, 1998, and the class period in the second Federal
Action extends to June 17, 1998. The complaints in both Federal Actions claimed
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.
The Company and the other parties (other than PwC) to the State Actions and
the Federal Actions reached an agreement to settle the lawsuits in March 1999,
which agreement was approved by the U.S. District Court for the Northern
District of California in June 1999. In November 1999, the settlement of State
Actions and the Federal Actions became final. The time to appeal from the
court's approval of the settlement has expired. Under the settlement, (i) the
Company's insurers paid $8.8 million on the behalf of the Company and the
officer and director defendants, and (ii) the Company issued 3,057,459 shares of
Common Stock to the plaintiffs and their counsel (750,000 shares were issued in
November 1999, and 2,307,459 shares were issued in February 2000), representing
21.9% of the shares of the Company's Common Stock that were outstanding at the
end of February 2000. As a result of the settlement 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 its insurance, and the
Company does not have insurance coverage for the attorneys fees and expenses
relating to the settlement that it incurs in the future.
49
<PAGE>
HYBRID NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. CONTINGENCIES (CONTINUED)
As of December 31, 1999 the Company had issued 750,000 shares (valued at
$386,000) in partial settlement of the action and had accrued $1,346,000 for the
value of the 2,307,459 shares then remaining to be issued in the settlement.
SEC INVESTIGATION
In October 1998, the Securities and Exchange Commission began a formal
investigation of the Company and certain individuals with respect to the
Company's 1997 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 before the
Securities and Exchange Commission's staff.
In November 1999, the SEC staff attorneys informed the Company in writing
that the staff intended to file a civil injunctive action and seek civil
monetary penalties against the Company for alleged violations of the federal
securities laws. Without admitting or denying any wrongdoing, the Company
recently reached agreement with the staff pursuant to which the staff will
recommend entry of an order enjoining the Company from violating the books and
records and related provisions of the federal securities laws. The recommended
action would not include any monetary penalties or an injunction against the
violation of the antifraud provisions of the securities laws. Resolution of this
matter is subject to negotiation and documentation of a final agreement with the
SEC staff attorneys, the Commission's acceptance of the staff's recommendation
and approval by the federal district court.
At December 31, 1999, the Company has accrued $1,500,000 for legal and other
costs expected to be incurred in the settlement of the investigation of the
Company and its former officers. Management believes, based on current
information, that this investigation will be settled within these limits.
However, if a favorable resolution cannot be obtained, there will be substantial
additional costs which cannot be estimated at this time.
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 were 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 agreement, the Company granted Com21 and Celestica a
nonexclusive license to 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 (no royalties have yet been paid), 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
50
<PAGE>
HYBRID NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. CONTINGENCIES (CONTINUED)
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 minimum royalties from
the license.
PACIFIC MONOLITHICS LAWSUIT
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, two of its directors, four former directors (one
of whom 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 alleged 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 alleged that the
Company wrongfully failed to consummate the acquisition. The complaint claimed
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 sought compensatory and punitive damages according to proof, plus
attorneys' fees and costs. In July 1999, the court granted the Company's motion
to compel arbitration and to stay the lawsuit pending the outcome of the
arbitration.
In October 1999, the plaintiff filed a demand for arbitration against the
Company and the individual defendants with the San Francisco office of the
American Arbitration Association. In the demand, the plaintiff alleges claims
for breach of contract, breach of implied covenant of good faith and fair
dealing, fraud and negligent misrepresentation arising out of the proposed
merger between the two companies. The demand seeks unspecified compensatory and
punitive damages, pre-judgement interest and attorneys' fees and costs. In
November 1999, the Company and the individual defendants answered the demand by
denying the claims and seeking an award of attorneys' fees and costs pursuant to
the agreement for the proposed merger. The arbitration hearing is scheduled to
be held in September 2000.
Management believes, based on current information (which is only
preliminary, since discovery has not commenced in the litigation), that the
outcome of this litigation will not have a material adverse impact on the
Company's financial statements.
9. STOCKHOLDERS' EQUITY
PREFERRED STOCK
The Board of Directors has authorized the issuance of up to 5,000,000 shares
of undesignated preferred stock and the Board has the authority to issue the
undesignated preferred stock in one or more series and to fix the rights,
preferences, privileges and restrictions thereof. In September 1999,
51
<PAGE>
HYBRID NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. STOCKHOLDERS' EQUITY (CONTINUED)
the Board authorized a new Series J preferred stock with special voting rights;
including the right to elect two members of the Board and veto rights over the
following:
- adopting an Annual Business Plan (as defined) or taking any actions that
materially deviate from such plan;
- making any capital expenditures in excess of $2 million in the aggregate
in any fiscal year, except to the extent contemplated in the Annual
Business Plan;
- making any acquisition or disposition of any interests in any other person
or business enterprise or any assets, in a single transaction or a series
of related transactions, in which the fair market value of the
consideration paid or received by the Company exceeds $1 million;
- organizing, forming or participating in any joint venture or similar
entity involving the sharing of profits in which the assets or services to
be contributed or provided by the Company to such joint venture or other
entity have a fair market value in excess of $1 million;
- forming a subsidiary
- issuing any common stock, preferred stock or other capital stock or any
stock or securities (including options and warrants) convertible into or
exercisable or exchangeable for common stock, preferred stock or other
capital stock or amending the terms of any such stock or securities or any
agreements relating thereto (other than employee stock options approved by
the Board of Directors of the Company and common stock issued upon
exercise thereof) or effecting any stock split or reverse stock split or
combination;
- entering into any transaction between the Company, on the one hand, and
any affiliate or associate of the Company (as defined), on the other,
other than the payment of compensation and other benefits to employees and
directors in the ordinary course of business;
- declaring or paying any dividend or other distribution with respect to the
capital stock of the Company;
- incurring any indebtedness for borrowed money or capital lease obligations
that are not expressly contemplated in the then-current Annual Business
Plan in excess of $250,000 in the aggregate during any fiscal year;
- amending the Company's Certificate of Incorporation or Bylaws or creating
or amending any stockholders' rights plan;
- declaring bankruptcy; or
- liquidating or dissolving the Company.
INITIAL PUBLIC OFFERING AND CONVERSION OF PREFERRED STOCK
In November 1997, the Company filed a registration statement with the
Securities and Exchange Commission permitting the Company to sell shares of its
common stock to the public. The offering was completed on November 12, 1997. In
connection with the initial public offering, all outstanding shares of preferred
stock were converted into shares of common stock.
52
<PAGE>
HYBRID NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. STOCKHOLDERS' EQUITY (CONTINUED)
WARRANTS
The Company has historically issued warrants in connection with its various
rounds of financing, equipment lease lines, and transfers of technology.
Warrants have been valued using the Black-Scholes Option Pricing Model.
In connection with the issuance of Series G preferred stock in July 1996,
and the 1996 equipment lease line, the Company issued warrants to purchase
58,021 and 5,802 shares of common stock, respectively, at $10.34 per share.
These warrants are exercisable at any time and expire in July 2001 and
August 2006, respectively.
In connection with the issuance of convertible promissory notes in
June 1996, which were later converted into Series G preferred stock, the Company
issued warrants to purchase 167,037 shares of common stock at $4.73 per share.
In connection with the issuance of Series D preferred stock May 1995, the
Company issued warrants, at $.001 per warrant, to purchase 592,593 shares of
common stock at $4.73 per share. In December 1997, a warrant to purchase 132,225
shares was exercised for a net exercise of 99,850 shares of common stock. The
remaining warrants are exercisable at any time and expire in June 2001.
During 1996, the Company issued warrants, at $.001 per warrant, to purchase
76,245 shares of Common stock at $4.73 per share. In connection with technology
transferred and the 1995 equipment lease line, the Company issued warrants to
purchase 169,259 and 8,466 shares of common stock, respectively, at $4.73 per
share. During 1996, a warrant to purchase 169,259 shares was exercised for a net
exercise of 91,921 shares of common stock. The remaining warrants are
exercisable at any time and expire in June 2001 and August 2005, respectively.
In September 1997, the Company issued warrants to purchase 252,381 shares of
common stock in connection with the convertible subordinated notes payable, at
an exercise price of $10.91. In October 1997, the Company issued warrants to
purchase 2,659 shares of common stock in connection with obtaining a bank credit
facility at an exercise price of $10.91. These warrants are exercisable at any
time and expire in September and October 2002. In November 1997, warrants to
purchase 151,267 shares of common stock were exercised for a net exercise of
76,096 shares of common stock.
In November 1997, the Company issued a five year warrant to purchase 458,295
shares of common stock at an exercise price of $10.91 per share, in connection
with a technology support and development arrangement.
In June 1999, the Company issued a five year warrant to purchase 210,000
shares of common stock at an exercise price of $0.50 per share to two customers
in accordance with their volume purchase agreements. The fair value of the
warrants of $407,000 (calculated using the Black-Scholes method) was recorded as
a discount on sales.
In September 1999, the Company issued to Sprint Corporation warrants to
purchase $8.4 million of convertible debentures, as described in Note 5 of the
Notes to Financial Statements. These debentures are convertible to 2,946,622
shares of common stock at an exercise price of $2.85 per share. The warrants
will be exercisable upon the placement by Sprint of certain purchase orders on
terms to be negotiated between the Company and Sprint. The fair value of these
warrants will be recognized as a discount on sales upon receipt of qualifying
purchase orders from Sprint.
53
<PAGE>
HYBRID NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. STOCKHOLDERS' EQUITY (CONTINUED)
Substantially all of the warrants are subject to net exercise provisions.
The Company has reserved shares for the exercise of all the warrants.
A summary of outstanding warrants as of December 31, 1999 follows:
<TABLE>
<CAPTION>
WARRANTS OUTSTANDING
-----------------------------------------------
NUMBER EXERCISE EXPIRATION
OUTSTANDING PRICE DATE
----------- -------- --------------
<S> <C> <C>
703,650... $ 4.73 June 2001
58,021.... 10.34 July 2001
458,295... 10.91 November 2002
103,773... 10.91 September 2002
210,000... 0.50 June 2005
8,466..... 4.73 August 2005
5,802..... 10.34 August 2006
---------
1,548,007
=========
</TABLE>
STOCK OPTION PLANS
In January 1999, the Company adopted a 1999 Officer Stock Option Plan and
reserved 1,000,000 shares for issuance to officers of the Company or of a parent
or subsidiary of the Company. In May 1999, the Company adopted a 1999 Stock
Option Plan and, as amended in August 1999 and October 1999, reserved 4,000,000
shares for issuance to employees (including officers and directors who are also
employees) or consultants of the Company or of a parent or subsidiary of the
Company who meet the suitability standards set forth by this plan. The 1999
Officer Stock Option Plan and the 1999 Stock Option Plan will terminate ten
years from the effective date or, if earlier, the date of stockholder approval
of termination.
In September 1997, the Company adopted the 1997 Equity Incentive Plan and
reserved a total of 1,750,000 shares for issuance to employees, officers,
directors, consultants, independent contractors, and advisors. The number of
shares outstanding will increase automatically by 5% of the outstanding shares
each year unless waived by the Board of Directors. In 1999, the Company
increased the number of shares reserved for issuance under the 1997 Equity
Incentive Plan by 523,501 shares. The 1997 Equity Incentive Plan expires in
September 2007. Also in September 1997, the Company adopted the 1997 Directors'
Stock Option Plan under which 100,000 shares of common stock have been reserved
for issuance. The Directors' Plan provides for the grant of non statutory stock
options to non-employee directors of the Company and expires in September 2007.
In December 1996, the Company adopted the 1996 Equity Incentive Plan and
reserved 185,185 shares of common stock for issuance to employees, officers,
directors, consultants, independent contractors and advisors. In June 1997, the
Company increased the number of shares reserved for issuance under the 1996
Equity Incentive Plan by 222,222. The 1996 Equity Incentive Plan expires in
December 2006.
54
<PAGE>
HYBRID NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. STOCKHOLDERS EQUITY (CONTINUED)
In December 1995, the Company adopted the Executive Officer Incentive Plan
and reserved 370,370 shares of common stock for issuance to the Company's chief
executive officer and other senior executive officers. In 1996 and 1997, the
Company increased the number of shares reserved under this plan by 129,630 and
62,963, respectively. In the event of a merger, consolidation, liquidation or
similar change of control transaction as a result of which the participants'
responsibilities and position with the Company are materially diminished,
options granted under this plan become fully exercisable and remain so for one
year thereafter. This plan will expire in December 2005.
In October 1993, the Company adopted the 1993 Equity Incentive Plan, and
reserved 185,185 shares of common stock for issuance to employees, officers,
directors, consultants and advisors. In 1995, 1996 and 1997, the Company
increased the number of shares reserved for issuance under the 1993 Equity
Incentive Plan by 351,851, 425,925 and 66,340 shares, respectively. The 1993
Equity Incentive Plan expires in October 2003.
Under all of the plans, the exercise price of incentive stock options may
not be less than the fair market value of the shares on the date of grant (not
less than 110% of fair market value if the option is granted to a 10%
stockholder). Under all of the plans other than the 1999 Stock Option Plan,
nonqualified stock options may not be granted at less than 85% of fair market
value on the date of grant. Options and stock awards generally vest 12.5% six
months from date of grant and 2.0833% per month thereafter; although certain
options vest over a shorter period of time, and the vesting of certain options
accelerates in certain circumstances. Stock options generally expire three
months after termination of employment and five years from date of grant,
subject to exceptions in certain cases.
Activity under the plans is set forth below (in thousands, except per share
data):
<TABLE>
<CAPTION>
WEIGHTED
VALUE OF AVERAGE
SHARES OPTIONS OPTIONS EXERCISE
AVAILABLE OUTSTANDING OUTSTANDING PRICE
--------- ----------- ----------- --------
<S> <C> <C> <C> <C>
Balances, January 1, 1997........... 213 1,479 $ 963 $0.65
Additional shares reserved........ 2,409 -- -- --
Options granted................... (862) 862 5,332 6.19
Stock bonus awards................ (13) -- -- --
Stock repurchased................. 12 -- -- --
Options canceled.................. 265 (265) (316) 1.19
Options exercised................. -- (150) (94) 0.63
------ ------ -------
Balances, December 31, 1997......... 2,024 1,926 5,885 3.06
Options granted................... (1,445) 1,445 4,527 3.13
Stock bonus award................. (1) -- -- --
Options canceled.................. 511 (511) (1,871) 3.66
Options exercised................. (125) (87) 0.70
------ ------ -------
Balances, December 31, 1998......... 1,089 2,735 8,454 3.09
------ ------ -------
Additional shares reserved........ 5,524
Options granted................... (4,075) 4,075 9,015 2.21
Options canceled.................. 1,664 (1,664) (4,388) 2.64
Options exercised................. (251) (357) 1.42
------ ------ -------
Balances, December 31, 1999......... 4,202 4,895 $12,724 $2.60
====== ====== =======
</TABLE>
55
<PAGE>
HYBRID NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. STOCKHOLDERS EQUITY (CONTINUED)
For the years ended December 31, 1999, 1998 and 1997, the weighted average
fair value of options granted was $2.04, $2.34 and $1.40 per share,
respectively.
As of December 31, 1999, the stock options outstanding were as follows (in
thousands, except per share data):
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
RANGE OF EXERCISE PRICES OUTSTANDING LIFE (YEARS) PRICE EXERCISABLE PRICE
- ------------------------ ----------- ------------ --------- ----------- --------
<S> <C> <C> <C> <C> <C>
$ 0.50 to $ 0.54....... 2,433 5.50 $ 0.51 1,260 $ 0.52
$ 1.08 to $ 2.19....... 515 3.84 2.10 160 1.97
$ 3.63 to $ 5.13....... 1,418 4.83 3.74 41 4.93
$ 5.31 to $ 8.78....... 281 7.07 8.33 92 8.38
$11.04 to $11.25....... 248 3.31 11.10 105 11.04
----- -----
4,895 5.11 $ 2.60 1,658 $ 1.87
===== =====
</TABLE>
As of December 31, 1998 and 1997, options to purchase 917,000 and 539,000
shares were exercisable at an average weighted exercise price of $2.56 and $0.76
per share, respectively.
The Company has elected to continue to follow the provisions of APB 25,
"Accounting for Stock Issued to Employees," for financial reporting purposes and
has adopted the disclosure-only provisions of SFAS 123. Compensation cost has
been recognized for the Company's stock option plans under APB 25 where options
were granted to employees at an exercise price which is below market value at
the date of grant. Had compensation cost for the Company's stock option plans
been determined based on the fair value at the grant date for awards in years
ended 1999, 1998 and 1997 consistent with the provisions of SFAS 123, the
Company's net loss and net loss per share for 1999, 1998, and 1997 would have
been increased to the pro forma amounts indicated below (in thousands, except
per share amounts):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Net loss as reported........................... $(22,192) $(24,625) $(21,602)
======== ======== ========
Net loss--pro forma............................ $(23,061) $(25,109) $(21,670)
======== ======== ========
Net loss per share--as reported................ $ (2.08) $ (2.37) $ (6.10)
======== ======== ========
Net loss per share--pro forma.................. $ (2.16) $ (2.41) $ (6.12)
======== ======== ========
</TABLE>
The above pro forma disclosures are not necessarily representative of the
effects on reported net income or loss for future years.
In accordance with the provisions of SFAS 123, the fair value of each option
is estimated using the following weighted average assumptions for grants during
1999, 1998 and 1997: dividend yield of 0%, volatility of 0% for options issued
prior to the Company's Initial Public Offering, 75% thereafter in 1997, 113% in
1998, and 117% in 1999, risk-free interest rates at the date of grant, and an
expected term of four years.
56
<PAGE>
HYBRID NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. STOCKHOLDERS EQUITY (CONTINUED)
EMPLOYEE STOCK PURCHASE PLAN
In September 1997, the Company's Board of Directors approved an Employee
Stock Purchase Plan. Under this plan, employees of the Company can purchase
Common Stock through payroll deductions. A total of 225,000 shares have been
reserved for issuance under this plan. As of December 31, 1999, no shares had
been purchased and all employees have withdrawn from the plan.
10. INCOME TAXES
Provision for income taxes for each of the years ended December 31, 1999,
1998 and 1997 was $0.
Total income tax benefit differed from the amounts computed by applying the
U.S. federal statutory tax rates to pre-tax income as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Total benefit computed by applying the U.S. statutory
rate............................................... (34.00)% (34.00)% (34.00)%
Permanent differences.............................. 11.40% 0.10% 0.10%
Change in valuation allowance...................... 22.60% 33.90% 33.90%
------ ------ ------
0% 0% 0%
====== ====== ======
</TABLE>
Temporary differences which gave rise to significant portions of deferred
tax assets are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1999 1998
-------- --------
<S> <C> <C>
Current deferred assets:
Allowance for doubtful accounts....................... $ 80 $ 80
Inventory reserves.................................... 1,132 1,307
UNICAP................................................ 644 174
Unearned revenue...................................... 302 281
Accrued liabilities................................... 1,443 1,072
Book compensation for stock options................... 417 29
-------- --------
Total current deferred assets......................... 4,018 2,943
Valuation allowance................................... (4,018) (2,943)
-------- --------
$ -- $ --
======== ========
Long-term deferred assets:
Net operating loss carryforwards...................... $ 16,946 $ 18,205
Capitalized research expenditures..................... 7,146 4,128
Tax credit carryforwards.............................. 2,524 1,905
Depreciation and amortization......................... 679 411
-------- --------
Total long-term deferred assets....................... 27,295 24,649
Valuation allowance................................... (27,295) (24,649)
-------- --------
$ -- $ --
======== ========
</TABLE>
57
<PAGE>
HYBRID NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
10. INCOME TAXES (CONTINUED)
In accordance with generally accepted accounting principles, a valuation
allowance must be established for a deferred tax asset if it is uncertain that a
tax benefit may be realized from the asset in the future. Management believes
that, based on a number of factors, the available objective evidence creates
sufficient uncertainty regarding the realizability of the deferred tax assets
such that a full valuation allowance has been recorded. These factors include
the Company's history of losses, recent increases in expense levels, the fact
that the market in which the Company competes is intensely competitive and
characterized by rapidly changing technology, the lack of carryback capacity to
realize deferred tax assets, and the uncertainty regarding market acceptance of
the Company's products. The Company will continue to assess the realizability of
the deferred tax assets in future periods. The valuation allowance increased by
$3,721,000, and $9,790,000 in 1999 and 1998, respectively. The Company had
federal and state net operating loss carry forwards of approximately $44,602,000
and $20,154,000, respectively, as of December 31, 1999 available to offset
future regular and alternative minimum taxable income. The Company's net
operating loss carry forwards expire in 2000 through 2019, if not utilized.
In addition, at December 31, 1999, the Company had the following available
credits to offset future tax liabilities:
<TABLE>
<CAPTION>
TAX EXPIRATION
REPORTING DATES
--------- -------------
<S> <C> <C>
Federal research and development credit............. $1,523 2007-2014
State research and development credit............... 861 No expiration
State manufacturing investment credit............... 136 2005
</TABLE>
The Company's net operating loss and tax credit carry forwards may be
subject to limitation in the event of ownership changes, as defined by tax laws.
11. EMPLOYEE BENEFIT PLAN
The Company adopted a defined contribution retirement plan (the "Plan"),
which qualifies under Section 401(k) of the Internal Revenue Code of 1986. The
Plan covers essentially all employees. Eligible employees may make voluntary
contributions to the Plan up to 15% of their annual compensation and the
employer is allowed to make discretionary contributions. In 1999, 1998, 1997,
the Company made no employer contributions.
12. RELATED PARTY TRANSACTIONS
The Company had net sales to stockholders of $482,000 for the year ended
December 31, 1998.
An executive officer of the Company purchased for $500,000 or 7% of the
$6,882,000 convertible subordinated notes issued by the Company in
September 1997. These notes were repaid in November 1997 with the proceeds from
the Company's initial public offering.
See also Notes 5, 9 and 13 for transactions with Sprint, Accel Partners,
OSSCO III L.P and Gary Lauder.
58
<PAGE>
HYBRID NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
13. BUSINESS SEGMENT AND MAJOR CUSTOMERS
The Company operates in a single industry segment and primarily sells its
products to customers in the U.S. Sales by industry segment during 1999 consist
of 52% to cable customers and 48% to wireless customers. Sales to international
customers represented 5.5%, 0%, and 13.5% of revenues in 1999, 1998 and 1997,
respectively. International sales in any one geographic area were insignificant.
Individual customers that comprise 10% or more of the Company's net sales
are as follows:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
RCN Corporation............................................ 31% 25% 13%
Sprint owned wireless operators............................ 28% -- --
Knology Holdings, Inc...................................... -- 13% --
Jones Intercable........................................... -- -- 12%
</TABLE>
At December 31, 1999 and 1998, these customers accounted for $423,000 and
$203,000, respectively, and 32% and 12%, respectively, of total accounts
receivable.
14. SUBSEQUENT EVENTS
In January 1999, the Company entered into a separation agreement with a
director whereby the Company accelerated vesting of 109,668 options with
exercise prices ranging from $0.54 to $11.04 per share. The accelerated options
are exercisable through July 2000. The value of the options was remeasured on
the date the separation agreement was entered into, resulting in a charge to
compensation expense of $1,304,000 in the first quarter of 2000.
Pursuant to the settlement of certain class action litigation, the Company
issued in February 2000, 2,307,459 shares of Common Stock to the plaintiffs and
their counsel in the class action litigation.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
In June 1998, PwC (then Coopers & Lybrand), our independent accountants,
notified us that its reports with respect to our financial statements as of
December 31, 1997 and for the year then ended, and as of September 30, 1997 and
for the nine months then ended, should no longer be relied upon and that PwC's
consent included with our Registration Statement on Form S-4 filed with the
Securities and Exchange Commission in May 1998 in connection with the pending
acquisition by us of Pacific Monolithics, Inc. was being withdrawn (the
"Withdrawn Reports").
In July 1998, PwC resigned as our independent auditors. PwC stated that it
was not specifying a reason for its resignation but informed us, for the first
time, that PwC was of the view that our 1997 financial statements (which PwC had
audited and reported upon) needed to be restated. PwC indicated the restatement
would relate to revenue recognition but did not identify the items or quantify
the amounts involved. PwC further informed us that PwC believed it was not in
the best interests of PwC or the Company for PwC to continue to act as our
independent auditors and that PwC would not address any restatement of the
Company's financial statements. PwC acknowledged that we have cooperated fully
with PwC in connection with its review of our financial statements and that
there were no disagreements between PwC and us on any matter of our accounting
principles or practices, financial statement disclosure or auditing scope or
procedure during the two most recent fiscal years
59
<PAGE>
HYBRID NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
14. SUBSEQUENT EVENTS (CONTINUED)
and through July 9, 1998. None of the Withdrawn Reports or PwC's report on our
financial statements contained an adverse opinion or a disclaimer of opinion or
was qualified or modified as to uncertainty, audit scope or accounting
principles.
In August 1998, we engaged AA as our independent accountants to audit the
financial statements of the Company as of December 31, 1997 and for the year
then ended and to act as our independent accountants on a continuing basis. In
November 1998, AA resigned as our independent public accountants for the
Company. AA informed us that, in AA's view, material weaknesses existed in our
internal controls of a nature that prevented AA from being able to form an
opinion on our conclusions as to the appropriate timing and amount of revenue
recognition for the purposes of our financial statements for the year ended
December 31, 1997. During the course of its work, AA had notified us and
discussed with our audit committee AA's conclusion that (i) AA needed to expand
significantly the scope of its audit, which it did with our approval and
cooperation, and (ii) while AA did not complete an audit of our 1997 financial
statements, those financial statements were materially misstated. There were no
disagreements between AA and us on any matter of our accounting principles or
practices, financial statement disclosure, or auditing scope or procedure.
In December 1998, we engaged Hein as our independent accountants to audit
our financial statements as of December 31, 1997 and for the year then ended and
to act as our independent accountants on a continuing basis, which engagement
included performing an audit of our financial statements as of December 31, 1998
and 1997 and for the years then ended. Prior to hiring Hein, neither we nor
anyone acting on our behalf consulted Hein during our two most recent fiscal
years or the subsequent interim periods.
60
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY.
The information required by Item 10 regarding our directors is incorporated
by reference to the information under the caption "Proposal No. 1--Election of
Directors" in Company's definitive Proxy Statement for the Company's annual
stockholders' meeting in 2000 (the "Proxy Statement") which Hybrid will file
with the Securities and Exchange Commission within 120 days after the end of the
calendar year covered by this report.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 of Form 10-K is incorporated by
reference to the information contained in the section captioned "Executive
Compensation" in the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information regarding this item is incorporated herein by reference from
the section entitled "Security Ownership of Certain Beneficial Owners and
Management" in the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information with respect to this item is incorporated herein by reference
from the section entitled "Certain Relationships and Related Transactions" in
the Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C> <C>
(a) Documents filed as part of this Report:
1. FINANCIAL STATEMENTS. See the Index to Financial Statements
at Item 8 of this Report.................................. 35
2. FINANCIAL STATEMENT SCHEDULES.
Schedules not listed below have been omitted because they
are not applicable or are not required or the information
required to be set forth in those schedules is included in
the financial statements or related notes.
Schedule II--Valuation and qualifying accounts.............. 69
3. EXHIBITS. The following exhibits are filed as part of, or
incorporated by reference into, this report on Form 10-K:
</TABLE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
--------------------- -------------
<C> <S>
3.01 Registrant's Amended and Restated Certificate of
Incorporation.(1)
3.02 Certificate of Designations of Series J Non-Convertible
Preferred Stock of the Registrant.(2)
3.03 Registrant's Amended and Restated Bylaws, as amended on
April 14, 1999
10.01 Amended and Restated Investors Rights Agreement, dated as of
September 18, 1997 between Registrant and certain
investors, as amended October 13, 1997 and as amended
November 6, 1997.(3)
10.02 Registrant's 1993 Equity Incentive Plan.(3)(10)
10.03 Registrant's 1996 Equity Incentive Plan.(3)(10)
</TABLE>
61
<PAGE>
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(CONTINUED)
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
--------------------- -------------
<C> <S>
10.04 Registrant's Executive Officer Incentive Plan.(3)(10)
10.05 Registrant's 1997 Equity Incentive Plan.(3)(10)
10.06 Registrant's 1997 Directors Stock Option Plan.(3)(10)
10.07 Registrant's 1997 Employee Stock Purchase Plan.(3)(10)
10.08 Registrant's 1999 Stock Option Plan
10.09 Registrant's 1999 Officer Stock Option Plan
10.10 Form of Indemnity Agreement entered into by Registrant with
each of its directors and officers.(4)
10.12 Senior Secured Convertible $5.5 Million Debenture Purchase
Agreement between Registrant and London Pacific Life &
Annuity Company dated April 30, 1997 and related Senior
Secured Convertible $5.5 Million Debenture Due 2002 and
Security Agreement and Senior Secured Convertible $5.5
Million Debenture Due.(3)
10.15 Collaboration Agreement among Registrant, Sharp Corporation
and Itochu Corporation dated November 25, 1996 and
Addendum No. 1 thereto dated November 25, 1996.(3)
10.16 Sales and Purchase Agreement between Registrant and Itochu
Corporation dated January 10, 1997.(3)(9)
10.17 Stipulation of settlement, dated March 3, 1999 among the
Registrant and lead counsel for the plaintiffs in class
action litigation against the Registrant
10.24 Sublease between the Registrant and Viking Freight, Inc.
dated February 9, 1998.(5)
10.26 Employment Letter from the Registrant to Judson Goldsmith
dated November 12, 1998.(6)(10)
10.27 Product Purchase Agreement between the Registrant and RCN
Operating Services, Inc. dated June 30, 1997(6)
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.(7)(10)
10.30 Separation Agreement and General Release between the
Registrant and William M. Daniher dated March 17,
1999.(7)(10)
10.1 Securities Purchase Agreement between Sprint Corporation and
the Registrant dated August 30, 1999.(8)
10.2 Warrant Agreement between Sprint Corporation and the
Registrant dated as of September 9, 1999.(8)
10.3 1999 Amended and Restated Investor Rights Agreement dated as
of September 9, 1999.(8)
10.4 Form of 4% Convertible Class A Debenture due 2009.(8)
10.5 Form of 4% Convertible Class B debenture due 2009.(8)
10.6 Securities Purchase Agreement among the Registrant and
certain investors dated as of August 30, 1999.(8)
10.7 Form of 4% Convertible Debenture due 2009.(8)
23.01 Consent of Independent Auditors for 1999
27.01 Financial Data Schedule
</TABLE>
- ------------------------
(1) Incorporated by reference to Exhibit 3.03 to the Registrant's
Registration Statement on Form S-1, File No. 333-36001, declared
effective by the SEC on November 11, 1997 (the "Form S-1").
62
<PAGE>
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(CONTINUED)
(2) Incorporated by reference to Exhibit 3.1 to the Registrants current
report on Form 8-K filed September 24, 1999.
(3) Incorporated by reference to the Exhibit with the same number to the
Form S-1.
(4) Incorporated by reference to Exhibit 10.08 to the Form S-1.
(5) Incorporated by reference to Exhibit with the same number to the
Registrant's Registration Statement on Form S-4, File No. 333-52083
(filed on May 7, 1998).
(6) Incorporated by reference to the Exhibit with the same number to the
Registrant's Annual Report Form 10-K for the year ended December 31,
1998.
(7) Incorporated by reference to the Exhibit with the same number to the
Registrant's Quarterly Report on Form 10-Q for the three months ended
March 31, 1999.
(8) Incorporated by reference to the Exhibit with the same number in the
Company's current report on Form 8-K filed September 24, 1999.
(9) Confidential treatment has been granted with respect to certain
portions of this agreement. Such portions have been omitted from the
filing and have been filed separately with the SEC.
(10) Represents a management agreement or compensatory plan.
(b) Reports on Form 8-K.
The following Current Reports on Form 8-K were filed by the Company since
September 30, 1999.
1. On October 12, 1999, the Company reported under Item 5. "Other Events"
the appointment of Thara M. Edson as Vice President, Finance and Chief
Financial Officer.
2. On October 28, 1999, the Company reported under Item 5. "Other Events"
the resignation of Carl S. Ledbetter, its Chief Executive Officer, and
the appointment of James R. Flach as acting Chief Executive Officer.
3. On January 19, 2000, the Company reported under Item 5. "Other Events"
the appointment of Michael D. Greenbaum as President and Chief Executive
Officer.
4. On January 31, 2000, the Company reported under Item 5. "Other Events"
the appointment of James R. Flach as Chairman of the Board of Directors
and Michael D. Greenbaum as a member of the board and the resignation of
Carl S. Ledbetter as Chairman and member of the Board of Directors.
(c) Exhibits. See (a)(3) above.
(d) Financial Statement Schedules. See (a)(2) above.
63
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Exchange Act, the
Registrant caused this Report to be signed on its behalf by the undersigned,
thereunto duly authorized.
<TABLE>
<S> <C> <C>
March , 2000 HYBRID NETWORKS, INC.
By: /s/ MICHAEL D. GREENBAUM
-----------------------------------------
Michael D. Greenbaum
CHIEF EXECUTIVE OFFICER
</TABLE>
Pursuant to the requirements of the Exchange Act, this Report has been
signed below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<C> <S> <C>
PRINCIPAL EXECUTIVE OFFICER
/s/ MICHAEL D. GREENBAUM
------------------------------------------- Chief Executive Officer March , 2000
Michael D. Greenbaum
PRINCIPAL FINANCIAL OFFICER AND
PRINCIPAL ACCOUNTING OFFICER:
/s/ THARA M. EDSON
------------------------------------------- Vice President, Finance March , 2000
Thara M. Edson Chief Financial Officer
ADDITIONAL DIRECTORS:
/s/ JAMES R. FLACH
------------------------------------------- Chairman, Board of Directors March , 2000
James R. Flach
/s/ GARY M. LAUDER
------------------------------------------- Director March , 2000
Gary M. Lauder
/s/ TIMOTHY S. SUTTON
------------------------------------------- Director March , 2000
Timothy S. Sutton
/s/ THEODORE H. SCHELL
------------------------------------------- Director March , 2000
Theodore H. Schell
</TABLE>
64
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Stockholders and Board of Directors
Hybrid Networks, Inc.
San Jose, California
Our report on the financial statements of Hybrid Networks, Inc. is included
on page 36 of this Form 10-K. In connection with our audits of such financial
statements, we have also audited the related financial statement schedule listed
in Item 14 (a) (2) of this Form 10-K.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included therein.
/s/ HEIN + ASSOCIATES LLP
Hein + Associates LLP
Orange, California
February 10, 2000
65
<PAGE>
HYBRID NETWORKS, INC.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
ALLOWANCE FOR DOUBTFUL ACCOUNTS
<TABLE>
<CAPTION>
ADDITIONS WEIGHTED
BALANCE AT CHARGED TO CHARGED BALANCE
BEGINNING COSTS AND TO OTHER AT END
OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS OF PERIOD
---------- ---------- -------- ---------- ---------
<S> <C> <C> <C> <C> <C>
For the year ended:
December 31, 1999.......................... $200 $ -- -- -- $200
December 31, 1998.......................... -- 200 -- -- 200
December 31, 1997.......................... -- -- -- -- --
</TABLE>
INVENTORY RESERVES
<TABLE>
<CAPTION>
ADDITIONS WEIGHTED
BALANCE AT CHARGED TO CHARGED BALANCE
BEGINNING COSTS AND TO OTHER AT END
OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS OF PERIOD
---------- ---------- -------- ---------- ---------
<S> <C> <C> <C> <C> <C>
For the year ended:
December 31, 1999.......................... $3,135 $ 529 -- $ (822) $2,842
December 31, 1998.......................... 3,015 1,691 -- (1,571) 3,135
December 31, 1997.......................... 256 2,759 -- -- 3,015
</TABLE>
66
<PAGE>
AMENDED AND RESTATED BYLAWS
OF
HYBRID NETWORKS, INC.
(A DELAWARE CORPORATION)
ARTICLE I
OFFICES
SECTION 1. REGISTERED OFFICE. The registered office shall be in the
City of Wilmington, County of New Castle, State of Delaware.
SECTION 2. OTHER OFFICES. Additional offices of the corporation shall
be located at such place or places, within or outside the State of Delaware, as
the board of Directors may from time to time authorize or the business of the
corporation may require.
ARTICLE II
MEETINGS OF STOCKHOLDERS AND VOTING RIGHTS
SECTION 3. PLACE OF MEETINGS. All meetings of the stockholders for the
election of directors shall be held at such place as may be fixed from time to
time by the Board of Directors, or at such other place either within or without
the State of Delaware as shall be designated from time to time by the Board of
Directors and stated in the notice of the meeting. Meetings of stockholders for
any other purpose may be held at such time and place, within or without the
State of Delaware, as shall be stated in the notice of the meeting or in a duly
executed waiver of notice thereof.
SECTION 4. ANNUAL MEETING. Annual meetings of stockholders, commencing
with the year 1991, shall be held at such date and time as shall be designated
from time to time by the Board of Directors and stated in the notice of the
meeting. At such annual meeting, directors shall be elected and any other
business may be transacted which may properly come before the meeting.
SECTION 5. POSTPONEMENT OF ANNUAL MEETING. The Board of Directors and
the President shall each have authority to hold at an earlier date and/or time,
or to postpone to a later date and/or time, the annual meeting of stockholders.
SECTION 6. SPECIAL MEETINGS.
(a) Special meetings of the stockholders, for any purpose or purposes,
may be called by the Chairman of the Board of Directors, or by the Chairman or
the Secretary at the written
<PAGE>
request of a majority of the total number of directors which the corporation
would have if there were no vacancies.
(b) Upon written request to the Chairman of the Board of Directors, the
President, any vice president or the Secretary of the corporation by any person
or persons (other than the Board of Directors) entitled to call a special
meeting of the stockholders, such officer forthwith shall cause notice to be
given to the stockholders entitled to vote, that a meeting will be held at a
time requested by the person or persons calling the meeting, such time to be not
less than 10 nor more than 60 days after receipt of such request. If such notice
is not given within 20 days after receipt of such request, the person or persons
calling the meeting may give notice thereof in the manner provided by law or in
these bylaws. Nothing contained in this Section 6 shall be construed as
limiting, fixing or affecting the time or date when a meeting of stockholders
called by action of the Board of Directors may be held.
SECTION 7. NOTICE OF MEETINGS. Except as otherwise may be required by
law and subject to Section 6 (b) above, written notice of each meeting of
stockholders shall be given to each stockholder entitled to vote at that meeting
(see Section 14 below), by the Secretary, assistant secretary or other person
charged with that duty, not less than 10 nor more than 60 days before such
meeting.
Notice of any meeting of stockholders shall state the date, place and
hour of the meeting and,
(a) in the case of a special meeting, the general nature
of the business to be transacted;
(b) in the case of an annual meeting, the general nature
of matters which the Board of Directors, at the time the notice is given,
intends to present for action by the stockholders; and
(c) in the case of any meeting at which directors are to
be elected, the names of the nominees intended at the time of the notice to be
presented by management for election.
At a special meeting, notice of which has been given in accordance with
this Section, action may not be taken with respect to business, the general
nature of which has not been stated in such notice. At an annual meeting, action
may be taken with respect to business started in the notice of such meeting and
any other business as may properly come before the meeting.
SECTION 8. MANNER OF GIVING NOTICE. Notice of any meeting of
stockholders shall be given either personally or by first-class mail,
telegraphic or other written communication, addressed to the stockholder at the
address of that stockholder appearing on the books of the corporation or given
by the stockholder to the corporation for the purpose of notice. If no such
address appears on the corporation's books or is given, notice shall be deemed
to have been given if sent to that stockholder by first-class mail or
telegraphic or other written communication to the corporation's principal
executive office, or if published at least once in a newspaper of general
circulation in the county where that office is located. Notice shall be
<PAGE>
deemed to have been given at the time when delivered personally or deposited
in the mail or sent by telegram or other means of written communication.
If any notice addressed to a stockholder at the address of that
stockholder appearing on the books of the corporation is returned to the
corporation by the United States Postal Service marked to indicate that the
United States Postal Service is unable to deliver the notice to the stockholder
at that addresses, all future notices shall be deemed to have been duly given
without further mailing if these shall be available to the stockholder on
written demand by the stockholder at the principal executive office of the
corporation for a period of one year from the date of the giving of the notice.
An affidavit of mailing of any notice or report in accordance with the
provisions of this Section 8, executed by the Secretary, Assistant Secretary or
any transfer agent, shall be prima facie evidence of the giving of the notice.
SECTION 9. QUORUM AND TRANSACTION OF BUSINESS.
(a) At any meeting of the stockholders, a majority of the
shares entitled to vote, represented in person or by proxy, shall constitute a
quorum. If a quorum is present, the affirmative vote of the majority of shares
represented at the meeting and entitled to vote on any matter shall be the act
of the stockholders, unless the vote of a greater number or voting by classes is
required by law or by the Certificate of Incorporation, and except as provided
in Section 9(c).
(b) At any meeting of the stockholders, only such business
shall be conducted as shall have been brought before the meeting (1) pursuant to
the corporation's notice of meeting, (2) by or at the direction of the Board of
Directors or (3) by any stockholder of the corporation who is a stockholder of
record at the time of giving of the notice provided for in this bylaw, who shall
be entitled to vote at such meeting and who complies with the notice procedures
set forth in this bylaw.
For business to be properly brought before any meeting by a stockholder
pursuant to clause (3) of this Section 9 (b), the stockholder must have given
timely notice thereof in writing to the Secretary of the corporation. To be
timely, a stockholder's notice must be delivered to or mailed and received at
the principal executive offices of the corporation not less than 20 days nor
more than 60 days prior to the date of the meeting. A stockholder's notice to
the Secretary shall set forth as to each matter the stockholder proposes to
bring before the meeting (i) a brief description of the business desired to be
brought before the meeting and the reasons for conducting such business at the
meeting, (ii) the name and address, as they appear on the corporation's books,
of the stockholder proposing such business, and the name and address of the
beneficial owner, if any, on whose behalf the proposal is made, (iii) the class
and number of shares of the corporation which are owned beneficially and of
record by such stockholder of record and by the beneficial owner, if any, on
whose behalf of the proposal is made and (iv) any material interest of such
stockholder of record and the beneficial owner, if any, on whose behalf the
proposal is made in such business.
<PAGE>
Notwithstanding anything in these bylaws to the contrary, no business
shall be conducted at a meeting except in accordance with procedures set forth
in this Section 9 (b). The presiding officer of the meeting shall, if the facts
warrant, determine and declare to the meeting that business was not properly
brought before the meeting and in accordance with the procedures prescribed by
this Section 9 (b), and if such person should so determine, such person shall so
declare to the meeting and any such business not properly brought before the
meeting shall not be transacted. Notwithstanding the foregoing provisions of
this Section 9 (b), a stockholder shall also comply with all applicable
requirements of the Securities Exchange Act of 1934, as amended, and the rules
and regulations thereunder with respect to the matters set forth in this Section
9 (b).
(c) The stockholders present at a duly called or held
meeting of the stockholders at which a quorum is present may continue to do
business until adjournment, notwithstanding the withdrawal of enough
stockholders to leave less than a quorum, provided that any action taken (other
than adjournment) is approved by at least a majority of the shares required to
constitute a quorum.
(d) In the absence of a quorum, no business other than
adjournment may be transacted, except as described in Section 9 (c).
SECTION 10. ADJOURNMENT AND NOTICE OF ADJOURNED MEETINGS. Any meeting
of stockholders may be adjourned from time to time, whether or not a quorum is
present, by the affirmative vote of a majority of shares represented at such
meeting either in person or by proxy and entitled to vote at such meeting.
In the event any meeting is adjourned, it shall not be necessary to
give notice of the time and place of such adjourned meeting pursuant to Sections
7 and 8; provided that if any of the following three events occur, such notice
must be given:
(1) announcement of the adjourned meeting's time and place
is not made at the original meeting which it continues or
(2) such meeting is adjourned for more than 30 days
from the date set for the original meeting or
(3) after the adjournment a new record date is fixed for
the adjourned meeting.
At the adjourned meeting, the corporation may transact any business
which might have been transacted at the original meeting.
SECTION 11. WAIVER OF NOTICE, CONSENT TO MEETING OR APPROVAL OF
MINUTES.
(a) Subject to this Section 11(b), the transactions of
any meeting of stockholders, however called and noticed, and wherever held,
shall be as valid as though made at
<PAGE>
a meeting duly held after regular call and notice, if a quorum is present
either in person or by proxy, and if, either before or after the meeting,
each of the persons entitled to vote but not present in person or by proxy
signs a written waiver of notice or a consent to holding of the meeting or an
approval of the minutes thereof.
(b) A waiver of notice, consent to the holding of a
meeting or approval of the minutes thereof need not specify the business to be
transacted or transacted at nor the purpose of the meeting.
(c) All waivers, consents and approvals shall be filed
with the corporate records or made a part of the minutes of the meeting.
(d) A person's attendance at a meeting shall constitute
waiver of notice of and presence at such meeting, except when such person
objects at the beginning of the meeting to transaction of any business because
the meeting is not lawfully called or convened and except that attendance at a
meeting is not a waiver of any right to object to the consideration of matters
which are required by law or these bylaws to be in such notice (including those
matters described in subsection (d) of Section 7 of these bylaws), but are not
so included if such person expressly objects to consideration of such matter or
matters at any time during the meeting.
SECTION 12. ACTION BY WRITTEN CONSENT WITHOUT A MEETING. Effective upon
the closing of the corporation's initial public offering of securities pursuant
to a registration statement filed under the Securities Act of 1933, as amended,
the stockholders of the corporation may not take action by written consent
without a meeting but must take any such actions at a duly called annual or
special meeting.
SECTION 13. VOTING. The stockholders entitled to vote at any meeting of
stockholders shall be determined in accordance with the provisions of Section
14.
Unless otherwise provided in the Certificate of Incorporation each
stockholder shall at every meeting of the stockholders be entitled to one vote
in person or by proxy for each share of the capital stock having voting power
held by such stockholder.
Any stockholder may vote part of such stockholders shares in favor of a
proposal and refrain from voting the remaining shares or vote them against the
proposal, other than elections to office, but, if the stockholder fails to
specify the number of shares such stockholder is voting affirmatively, it will
be conclusively presumed that the stockholder's approving vote is with respect
to all shares such stockholder is entitled to vote.
SECTION 14. PERSONS ENTITLED TO VOTE OR CONSENT. The officer who has
charge of the stock ledger of the corporation shall prepare and make, at least
ten days before every meeting of stockholders, a complete list of the
stockholders entitled to vote at the meeting, arranged in alphabetical order,
and showing the address of each stockholder and the number of shares registered
in the name of each stockholder. Such list shall be open to the examination of
any stockholder, for any purpose germane to the meeting, during ordinary
business hours, for a period of at least ten days prior to the meeting, either
at a place within the
<PAGE>
city where the meeting is to be held, which place shall be specified in the
notice of the meeting, or, if not so specified, at the place where the
meeting is to be held. The list shall also be produced and kept at the time
and place of the meeting during the whole time thereof, and may be inspected
by any stockholder who is present.
SECTION 15. PROXIES. Every person entitled to vote or execute consents
may do so either in person or by one or more agents authorized to act by a
written proxy executed by the person or such person's duly authorized agent and
filed with the Secretary of the corporation; provided that no such proxy shall
be valid after the expiration of three years from the date of its execution,
unless the proxy provides for a longer period. The manner of execution,
suspension, revocation, exercise and effect of proxies is governed by law.
SECTION 16. INSPECTORS OF ELECTION. Before any meeting of stockholders,
the Board of Directors may appoint one or more persons, other than nominees for
office, to act as inspectors of election at the meeting or its adjournment. If
no inspectors of election are so appointed, the chairman of the meeting may, and
on the request of any stockholder or a stockholder's proxy shall, appoint
inspectors of election at the meeting. If any person appointed as inspector
fails to appear or fails or refuses to act, the chairman of the meeting may, and
upon the request of any stockholder or a stockholders proxy shall, appoint a
person to fill that vacancy.
These inspectors shall: (i) determine the number of shares outstanding
and the voting power of each, the shares represented at the meeting, the
existence of a quorum, and the authenticity, validity, and effect of proxies;
(ii) receive votes, ballots, or consents; (iii) hear and determine all
challenges and questions in any way arising in connection with the right to
vote; (iv) count and tabulate all votes or consents; (v) determine when the
polls shall close; (vi) determine the result; and (vii) do any other acts that
may be proper to conduct the election or vote with fairness to all stockholders.
ARTICLE III
BOARD OF DIRECTORS
SECTION 17. POWERS. The business of the corporation shall be managed by
or under the direction of its board of directors which may exercise all such
powers of the corporation and do all such lawful acts and things as are not by
statute or by the certificate of incorporation or by these bylaws directed or
required to be exercised or done by the stockholders.
SECTION 18. NUMBER OF DIRECTORS. The authorized number of directors of
this corporation shall be not less than five and not more than nine. As of the
date of the adoption of these bylaws, the number of directors shall be 5, and
thereafter the number of directors shall be fixed from time to time exclusively
by resolution of the Board of Directors adopted by an affirmative vote of a
majority of the total number of directors that the corporation would have if
there were no vacancies. No reduction in the number of directors shall remove
any director prior to the expiration of such director's term of office. Any
bylaw amendment adopted by the Board of Directors increasing or reducing the
authorized number of directors shall require
<PAGE>
the affirmative vote of a majority of the total number of directors which the
corporation would have if there were no vacancies. In the event of any
increase or reduction in the authorized number of directors: (i) each
director then serving shall nevertheless continue as a director of the class
of which such director is a member until the expiration of such director's
current term, or such director's earlier resignation, removal from office or
death, and (ii) the newly created or eliminated directorship or directorships
resulting from such increase or reduction shall be apportioned by the Board
of Directors, by resolution adopted by an affirmative vote of a majority of
the total number of directors that the corporation would have if there were
no vacancies, among the three classes of directors so as to maintain such
classes as nearly equal in number as possible.
SECTION 19. ELECTION OF DIRECTORS, TERM, QUALIFICATIONS. The directors
shall be divided into three classes. The term of office of the first class,
which class shall consist of two directors, shall expire at the annual meeting
of stockholders held in 1998; the term of office of the second class, which
class shall consists of one director, shall expire at the annual meeting of
stockholders held in 1999; and the term of office of the third class, which
class shall consist of two directors, shall expire at the annual meeting of
stockholders held in 2000. Thereafter, each term of each class shall expire at
each third succeeding annual meeting of stockholders after the meeting of
stockholders at which the director or directors in such class were elected. Each
Director shall serve until his or her successor is elected and qualified, or
until his or her earlier resignation or removal.
Nominations for election to the Board of Directors must be made by the
Board of Directors or by any stockholder of any outstanding class of capital
stock of the corporation entitled to vote for the election of directors.
Nominations, other than those made by the Board of Directors of the corporation,
must be preceded by notification in writing received by the Secretary of the
corporation not less than 20 days nor more than 60 days prior to any meeting of
stockholders called for the election of directors. Such notification shall
contain the written consent of each proposed nominee to serve as a director if
so elected and the following information as to each proposed nominee and as to
each person, acting alone or in conjunction with one or more other persons as a
partnership, limited partnership, syndicate or other group, who participates or
is expected to participate in making such nomination or in organizing, directing
or financing such nomination or solicitation of proxies to vote for the nominee:
(a) the name, age, residence, address, and business address of each
proposed nominee and of each such person;
(b) the principal occupation or employment, the name, type of business
and address of the corporation or other organization in which such employment is
carried on of each proposed nominee and of each such person;
(c) the amount of stock of the corporation owned beneficially, either
directly or indirectly, by each proposed nominee and each such person; and
(d) a description of any arrangement or understanding of each proposed
nominee and of each such person with each other or any other person regarding
future employment or any
<PAGE>
future transaction to which the corporation will or may be a party.
The presiding officer of the meeting shall have the authority to
determine and declare to the meeting that a nomination not preceded by
notification made in accordance with the foregoing procedure shall be
disregarded.
SECTION 20. RESIGNATIONS. Any director of the corporation may resign
effective upon giving written notice to the Chairman of the Board, the
President, the Secretary or the Board of Directors of the corporation, unless
the notice specifies a later time for the effectiveness of such resignation. If
the resignation specifies effectiveness at a future time, a successor may be
elected pursuant to Section 22 to take office on the date that the resignation
becomes effective.
SECTION 21. REMOVAL. The entire Board of Directors or any individual
director may be removed from office, with or without cause, by the affirmative
vote of at least a majority of the combined voting power of all shares of the
corporation entitled to vote generally in the election of directors, voting
together as a single class.
SECTION 22. VACANCIES. A vacancy or vacancies on the Board of Directors
shall be deemed to exist in case of the death, resignation or removal of any
director, or upon increase in the authorized number of directors or if
stockholders fail to elect the full authorized number of directors at an annual
meeting of stockholders or if, for whatever reason, there are fewer directors on
the Board of Directors than the full number authorized. Such vacancy or
vacancies may be filled by a majority of the remaining directors, though less
than a quorum, or by a sole remaining director, and the directors so chosen
shall hold office for the remainder of the term of the class of the director for
which such vacancy exists and until their earlier resignation or removal. If
there are no directors in office, then an election of directors may be held in
the manner provided by statute.
SECTION 23. REGULAR MEETINGS. Regular meetings of the Board of
Directors shall be held at such times, places and dates as fixed in these bylaws
or by the Board of Directors; provided, however, that if the date for such a
meeting falls on a legal holiday, then the meeting shall be held at the same
time on the next succeeding full business day. Regular meetings of the Board of
Directors held pursuant to this Section 23 may be held without notice.
SECTION 24. PARTICIPATION BY TELEPHONE. Members of the Board of
Directors may participate in a meeting through use of conference telephone or
similar communications equipment, so long as all members participating in such
meeting can hear one another. Such participation constitutes presence in person
at such meeting.
SECTION 25. SPECIAL MEETINGS. Special meetings of the Board of
Directors for any purpose may be called by the Chairman of the Board or the
President or any vice president or the Secretary of the corporation or any two
directors.
SECTION 26. NOTICE OF MEETINGS. Notice of the date, time and place of
all meetings of the Board of Directors, other than regular meetings held
pursuant to Section 24, shall
<PAGE>
be delivered personally, orally or in writing, or by telephone, telegraph or
facsimile, to each director at least 48 hours before the meeting, or sent in
writing to each director by first-class mail, charges prepaid, at least four
days before the meeting. Such notice may be given by the Secretary of the
corporation or by the person or persons who called a meeting. Such notice
need not specify the purpose of the meeting. Notice of any meeting of the
Board of Directors need not be given to any director who signs a waiver of
notice of such meeting, or a consent to holding the meeting or an approval of
the minutes thereof, either before or after the meeting, or who attends the
meeting without protesting prior thereto or at its commencement such
director's lack of notice. All such waivers, consents and approvals shall be
filed with the corporate records or made a part of the minutes of the meeting.
SECTION 27. PLACE OF MEETINGS. Meetings of the Board of Directors may
be held at any place within or without the state which has been designated in
the notice of the meeting or, if not stated in the notice or there is no notice,
designated in the bylaws or by resolution of the Board of Directors.
SECTION 28. ACTION BY WRITTEN CONSENT WITHOUT A MEETING. Any action
required or permitted to be taken by the Board of Directors may be taken without
a meeting, if all members of the Board of Directors individually or collectively
consent in writing to such action. Such written consent or consents shall be
filed with the minutes of the proceedings of the Board of Directors. Such action
by written consent shall have the same force and effect as a unanimous vote of
such directors.
SECTION 29. QUORUM AND TRANSACTION OF BUSINESS. A majority of the
authorized number of directors shall constitute a quorum for the transaction of
business. Every act or decision done or made by a majority of the authorized
number of directors present at a meeting duly held at which a quorum is present
shall be the act of the Board of Directors, unless the law, the Certificate of
Incorporation or these bylaws specifically require a greater number. A meeting
at which a quorum is initially present may continue to transact business,
notwithstanding withdrawal of directors, if any action taken is approved by at
least a majority of the number of directors constituting a quorum for such
meeting. In the absence of a quorum at any meeting of the Board of Directors, a
majority of the directors present may adjourn the meeting, as provided in
Section 30 of these bylaws.
SECTION 30. ADJOURNMENT. Any meeting of the Board of Directors, whether
or not a quorum is present, may be adjourned to another time and place by the
affirmative vote of a majority of the directors present. If the meeting is
adjourned for more than 24 hours, notice of such adjournment to another time or
place shall be given prior to the time of the adjourned meeting to the directors
who were not present at the time of the adjournment.
SECTION 31. ORGANIZATION. The Chairman of the Board shall preside at
every meeting of the Board of Directors, if present. If there is no Chairman of
the Board or if the Chairman is not present, a Chairman chosen by a majority of
the directors present shall act as chairman. The Secretary of the corporation
or, in the absence of the Secretary, any person appointed by the Chairman shall
act as secretary of the meeting.
<PAGE>
SECTION 32. COMPENSATION. Unless otherwise restricted by the
certificate of incorporation or these bylaws, the Board of Directors shall have
the authority to fix the compensation of directors. The directors may be paid
their expenses, if any, of attendance at each meeting of the Board of Directors
and may be paid a fixed sum for attendance at each meeting of the Board of
Directors or a stated salary as director. No such payment shall preclude any
director from serving the corporation in any other capacity and receiving
compensation therefor. Members of special or standing committees may be allowed
like compensation for attending committee meetings.
SECTION 33. COMMITTEES. The Board of Directors may, by resolution
passed by a majority of the whole board, designate one or more committees, each
committee to consist of one or more of the directors of the corporation. The
Board may designate one or more directors as alternate members of any committee,
who may replace any absent or disqualified member at any meeting of the
committee.
In the absence of disqualification of a member of a committee, the
member or members thereof present at any meeting and not disqualified from
voting, whether or not he or they constitute a quorum, may unanimously appoint
another member of the Board of Directors to act at the meeting in the place of
any such absent or disqualified member.
Any such committee, to the extent provided in the resolution of the
Board of Directors, shall have and may exercise all the powers and authority of
the Board of Directors in the management of the business and affairs of the
corporation, and may authorize the seal of the corporation to be affixed to all
papers that may require it; but no such committee shall have the power or
authority in reference to amending the certificate of incorporation, adopting an
agreement of merger or consolidation, recommending to the stockholders the sale,
lease or exchange of all or substantially all of the corporation's property and
assets, recommending to the stockholders a dissolution of the corporation or a
revocation of a dissolution, or amending the bylaws of the corporation; and,
unless the resolution or the certificate of incorporation expressly so provide,
no such committee shall have the power or authority to declare a dividend or to
authorize the issuance of stock. Such committee or committees shall have such
name or names as may be determined from time to time by resolution adopted by
the Board of Directors.
Each committee shall keep regular minutes of its meetings and report
the same to the Board of Directors when required.
ARTICLE IV
OFFICERS
SECTION 34. OFFICERS. The officers of the corporation shall be a
President, Chief Financial Officer and a Secretary. The Board of Directors may
elect from among its members a Chairman of the Board and a Vice Chairman of the
Board. The Board of Directors may also choose one or more Vice-Presidents,
Assistant Secretaries and Assistant Treasurers. Any number of offices may be
held by the same person, unless the certificate of incorporation or
<PAGE>
these bylaws otherwise provide.
SECTION 35. APPOINTMENT. All officers shall be chosen and appointed by
the Board of Directors. The Board of Directors at its first meeting after each
annual meeting of stockholders shall choose a President, a Treasurer, and a
Secretary and may choose Vice Presidents. The Board of Directors may appoint
such other officers and agents as it shall deem necessary who shall hold their
offices for such terms and shall exercise such powers and perform such duties as
shall be determined from time to time by the board.
SECTION 36. INABILITY TO ACT. In the case of absence or inability to
act of any officer of the corporation or of any person authorized by these
bylaws to act in such officer's place, the Board of Directors may from time to
time delegate the powers or duties of such Officer to any other officer, or any
director or other person whom it may select, for such period of time as the
Board of Directors deems necessary.
SECTION 37. RESIGNATION. Any officer may resign at any time upon
written notice to the corporation, without prejudice to the rights, if any, of
the corporation under any contract to which such officer is a party. Such
resignation shall be effective upon its receipt by the Chairman of the Board,
the President, the Secretary or the Board of Directors, unless a different time
is specified in the notice for effectiveness of such resignation. The acceptance
of any such resignation shall not be necessary to make it effective unless
otherwise specified in such notice.
SECTION 38. REMOVAL. Any officer may resign at any time upon written
notice to the corporation, without prejudice to the rights, if any, of the
corporation under any contract to which such officer is a party. Such
resignation shall be effective upon its receipt by the Chairman of the Board,
the President, the Secretary or the Board of Directors, unless a different time
is specified in the notice for effectiveness of such resignation. The acceptance
of any such resignation shall not be necessary to make it effective unless
otherwise specified in such notice.
Any officer may be removed from office at any time, with or without
cause, but subject to the rights, if any, of such officer under any contract of
employment, by the Board of Directors or by any committee to whom such power of
removal has been duly delegated, or, with regard to any officer who has been
appointed by the chief executive officer pursuant to Section 35, by the chief
executive officer or any other officer upon whom such power of removal may be
conferred by the Board of Directors.
SECTION 39. VACANCIES. A vacancy occurring in any office for any cause
may be filled by the Board of Directors, in the manner prescribed by this
Article of the bylaws for initial appointment to such office.
SECTION 40. CHAIRMAN OF THE BOARD. The Chairman of the Board, if any,
shall preside at all meetings of the Board of Directors and of the stockholders
at which he shall be present. He/she shall have and may exercise such powers as
are, from time to time, assigned to him by the Board and as may be provided by
law. In the absence of the Chairman of
<PAGE>
the Board, the Vice Chairman of the Board, if any, shall preside at all
meetings of the Board of Directors and of the stockholders at which he shall
be present. He shall have and may exercise such powers as are, from time to
time, assigned to him by the Board and as may be provided by law.
SECTION 41. PRESIDENT. Subject to such powers, if any, as may be given
by the Board of Directors to the Chairman of the Board, if there be such an
officer, the President shall be the general manager and chief executive officer
of the corporation and shall have general supervision, direction, and control
over the business and affairs of the corporation, subject to the control of the
Board of Directors. The President may sign and execute, in the name of the
corporation, any instrument authorized by the Board of Directors, except when
the signing and execution thereof shall have been expressly delegated by the
Board of Directors or by these bylaws to some other officer or agent of the
corporation. The President shall have all the general powers and duties of
management usually vested in the president of a corporation, and shall have such
other powers and duties as may be prescribed from time to time by the Board of
Directors or these bylaws. The President shall have discretion to prescribe the
duties of other officers and employees of the corporation in a manner not
inconsistent with the provisions of these bylaws and the directions of the Board
of Directors.
SECTION 42. VICE PRESIDENTS. In the absence or disability of the
President, in the event of a vacancy in the office of President, or in the event
such officer refuses to act, the Vice President shall perform all the duties of
the President and, when so acting, shall have all the powers of, and be subject
to all the restrictions on, the President. If at any such time the corporation
has more than one vice president, the duties and powers of the President shall
pass to each vice president in order of such vice president's rank as fixed by
the Board of Directors or, if the vice presidents are not so ranked, to the vice
president designated by the Board of Directors. The vice presidents shall have
such other powers and perform such other duties as may be prescribed for them
from time to time by the Board of Directors or pursuant to Sections 34 and 35 or
otherwise pursuant to these bylaws.
SECTION 43. SECRETARY AND ASSISTANT SECRETARY. The Secretary shall:
(a) Keep, or cause to be kept, minutes of all meetings of
the corporation's stockholders, Board of Directors, and committees of the Board
of Directors, if any. Such minutes shall be kept in written form.
(b) Keep, or cause to be kept, at the principal executive
office of the corporation, or at the office of its transfer agent or registrar,
if any, a record of the corporation's stockholders, showing the names and
addresses of all stockholders, and the number and classes of shares held by
each. Such records shall be kept in written form or any other form capable of
being converted into written form.
(c) Give, or cause to be given, notice of all meetings of
stockholders, directors and committees of the Board of Directors, as required by
law or by these bylaws.
<PAGE>
(d) Keep the seal of the corporation, if any, in safe
custody.
(e) Exercise such powers and perform such duties as are
usually vested in the office of secretary of a corporation, and exercise such
other powers and perform such other duties as may be prescribed from time to
time by the Board of Directors or these bylaws.
If any assistant secretaries are appointed, the assistant secretary, or
one of the assistant secretaries in the order of their rank as fixed by the
Board of Directors or, if they are not so ranked, the assistant secretary
designated by the Board of Directors, in the absence or disability of the
Secretary or in the event of such officer's refusal to act or if a vacancy
exists in the office of Secretary, shall perform the duties and exercise the
powers of the Secretary and discharge Such duties as may be assigned from time
to time pursuant to these bylaws or by the Board of Directors.
SECTION 44. CHIEF FINANCIAL OFFICER. The Chief Financial Officer shall:
(a) Be responsible for all functions and duties of the
treasurer of the corporation.
(b) Keep and maintain, or cause to be kept and maintained,
adequate and correct books and records of account for the corporation.
(c) Receive or be responsible for receipt of all monies
due and payable to the corporation from any source whatsoever; have charge and
custody of, and be responsible for, all monies and other valuables of the
corporation and be responsible for deposit of all such monies in the name and to
the credit of the corporation with such depositories as may be designated by the
Board of Directors or a duly appointed and authorized committee of the Board of
Directors.
(d) Disburse or be responsible for the disbursement of the
funds of the corporation as may be ordered by the Board of Directors or a duly
appointed and authorized committee of the Board of Directors.
(e) Render to the chief executive officer and the Board of
Directors a statement of the financial condition of the corporation if called
upon to do so.
(f) Exercise such powers and perform such duties as are
usually vested in the office of chief financial officer of a corporation, and
exercise such other powers and perform such other duties as may be prescribed by
the Board of Directors or these bylaws.
If any assistant financial officer is appointed, the assistant
financial officer, or one of the assistant financial officers, if there are more
than one in the order of their rank as fixed by the Board of Directors or, if
they are not so ranked, the assistant financial officer designated by the Board
of Directors, shall, in the absence or disability of the Chief Financial Officer
or in the event of such officer's refusal to act, perform the duties and
exercise the powers of the Chief Financial Officer, and shall have such powers
and discharge such duties as may be assigned from
<PAGE>
time to time pursuant to these bylaws or by the Board of Directors.
SECTION 45. COMPENSATION. The compensation of the officers shall be
fixed from time to time by the Board of Directors, and no officer shall be
prevented from receiving such compensation by reason of the fact that such
officer is also a director of the corporation.
ARTICLE V
CONTRACTS, LOANS, BANK ACCOUNTS, CHECKS AND DRAFTS
SECTION 46. EXECUTION OF CONTRACTS AND OTHER INSTRUMENTS. Except as
these bylaws may otherwise provide, the Board of Directors or its duly appointed
and authorized committee may authorize any officer or officers, agent or agents,
to enter into any contract or execute and deliver any instrument in the name of
and on behalf of the corporation, and such authorization may be general or
confined to specific instances. Except as so authorized or otherwise expressly
provided in these bylaws, no officer, agent, or employee shall have any power or
authority to bind the corporation by any contract or engagement or to pledge its
credit or to render it liable for any purpose or in any amount.
SECTION 47. LOANS. No loans shall be contracted on behalf of the
corporation and no negotiable paper shall be issued in its name, unless and
except as authorized by the Board of Directors or its duly appointed and
authorized committee. When so authorized by the Board of Directors or such
committee, any officer or agent of the corporation may effect loans and advances
at any time for the corporation from any bank, trust company, or other
institution, or from any firms, corporation or individual, and for such loans
and advances may make, execute and deliver promissory notes, bonds or other
evidences of indebtedness of the corporation and, when authorized as aforesaid,
may mortgage, pledge, hypothecate or transfer any and all stocks, securities and
other property, real or personal, at any time held by the corporation, and to
that end endorse, assign and deliver the same as security for the payment of any
and all loans, advances, indebtedness, and liabilities of the corporation. Such
authorization may be general or confined to specific instances.
SECTION 48. BANK ACCOUNTS. The Board of Directors or its duly appointed
and authorized committee from time to time may authorize the opening and keeping
of general and/or special bank accounts with such banks, trust companies, or
other depositories as may be selected by the Board of Directors, its duly
appointed and authorized committee or by any officer or officers, agent or
agents, of the corporation to whom such power may be delegated from time to time
by the Board of Directors. The Board of Directors or its duly appointed and
authorized committee may make such rules and regulations with respect to said
bank accounts, not inconsistent with the provisions of these bylaws, as are
deemed advisable.
SECTION 49. CHECKS, DRAFTS, ETC. All checks, drafts or other orders for
the payment of money, notes, acceptances or other evidences of indebtedness
issued in the name of the corporation shall be signed by such officer or
officers, agent or agents, of the corporation, and in such manner, as shall be
determined from time to time by resolution of the Board of
<PAGE>
Directors or its duly appointed and authorized committee. Endorsements for
deposit to the credit of the corporation in any of its duly authorized
depositories may be made, without counter-signature by the President or any
vice president or the Chief Financial Officer or any assistant financial
officer or by any other officer or agent of the corporation to whom the Board
of Directors or its duly appointed and authorized committee, by resolution,
shall have delegated such power or by hand-stamped impression in the name of
the corporation.
ARTICLE VI
CERTIFICATES FOR STOCK AND THEIR TRANSFER
SECTION 50. CERTIFICATE FOR STOCK. Every holder of shares in the
corporation shall be entitled to have a certificate signed in the name of the
corporation by the Chairman or Vice Chairman of the Board or the President or a
Vice President and by the Chief Financial Officer or an assistant financial
officer or by the Secretary or an assistant secretary, certifying the number of
shares and the class or series of shares owned by the stockholder. Any or all of
the signatures on the certificate may be facsimile. In case any officer,
transfer agent or registrar who has signed or whose facsimile signature has been
placed upon a certificate shall have ceased to be such officer, transfer agent
or registrar before such certificate is issued, it may be issued by the
corporation with the same effect as if such person were an officer, transfer
agent or registrar at the date of issue.
In the event that the corporation shall issue any shares as only partly
paid, the certificate issued to represent such partly paid shares shall have
stated thereon the total consideration to be paid for such shares and the amount
paid thereon.
If the corporation shall be authorized to issue more than one class of
stock or more than one series of any class, the powers, designations,
preferences and relative, participating, optional or other special rights of
each class of stock or series thereof and the qualification, limitations or
restrictions of such preferences and/or rights shall be set forth in full or
summarized on the face or back of the certificate that the corporation shall
issue to represent such class or series of stock, provided that, except as
otherwise provided in Section 202 of the General Corporation Law of Delaware, in
lieu of the foregoing requirements, there may be set forth on the face or back
of the certificate that the corporation shall issue to represent such class or
series of stock, a statement that the corporation will furnish without charge to
each stockholder who so requests the powers, designations, preferences and
relative, participating, optional or other special rights of each class of stock
or series thereof and the qualifications, limitations or restrictions of such
preferences and/or rights.
SECTION 51. TRANSFER ON THE BOOKS. Upon surrender to the Secretary or
transfer agent (if any) of the corporation of a certificate for shares of the
corporation duly endorsed, with reasonable assurance that the endorsement is
genuine and effective, or accompanied by proper evidence of succession,
assignment or authority to transfer and upon compliance with applicable federal
and state securities laws and if the corporation has no statutory duty to
inquire into adverse claims or has discharged any such duty and if any
applicable law relating to the collection of taxes has been complied with, it
shall be the duty of
<PAGE>
the corporation, by its Secretary or transfer agent, to cancel the old
certificate, to issue a new certificate to the person entitled thereto and to
record the transaction on the books of the corporation.
SECTION 52. LOST, DESTROYED AND STOLEN CERTIFICATES. The holder of any
certificate for shares of the corporation alleged to have been lost, destroyed
or stolen shall notify the corporation by making a written affidavit or
affirmation of such fact. Upon receipt of said affidavit or affirmation the
Board of Directors, or its duly appointed and authorized committee or any
officer or officers authorized by the Board so to do, may order the issuance of
a new certificate for shares in the place of any certificate previously issued
by the corporation and which is alleged to have been lost, destroyed or stolen.
However, the Board of Directors or such authorized committee, officer or
officers may require the owner of the allegedly lost, destroyed or stolen
certificate, or such owner's legal representative, to give the corporation a
bond or other adequate security sufficient to indemnify the corporation and its
transfer agent and/or registrar, if any, against any claim that may be made
against it or them on account of such allegedly lost, destroyed or stolen
certificate or the replacement thereof. Said bond or other security shall be in
such amount, on such terms and conditions and, in the case of a bond, with such
surety or sureties as may be acceptable to the Board of Directors or to its duly
appointed and authorized committee or any officer or officers authorized by the
Board of Directors to determine the sufficiency thereof. The requirement of a
bond or other security may be waived in particular cases at the discretion of
the Board of Directors or its duly appointed and authorized committee or any
officer or officers authorized by the Board of Directors so to do.
SECTION 53. ISSUANCE, TRANSFER AND REGISTRATION OF SHARES. The Board of
Directors may make such rules and regulations, not inconsistent with law or with
these bylaws, as it may deem advisable concerning the issuance, transfer and
registration of certificates for shares of the capital stock of the corporation.
The Board of Directors may appoint a transfer agent or registrar of transfers,
or both, and may require all certificates for shares of the corporation to bear
the signature of either or both.
ARTICLE VII
INSPECTION OF CORPORATE RECORDS
SECTION 54. INSPECTION BY DIRECTORS. Every director shall have the
absolute right at any reasonable time to inspect and copy all books, records,
and documents of every kind of the corporation and any of its subsidiaries and
to inspect the physical properties of the corporation and any of its
subsidiaries. Such inspection may be made by the director in person or by agent
or attorney, and the right of inspection includes the right to copy and make
extracts.
SECTION 55. INSPECTION BY STOCKHOLDERS.
(a) INSPECTION OF CORPORATE RECORDS. Any stockholder, in person or by
attorney or other agent, shall, upon written demand under oath stating the
purpose thereof, have the right during the usual hours for business to inspect
for any proper purpose the corporation's
<PAGE>
stock ledger, a list of its stockholders, and its other books and records,
and to make copies or extracts therefrom. A proper purpose shall mean a
purpose reasonably related to such person's interest as a stockholder. In
every instance where an attorney or other agent shall be the person who seeks
the right to inspection, the demand under oath shall be accompanied by a
power of attorney or such other writing which authorizes the attorney or
other agent to so act on behalf of the stockholder. The demand under oath
shall be directed to the corporation at is registered office in the State of
Delaware or at its principal place of business.
(b) INSPECTION OF BYLAWS. The original or a copy of these bylaws shall
be kept as provided in Section 43 and shall be open to inspection by the
stockholders at all reasonable times during office hours. A current copy of
these bylaws shall be furnished to any stockholder upon written request.
SECTION 56. WRITTEN FORM. If any record subject to inspection pursuant
to Section 55 is not maintained in written form, a request for inspection is not
complied with unless and until the corporation at its expense makes such record
available in written form.
ARTICLE VIII
MISCELLANEOUS
SECTION 57. FISCAL YEAR. Unless otherwise freed by resolution of the
Board of Directors, the fiscal year of the corporation shall end on the 31st day
of December in each calendar year.
SECTION 58. ANNUAL REPORT.
(a) Subject to the provisions of Section 58 (b), the Board of Directors
shall cause an annual report to be/sent to each stockholder of the corporation
in the manner provided in Section 8 of these bylaws not later than 120 days
after the close of the corporation's fiscal year. Such report shall include a
balance sheet as of the end of such fiscal year and an income statement and
statement of changes in financial position for such fiscal year, accompanied by
any report thereon of independent accountants or, if there is no such report,
the certificate of an authorized officer of the corporation that such statements
were prepared without audit from the books and records of the corporation. Such
report shall be sent to stockholders at least 15 (or, if sent by third-class
mail, 35) days prior to the next annual meeting of stockholders after the end of
the fiscal year to which it relates.
(b) If and so long as there are fewer than 100 holders of record of the
corporation's shares, the requirement of sending of an annual report to the
stockholders of the corporation is hereby expressly waived.
SECTION 59. RECORD DATE. The Board of Directors may fix a time in the
future as a record date for the determination of the stockholders entitled to
notice of or to vote at any meeting or entitled to receive payment of any
dividend or other distribution or allotment of any rights or entitled to
exercise any rights in respect of any change, conversion or exchange of
<PAGE>
shares or entitled to exercise any rights in respect of any other lawful
action. The record date so fixed shall not be more than 60 days nor less than
10 days prior to the date of the meeting nor more than 60 days prior to any
other action or event for the purpose of which it is fixed. If no record date
is fixed, the provisions of Section 14 shall apply with respect to notice of
meetings, votes, and contents and the record date for determining
stockholders for any other purpose shall be at the close of business on the
day on which the Board of Directors adopt the resolutions relating thereto,
or the 60th day prior to the date of such other action or event, whichever is
later.
Only stockholders of record at the close of business on the record date
shall be entitled to notice and to vote or to receive the dividend, distribution
or allotment of rights or to exercise the rights, as the case may be,
notwithstanding any transfer of any shares on the books of the corporation after
the record date, except as otherwise provided in the Certificate of
Incorporation, by agreement or by law.
SECTION 60. BYLAW AMENDMENTS. In furtherance and not in limitation of
the powers conferred by law, the Board of Directors is expressly authorized to
make, alter, amend and repeal these bylaws subject to the power of the holders
of capital stock of the corporation to alter, amend or repeal the bylaws;
provided, however, that, with respect to the powers of holders of capital stock
to make, alter, amend and repeal bylaws of the corporation, notwithstanding any
other provision of these bylaws or any provision of law which might otherwise
permit a lesser vote or no vote, but in addition to any affirmative vote of the
holders of any particular class or series of the capital stock of the
corporation required by law, these bylaws or any preferred stock, the
affirmative vote of the holders of at least a majority of the combined voting
power of all of the then-outstanding shares entitled to vote generally in the
election of directors, voting together as a single class, shall be required to
make, alter, amend or repeal any provision of these bylaws.
SECTION 61. CONSTRUCTION AND DEFINITION. Unless the context requires
otherwise, the general provisions, rules of construction, and definitions
contained in the Delaware General Corporation Law shall govern the construction
of these bylaws. Without limiting the foregoing, "shall" is mandatory and "may"
is permissive.
SECTION 62. REGISTERED STOCKHOLDERS. The corporation shall be entitled
to recognize the exclusive right of a person registered on its books as the
owner of shares to receive dividends, and to vote as such owner, and to hold
liable for calls and assessments a person registered on its books as the owner
of shares and shall not be bound to recognize any equitable or other claim to or
interest in such share or shares on the part of any other person, whether or not
it shall have express or other notice thereof, except as otherwise provided by
the laws of Delaware.
SECTION 63. DIVIDENDS. Dividends upon the capital stock of the
corporation, subject to the provisions of the certificate of incorporation, if
any, may be declared by the Board of Directors at any regular or special
meeting, pursuant to law. Dividends may be paid in cash, in property, or in
shares of the capital stock, subject to the provisions of the certificate of
incorporation.
<PAGE>
Before payment of any dividend, there may be set aside out of any funds
of the corporation available for dividends such sum of sums as the directors
from time to time, in their absolute discretion, think proper as a reserve or
reserves to meet contingencies, or for equalizing dividends, or for repairing or
maintaining any property of the corporation, or for such other purposes as the
directors shall think conducive to the interest of the corporation, and the
directors may modify or abolish any such reserve in the manner in which it was
created.
ARTICLE IX.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
SECTION 64. RIGHT TO INDEMNIFICATION. Each person who was or is made a
party or is threatened to be made a party to or is otherwise involved in any
action, suit or proceeding, whether civil, criminal, administrative or
investigative (hereinafter a "proceeding"), by reason of the fact that he or she
is or was a director or an executive officer of the corporation or is or was
serving at the request of the corporation as a director, officer, employee or
agent of another corporation or of a partnership, joint venture, trust or other
enterprise, including service with respect to an employee benefit plan
(hereinafter an "indemnitee"), whether the basis of such proceeding is alleged
action in an official capacity as a director, officer, employee or agent or in
any other capacity while serving as a director, officer, employee or agent,
shall be indemnified and held harmless by the corporation to the fullest extent
authorized by the Delaware General Corporation Law, as the same exists or may
hereafter be amended (but, in the case of any such amendment, only to the extent
that such amendment permits the corporation to provide broader indemnification
rights than such law permitted the corporation to provide prior to such
amendment), against all expense, liability and loss (including attorneys' fees,
judgments, fines, ERISA excise taxes or penalties and amounts paid in
settlement) reasonably incurred or suffered by such indemnitee in connection
therewith; provided, however, that, except as provided in Section 66 with
respect to proceedings to enforce rights to indemnification, the corporation
shall indemnify any such indemnitee in connection with a proceeding (or part
thereof) initiated by such indemnitee only if such proceeding (or part thereof)
was authorized by the Board of Directors of the corporation.
SECTION 65. RIGHT TO ADVANCEMENT OF EXPENSES. The right to
indemnification conferred in Section 64 shall include the right to be paid by
the corporation the expenses (including attorney's fees) incurred in defending
any such proceeding in advance of its final disposition (hereinafter an
"advancement of expenses"); provided, however, that, if the Delaware General
Corporation Law requires, an advancement of expenses incurred by an indemnitee
in his or her capacity as a director or officer (and not in any other capacity
in which service was or is rendered by such indemnitee, including, without
limitation, service to an employee benefit plan) shall be made only upon
delivery to the corporation of an undertaking (hereinafter an "undertaking"), by
or on behalf of such indemnitee, to repay all amounts so advanced if it shall
ultimately be determined by final judicial decision from which there is no
further right to appeal (hereinafter a "final adjudication") that such
indemnitee is not entitled to be indemnified for such expenses under this
Section 65 or otherwise. The rights to
<PAGE>
indemnification and to the advancement of expenses conferred in Sections 64
and 65 shall be contract rights and such rights shall continue as to an
indemnitee who has ceased to be a director, officer, employee or agent and
shall inure to the benefit of the indemnitee's heirs, executors and
administrators.
SECTION 66. RIGHT OF INDEMNITEE TO BRING SUIT. If a claim under Section
64 or 65 of this ARTICLE IX is not paid in full by the corporation within 60
days after a written claim has been received by the corporation, except in the
case of a claim for an advancement of expenses, in which case the applicable
period shall be 20 days, the indemnitee may at any time thereafter bring suit
against the corporation to recover the unpaid amount of the claim. If successful
in whole or in part in any such suit, or in a suit brought by the corporation to
recover an advancement of expenses pursuant to the terms of an undertaking, the
indemnitee shall be entitled to be paid also the expense of prosecuting or
defending such suit. In (i) any suit brought by the indemnitee to enforce a
right to indemnification hereunder (but not in a suit brought by the indemnitee
to enforce a right to an advancement of expenses) it shall be a defense that,
and (ii) in any suit brought by the corporation to recover an advancement of
expenses pursuant to the terms of an undertaking, the corporation shall be
entitled to recover such expenses upon a final adjudication that, the indemnitee
has not met any applicable standard for indemnification set forth in the
Delaware General Corporation Law. Neither the failure of the corporation
(including its Board of Directors, independent legal counsel, or its
stockholders) to have made a determination prior to the commencement of such
suit that indemnification of the indemnitee is proper in the circumstances
because the indemnitee has met the applicable standard of conduct set forth in
the Delaware General Corporation Law, nor an actual determination by the
corporation (including its Board of Directors, independent legal counsel, or its
stockholders) that the indemnitee has not met such applicable standard of
conduct, shall create a presumption that the indemnitee has not met the
applicable standard of conduct or, in the case of such a suit brought by the
indemnitee, be a defense to such suit. In any suit brought by the indemnitee to
enforce a right to indemnification or to an advancement of expenses hereunder,
or brought by the corporation to recover an advancement of expenses pursuant to
the terms of an undertaking, the burden of proving that the indemnitee is not
entitled to be indemnified, or to such advancement of expenses, under this
ARTICLE IX or otherwise shall be on the corporation.
SECTION 67. NON-EXCLUSIVITY OF RIGHTS. The rights to indemnification
and to the advancement of expenses conferred in this ARTICLE IX shall not be
exclusive of any other right which any person may have or hereafter acquire
under any statute, the corporation's Certificate of Incorporation, bylaws,
agreement, vote of stockholders or disinterested directors or otherwise.
SECTION 68. INSURANCE. The corporation may maintain insurance, at its
expense, to protect itself and any director, officer, employee or agent of the
corporation or another corporation, partnership, joint venture, trust or other
enterprise against any expense, liability or loss, whether or not the
corporation would have the power to indemnify such person against such expense,
liability or loss under the Delaware General Corporation Law.
SECTION 69. INDEMNIFICATION OF EMPLOYEES AND AGENTS OF THE
<PAGE>
CORPORATION. The corporation may, to the extent authorized from time to time
by the Board of Directors, grant rights to indemnification and to the
advancement of expenses to any officer, employee or agent of the corporation
to the fullest extent of the provisions of this Article with respect to the
indemnification and advancement of expenses of directors and executive
officers of the corporation.
<PAGE>
HYBRID NETWORKS, INC.
1999 STOCK OPTION PLAN
AS ADOPTED AS OF MAY 5, 1999 AND AMENDED AS OF AUGUST 10, 1999 AND
OCTOBER 7, 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 4,000,000 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 will be proportionately adjusted, 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) or consultants 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:
<PAGE>
(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;
(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
<PAGE>
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 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
<PAGE>
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 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
<PAGE>
(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
(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
<PAGE>
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 surrender and
cancellation of any or all outstanding Awards. The Committee
<PAGE>
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
<PAGE>
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 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.
<PAGE>
"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 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
<PAGE>
(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 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.
"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").
<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 will be proportionately adjusted, 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;
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<PAGE>
(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 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
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<PAGE>
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 (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
3
<PAGE>
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 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;
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<PAGE>
(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.
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
5
<PAGE>
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 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
6
<PAGE>
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 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
7
<PAGE>
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 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 Company,
other than as a result of having a Disability, or a breach of any applicable
8
<PAGE>
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.
9
<PAGE>
"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 (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").
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<PAGE>
MILBERG WEISS BERSHAD
HYNES & LERACH LLP
WILLIAM S. LERACH (68581)
KEITH F. PARK (54275)
600 West Broadway, Suite 1800
San Diego, CA 92101
Telephone: 619/231-1058
- and -
REED R. KATHREIN (139304)
KIMBERLY C. EPSTEIN (169012)
222 Kearny Street, 10th Floor
San Francisco, CA 94108
Telephone: 415/288-4545
COHEN, MILSTEIN, HAUSFELD
& TOLL, P.L.L.C.
STEVEN J. TOLL
KRISTOPHER A. KINKADE
999 Third Avenue, Suite 3600
Seattle, WA 98104
Telephone: 206/521-0080
Co-Lead Counsel for Plaintiffs
UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF CALIFORNIA
SAN JOSE DIVISION
MARK ALAN ROSENBERG, et al., On ) No. C-98-20956-RMW
Behalf of Themselves and All ) (Consolidated with No.
Others Similarly Situated, ) C-98-20888-RMW)
)
Plaintiffs, ) CLASS ACTION
) ------------
vs. )
)
HYBRID NETWORKS, INC., et al., )
)
Defendants. )
- -----------------------------------
STIPULATION OF SETTLEMENT
<PAGE>
This Stipulation of Settlement, dated as of March 3, 1999 (the
"Stipulation"), is made and entered into by and among the following parties (as
defined further in SectionIV hereof) to the above-entitled action: (i)
Representative Plaintiffs (on behalf of themselves and each of the other
Settlement Class Members), by and through their Settlement Counsel; and (ii)
Settling Defendants, by and through their Counsel of Record. The Stipulation is
intended by the Settling Parties to fully, finally and forever resolve,
discharge and settle the Released Claims and the Litigation, with respect to the
Settling Parties and their Related Parties, and to bar all future claims
relating to the subject matter of the Litigation against the Settling Defendants
and their Related Parties including claims by the Non-Settling Defendant, upon
and subject to the terms and conditions hereof.
I. THE LITIGATION
On and after July 10, 1998, the following class actions were filed in
the United States District Court for the Northern District of California (the
"Court"): ROSENBERG V. NATIONSBANC MONTGOMERY SECURITIES, INC., ET AL.,
C-98-2731-SI and NGUYEN V. HYBRID NETWORKS, INC., ET AL., C-98-20888-RMW. These
actions were subsequently consolidated (the "Federal Action"). The Federal
Action names as defendants Hybrid Networks, Inc. ("Hybrid" or the "Company"),
certain of its present and former officers and directors, the lead underwriters
of Hybrid's initial public offering and its auditors, and alleges violations of
Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (the
"Exchange Act") and Rule 10b-5 promulgated thereunder and violations of
Sections 11, 12
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<PAGE>
and 15 of the Securities Act of 1933. Hybrid is a broadband access equipment
provider which designs, develops, manufactures and markets wireless and cable
systems. The Federal Action alleges that, during the Class Period, the
Defendants disseminated false financial statements and made other
misrepresentations regarding Hybrid and its operations.
On September 8, 1998, the plaintiffs in the NGUYEN action filed their
motion to be appointed Lead Plaintiffs and for approval of Milberg Weiss Bershad
Hynes & Lerach LLP and Cohen, Milstein, Hausfeld & Toll, P.L.L.C. to act as Lead
Plaintiffs' Counsel. The Court granted the motion on December 11, 1998.
On and after June 5, 1998 the following actions were filed in the
Superior Court for the State of California, County of Santa Clara (the "State
Court"):
PARNES V. NATIONSBANC MONTGOMERY SECURITIES, ET AL.,
----------------------------------------------------
CV774486
NUSSBAUM V. NATIONSBANC MONTGOMERY SECURITIES, ET AL.,
------------------------------------------------------
CV774572
SCHNECK V. NATIONSBANC MONTGOMERY SECURITIES, ET AL.,
-----------------------------------------------------
CV774641
BICKELL V. HYBRID NETWORKS, INC., ET AL.,
-----------------------------------------
CV774769
BRAINARD V. NATIONSBANC MONTGOMERY SECURITIES, ET AL.,
------------------------------------------------------
CV775464
MAGGIARO V. NATIONSBANC MONTGOMERY SECURITIES, ET AL.,
------------------------------------------------------
CV774855
(the "State Actions"). The State Actions were consolidated by Order dated
October 29, 1998. The State Actions and the Federal Action are based on the same
factual allegations. The Federal Action and the State Actions are collectively
referred to herein as the "Litigation."
-2-
<PAGE>
Class Counsel have performed substantial investigation with respect to
the claims asserted and the defenses that were or could be asserted in the
Litigation. Among other things, Class Counsel consulted with experts, including
damages and accounting experts; subpoenaed documents from 24 third parties and
underwriters, and analyzed approximately 5,000 pages of produced documents, as
well as Hybrid's public filings, annual reports, and other public statements;
reviewed related public filings and reports by securities analysts; and
researched the applicable law with respect to the claims asserted and the
potential defenses thereto. In addition, Settling Defendants' Counsel of Record
met several times with Plaintiffs' Settlement Counsel to discuss the class's
allegations and key internal documents.
II. CLAIMS OF THE REPRESENTATIVE PLAINTIFFS AND BENEFITS OF
SETTLEMENT
The Representative Plaintiffs and Plaintiffs' Settlement Counsel have
concluded that it is in the best interests of the Representative Plaintiffs and
Settlement Class Members that the Litigation be settled on the terms and
conditions set forth in this Stipulation. The Representative Plaintiffs and
Plaintiffs' Settlement Counsel have reached this conclusion after considering
the risks and uncertainties of prevailing on the claims at the pleading stage,
summary judgment or trial due to the defenses that have been or could be
asserted by Settling Defendants. These include, among other things, whether
Representative Plaintiffs have met the requirements for pleading a claim;
whether Settling Defendants ever issued any false or misleading statements;
whether
-3-
<PAGE>
any statements, if false or misleading, were material; whether any Settling
Defendant acted with scienter; and whether the Representative Plaintiffs or
any Settlement Class Member suffered any loss as a result of any alleged
action or statement by any of the Settling Defendants. Further considerations
supporting the decision to enter into the Settlement described herein were
the expense and length of continued proceedings necessary to prosecute the
Litigation against Settling Defendants through trial and through appeals and
the substantial benefits the Settlement confers upon the Representative
Plaintiffs and the Settlement Class.
III. SETTLING DEFENDANTS' STATEMENT AND DENIALS OF WRONGDOING AND LIABILITY
Settling Defendants have denied and continue to deny each and all of
the claims and contentions alleged by the Representative Plaintiffs in the
Litigation. Nonetheless, Settling Defendants have concluded that it is in their
best interests that the Litigation be settled on the terms and conditions set
forth in this Stipulation. Settling Defendants have reached this conclusion
after (1) analyzing the factual and legal issues in the Litigation; (2)
determining that further conduct of the Litigation would be protracted and
expensive, including potential litigation not only through trial, but also
through any appeals that might be taken; and (3) considering the substantial
benefits to Settling Defendants and Hybrid's shareholders of a final resolution
of the Litigation, including avoiding further expenses, disposing of burdensome
and protracted litigation, and permitting Settling Defendants to
-4-
<PAGE>
conduct their business unhampered by the distractions of continued litigation.
IV. DEFINED TERMS OF STIPULATION AND AGREEMENT OF SETTLEMENT
NOW, THEREFORE, IT IS HEREBY STIPULATED AND AGREED by the
Representative Plaintiffs for themselves and on behalf of the other Settlement
Class Members, and by Settling Defendants, by and through their respective
counsel, that subject to the approval of the Court, the Litigation and the
Released Claims shall be finally and fully compromised, settled and released,
and the Litigation shall be dismissed with prejudice, as to the Settling
Parties, upon and subject to the terms and conditions of the Stipulation, as
follows:
1. DEFINITIONS
As used in the Stipulation, the following terms have the meanings
specified below:
1.1 "Authorized Claimant" means any claimant whose timely claim for
recovery has been allowed pursuant to the terms of the Stipulation and the Plan
of Allocation.
1.2 "Authorized Stock Recipient" means a Person who is to receive
shares of the Settlement Stock.
1.3 "Claimant" means any Settlement Class Member who files a Proof
of Claim in such form and manner, and within such time, as the Court shall
prescribe.
1.4 "Claims Administrator" or the "Receiver" means Gilardi & Co.,
P.O. Box 5100, Larkspur, California 94977-5100.
-5-
<PAGE>
1.5 "Defendants" means Hybrid, Carl S. Ledbetter, Dan E. Steimle,
James R. Flach, Stephen E. Halprin, Gary M. Lauder, Douglas M. Leone, Gustavo
Ezcurra, Howard L. Strachman and PriceWaterhouseCoopers LLP.
1.6 "Effective Date" means the first date by which all of the
events and conditions specified in PARA10.1 of the Stipulation have occurred
or have been met.
1.7 "Escrow Agent" means Milberg Weiss Bershad Hynes & Lerach LLP or
its successors.
1.8 "Final" means the latest of:
(a) the date of final affirmance of any appeal of any judgment
or order of dismissal, the expiration of the time for a petition for a writ of
certiorari or writ of review to review any judgment or order of dismissal and,
if certiorari or review is granted, the date of final affirmance of any judgment
or order of dismissal following review pursuant to that grant; or
(b) the date of final dismissal or withdrawal of any appeal from
any judgment or order of dismissal or the final dismissal, denial or withdrawal
of any proceeding on certiorari or writ of review to review any judgment or
order of dismissal;
(c) the expiration date of the time for the filing or noticing
of any appeal from any judgment or order of dismissal; or
(d) for purposes of this paragraph, an "appeal" shall include
any petition for a writ of certiorari or other writ that may be filed in
connection with approval or disapproval of this Settlement, but shall not
include any appeal that concerns only the issue of attorneys' fees and
reimbursement of costs and disbursements awarded to Class Counsel or any Plan of
Allocation.
-6-
<PAGE>
1.9 "Hybrid" or the "Company" means Hybrid Networks, Inc. or any of its
predecessors, successors, parents, subsidiaries, divisions, affiliates or
related affiliates, officers, directors, or employees. For purposes of
Sections 4 and 5, "Hybrid" or the "Company" does not include its officers,
directors or employees.
1.10 "Individual Settling Defendants" means Carl S. Ledbetter, Dan E.
Steimle, James R. Flach, Stephen E. Halprin, Gary M. Lauder, Douglas M. Leone,
Gustavo Ezcurra and Howard L. Strachman.
1.11 "Judgment" means the Final Judgment and Order of Dismissal to be
rendered by the Court, substantially in the form attached hereto as Exhibit B.
1.12 "Non-Settling Defendant" means PriceWaterhouseCoopers LLP.
1.13 "Notice Order" means the Order preliminarily approving the
Settlement provided for in PARA6.1.
1.14 "Parties" or "Settling Parties" means, collectively, each of the
Settling Defendants, and the Representative Plaintiffs on behalf of themselves
and the other Members of the Settlement Class.
1.15 "Person" means a natural person, individual, corporation,
partnership, limited partnership, association, joint venture, joint stock
company, estate, legal representative, trust, unincorporated association,
government or any political subdivision or agency thereof, and any business or
legal entity and their/its heirs, executors, administrators, predecessors,
successors, representatives, or assignees.
1.16 "Plaintiffs' Settlement Counsel" or "Settlement Counsel" means the
following counsel for the Representative Plaintiffs in the Litigation: Milberg
Weiss Bershad Hynes & Lerach LLP, Keith F.
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<PAGE>
Park, Reed R. Kathrein, 600 W. Broadway, Suite 1800, San Diego, California,
92101, Telephone: 619/231-1058 and Steven J. Toll, Cohen, Milstein, Hausfeld
& Toll, P.L.L.C., 1100 New York Avenue, N.W., West Tower, Suite 500,
Washington, DC 20005-3964, Telephone: 202/408-4600.
1.17 "Plan of Allocation" means a plan or formula of allocation of the
Settlement Fund which shall be described in the "Notice of Pendency and
Settlement of Class Action and Settlement Hearing" to be sent to Settlement
Class Members in connection with the Settlement whereby the Settlement Fund
shall be distributed to Authorized Claimants after payment of expenses of notice
and administration of the Settlement, any taxes, penalties or interest or tax
preparation fees owed by the Settlement Fund, and such attorneys' fees, costs,
expenses and interest as may be awarded by the Court. The Plan of Allocation is
not part of the Stipulation.
1.18 "Preliminary Approval" means the signed Notice Order or an order
signed by the Court substantially in the form attached hereto as Exhibit A.
1.19 "Related Parties" means each of any Settling Defendants' past,
present or future directors, officers, employees, partnerships and partners,
principals, agents (except securities brokers and dealers), controlling
shareholders, any entity in which any Settling Defendant and/or any member(s) of
that Settling Defendant's immediate family has or have a controlling interest,
attorneys, accountants, auditors (except the Non-Settling Defendant), advisors,
personal or legal representatives, underwriters, syndicate members, banks,
investment banks or investment bankers, analysts, associates, insurers,
co-insurers and
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reinsurers, predecessors, successors, parents, subsidiaries, divisions,
assigns, joint ventures and joint venturers, spouses, heirs, executors,
administrators, related or affiliated entities, any members of an Individual
Settling Defendant's immediate family, or any trust of which any Settling
Defendant is the settlor or which is for the benefit of any Individual
Settling Defendant and/or member(s) of his family. Related Parties does not
include the Non-Settling Defendant.
1.20 "Released Claims" means the "Released Class Claims" and "Unknown
Claims" as defined herein.
1.21 "Released Class Claims" means any and all claims, actions, demands,
rights, liabilities, suits, and causes of action of every nature and description
whatsoever, known or unknown, that were asserted or that could or might have
been asserted in any pleading or amended pleading by the Representative
Plaintiffs, by the Representative Plaintiffs on behalf of the class, or by any
of the other Settlement Class Members against Released Persons, based upon,
arising from, or in any way related to both the purchase of Hybrid common stock
by the Representative Plaintiffs or the other Settlement Class Members during
the Settlement Class Period and the facts, transactions, events, occurrences,
disclosures, statements, acts or omissions or failures to act which were or
could have been alleged in the Litigation; or any claim that the Settling
Defendants or their Related Parties improperly defended or settled the
Litigation and/or the Released Claims.
1.22 "Released Persons" means each and all of the Settling Defendants,
and their respective Related Parties. Released Persons does not include the
Non-Settling Defendant.
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1.23 "Representative Plaintiffs" or "Plaintiffs" means each Person named
as a Plaintiff in the Federal Action.
1.24 "Representative Plaintiffs' Counsel" or "Class Counsel" means the
law firms representing the Representative Plaintiffs.
1.25 "Settlement" means the terms and conditions set forth in the
Stipulation of Settlement.
1.26 "Settlement Class" or "Class" means all Persons who purchased
Hybrid common stock between November 12, 1997 and June 17, 1998, inclusive.
Excluded from the Class are the Defendants named in the Litigation, members of
the immediate family of the Individual Defendants, any entity in which any
Defendant has a controlling interest, and the legal representatives, heirs,
successors, or assigns of the Defendants. Also excluded are those Persons who
timely and validly request exclusion from the Class pursuant to the "Notice of
Pendency and Settlement of Class Action and Settlement Hearing" to be sent to
the Class substantially in the form of Exhibit A-1 hereto.
1.27 "Settlement Class Member" or "Member of the Settlement Class"
means a Person who falls within the definition of the Settlement Class as set
forth in PARA1.26 of the Stipulation.
1.28 "Settlement Class Period" or "Class Period" means the period from
November 12, 1997 through June 17, 1998, inclusive.
1.29 "Settlement Fund" means (a) the principal amount of Eight
Million Eight Hundred Thousand Dollars ($8.8 million) in cash together with
any interest earned or accrued while in escrow or as provided by PARA2.1 of
this Stipulation; and (b) Three Million (3.0 million) shares of Hybrid common
stock (the "Settlement Stock") subject to the terms and conditions of
PARAS4.1-4.5 hereof; (c) if
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prior to December 3, 1999, Hybrid is sold, acquired or merged in a
transaction in which the consideration for such sale, acquisition or merger
is paid by the acquirer to Hybrid's stockholders (rather than to Hybrid
itself for ultimate distribution to its stockholders as provided in PARA(d)
below), Hybrid shall pay or cause to be paid, within 30 days after such sale,
acquisition or merger, an amount in cash, freely tradable securities or other
property that is equal to 10% of the consideration paid by the acquirer to
Hybrid's stockholders in the sale, acquisition or merger; and (d) if Hybrid
sells all or substantially all its assets on or before December 3, 1999 (or
after that date but the sale is the subject of ongoing negotiations before
that date), Hybrid shall pay or cause to be paid, within 30 days after such
sale, an amount equal to 10% of the consideration it receives from such sale,
except that, if any portion of the proceeds of such sale are used in a
liquidation or partial liquidation of Hybrid to pay Hybrid's creditors, then
Hybrid shall pay into the Settlement Fund an amount equal to 10% of the
amount of such net proceeds that it would otherwise distribute to its
stockholders in such liquidation, which payment shall be made on or before
the date on which distribution of any such net proceeds is made to such
stockholders. In no event shall Hybrid make payments pursuant to both (c) and
(d) of this PARA1.29.
1.30 "Settlement Hearing" means the hearing to determine whether the
proposed Settlement of the Federal Action should be approved as fair, reasonable
and adequate; whether the proposed Plan of Allocation of the Net Settlement Fund
should be approved; and whether the application of Class Counsel for attorneys'
fees, costs and expenses should be approved.
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1.31 "Settling Defendants" means Hybrid, Carl S. Ledbetter, Dan E.
Steimle, James R. Flach, Stephen E. Halprin, Gary M. Lauder, Douglas M. Leone,
Gustavo Ezcurra and Howard L. Strachman.
1.32 "Settling Defendants' Counsel of Record" means Morrison & Foerster
LLP.
1.33 "Settling Parties" means, collectively, each of the Settling
Defendants, and the Representative Plaintiffs on behalf of themselves and each
of the Settlement Class Members.
1.34 "State Court Judgment" means the Judgment provided for in the
Stipulation and [Proposed] Order Re: Entry of Judgment attached hereto as
Exhibit C.
1.35 "Stipulation" means this Stipulation of Settlement.
1.36 "Unknown Claims" means any Released Class Claims which the
Representative Plaintiffs or any other Settlement Class Member do not know or
suspect to exist in their favor at the time of the release of the Released
Persons which, if known by them, might have affected their Settlement with and
release of the Released Persons, or might have affected their decision not to
object to this Settlement. With respect to any and all Released Class Claims
against the Released Persons, the Parties stipulate and agree that, upon the
Effective Date, the Representative Plaintiffs shall expressly waive and
relinquish, and the other Settlement Class Members shall be deemed to have, and
by operation of the Judgment shall have, expressly waived and relinquished, to
the fullest extent permitted by law, the provisions, rights, and benefits
conferred by Section1542 of the California Civil Code, which provides:
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
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him must have materially affected his settlement with the debtor
and by any law of any state or territory of the United States, or principle
of common law, or of international or foreign law, which is similar,
comparable or equivalent to Section1542 of the California Civil Code. The
Representative Plaintiffs and the other Settlement Class Members may
hereafter discover facts in addition to or different from those which he, she
or it now knows or believes to be true with respect to the Released Class
Claims, but hereby stipulate and agree that upon the Effective Date, the
Representative Plaintiffs fully, finally and forever settle and release, and
each other Settlement Class Member shall be deemed to have, and by operation
of the Judgment shall have, fully, finally, and forever settled and released
any and all Released Class Claims against the Released Persons, known or
unknown, suspected or unsuspected, contingent or non-contingent, whether or
not concealed or hidden, which now exist, or heretofore have existed, upon
any theory of law or equity now existing or coming into existence in the
future, including, but not limited to, conduct which is negligent,
intentional, with or without malice, or a breach of any duty, law or rule,
without regard to the subsequent discovery or existence of such different or
additional facts. The Settling Parties acknowledge that the foregoing waiver
was bargained for and a key element of the Settlement of which the release in
this PARA1.36 is a part.
2. ESTABLISHMENT AND MAINTENANCE OF THE SETTLEMENT FUND
2.1 The Settling Defendants directors' and officers' insurer paid or
caused to be paid Eight Million Eight Hundred Thousand
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($8.8 million) into an interest bearing escrow account maintained by the
Escrow Agent on March 15, 1999, receipt of which Representative Plaintiffs'
Counsel acknowledges.
3. ADMINISTRATION OF THE SETTLEMENT FUND
a. THE ESCROW AGENT
3.1 The Escrow Agent shall invest the cash portion of the Settlement
Fund in instruments backed by the full faith and credit of the United States
Government or fully insured by the United States Government or an agency thereof
and shall reinvest the proceeds of these instruments as they mature in similar
instruments at the then-current market rates. Neither Settling Defendants nor
Settling Defendants' Counsel of Record shall have any responsibility or
liability for investment decisions.
3.2 The Escrow Agent shall not disburse the Settlement Fund except as
provided for in the Stipulation, or by an Order of the Court, or with the
written agreement of Settling Defendants' Counsel of Record and Plaintiffs'
Settlement Counsel.
3.3 The Escrow Agent is authorized to execute such transactions on
behalf of the Settlement Class Members as are consistent with the terms of the
Stipulation.
3.4 All funds held by the Escrow Agent shall be deemed and considered to
be in CUSTODIA LEGIS of the Court, and shall remain subject to the jurisdiction
of the Court, until such time as such funds shall be distributed pursuant to the
Stipulation, the Plan of Allocation and/or further order(s) of the Court.
3.5 Within ten (10) days after the transfer of the Settlement Fund or a
portion thereof to the Escrow Agent, the Escrow Agent may establish a "Notice
and Administration Fund," and $50,000 may be
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transferred from the Settlement Fund to it. The Notice and Administration
Fund may be used by Plaintiffs' Settlement Counsel to pay costs and expenses
reasonably and actually incurred in connection with providing notice to the
Settlement Class, locating Settlement Class Members, assisting with the
filing of claims, administering and distributing the Settlement Fund to the
Members of the Settlement Class, processing Proof of Claim and Release forms
and paying escrow fees and costs, if any. The Notice and Administration Fund
may also be invested and earn interest as provided for in PARA3.1 of this
Stipulation.
3.6 On the Effective Date, any balance (including interest) then
remaining in the Notice and Administration Fund, less expenses incurred but
not yet paid, may be transferred by the Escrow Agent to, and deposited and
credited as part of, the Settlement Fund to be applied as set forth in
PARA8.2 below. Thereafter, Plaintiffs' Settlement Counsel shall have the
right to use such portions of the Settlement Fund as are, in their exercise
of reasonable judgment, necessary to carry out the purposes set forth in
PARA3.5.
b. TAXES
3.7 (a) The Parties and the Escrow Agent agree to treat the Settlement
Fund as being at all times a "qualified Settlement fund" within the meaning of
Treas. Reg. Section1.468B-1. In addition, the Escrow Agent and, as required, the
Settling Defendants contributing any settlement consideration shall jointly and
timely make the "relation-back election" (as defined in Treas. Reg.
Section1.468B-1) back to the earliest permitted date. Such election shall be
made in compliance with the procedures and requirements contained in such
regulations. It shall be the responsibility of the Escrow Agent to
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timely and properly prepare and deliver the necessary documentation for
signature by all necessary parties, and thereunder to cause the appropriate
filing to occur.
(b) For the purposes of Section468B of the Internal Revenue Code
of 1986, and Treas. Reg. Section1.468B, the "administrator" shall be the
Escrow Agent. The Escrow Agent shall timely and properly file all
informational and other tax returns necessary or advisable with respect to
the Settlement Fund (including without limitation the returns described in
Treas. Reg. Section1.468B-2(k)). Such returns (as well as the election
described in PARA3.7(a)) shall be consistent with this PARA3.7 and in all
events shall reflect that all taxes (including any estimated taxes, interest
or penalties) on the income earned by the Settlement Fund shall be paid out
of the Settlement Fund as provided in PARA3.7(c) hereof.
(c) All (i) taxes (including any estimated taxes, interest or
penalties) arising with respect to the income earned by the Settlement Fund
("Taxes") and (ii) expenses and costs incurred in connection with the
operation and implementation of this PARA3.7 (including, without limitation,
expenses of tax attorneys and/or accountants and mailing and distribution
costs and expenses relating to filing (or failing to file) the returns
described in this PARA3.7) ("Tax Expenses"), shall be paid out of the
Settlement Fund; in all events the Settling Defendants shall have no
liability or responsibility for the Taxes, the Tax Expenses, or the filing of
any tax returns or other documents with the Internal Revenue Service or any
other state or local taxing authority. The Escrow Agent shall indemnify and
hold Settling Defendants harmless for Taxes and Tax Expenses (including,
without limitation, Taxes
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payable by reason of any such indemnification). Further, Taxes and Tax
Expenses shall be treated as, and considered to be, a cost of administration
of the Settlement and shall be timely paid by the Escrow Agent out of the
Settlement Fund without prior order from the Court, and the Escrow Agent
shall be obligated (notwithstanding anything herein to the contrary) to
withhold from distribution to Authorized Claimants any funds necessary to pay
such amounts (as well as any amounts that may be required to be withheld
under Treas. Reg. Section1.468B-2(1)-(2)); the Settling Defendants are not
responsible and shall have no liability therefor, or for any reporting
requirements that may relate thereto. The Settling Parties hereto agree to
cooperate with the Escrow Agent, each other, and their tax attorneys and
accountants to the extent reasonably necessary to carry out the provisions of
this PARA3.7.
c. TERMINATION
3.8 In the event that the Stipulation is not approved, or is
terminated, canceled, or fails to become effective for any reason, the
Settlement Fund (including accrued interest) and the funds in the Notice and
Administration Fund (described in PARA3.5 above), less expenses actually
paid, incurred or due and owing in connection with the Settlement provided
for herein, shall be refunded to Settling Defendants as provided in PARA8.5
below.
d. WARRANTIES
3.9 Each Settling Defendant warrants as to himself or itself, that he
or it has a good faith belief that the payments made or caused to be made by
him or it or on his or its behalf on March 15, 1999 pursuant to PARA2.1
above, did not render him or it insolvent within the meaning of and/or for
the purposes of United States
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Bankruptcy Code Section101(32) and/or Section547. This warranty is made by
each such Settling Defendant and not by each Settling Defendant's Counsel of
Record.
3.10 If a case is commenced with respect to any Defendant under Title
11 of the United States Code (Bankruptcy), or a trustee, receiver or
conservator is appointed under any similar law, and in the event of the entry
of a final order of a court of competent jurisdiction determining the
transfer of the March 15, 1999 payment pursuant to PARA2.1, or any portion
thereof, to be a preference, voidable transfer, fraudulent conveyance or
similar transaction as to a Settling Defendant, then, as to such Settling
Defendant only, the releases given and Judgment entered in favor of such
Settling Defendant pursuant to this Stipulation shall be null and voidable by
Representative Plaintiffs, but only to the extent of any recovery of such
preference, voidable transfer, fraudulent conveyance, or similar transaction.
4. RIGHTS WITH RESPECT TO THE SETTLEMENT STOCK
4.1 To facilitate the issuance and distribution of the Settlement Stock,
the Parties shall request the Court to appoint Gilardi & Co. LLC as Receiver in
connection therewith. Hybrid shall hold Gilardi & Co. LLC harmless from all
claims, demands, liabilities, rights, causes of action, or proceedings asserted
against Gilardi & Co. LLC for the distribution of unregistered securities in its
capacity as Receiver.
4.2 Notwithstanding anything to the contrary in this Stipulation, Hybrid
shall not issue any Settlement Stock unless: (i) the Court has held a hearing
(the "Settlement Hearing") on the fairness of the terms and conditions of this
Stipulation and the
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issuance of the Settlement Stock pursuant hereto; (ii) all Persons to whom
any Settlement Stock is to be issued receive notice of the Settlement Hearing
and of the right to be heard at such hearing; (iii) the Court is advised
prior to the hearing that registration of the Settlement Stock under the
Securities Act of 1933, as amended (the "Securities Act"), will not be
required by virtue of the Court's approval of this Stipulation and the
issuance of the Settlement Stock; and (iv) the Court approves the fairness of
this Stipulation and the issuance of the Settlement Stock. In order that the
Settlement Stock may be distributed to, and be fully and freely traded by,
the recipients who are not deemed affiliates of Hybrid within the meaning of
Rule 144(a)(1) of the Securities Act ten (10) days before the Settlement
Hearing date, Hybrid shall provide Plaintiffs' Settlement Counsel with the
written opinion of outside counsel substantially to the effect that, upon
approval of the Settlement by the Court in accordance with the procedures set
forth herein and the filing of the Judgment: (a) the issuance of the
Settlement Stock will be exempt from the registration requirements of the
Securities Act; (b) the shares of Settlement Stock will not be "restricted
securities" as defined in Rule 144(a)(3) under the Securities Act; (c) the
Authorized Stock Recipients who acquire the Settlement Stock and who are not
deemed affiliates of Hybrid within the meaning of Rule 144(a)(1) may sell
such shares without registration under the Securities Act without compliance
with Rule 144 under the Securities Act; (d) the Authorized Stock Recipients
who acquire the Settlement Stock and who are deemed affiliates of Hybrid
within the meaning of Rule 144(a)(1) under the Securities Act may sell such
shares in
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compliance with Rule 144 under the Securities Act, but without regard to the
holding period requirements of Rule 144(d); and (e) when issued in accordance
with the procedures provided for in this Stipulation, such shares will be
fully paid and non-assessable. Within 30 days after the Claims Administrator
shall have provided Hybrid with a written list identifying the states in
which the Settlement Class Members are located, Hybrid shall provide
Plaintiffs' Settlement Counsel with the written opinion of outside counsel
substantially to the effect that, upon approval of the Settlement by the
Court in accordance with the procedures set forth herein, the filing of the
Judgment and the issuance of the Settlement Stock in such states to such
Persons in accordance with the procedures provided for herein, such issuance
will be qualified or exempt from qualification under the blue sky laws of
such states, except that, to the extent that qualification is required in any
state and the state securities administrator has not granted qualification by
the Effective Date, the shares that would otherwise be distributed in such
state will be held by the Claims Administrator until such counsel has
certified that such qualification has been granted, except that, if such
qualification has not been granted six months after the Effective Date, those
affected Authorized Claimants shall receive equivalent cash consideration
from the Settlement Fund in lieu of the payment of stock.
4.3 Within five (5) business days of the completion of claims
administration, the Claims Administrator shall provide Hybrid's transfer agent
with a list identifying each Settlement Class Member who is entitled to receive
stock and the number of shares of
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Settlement Stock to be issued to each such Person. Hybrid shall direct its
stock transfer agent to issue and distribute the certificates representing
the Settlement Stock within ten (10) business days of receipt of the list of
the Persons and in the amounts shown on said list. Any reasonable costs
associated with the distribution of the Settlement Stock, including all
reasonable fees charged by the transfer agent, shall be considered a cost of
administration of the Settlement and shall be paid from the Settlement Fund.
4.4 To the extent that the Court authorizes the distribution of a
portion of the Settlement Stock as payment of any portion of the attorneys'
fees to counsel for the Representative Plaintiffs, Hybrid shall direct its
stock transfer agent to issue and distribute the stock on or before the fifth
business day following the Effective Date.
4.5 The remainder of the Settlement Stock shall be distributed pursuant
to PARA4.3 hereof.
4.6 The number of shares of Settlement Stock is predicated on the
assumption that there are and will be no more than 10.5 million shares of Hybrid
outstanding as of the Effective Date and that there will be no further dilution
of the stock until after these shares have been issued, except as described in
the following sentence. If additional stock is distributed or otherwise becomes
outstanding before the Effective Date, the number of Settlement Shares shall be
increased proportionately so that the number of shares of Settlement Stock as
compared to the number of shares of Hybrid outstanding at the Effective Date
shall remain at a proportion of 3 to 13.5. If the Company is sold, acquired or
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merged prior to the Effective Date, the Settlement Shares shall be treated for
purposes of such corporate transaction as if they had been issued, distributed
and outstanding prior to the closing of the transaction, and will receive the
same proportionate treatment as such other shares as follows: To the extent that
any consideration paid in such sale, acquisition or merger is received by
Hybrid's stockholders (directly or indirectly through distribution of such
consideration by Hybrid to its stockholders after paying debts and other
obligations), Hybrid shall pay or cause to be distributed on the Effective Date
(or, if later, on the date of distribution to its stockholders) a proportionate
amount of like consideration that is received by such stockholders.
5. ADDITIONAL CONSIDERATION FOR THE SETTLEMENT
5.1 Upon the execution of this Stipulation, Hybrid shall assign to
Representative Plaintiffs any and all claims it has against the Non-Settling
Defendant (or its legal predecessor or successor) (the "Auditor Claim"), which
claims shall revert back to Hybrid if the Settlement does not become Final.
5.2 In the event Representative Plaintiffs shall assert any Auditor
Claims, Representative Plaintiffs agree that any recovery by Representative
Plaintiffs for the Class on an Auditor Claim shall be reduced by the
proportionate share of fault that the trier of fact shall allocate or apportion
to any Settling Defendant so as to extinguish any contribution, indemnity,
apportionment or other similar rights that the Non-Settling Defendant might
otherwise arguably have against the Settling Defendants. Plaintiffs agree to use
their best efforts to seek such a determination of
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proportionate shares of fault in any proceeding in which they elect to pursue
any Auditor Claim.
5.3 Immediately upon the signing of the Stipulation of Settlement the
Settling Defendants will provide complete and full cooperation in the
prosecution of the class's claims against the Non-Settling Defendant arising out
of acts or transactions that are the subject of the Litigation. Such cooperation
includes full access to the Company's documents, employees, consultants, experts
and the defendants for review and interviews, as reasonable under the
circumstances, and subject to a protective order entered into by the Parties.
Settling Defendants will produce documents and appear for deposition as
requested by plaintiffs without need for subpoena. Settling Defendants will use
their best efforts to assist in drafting or amendment of Plaintiffs' complaint
against the Non-Settling Defendant.
6. NOTICE ORDER AND SETTLEMENT HEARING
6.1 Promptly after execution of the Stipulation, the Parties shall
submit the Stipulation together with its Exhibits to the Court and shall jointly
apply for entry of an order (the "Notice Order"), substantially in the form of
Exhibit A hereto, certifying the Settlement Class solely for the purpose of
effectuating this Settlement, requesting preliminary approval of the Settlement
set forth in the Stipulation, and approval for the mailing and publication of a
"Notice of Pendency and Settlement of Class Action and Settlement Hearing"
("Notice") which shall include the general terms of the Settlement set forth in
the Stipulation, the proposed Plan of Allocation, the general terms of the Fee
and Expense
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Application (as defined in PARA9.1) and the date of the Settlement Hearing (as
defined below in PARA6.2).
6.2 The Parties shall request that, after notice is given, the Court
hold the Settlement Hearing and finally approve this Settlement as set forth
herein. At or after the Settlement Hearing, Representative Plaintiffs' Counsel
also will request that the Court approve the proposed Plan of Allocation and the
Fee and Expense Application.
7. RELEASES
7.1 Upon the Effective Date, the Representative Plaintiffs hereby fully,
finally, and forever release, relinquish and discharge all Released Claims
(including Unknown Claims) against each and all of the Released Persons.
7.2 Upon the Effective Date, each and all Settlement Class Members shall
be deemed to have fully, finally, and forever released, relinquished and
discharged all Released Claims (including Unknown Claims) against each and all
of the Released Persons, whether or not such Settlement Class Member executes
and delivers the Proof of Claim and Release.
7.3 Upon the Effective Date, each of the Settling Defendants shall
fully, finally, and forever release, relinquish and discharge the Representative
Plaintiffs and each and all of the other Settlement Class Members, and
Representative Plaintiffs' Counsel, from all claims (including Unknown Claims)
arising out of, relating to, or in connection with the institution, prosecution,
assertion or resolution of the Litigation or the Released Claims.
7.4 Upon the Effective Date, each of the Settling Defendants hereby
fully, finally, and forever releases, relinquishes and
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discharges against each of the other Settling Defendants the following: all
claims arising out of, relating to, or in connection with (1) the Released
Claims; (2) the payments provided for in PARA1.29 of this Stipulation; and (3)
the payment of attorneys' fees, costs and expenses incurred in defense of
this Litigation. Specifically excluded from the releases in this paragraph
are: (i) any claims, rights, demands, causes of action, liabilities, and
suits arising out of the claims that are or may be asserted by any Person
falling within the definition of the Settlement Class who validly and timely
requests to be excluded from the Settlement of the Litigation as provided for
in this Stipulation; and (ii) any obligation on the part of Hybrid to
indemnify its present and former officers and directors to the extent
required by Hybrid's articles of incorporation and by-laws, any existing
agreements, or any resolution or otherwise, of the Board of Directors of
Hybrid.
7.5 Only those Settlement Class Members filing valid and timely Proof of
Claim and Release forms shall be entitled to participate in the Settlement and
receive a distribution from the Settlement Fund. The Proof of Claim and Release
to be executed by the Settlement Class Members shall release all Released Claims
against the Released Persons, and shall be in the form contained in Exhibit A-2
hereto. All Settlement Class Members shall be bound by the releases set forth in
this Section7 whether or not they submit a valid and timely Proof of Claim and
Release.
8. ADMINISTRATION AND CALCULATION OF CLAIMS, FINAL
AWARDS AND SUPERVISION AND DISTRIBUTION OF SETTLEMEN
FUND
8.1 Plaintiffs' Settlement Counsel, or their authorized agents, acting
on behalf of the Settlement Class shall administer
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and calculate the claims submitted by Settlement Class Members and shall
oversee distribution of that portion of the Settlement Fund which is finally
awarded by the Court to the Settlement Class Members. Settling Defendants
shall have no role in or responsibility for the review or evaluation of Proof
of Claim and Release forms. This is not a claims-made Settlement and, if all
conditions under the Stipulation are satisfied, the Settlement becomes Final,
and the Settlement is not successfully collaterally attacked, no portion of
the Settlement Fund will be returned to any Settling Defendant.
8.2 The Settlement Fund shall be applied as follows:
(a) To pay all unpaid costs and expenses reasonably and
actually incurred in connection with providing notice, including locating
Settlement Class Members, assisting with the filing of claims, administering and
distributing the Settlement Fund to the Settlement Class, processing Proof of
Claim and Release forms and paying escrow fees and costs, if any;
(b) To pay Taxes and Tax Expenses;
(c) To pay Class Counsel's attorneys' fees, expenses and
costs, with interest thereon (the "Fee and Expense Award"), if and to the extent
allowed by the Court; and
(d) After the Effective Date, to distribute the balance of the
Settlement Fund (the "Net Settlement Fund") to Authorized Claimants as allowed
by the Stipulation, the Plan of Allocation and the Court.
8.3 After the Effective Date and subject to such further approval and
further order(s) of the Court as may be required, the
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Net Settlement Fund shall be distributed to Authorized Claimants, subject to
and in accordance with the following:
(a) Within ninety (90) days after the mailing of the Notice or
such other time as may be set by the Court, each Person claiming to be an
Authorized Claimant shall be required to submit to the Claims Administrator a
separate completed Proof of Claim and Release in the form of Exhibit A-2 hereto,
signed under penalty of perjury and supported by such documents as are specified
in the Proof of Claim and Release and as are reasonably available to the
Authorized Claimant.
(b) Except as otherwise ordered by the Court, all Settlement
Class Members who fail to timely submit valid Proof of Claim and Release forms
within such period, or such other period as may be ordered by the Court, shall
be forever barred from receiving any payments pursuant to the Stipulation and
the Settlement set forth herein, but will in all other respects be subject to
and bound by the provisions of the Stipulation, the Settlement and releases
contained herein, and the Judgment.
(c) After the Effective Date, the Net Settlement Fund shall be
distributed to the Authorized Claimants in accordance with and subject to the
Plan of Allocation to be described in the Notice mailed to Settlement Class
Members. The proposed Plan of Allocation shall not be a part of the Stipulation.
8.4 The Settling Defendants shall not have any responsibility for,
interest in, or liability whatsoever with respect to the investment or
distribution of the Settlement Fund, the Plan of Allocation, the determination
or administration of taxes, or any losses incurred in connection therewith. No
Person shall have any
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claim of any kind against Settling Defendants, or Settling Defendants'
Counsel of Record, director and officer liability insurers and reinsurers
with respect to the matters set forth in this paragraph; and the Settlement
Class Members and Class Counsel release Settling Defendants from any and all
liability and claims arising from or with respect to the investment or
distribution of the Settlement Fund.
8.5 No Person shall have any claim against Class Counsel or any Claims
Administrator, or other agent designated by Class Counsel, or Settling
Defendants or Settling Defendants' Counsel of Record, based on distributions
made substantially in accordance with the Stipulation and the Settlement
contained herein, the Plan of Allocation, or further orders of the Court.
8.6 It is understood and agreed by the Parties that any proposed Plan of
Allocation of the Net Settlement Fund, including, without limitation, the
calculation of an Authorized Claimant's claim, as set forth therein, is not a
part of the Stipulation and is to be considered by the Court separately from the
Court's consideration of the fairness, reasonableness and adequacy of the
Settlement set forth in the Stipulation, and any order or proceeding relating to
the Plan of Allocation shall not operate to terminate or cancel the Stipulation
or affect the finality of the Court's Judgment approving the Stipulation and the
Settlement set forth herein, or any other orders entered pursuant to the
Stipulation.
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9. REPRESENTATIVE PLAINTIFFS' COUNSEL'S ATTORNEYS' FEES
AND REIMBURSEMENT OF EXPENSES
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<PAGE>
9.1 The Representative Plaintiffs' Counsel may submit an application or
applications (the "Fee and Expense Application") for distributions to them from
the Settlement Fund for: (i) an award of attorneys' fees as set forth in the
Notice; plus (ii) reimbursement of all expenses and costs, including the fees of
any experts or consultants incurred in connection with prosecuting the
Litigation; plus (iii) interest on such attorneys' fees, costs and expenses at
the same rate and for the same periods as earned by the Settlement Fund (until
paid), as may be awarded by the Court.
9.2 The cash portion of the attorneys' fees, expenses and costs,
including the fees of experts and consultants, as awarded by the Court shall be
transferred to Plaintiffs' Settlement Counsel from the Settlement Fund
immediately after the Court executes an order awarding such fees and expenses
and the stock portion of the fees immediately after the Effective Date (the "Fee
and Expense Award"). As received, Plaintiffs' Settlement Counsel shall
thereafter allocate the Fee and Expense Award amongst Representative Plaintiffs'
Counsel in a manner which Plaintiffs' Settlement Counsel in good faith believe
reflects the contributions of such counsel to the prosecution and Settlement of
the Litigation; provided, however, that in the event that the Stipulation and
the Settlement set forth herein do not become effective for any reason, or the
Judgment or the order making the Fee and Expense Award is reversed or modified
on appeal, and in the event that the Fee and Expense Award has been paid to any
extent, then Representative Plaintiffs' Counsel shall within five (5) business
days from the event which precludes the Effective Date from occurring or such
reversal or modification, refund to the
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Settlement Fund the fees, expenses, costs and interest previously paid to
them from the Settlement Fund, including accrued interest on any such amount
at the average rate earned on the Settlement Fund from the time of withdrawal
until the date of refund. Each such Representative Plaintiffs' Counsel's law
firm, as a condition of receiving such fees and expenses, on behalf of itself
and each partner and/or shareholder of it, agrees that the law firm and its
partners and/or shareholders are subject to the jurisdiction of the Court for
the purpose of enforcing this PARA9.2 of the Stipulation. Without limitation,
each such law firm and its partners and/or shareholders agree that the Court
may, upon application of Settling Defendants and notice to Representative
Plaintiffs' Counsel, summarily issue orders, including but not limited to,
judgments and attachment orders, and may make appropriate findings of or
sanctions for contempt, against them or any of them should such law firm fail
timely to repay fees and expenses pursuant to this PARA9.2 of the Stipulation.
9.3 Settling Defendants and their respective Related Parties shall have
no responsibility for, and no liability whatsoever with respect to, any payment
to Plaintiffs or Class Counsel from the Settlement Fund that may occur before
the Effective Date.
9.4 Settling Defendants and their respective Related Parties shall have
no responsibility for, and no liability whatsoever with respect to, the
allocation among Class Counsel, and any other Person who may assert some
claim thereto, of any Fee and Expense Awards that this Court may make, and
Settling Defendants and their respective Related Parties take no position
with respect to such matters.
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9.5 The procedure for and the allowance or disallowance by the Court of
any applications by any of the Class Counsel for attorneys' fees, costs and
expenses, including the fees of experts and consultants, to be paid out of the
Settlement Fund, are not part of the Settlement set forth in the Stipulation,
and are to be considered by the Court separately from the Court's consideration
of the fairness, reasonableness and adequacy of the Settlement set forth in the
Stipulation, and any order or proceedings relating to the Fee and Expense
Application, or any appeal from any order relating thereto, shall not operate to
terminate or cancel the Stipulation, or affect or delay the finality of the
Judgment approving the Stipulation and the Settlement of the Litigation set
forth herein.
10. CONDITIONS OF SETTLEMENT, EFFECT OF DISAPPROVAL,
CANCELLATION OR TERMINATION
10.1 The Effective Date of the Stipulation shall be the first date by
which all of the events and conditions listed below in PARA10.1(a)-(g)
have occurred or have been met:
(a) Plaintiffs' Settlement Counsel and Settling Defendants'
Counsel of Record have executed this Stipulation;
(b) Settling Defendants shall have timely transferred or
caused to be timely transferred the cash portion of the Settlement Fund to the
Escrow Agent as set forth in PARA2.1 above;
(c) The Court has entered the Notice Order, as required by
PARA6.1, above;
(d) The Court has entered the Judgment, or a judgment
substantially in the form of Exhibit B hereto;
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(e) The Superior Court of Santa Clara County has entered the
California judgments dismissing with prejudice the State Court Actions and all
claims asserted therein;
(f) Settling Defendants' Counsel of Record shall not have
given notice of intent to withdraw from the Settlement pursuant to PARA10.5;
and
(g) The judgment of the Court referred to in PARA10.1(d),
and the State Court judgments referred to in PARA10.1(e), have become Final,
as defined in PARA 1.8, above.
10.2 Upon the occurrence of all of the events referenced in PARA10.1
above, any and all remaining interest or right of Settling Defendants to the
Settlement Fund shall be absolutely and forever extinguished.
10.3 Neither a modification nor a reversal on appeal of any Plan of
Allocation or of any amount of attorneys' fees, costs, expenses and interest
awarded by the Court to any of the Representative Plaintiffs' Counsel shall
constitute grounds for cancellation and termination of the Stipulation.
10.4 If all of the conditions specified in PARA10.1 are not met, then
the Stipulation shall be canceled and terminated unless Plaintiffs'
Settlement Counsel and Settling Defendants' Counsel of Record mutually agree
in writing to proceed with the Stipulation.
10.5 If prior to the Settlement Hearing, any Persons who otherwise would
be Members of the Settlement Class have timely requested exclusion ("Requests
for Exclusion") from the Settlement Class in accordance with the provisions of
the Notice Order and the notice given pursuant thereto, and such Persons in the
aggregate purchased a number of shares of Hybrid common stock during the
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Settlement Class Period in an amount greater than the sum specified in a
separate "Supplemental Agreement" between the Settling Parties, Hybrid shall
have, in its sole and absolute discretion, the option to terminate this
Stipulation in accordance with the procedures set forth in the Supplemental
Agreement. The Supplemental Agreement will not be filed with the Court unless
and until a dispute among the Settling Parties concerning its interpretation or
application arises. Copies of all Requests for Exclusion received, together with
copies of all written revocations of Requests for Exclusion, shall be delivered
to Settling Defendants' Counsel of Record within five (5) business days of
receipt by Plaintiffs or Plaintiffs' Settlement Counsel but in no event later
than seven (7) business days before the Settlement Hearing. Hybrid may terminate
the Stipulation by serving written notice of termination on the Court and
Plaintiffs' Settlement Counsel by hand delivery or first class mail, postmarked
on or before 5 business days after the receipt of all of the copies of the
Requests for Exclusion, on or before 5 business days after the Court grants
additional exclusion for any reason, or on or before 3 business days before the
Settlement Hearing, whichever occurs last.
10.6 Unless otherwise ordered by the Court, in the event the Stipulation
shall terminate, or be canceled, or shall not become effective for any
reason, within five (5) business days after written notification of such
event is sent by Settling Defendants' Counsel of Record, the Representative
Plaintiffs or Plaintiffs' Settlement Counsel to the Escrow Agent, the
Settlement Fund (including accrued interest), plus any amount then remaining
in the
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Notice and Administration Fund (including accrued interest), less expenses
and any costs which have either been disbursed pursuant to PARAS3.5 or 3.6
hereof, or are determined to be chargeable to the Notice and Administration
Fund, shall be refunded by the Escrow Agent pursuant to written instructions
from Settling Defendants' Counsel of Record. In such event the Settling
Defendants shall be entitled to any tax refund, if any, owing to the
Settlement Fund. At the request of the Settling Defendants or Settling
Defendants' Counsel of Record, the Escrow Agent or its designee shall apply
for any such refund and pay the proceeds, less the cost of obtaining the tax
refund.
10.7 If the Effective Date does not occur, or if the Stipulation is
terminated pursuant to its terms, the Settling Parties shall be restored to
their respective positions in the Litigation as of March 2, 1999, the date
prior to which the agreement-in-principle to settle the Litigation was
reached. In such event, the terms and provisions of the Stipulation, with the
exception of PARAS3.4, 3.7, 3.8, 8.4, 8.5, 9.2-9.5, 10.1-10.6 and 10.8
herein, shall have no further force and effect with respect to the Settling
Parties and shall not be used in the Litigation or in any other proceeding
for any purpose, except as provided herein. Any Judgment or order entered by
the Court in accordance with the terms of the Stipulation shall be treated as
vacated NUNC PRO TUNC. No order of the Court or modification or reversal on
appeal of any order of the Court concerning the Plan of Allocation or the
amount of any attorneys' fees, costs, expenses and interest awarded by the
Court to the Representative Plaintiffs or Class Counsel shall
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constitute grounds for cancellation or termination of the Stipulation.
10.8 If the Effective Date does not occur, or if the Stipulation is
terminated pursuant to its terms, neither the Representative Plaintiffs nor
Class Counsel shall have any obligation to repay any amounts actually and
properly disbursed from the Notice and Administration Fund. In addition, any
expenses already incurred and properly chargeable to the Notice and
Administration Fund pursuant to PARA3.5 hereof at the time of such
termination or cancellation but which have not been paid, shall be paid by
the Escrow Agent from the Notice and Administration Fund in accordance with
the terms of the Stipulation prior to the balance being refunded in
accordance with PARA10.6 above.
11. MISCELLANEOUS PROVISIONS
11.1 The Settling Parties (a) acknowledge that it is their intent to
consummate this agreement; and (b) agree to cooperate to the extent necessary to
effectuate and implement all terms and conditions of the Stipulation and to
exercise their best efforts to accomplish the foregoing terms and conditions of
the Stipulation.
11.2 The Settling Parties agree that the amount of the Settlement Fund,
as well as the other terms of the Settlement, reflects a good-faith Settlement
of Representative Plaintiffs' and the other Settlement Class Members' claims in
the Litigation, reached voluntarily after consultation with experienced legal
counsel. Neither the Stipulation nor the Settlement contained herein, nor any
act performed or document executed pursuant to or in furtherance of the
Stipulation or the Settlement: (i) is or may be deemed to be or may be used as
an admission of, or evidence of,
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the validity of any Released Claim, or of any wrongdoing or liability of the
Settling Defendants, or (ii) is or may be deemed to be or may be used as an
admission of, or evidence of, any fault or omission of any of the Settling
Defendants in any civil, criminal or administrative proceeding in any court,
administrative agency or other tribunal. Released Persons may file the
Stipulation and/or the Judgment from this Litigation in any other action that
may be brought against them in order to support a defense or counterclaim
based on principles of RES JUDICATA, collateral estoppel, release, good-faith
settlement, judgment bar or reduction or any theory of claim preclusion or
issue preclusion or similar defense or counterclaim. Settling Defendants have
denied and continue to deny each and all of the claims alleged in the
Litigation. Representative Plaintiffs or any other member of the Settlement
Class may file the Stipulation in any proceeding brought to enforce any of
its terms or provisions. The Parties and their counsel, and each of them,
agree, to the extent permitted by law, that all agreements made and orders
entered during the course of the Litigation relating to the confidentiality
of information shall survive this Stipulation.
11.3 While retaining their right to deny that the claims advanced in the
Litigation were meritorious, Settling Defendants do not dispute that the Federal
Action was filed in compliance with Federal Rule of Civil Procedure 11, and is
being settled voluntarily after consultation with competent legal counsel.
11.4 All of the Exhibits to the Stipulation are material and integral
parts hereof and are fully incorporated herein by this reference.
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11.5 The Stipulation may be amended or modified only by a written
instrument signed by or on behalf of all Parties or their
successors-in-interest.
11.6 Except as provided herein, the Stipulation and the Exhibits attached
hereto constitute the entire agreement among the Parties hereto, and no
representations, warranties or inducements have been made to any Party
concerning the Stipulation or its Exhibits other than the representations,
warranties and covenants contained and memorialized in such documents. Except as
otherwise provided herein, each Party shall bear its own costs.
11.7 Plaintiffs' Settlement Counsel, on behalf of the Settlement Class,
are expressly authorized by the Representative Plaintiffs to take all
appropriate action required or permitted to be taken by the Settlement Class
pursuant to the Stipulation to effectuate its terms and also are expressly
authorized to enter into any modifications or amendments to the Stipulation on
behalf of the Settlement Class which they deem appropriate.
11.8 Each counsel or other Person executing the Stipulation or any of its
Exhibits on behalf of any Party hereto hereby warrants that such Person has the
full authority to do so.
11.9 The Stipulation may be executed in one or more counterparts. All
executed counterparts and each of them shall be deemed to be one and the same
instrument. Counsel for the Settling Parties to the Stipulation shall exchange
among themselves signed counterparts, and a complete set of original executed
counterparts shall be filed with the Court.
11.10 The Stipulation shall be binding upon, and inure to the benefit of,
the successors and assigns of the Parties hereto.
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11.11 The Court shall retain jurisdiction with respect to implementation
and enforcement of the terms of the Stipulation, and all Parties hereto submit
to the jurisdiction of the Court for purposes of implementing and enforcing the
Settlement embodied in the Stipulation.
11.12 The Stipulation shall be construed and enforced in accordance with
the laws of the State of California without giving effect to that State's
choice-of-law principles.
IN WITNESS WHEREOF, the Parties hereto have caused the Stipulation to
be executed, by their duly authorized attorneys.
DATED: _________________
MILBERG WEISS BERSHAD
HYNES & LERACH LLP
WILLIAM S. LERACH
KEITH F. PARK
------------------------------
KEITH F. PARK
600 West Broadway, Suite 1800
San Diego, CA 92101
Telephone: 619/231-1058
MILBERG WEISS BERSHAD
HYNES & LERACH LLP
REED R. KATHREIN
KIMBERLY C. EPSTEIN
222 Kearny Street, 10th Floor
San Francisco, CA 94108
Telephone: 415/288-4545
COHEN, MILSTEIN, HAUSFELD
& TOLL, P.L.L.C.
STEVEN J. TOLL
KRISTOPHER A. KINKADE
999 Third Avenue, Suite 3600
Seattle, WA 98104
Telephone: 206/521-0080
Co-Lead Counsel for Plaintiffs
MORRISON & FOERSTER, LLP
JORDAN ETH
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------------------------------
JORDAN ETH
425 Market Street
San Francisco, CA 94105-2482
Telephone: 415/268-7000
Counsel for Settling Defendants
STIPULATION OF SETTLEMENT - C-98-20888-RMW
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<PAGE>
DECLARATION OF SERVICE BY MAIL
PURSUANT TO NORTHERN DISTRICT LOCAL RULE 23-2(c)(2)
I, the undersigned, declare:
1. That declarant is and was, at all times herein mentioned, a citizen
of the United States and a resident of the County of San Diego, over the age of
18 years, and not a party to or interested in the within action; that
declarant's business address is 600 West Broadway, Suite 1800, San Diego,
California 92101.
2. That on June 14, 1999, declarant served the STIPULATION OF
SETTLEMENT by depositing a true copy thereof in a United States mailbox at San
Diego, California in a sealed envelope with postage thereon fully prepaid and
addressed to the parties listed on the attached Service List and that this
document was forwarded to the following designated Internet site at:
HTTP://SECURITIES.MILBERG.COM
3. That there is a regular communication by mail between the place of
mailing and the places so addressed.
I declare under penalty of perjury that the foregoing is true and
correct. Executed this 14th day of June, 1999, at San Diego, California.
-----------------------------
DANELLE L. McNERTNEY
<PAGE>
UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF CALIFORNIA
SAN JOSE DIVISION
MARK ALAN ROSENBERG, et al., On ) No. C-98-20956-RMW
Behalf of Themselves and All Others ) (Consolidated with No.
Similarly Situated, ) C-98-20888-RMW)
)
Plaintiffs, ) CLASS ACTION
)
vs. )
)
HYBRID NETWORKS, INC., et al., )
)
Defendants. )
)
- -----------------------------------
[PROPOSED] ORDER CERTIFYING SETTLEMENT CLASS AND
PRELIMINARILY APPROVING SETTLEMENT AND APPROVING
THE FORM AND MANNER OF NOTICE
<PAGE>
The Court has received the Stipulation of Settlement (the
"Stipulation"), dated as of March 3, 1999, that has been entered into by the
Representative Plaintiffs and Settling Defendants. The Court has reviewed the
Stipulation and its attached exhibits, and, good cause appearing,
IT IS HEREBY ORDERED as follows:
1. The Court, for purposes of this preliminary order, adopts all
defined terms as set forth in the Stipulation.
2. The Court preliminarily approves: (1) the Settlement of the
Litigation set forth in the Stipulation and each of the releases set forth
therein, and (2) the proposed Plan of Allocation described in the Notice of
Pendency and Settlement of Class Action and Settlement Hearing, subject to the
right of any Settlement Class Member to challenge the fairness, reasonableness,
and adequacy of the Stipulation or the proposed Plan of Allocation and to show
cause, if any exists, why a final judgment dismissing the Litigation based on
the Stipulation should not be ordered herein after due and adequate notice to
the Settlement Class has been given in conformity with this Order.
3. For purposes of this Settlement only, the Court certifies a
Settlement Class defined as: all Persons who purchased Hybrid Networks, Inc.
("Hybrid") common stock between November 12, 1997 and June 17, 1998, inclusive.
Excluded from the Class are the Defendants named in the Litigation, members of
the immediate families of the Individual Defendants, any entity in which any
Defendant has a controlling interest, and the legal representatives, heirs,
successors, or assigns of the Defendants. Also excluded are those Persons who
timely and validly request
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exclusion from the Class pursuant to the "Notice of Pendency and Settlement of
Class Action and Settlement Hearing."
4. The Court approves as to form and content, and for distribution to
Settlement Class Members, a Notice of Pendency and Settlement of Class Action
and Settlement Hearing ("Notice") substantially in the form of Exhibit A-1
hereto, a Proof of Claim and Release ("Proof of Claim") in the form of Exhibit
A-2 hereto; and for publication a Summary Notice of Proposed Settlement
("Summary Notice") in the form of Exhibit A-3 hereto.
5. Pending resolution of these Settlement proceedings, no other action
now pending or hereafter filed arising out of all or any part of the subject
matter of this Litigation shall be maintained as a class action, and except as
provided by this or further Order of the Court, for good cause shown, all
Persons are hereby enjoined during the pendency of these Settlement proceedings
from filing or prosecuting purported class actions against any Person with
respect to any of the Released Claims.
6. Plaintiffs' Settlement Counsel are authorized to act on behalf of
the Settlement Class with respect to all acts required by, or which may be given
pursuant to, the Stipulation or such other acts which are reasonably necessary
to consummate the proposed Settlement set forth in the Stipulation.
7. Plaintiffs' Settlement Counsel are hereby authorized to retain the
firm of Gilardi & Co. LLC as Claims Administrator to supervise and administer
the notice and claims procedures. Gilardi & Co. LLC is hereby appointed as
receiver for purposes of the issuance and distribution of the Settlement Stock
to Authorized Claimants.
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8. Plaintiffs' Settlement Counsel shall make reasonable efforts to
identify all Persons who are Members of the Settlement Class, including
beneficial owners whose Hybrid common stock is held by banks, brokerage firms,
or other nominees. Plaintiffs' Settlement Counsel shall cause the Claims
Administrator to send the Notice and the Proof of Claim by first class mail to
all Persons who appear on the transfer records of Hybrid as having transferred
to their names Hybrid common stock during the period from November 12, 1997
through June 17, 1998, inclusive. The mailing of the Notice and Proof of Claim
forms shall be on or before ___________, 1999 (the "Notice Date"). Pursuant to
the Notice, each nominee shall either: (1) send the Notice and Proof of Claim to
Settlement Class Members for which they act as nominee by first class mail
within ten (10) days after the nominee receives the Notice; or (2) send a list
of the names and addresses of such beneficial owners to Plaintiffs' Settlement
Counsel within ten (10) days after the nominee receives the Notice and, in the
event of the latter, Plaintiffs' Settlement Counsel shall send by first class
mail the Notice and Proof of Claim to all Settlement Class Members who are on
the list received from the nominee. Plaintiffs' Settlement Counsel shall, if
requested, reimburse banks, brokerage houses or other nominees solely for their
reasonable out-of-pocket expenses incurred in providing notice to beneficial
owners who are Settlement Class Members, out of the Settlement Fund, which
expenses would not have been incurred except for the sending of such notice,
subject to further order of this Court with respect to any dispute concerning
such compensation. Plaintiffs' Settlement Counsel shall file with the Court and
serve upon Settling
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Defendants' Counsel of Record no later than seven (7) days prior to the
Settlement Hearing an affidavit or declaration describing the efforts taken to
comply with this order and stating that the mailings have been completed in
accordance with the terms of this Order.
9. Within ten (10) days of the Notice Date, Plaintiffs' Settlement
Counsel shall publish a Summary Notice substantially in the form of Exhibit A-3
hereto once in INVESTOR'S BUSINESS DAILY. Plaintiffs' Settlement Counsel shall
file with the Court and serve upon Defendants' Counsel of Record no later than
seven (7) days prior to the Settlement Hearing an affidavit or declaration
stating that the Summary Notice has been published in accordance with the terms
of this Order.
10. The Court finds that dissemination of the Notice and Proof of
Claim in the manner required by PARA8, and publication of the Summary Notice
in the manner required by PARA9, constitute the best notice practicable under
the circumstances to Settlement Class Members and meet the requirements of
Rule 23 of the Federal Rules of Civil Procedure, due process under the United
States Constitution, and any other applicable law, and shall constitute due
and sufficient notice to all Persons entitled thereto.
11. Any Person falling within the definition of the Settlement Class
may, upon request, be excluded from the Settlement. Any such Person must submit
to the Claims Administrator a request for exclusion ("Request for Exclusion"),
postmarked no later than _____________, 1999. A Request for Exclusion must
state: (1) the name, address, and telephone number of the Person requesting
exclusion; (2) the Person's purchases and
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sales of Hybrid common stock made during the Settlement Class Period, including
the dates, the number of shares, and price paid or received per share for each
such purchase or sale; and (3) that the Person wishes to be excluded from the
Settlement Class. All Persons who submit valid and timely Requests for Exclusion
in the manner set forth in this paragraph shall have no rights under the
Stipulation, shall not share in the distribution of the Settlement Fund, and
shall not be bound by the Stipulation or the Final Judgment.
12. Any Settlement Class Member who objects to the Settlement of the
Litigation, the proposed Plan of Allocation, or the application of counsel for
attorneys' fees, costs, and expenses, shall have a right to appear and be heard
at the Settlement Hearing. Any Settlement Class Member may enter an appearance
through counsel of such member's own choosing and at such member's own expense
or may appear on their own. However, no Settlement Class Member shall be heard
at the Settlement Hearing unless, on or before ____________, 1999, such Person
has filed with the Court and delivered to Plaintiffs' Settlement Counsel and
Settling Defendants' Counsel of Record a written notice of objection and their
grounds for opposing the Settlement, Plan of Allocation, or application for
attorneys' fees, costs and expenses, along with proof of membership in the
Settlement Class. The manner in which a notice of objection must be prepared,
filed, and delivered shall be stated in the Notice. Only Settlement Class
Members who have filed and delivered valid and timely written notices of
objection will be entitled to be heard at the Settlement Hearing unless the
Court orders otherwise.
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<PAGE>
13. The Court authorizes payment out of the Notice and
Administration Fund of the expenses described in PARA3.5 of the Stipulation.
After the Effective Date, the notice and administration costs payable out of
the Settlement Fund may be disbursed without the necessity of a court order
in accordance with PARA3.6 of the Stipulation.
14. A Settlement Hearing will be held on ______________, 1999, at _____
_.m. before this Court in the United States Courthouse, 280 South First Street,
San Jose, California, to determine whether the proposed Settlement of the
Litigation as set forth in the Stipulation, should be approved as fair, just,
reasonable and adequate as to the Settling Parties, and whether the Final
Judgment approving the Settlement should be entered. If the Settlement is
approved by the Court, the Settlement Stock will be issued pursuant to an
exemption from registration pursuant to Section3(a)(10) of the Securities Act
of 1933. The Court has been advised that registration of the Settlement Stock
under the Securities Act of 1933 will not be required by virtue of the Court's
approval of this Stipulation and the issuance of the Settlement Stock. The Court
may adjourn or continue the Settlement Hearing without further notice to
Settlement Class Members.
15. At the Settlement Hearing, the Court will determine whether
Plaintiffs' Settlement Counsel's proposed Plan of Allocation of the Net
Settlement Fund should be approved.
16. The passage of title and ownership of the Settlement Fund to the
Escrow Agent in accordance with the terms of the Stipulation is approved. No
Person that is not a Settlement Class Member or counsel for the Representative
Plaintiffs shall have any right to
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<PAGE>
any portion of, or in the distribution of, the Settlement Fund unless otherwise
ordered by the Court or otherwise provided in the Stipulation.
17. All funds held by the Escrow Agent shall be deemed and considered
to be in CUSTODIA LEGIS of the Court in accordance with the Stipulation, and
shall remain subject to the jurisdiction of the Court, until such time as such
funds shall be distributed pursuant to the Stipulation, the Plan of Allocation
and/or further order(s) of the Court.
18. At or after the Settlement Hearing, the Court will determine
whether the application of Representative Plaintiffs' Counsel for an award of
attorneys' fees, costs and expenses should be approved.
19. No later than 90 days after the Notice Date, any Settlement Class
Member who wishes to participate in the Settlement Fund must submit a valid
Proof of Claim form to the Claims Administrator. Proof of Claim forms shall be
deemed to have been submitted when postmarked, if mailed by first class, or
registered or certified mail, postage prepaid, addressed in accordance with the
instructions given in the Proof of Claim. All other Proof of Claim forms shall
be deemed to have been submitted at the time they are actually received by the
Claims Administrator. To be valid, a Proof of Claim must be: (1) completed in a
manner that permits the Claims Administrator to determine the eligibility of the
claim as set forth in the Proof of Claim; and (2) signed with an affirmation
that the information is true and correct. All Settlement Class Members who do
not submit valid and timely Proof of Claim forms shall be forever barred from
receiving any payments from the
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<PAGE>
Settlement Fund, but will in all other respects be subject to and bound by the
provisions of the Stipulation and the Final Judgment, if entered.
20. Neither Settling Defendants nor Settling Defendants' Counsel of
Record shall have any responsibility for the Plan of Allocation of the
Settlement Fund submitted by Plaintiffs' Settlement Counsel and it will be
considered separately from the fairness, reasonableness and adequacy of the
Settlement.
21. No later than seven (7) days before the Settlement Hearing, all
briefs supporting the Settlement, the Plan of Allocation, and the request for
attorneys' fees and costs, shall be served and filed.
22. Neither the Stipulation, nor any of its terms or provisions, nor
any of the negotiations or proceedings connected with it, shall be construed as
an admission or concession by Settling Defendants of the truth of any of the
allegations in the Litigation, or of any liability, fault, or wrongdoing of any
kind, or by the Representative Plaintiffs or any other Member of the Settlement
Class of the merit of any defense or lack of merit of any claim.
23. All discovery and other proceedings in the Litigation with respect
to the Settling Defendants are stayed until further order of the Court, except
as may be necessary to implement the Settlement or comply with the terms of the
Stipulation. The Representative Plaintiffs and the other Settlement Class
Members are barred from commencing or prosecuting any direct or representative
action, or any action in any other capacity,
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<PAGE>
asserting any of the Released Claims unless and until the Stipulation is
terminated according to its terms.
24. The Court may, for good cause, extend any of the deadlines set
forth in this Order without further notice to Settlement Class Members.
DATED: __________________ ___________________________________
THE HONORABLE RONALD M. WHYTE
UNITED STATES DISTRICT COURT JUDGE
Submitted by:
MILBERG WEISS BERSHAD
HYNES & LERACH LLP
WILLIAM S. LERACH
KEITH F. PARK
- ------------------------------
KEITH F. PARK
600 West Broadway, Suite 1800
San Diego, CA 92101
Telephone: 619/231-1058
MILBERG WEISS BERSHAD
HYNES & LERACH LLP
REED R. KATHREIN
KIMBERLY C. EPSTEIN
222 Kearny Street, 10th Floor
San Francisco, CA 94108
Telephone: 415/288-4545
COHEN, MILSTEIN, HAUSFELD
& TOLL, P.L.L.C.
STEVEN J. TOLL
KRISTOPHER A. KINKADE
999 Third Avenue, Suite 3600
Seattle, WA 98104
Telephone: 206/521-0080
Co-Lead Counsel for Plaintiffs
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<PAGE>
DECLARATION OF SERVICE BY MAIL
I, the undersigned, declare:
1. That declarant is and was, at all times herein mentioned, a citizen
of the United States and a resident of the County of San Diego, over the age of
18 years, and not a party to or interested in the within action; that
declarant's business address is 600 West Broadway, Suite 1800, San Diego,
California 92101.
2. That on June 14, 1999, declarant served the [PROPOSED] ORDER
CERTIFYING SETTLEMENT CLASS AND PRELIMINARILY APPROVING SETTLEMENT AND
APPROVINGTHE FORM AND MANNER OF NOTICE by depositing a true copy thereof in a
United States mailbox at San Diego, California in a sealed envelope with postage
thereon fully prepaid and addressed to the parties listed on the attached
Service List.
3. That there is a regular communication by mail between the place of
mailing and the places so addressed.
I declare under penalty of perjury that the foregoing is true and
correct. Executed this 14th day of June, 1999, at San Diego, California.
-----------------------------
DANELLE L. McNERTNEY
<PAGE>
MILBERG WEISS BERSHAD
HYNES & LERACH LLP
WILLIAM S. LERACH (68581)
KEITH F. PARK (54275)
600 West Broadway, Suite 1800
San Diego, CA 92101
Telephone: 619/231-1058
- and -
REED R. KATHREIN (139304)
KIMBERLY C. EPSTEIN (169012)
222 Kearny Street, 10th Floor
San Francisco, CA 94108
Telephone: 415/288-4545
COHEN, MILSTEIN, HAUSFELD
& TOLL, P.L.L.C.
STEVEN J. TOLL
KRISTOPHER A. KINKADE
999 Third Avenue, Suite 3600
Seattle, WA 98104
Telephone: 206/521-0080
Co-Lead Counsel for Plaintiffs
UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF CALIFORNIA
SAN JOSE DIVISION
MARK ALAN ROSENBERG, et al., On ) No. C-98-20956-RMW
Behalf of Themselves and All Other ) (Consolidated with No.
Similarly Situated, ) C-98-20888-RMW)
)
)
Plaintiffs, ) CLASS ACTION
)
vs. )
)
HYBRID NETWORKS, INC., et al., )
)
Defendants. )
)
- -----------------------------------
NOTICE OF PENDENCY AND SETTLEMENT
OF CLASS ACTION AND SETTLEMENT HEARING
EXHIBIT A-1
<PAGE>
TO: ALL PERSONS WHO PURCHASED THE COMMON STOCK OF HYBRID NETWORKS,
INC. ("HYBRID") DURING THE PERIOD NOVEMBER 12, 1997 THROUGH JUNE 17,
1998, INCLUSIVE.
THIS NOTICE MAY AFFECT YOUR RIGHTS. YOU ARE URGED TO READ IT CAREFULLY.
IF YOU PURCHASED COMMON STOCK OF HYBRID DURING THE PERIOD NOVEMBER 12, 1997
THROUGH JUNE 17, 1998, INCLUSIVE (THE "SETTLEMENT CLASS PERIOD"), YOU MAY BE A
MEMBER OF THE CLASS AND MAY BE ENTITLED TO SHARE IN THE PROCEEDS OF THE
SETTLEMENT DESCRIBED IN THIS NOTICE (THE "SETTLEMENT").
This Notice is given pursuant to Rule 23 of the Federal Rules of Civil
Procedure and pursuant to an Order of the United States District Court for the
Northern District of California (the "District Court"). The purpose of this
Notice is to inform you of the pendency of this Action as a class action and of
a proposed partial Settlement of the class action pursuant to a Stipulation of
Settlement dated as of March 3, 1999, filed with the District Court.
The proposed partial Settlement creates a fund in the amount of $8.8
million in cash and will include any interest that accrues on the fund prior
to distribution as well as 3.0 million shares of Hybrid common stock subject
to certain terms and conditions. The stock is to be issued exempt from the
registration requirements pursuant to Section 3(a)(10) of the Securities Act
of 1933. In addition, if, prior to December 3, 1999, Hybrid is sold, acquired
or merged in a transaction in which the consideration for such sale,
acquisition or merger is paid by the acquirer to Hybrid's stockholders
(rather than to Hybrid itself for ultimate distribution to its stockholders),
Hybrid shall pay or cause to be paid, within 30 days after such sale,
acquisition or merger, an
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<PAGE>
amount in cash, freely tradable securities or other property that is equal to
the 10% of the consideration paid by the acquirer to Hybrid's stockholders in
the sale, acquisition or merger; or if Hybrid sells all or substantially all
of its assets on or before December 3, 1999 (or after that date but the sale
is the subject of ongoing negotiations before that date), Hybrid shall pay or
cause to be paid, within 30 days after such sale, an amount equal to 10% of
the consideration it receives from such sale, except that, if any portion of
the proceeds of such sale are used in a liquidation or partial liquidation of
Hybrid to pay Hybrid's creditors, then Hybrid shall pay into the Settlement
Fund an amount equal to 10% of the amount of such net proceeds that it would
otherwise distribute to its stockholders in such liquidation, which payment
shall be made on or before the date on which distribution of any such net
proceeds is made to such stockholders. Based on Representative Plaintiffs'
estimate of the number of shares entitled to participate in the Settlement,
the current price of Hybrid stock, and the anticipated number of claims to be
submitted by Class members (but without giving effect to the consideration
which might be paid upon the acquisition or liquidation of Hybrid) the
average distribution per share would be approximately $1.55 before deduction
of court-approved fees and expenses. However, your actual recovery from this
fund will depend on a number of variables including the number of shares you
purchased and the timing of your purchases and sales, if any.
Plaintiffs and Settling Defendants do not agree on the average amount
of damages per share that would be recoverable if Representative Plaintiffs were
to have prevailed on each claim
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<PAGE>
alleged under the Securities Exchange Act of 1934. The issues on which the
Parties disagree include (1) the appropriate economic model for determining
the amount by which Hybrid common stock was allegedly artificially inflated
(if at all) during the Class Period; (2) the amount by which Hybrid common
stock was allegedly artificially inflated (if at all) during the Class
Period; (3) the effect of various market forces influencing the trading price
of Hybrid common stock at various times during the Class Period; (4) the
extent to which external factors, such as general market conditions,
influenced the trading price of Hybrid common stock at various times during
the Class Period; (5) the extent to which the various matters that
Representative Plaintiffs alleged were materially false or misleading
influenced (if at all) the trading price of Hybrid common stock at various
times during the Class Period; (6) the extent to which the various allegedly
adverse material facts that Representative Plaintiffs alleged were omitted
influenced (if at all) the trading price of Hybrid common stock at various
times during the Class Period; and (7) whether the statements made or facts
allegedly omitted were material or otherwise actionable under the federal
securities laws.
The plaintiffs believe that the proposed Settlement is a good recovery
and is in the best interests of the Class. Because of the risks associated with
continuing to litigate and proceeding to trial, there was a danger that
Plaintiffs would not have prevailed on any of their claims, in which case the
Class would receive nothing. For example, Representative Plaintiffs faced the
possibility that all or many of the claims in this case could have been
dismissed. In addition, the amount of damages recoverable by
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<PAGE>
the Class was and is challenged by Settling Defendants. Recoverable damages
are limited to losses caused by conduct actionable under applicable
securities laws and, had the Litigation gone to trial, Defendants intended to
prove that all or most of the losses of Class members were caused by
non-actionable market industry or general economic factors. Settling
Defendants would also assert that throughout the Settlement Class Period they
fully and adequately disclosed Hybrid's financial condition and all
uncertainties and risks associated with Hybrid's business.
Representative Plaintiffs' Counsel have not received any payment for
their services in conducting this Litigation on behalf of Plaintiffs and the
members of the Class, nor have they been reimbursed for their out-of-pocket
expenditures. If the Settlement is approved by the District Court, counsel for
the Plaintiffs will apply to the District Court for attorneys' fees of 30% of
the settlement proceeds plus reimbursement of out-of-pocket expenses not to
exceed $300,000 to be paid from the settlement proceeds. If the amount requested
by counsel is approved by the District Court, the average cost per share would
be $0.49.
This Notice is not an expression of any opinion by the District Court
about the merits of any of the claims or defenses asserted by any party in this
Litigation or the fairness or adequacy of the proposed Settlement.
For further information regarding this Settlement you may contact: Rick
Nelson, Milberg Weiss Bershad Hynes & Lerach LLP, 600 West Broadway, Suite 1800,
San Diego, California 92101, Telephone: 619/231-1058. Please do not call any
representative of Hybrid.
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<PAGE>
I. NOTICE OF HEARING ON PROPOSED SETTLEMENT
A hearing (the "Settlement Hearing") will be held on ___________, 1999,
at ____ _.m. (or at any such adjourned time or times as the District Court may
without further notice direct) (the "Hearing Date"), before the Honorable Ronald
M. Whyte, in the United States Courthouse, 280 South First Street, San Jose,
California, to determine whether the proposed Settlement of this class action
(the "Federal Action") between Representative Plaintiffs, individually and on
behalf of the Settlement Class described below, and Settling Defendants Hybrid,
Carl S. Ledbetter, Dan E. Steimle, James R. Flach, Stephen E. Halprin, Gary M.
Lauder, Douglas M. Leone, Gustavo Ezcurra and Howard L. Strachman (hereinafter
referred to collectively as the "Settling Defendants"), for the consideration
described above is fair, reasonable and adequate and should be approved by the
District Court.
The District Court has certified a class composed of purchasers of
Hybrid common stock between November 12, 1997 and June 17, 1998, excluding
Defendants and certain related persons or entities. Pursuant to that
certification, the Settlement Class consists of the named Plaintiffs herein and
all persons or entities who purchased the common stock of Hybrid at any time
during the period November 12, 1997 through June 17, 1998, inclusive (the
"Settlement Class Period"). Excluded from the Class are the Defendants named in
the complaint, members of the immediate families of the individual defendants,
any entity in which any Defendant has a controlling interest, and any of the
legal representatives, heirs, successors, or assigns of the Defendants.
- 5 -
<PAGE>
Further excluded from the Settlement Class are those persons who submit valid
and timely requests for exclusion from the Settlement Class pursuant to the
terms of this Notice.
II. THE LITIGATION
On and after July 10, 1998, the following class actions were filed
in the United States District Court for the Northern District of California
(the "Court"): ROSENBERG V. NATIONSBANC MONTGOMERY SECURITIES, INC., ET AL.,
C-98-2731-SI and NGUYEN V. HYBRID NETWORKS, INC., ET AL., C-98-20888-RMW.
These actions were subsequently consolidated (the "Federal Action"). The
Federal Action names as defendants Hybrid Networks, Inc. ("Hybrid" or the
"Company"), certain of its present and former officers and directors, the
lead underwriters of Hybrid's initial public offering and its auditors, and
alleges violations of Sections 10(b) and 20(a) of the Securities Exchange Act
of 1934 (the "Exchange Act") and Rule 10b-5 promulgated thereunder and
Sections 11, 12 and 15 of the Securities Act of 1933. Hybrid is a broadband
access equipment provider which designs, develops, manufactures and markets
wireless and cable systems. The Federal Action alleges that, during the Class
Period, the Defendants disseminated false financial statements and made other
misrepresentations regarding Hybrid and its operations.
On September 8, 1998, the plaintiffs in the NGUYEN action filed their
motion to be appointed Lead Plaintiffs and for approval of Milberg Weiss Bershad
Hynes & Lerach LLP and Cohen, Milstein, Hausfeld & Toll, P.L.L.C. to act as Lead
Plaintiffs' Counsel. The Court granted the motion on December 11, 1998.
- 6 -
<PAGE>
On and after June 5, 1998 the following actions were filed in the
Superior Court for the State of California, County of Santa Clara (the "State
Court"):
PARNES V. NATIONSBANC MONTGOMERY SECURITIES, ET AL.,
CV774486
NUSSBAUM V. NATIONSBANC MONTGOMERY SECURITIES, ET AL.,
CV774572
SCHNECK V. NATIONSBANC MONTGOMERY SECURITIES, ET AL.,
CV774641
BICKELL V. HYBRID NETWORKS, INC., ET AL.,
CV774769
BRAINARD V. NATIONSBANC MONTGOMERY SECURITIES, ET AL.,
CV775464
MAGGIARO V. NATIONSBANC MONTGOMERY SECURITIES, ET AL.,
CV774855
(the "State Actions"). The State Actions were consolidated by Order dated
October 29, 1998. The State Actions and the Federal Action are based on the same
factual allegations. The Federal Action and the State Actions are collectively
referred to herein as the "Litigation."
Class Counsel have performed substantial investigation with respect to
the claims asserted and the defenses that were or could be asserted in the
Litigation. Among other things, Class Counsel consulted with experts, including
damages and accounting experts; subpoenaed documents from 24 third parties and
underwriters, and analyzed approximately 5,000 pages of produced documents, as
well as Hybrid's public filings, annual reports, and other public statements;
reviewed related public filings and reports by securities analysts; and
researched the applicable law with respect to the claims asserted and the
potential defenses thereto. In addition, Settling Defendants' Counsel of Record
met several times
- 7 -
<PAGE>
with Plaintiffs' Settlement Counsel to discuss the class's allegations and
key internal documents.
III. SETTLING DEFENDANTS' STATEMENT AND DENIALS OF WRONGDOING AND LIABILITY
Settling Defendants have denied and continue to deny each and all of
the claims and contentions alleged by the Representative Plaintiffs in the
Litigation. Nonetheless, Settling Defendants have concluded that it is in their
best interests that the Litigation be settled on the terms and conditions set
forth in this Stipulation. Settling Defendants have reached this conclusion
after (1) analyzing the factual and legal issues in the Litigation; (2)
determining that further conduct of the Litigation would be protracted and
expensive, including potential litigation not only through trial, but also
through any appeals that might be taken; and (3) considering the substantial
benefits to Settling Defendants and Hybrid's shareholders of a final resolution
of the Litigation, including avoiding further expenses, disposing of burdensome
and protracted litigation, and permitting Settling Defendants to conduct their
business unhampered by the distractions of continued litigation.
IV. CLAIMS OF THE REPRESENTATIVE PLAINTIFFS AND BENEFITS OF SETTLEMENT
The Representative Plaintiffs and Plaintiffs' Settlement Counsel have
concluded that it is in the best interests of the Representative Plaintiffs and
Settlement Class Members that the Litigation be settled on the terms and
conditions set forth in this Stipulation. The Representative Plaintiffs and
Plaintiffs'
- 8 -
<PAGE>
Settlement Counsel have reached this conclusion after considering
the risks and uncertainties of prevailing on the claims at the pleading stage,
summary judgment or trial due to the defenses that have been or could be
asserted by Settling Defendants. These include, among other things, whether
Representative Plaintiffs have met the requirements for pleading a claim;
whether Settling Defendants ever issued any false or misleading statements;
whether any statements, if false or misleading, were material; whether any
Settling Defendant acted with scienter; and whether the Representative
Plaintiffs or any Settlement Class Member suffered any loss as a result of any
alleged action or statement by any of the Settling Defendants. Further
considerations supporting the decision to enter into the Settlement described
herein were the expense and length of continued proceedings necessary to
prosecute the Litigation against Settling Defendants through trial and through
appeals and the substantial benefits the Settlement confers upon the
Representative Plaintiffs and the Settlement Class.
V. THE SETTLEMENT
A settlement has been reached in this Litigation between the Plaintiffs
and the Settling Defendants which is embodied in a Stipulation of Settlement
(the "Stipulation") dated March 3, 1999, on file with the District Court. The
following description of the proposed Settlement of the Federal Action and the
State Court Actions is only a summary, and reference is made to the text of the
Stipulation on file with the District Court for a full statement of its
provisions.
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<PAGE>
The Defendants have paid into an escrow account, pursuant to the
terms of the Stipulation of Settlement dated as of _______, 1999 (the
"Stipulation"), cash in the amount of $8.8 million (the "Settlement Fund")
which has been and will continue to earn interest for the benefit of the
Settlement Class. The Settlement Fund also includes 3.0 million shares of
Hybrid common stock (the "Settlement Stock") to be issued pursuant to Section
3(a)(10) of the Securities Act of 1933, as amended. The amount of stock or
other consideration to be contributed to the Settlement Fund may be increased
under the circumstances described at pp.___ above.
The "Net Settlement Fund" is the balance of the Settlement Fund after
deduction of Plaintiffs' attorneys' fees and reimbursement of their expenses,
and the costs in connection with sending this Notice and administering the
Settlement Fund, as and if permitted by the District Court. These fees, costs
and expenses will be deducted from the Settlement Fund. The Settlement Fund will
be applied to pay Plaintiffs' attorneys' fees and expenses to the extent as may
be allowed by the District Court, and to satisfy all reasonable notice and
administrative costs and any taxes due. The balance of the Settlement Fund will
be distributed to Settlement Class Members who have submitted valid, timely
Proof of Claim forms (the "Authorized Claimants") in accordance with the Plan of
Allocation described below.
If the proposed Settlement is approved by the District Court, the
District Court and the State Court will enter Judgments which will dismiss the
Litigation against Settling Defendants with prejudice, and bar and permanently
enjoin the Representative Plaintiffs and each Settlement Class Member, whether
or not such
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<PAGE>
Settlement Class Member has submitted a Proof of Claim, from prosecuting the
Released Claims (defined below) against the Released Parties (defined below),
and any such Settlement Class Member shall be conclusively deemed to have
released any and all such Released Claims against the Released Parties. The
District Court shall retain jurisdiction over implementation of the
Settlement, disposition of the Settlement Fund, hearing and determining
Representative Plaintiffs' applications for attorneys' fees, costs, interest,
expenses (including fees and costs of experts and/or consultants), and
enforcing and administering the Stipulation, including any releases executed
in connection therewith.
"Released Claims" means the "Released Class Claims" and "Unknown
Claims" as defined herein.
As used above, "Released Class Claims" shall mean any and all claims,
actions, demands, rights, liabilities, suits, and causes of action of every
nature and description whatsoever, known or unknown, that were asserted or that
could or might have been asserted in any pleading or amended pleading by the
Representative Plaintiffs, by the Representative Plaintiffs on behalf of the
class, or by any of the other Settlement Class Members against Released Persons,
based upon, arising from, or in any way related to both the purchase of Hybrid
common stock by the Representative Plaintiffs or the other Settlement Class
Members during the Settlement Class Period and the facts, transactions, events,
occurrences, disclosures, statements, acts or omissions or failures to act which
were or could have been alleged in the Litigation; or any claim that the
Settling Defendants or their Related Parties
- 11 -
<PAGE>
improperly defended or settled the Litigation and/or the Released Claims.
"Unknown Claims" as used in the above definition of Released Claims
means any Released Class Claims which the Representative Plaintiffs or any
other Settlement Class Member do not know or suspect to exist in their favor
at the time of the release of the Released Persons which, if known by them,
might have affected their Settlement with and release of the Released
Persons, or might have affected their decision not to object to this
Settlement. With respect to any and all Released Class Claims against the
Released Persons, the Parties stipulate and agree that, upon the Effective
Date, the Representative Plaintiffs shall expressly waive and relinquish, and
the other Settlement Class Members shall be deemed to have, and by operation
of the Judgment shall have, expressly waived and relinquished, to the fullest
extent permitted by law, the provisions, rights, and benefits conferred by
Section 1542 of the California Civil Code, which provides:
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,
and by any law of any state or territory of the United States, or principle
of common law, or of international or foreign law, which is similar,
comparable or equivalent to Section 1542 of the California Civil Code. The
Representative Plaintiffs and the other Settlement Class Members may
hereafter discover facts in addition to or different from those which he, she
or it now knows or believes to be true with respect to the Released Class
Claims, but hereby stipulate and agree that upon the Effective Date, the
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<PAGE>
Representative Plaintiffs fully, finally and forever settle and release, and
each other Settlement Class Member shall be deemed to have, and by operation
of the Judgment shall have, fully, finally, and forever settled and released
any and all Released Class Claims against the Released Persons, known or
unknown, suspected or unsuspected, contingent or non-contingent, whether or
not concealed or hidden, which now exist, or heretofore have existed, upon
any theory of law or equity now existing or coming into existence in the
future, including, but not limited to, conduct which is negligent,
intentional, with or without malice, or a breach of any duty, law or rule,
without regard to the subsequent discovery or existence of such different or
additional facts. The Settling Parties acknowledge that the foregoing waiver
was bargained for and a key element of the Settlement of which this release
is a part.
As used above "Released Persons" means the Settling Defendants, and
their respective Related Parties (I.E., each of any Settling Defendants' past,
present or future directors, officers, employees, partnerships and partners,
principals, agents (except securities brokers and dealers), controlling
shareholders, any entity in which any Settling Defendant and/or any member(s) of
that Settling Defendant's immediate family has or have a controlling interest,
attorneys, accountants, auditors (except the Non-Settling Defendant), advisors,
personal or legal representatives, underwriters, syndicate members, banks,
investment banks or investment bankers, analysts, associates, insurers,
co-insurers and reinsurers, predecessors, successors, parents, subsidiaries,
divisions, assigns, joint ventures and joint venturers, spouses, heirs,
executors, administrators, related or affiliated entities,
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<PAGE>
any members of an Individual Settling Defendant's immediate family, or any
trust of which any Settling Defendant is the settlor or which is for the
benefit of any Individual Settling Defendant and/or member(s) of his family.
Related Parties does not include the Non-Settling Defendant.) Released
Persons does not include the Non-Settling Defendant. The Litigation will
continue against the Non-Settling Defendant PriceWaterhouseCoopers LLP.
VI. THE PLAN OF ALLOCATION
The Net Settlement Fund shall be distributed to Settlement Class
Members who submit valid, timely Proof of Claim forms ("Authorized Claimants")
under the Plan of Allocation. The Plan of Allocation provides that you will be
eligible to participate in the distribution of the Settlement Fund only if you
have a net loss on all transactions in Hybrid common stock during the Settlement
Class Period.
The Plan of Allocation was arrived at by Plaintiffs' Settlement
Counsel, with the assistance of their damages consultant, considering the
relative merits of the claims asserted and the likely damages that could have
been recovered if the Class was successful in establishing liability at trial.
To the extent there are sufficient funds in the Net Settlement Fund,
each Authorized Claimant will receive an amount equal to the Authorized
Claimant's claim, as defined below. If, however, the amount in the Net
Settlement Fund is not sufficient to permit payment of the total claim of each
Authorized Claimant, then each Authorized Claimant shall be paid the percentage
that each Authorized Claimant's claim bears to the total of the claims of all
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<PAGE>
Authorized Claimants. Payment in this manner shall be deemed conclusive against
all Authorized Claimants.
A claim will be calculated as follows:
1. For shares of Hybrid common stock that were PURCHASED OR
OTHERWISE ACQUIRED ON NOVEMBER 12, 1997 THROUGH JUNE 17, 1998,
and
(a) sold from November 12, 1997 through June 17, 1998,
the claim per share is the difference between the
price paid for the shares of Hybrid common stock and
the amount realized from the sale of any such shares;
(b) retained at the end of June 17, 1998, the claim per
share is the difference between the price paid for
the shares of Hybrid common stock and $2.188 per
share (June 17, 1998 closing price).
2. The date of purchase or sale is the "contract" or "trade" date as
distinguished from the "settlement" date.
3. For Settlement Class Members who made multiple purchases or multiple
sales during the Settlement Class Period, the earliest subsequent sale shall be
matched with the earliest purchase and chronologically thereafter for purposes
of the claim calculations.
4. All profits shall be subtracted from the total of all losses to
determine the claim of each Settlement Class Member. Only if a Settlement Class
Member had a net loss, after profits from all transactions in Hybrid common
stock during the Settlement Class Period are subtracted from the total of
losses, will such Class member be eligible to receive a distribution from the
Net Settlement Fund.
5. The Court has reserved jurisdiction to allow, disallow or adjust the
claim of any Settlement Class Member on equitable grounds.
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<PAGE>
6. Representative Plaintiffs' Counsel ("Class Counsel"), acting on
behalf of the Settlement Class and subject to the supervision of the District
Court, shall be responsible for the administration and calculation of the claims
and shall oversee the distribution of the Net Settlement Fund to Settlement
Class Members.
7. Any controversies that may arise concerning the distribution of the
Net Settlement Fund, including the allowance or disallowance of claims and the
amounts thereof, which are not resolved between Class Counsel and any Claimant,
shall be presented to the District Court for resolution.
8. Any Settlement Class Member who fails to file a valid and timely
Proof of Claim and Release in the manner and with the information required shall
be barred from participating in the distribution of the Net Settlement Fund, but
otherwise shall be bound by all of the terms of the Stipulation, including any
release and the provisions of any orders and judgments made or entered pursuant
to the Stipulation.
VII. THE RIGHTS OF SETTLEMENT CLASS MEMBERS
If you are a Member of the Settlement Class, you have the following
options:
1. YOU MAY FILE A PROOF OF CLAIM. If you choose this option you will
remain a Member of the Settlement Class, you will share in the proceeds of the
proposed Settlement if your claim is timely and valid and if the proposed
Settlement is finally approved by the Court, and you will be bound by the
Judgment and release described above.
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<PAGE>
Each Settlement Class Member who desires to assert a claim for payment
from the Net Settlement Fund must submit a completed and signed Proof of Claim,
a copy of which is enclosed with this Notice, supported by the documents
described in the Proof of Claim. The Proof of Claim must be submitted as
described below to:
HYBRID NETWORKS, INC. SECURITIES LITIGATION, c/o Gilardi & Co., P.O.
Box 5100, Larkspur, CA 94977-5100.
ALL PROOFS OF CLAIM MUST BE POSTMARKED OR OTHERWISE SUBMITTED BY
_________________, 1999. Any Settlement Class Member who fails to submit a valid
and timely Proof of Claim will not receive any portion of the Net Settlement
Fund, but will be bound by all terms of the Settlement and of any Final Judgment
or other order entered in this Action if the Settlement is approved (unless such
person previously has validly and properly requested exclusion from the
Settlement Class). A Proof of Claim and Release will be deemed to have been
submitted when mailed, if a postmark is indicated on the envelope and it was
mailed first class, postage prepaid, and addressed as indicated above. Proof of
Claim forms otherwise submitted will be deemed to be submitted at the time they
are actually received at the address designated above. Submission of a Proof of
Claim and Release is not a waiver of certain rights with respect to the
Settlement, including the right to object to the Settlement, the distribution of
the Net Settlement Fund or Plaintiffs' Settlement Counsel's request for
attorneys' fees or reimbursement of expenses.
If you submit a Proof of Claim, Plaintiffs' Settlement Counsel is
entitled to make inquiry to ensure that you are a Settlement Class Member or are
entitled to a portion of the Net Settlement
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<PAGE>
Fund and to confirm the amount of your claim. By submitting a Proof of Claim,
you are agreeing that the District Court has jurisdiction with respect to
your claim.
2. YOU MAY REQUEST TO BE EXCLUDED. If you do not wish to be included in
the Settlement Class and you do not wish to participate in the proposed
Settlement described in the Notice, you may request to be excluded from the
Settlement Class.
VIII. PROCEDURE FOR EXCLUSION
Any Settlement Class Member may exclude himself, herself or itself from
the Settlement Class by mailing on or before __________________, 1999, a
statement to HYBRID NETWORKS, INC. SECURITIES LITIGATION, c/o Gilardi & Co.,
P.O. Box 5100, Larkspur, CA 94977-5100, of his, her or its desire to be excluded
from the Settlement Class in the HYBRID NETWORKS, INC. SECURITIES LITIGATION,
and stating the number of shares of Hybrid common stock purchased and sold
during the Settlement Class Period, the dates of purchases and/or sales and the
prices paid or received for each purchase or sale. All persons who exclude
themselves from the Settlement Class will not participate in or receive any
portion of the Net Settlement Fund described above, nor will they be bound by
the terms of the Settlement, or any Final Judgment in this Action, including any
release of claims against Defendants; but they may pursue their own individual
remedies, if any.
No request for exclusion will be considered valid unless all of the
information described above is included in any such request.
If you do not request to be excluded from the Settlement Class you will
be bound by any and all determinations or judgments in the
- 18 -
<PAGE>
Action, whether favorable or unfavorable to the Settlement Class including,
without limitation, any Final Judgment.
3. YOU MAY DO NOTHING AT ALL. If you choose this option, you will NOT
share in the proceeds of the Settlement, but you WILL be bound by any Judgment
entered by the Court.
IX. SETTLEMENT HEARING
The purpose of the Settlement Hearing scheduled for ____________, 1999,
will be to determine whether the proposed partial Settlement of this Action as
set forth in the Stipulation of Settlement, dated as of March 3, 1999, is fair,
reasonable and adequate and, thus, whether the Settlement should be approved by
the District Court, and the Litigation dismissed in its entirety as to the
Defendants, with prejudice as against Settlement Class Members.
The District Court will also consider at the Settlement Hearing the
request of counsel for the Representative Plaintiffs and the Settlement Class
for an award of attorneys' fees and reimbursement of expenses. Class Counsel
will apply to the District Court for an award of attorneys' fees and for the
reimbursement of expenses for the services they rendered in this Litigation.
Class Counsel intend to seek attorneys' fees of thirty percent (30%) of the
Settlement Fund plus their out-of-pocket expenses not to exceed $300,000. Any
attorneys' fees and expenses that the District Court awards will be paid out of
the Settlement Fund.
Any Settlement Class Member who has not requested exclusion from the
Settlement Class may appear in person or through counsel
- 19 -
<PAGE>
at the hearing described above and be heard as to why the proposed Settlement
of the Action, the distribution of the Net Settlement Fund, and the
application by Class Counsel for an award of fees and expenses should or
should not be approved as fair, reasonable and adequate, or why a Final
Judgment dismissing the Action against Defendants with prejudice should or
should not be entered herein; provided, however, that no Settlement Class
Member shall be heard or be entitled to object to the approval of the terms
and conditions of the proposed Settlement, or the distribution of the funds,
or the application by Class Counsel for an award of fees and expenses, unless
on or before __________, 1999 that person has filed such papers with the
District Court and has served by hand or first-class mail written objections
and copies of any supporting papers and briefs upon each of the following:
Keith F. Park
MILBERG WEISS BERSHAD
HYNES & LERACH LLP
600 W. Broadway, Suite 1800
San Diego, California, 92101
Steven J. Toll
COHEN, MILSTEIN, HAUSFELD
& TOLL, P.L.L.C.
1100 New York Avenue, N.W.
West Tower, Suite 500
Washington, DC 20005-3964
Counsel for Plaintiffs
Jordan Eth, Esq.
MORRISON & FOERSTER
425 Market Street
San Francisco, CA 94105-2482
Counsel for Settling Defendants
Any such papers served must include the number of shares of Hybrid stock the
objector purchased and sold during the Settlement Class Period, and the dates of
such purchase(s) and sale(s). Unless
- 20 -
<PAGE>
otherwise ordered by the Court, any Member of the Settlement Class who does
not make his or her objection or opposition in the manner provided shall be
deemed to have waived all objections and opposition to the fairness,
reasonableness and adequacy of the proposed Settlement, the Plan of
Allocation and the request of Class Counsel for attorneys' fees, costs and
expenses.
X. NOTICE TO BANKS, BROKERS AND OTHER NOMINEES
Pursuant to an order of the District Court, each bank, brokerage firm
and other nominee who purchased Hybrid common stock during the Settlement Class
Period for a beneficial owner is requested within ten days to forward to such
persons a copy of this Notice and a copy of the Proof of Claim form enclosed
herewith. Additional copies may be obtained, without charge, by written request
to HYBRID NETWORKS, INC. SECURITIES LITIGATION, c/o Gilardi & Co., at the
address listed below. Alternatively, nominees may provide the names and
addresses of persons for whom they purchased Hybrid common stock during the
Settlement Class Period to HYBRID NETWORKS, INC. SECURITIES LITIGATION, c/o
Gilardi & Co. who, in turn, will mail the notices and Proof of Claim forms. The
Settlement Fund will reimburse all such nominees for reasonable administrative
costs incurred in providing the Notice and Proof of Claim forms to beneficial
owners, upon submission of appropriate documentation.
XI. EXAMINATION OF PAPERS AND INQUIRIES
The foregoing is only a summary of the Action and the proposed
Settlement, and does not purport to be comprehensive. For a more
- 21 -
<PAGE>
detailed statement of the matters involved in the above Action and the
proposed Settlement, you may refer to the pleadings, the Stipulation of
Settlement and other papers filed in the above Action, which may be inspected
at the Office of the Clerk of the District Court during normal business hours
of each business day.
All inquiries by Settlement Class Members should be directed in the
first instance to HYBRID NETWORKS, INC. SECURITIES LITIGATION, c/o Gilardi &
Co., P.O. Box 5100, Larkspur, CA 94977-5100, during normal business hours.
INQUIRIES SHOULD NOT BE DIRECTED TO THE CLERK OF THE COURT OR TO THE
JUDGE.
DATED: BY ORDER OF THE UNITED STATES
-------------
DISTRICT COURT FOR THE NORTHERN
DISTRICT OF CALIFORNIA
- 22 -
<PAGE>
MILBERG WEISS BERSHAD
HYNES & LERACH LLP
WILLIAM S. LERACH (68581)
KEITH F. PARK (54275)
600 West Broadway, Suite 1800
San Diego, CA 92101
Telephone: 619/231-1058
- and -
REED R. KATHREIN (139304)
KIMBERLY C. EPSTEIN (169012)
222 Kearny Street, 10th Floor
San Francisco, CA 94108
Telephone: 415/288-4545
COHEN, MILSTEIN, HAUSFELD
& TOLL, P.L.L.C.
STEVEN J. TOLL
KRISTOPHER A. KINKADE
999 Third Avenue, Suite 3600
Seattle, WA 98104
Telephone: 206/521-0080
Co-Lead Counsel for Plaintiffs
UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF CALIFORNIA
SAN JOSE DIVISION
MARK ALAN ROSENBERG, et al., On ) No. C-98-20956-RMW
Behalf of Themselves and All Others ) (Consolidated with No.
Similarly Situated, ) C-98-20888-RMW)
)
Plaintiffs, ) CLASS ACTION
)
vs. )
)
HYBRID NETWORKS, INC., et al., )
)
Defendants. )
)
- ---------------------------------------
PROOF OF CLAIM AND RELEASE
EXHIBIT A-2
<PAGE>
GENERAL INSTRUCTIONS
1. To recover as a Member of the Settlement Class based on your claims
in the above-entitled action (the "Class Action"), you must complete and on page
__ hereof, sign this Proof of Claim and Release. If you fail to file a properly
addressed (as set forth in paragraph 3 below) Proof of Claim and Release, your
claim may be rejected and you may be precluded from any recovery from the
Settlement Fund created in connection with the proposed Settlement of the Class
Action.
2. Submission of this Proof of Claim and Release, however, does not
assure that you will share in the proceeds of Settlement in the Litigation.
3. YOU MUST MAIL YOUR COMPLETED AND SIGNED PROOF OF CLAIM AND RELEASE
POSTMARKED ON OR BEFORE __________, 1999 ADDRESSED AS FOLLOWS:
HYBRID NETWORKS, INC. SECURITIES LITIGATION
c/o Gilardi & Co.
P.O. Box 5100
Larkspur, California 94977-5100
4. If you are a Member of the Settlement Class and you do not timely
request exclusion in connection with the proposed Settlement, you are bound by
the terms of any judgment entered in the Class Action, WHETHER OR NOT YOU SUBMIT
A PROOF OF CLAIM AND RELEASE.
5. If you are NOT a Member of the Settlement Class as defined in the
Notice of Pendency and Settlement of Class Action and Settlement Hearing (the
"Notice"), DO NOT submit a Proof of Claim and Release form.
- 1 -
<PAGE>
CLAIMANT IDENTIFICATION
1. If you purchased Hybrid common stock, and held the certificate(s) in
your name, you are the beneficial purchaser as well as the record purchaser. If,
however, you purchased these securities, and the certificate(s) were registered
in the name of a third party, such as a nominee or brokerage firm, you are the
beneficial purchaser and the third party is the record purchaser.
2. Use Part I of this form entitled "Claimant Identification" to
identify each purchaser of record, if different from the beneficial purchaser
("nominee") of Hybrid stock which forms the basis of this claim. THIS CLAIM MUST
BE FILED BY THE ACTUAL BENEFICIAL PURCHASER OR PURCHASERS, OR THE LEGAL
REPRESENTATIVE OF SUCH PURCHASER OR PURCHASERS, OF THE STOCK, UPON WHICH THIS
CLAIM IS BASED.
3. All joint purchasers must sign this claim. Executors,
administrators, guardians, conservators and trustees must complete and sign this
claim on behalf of persons represented by them and their authority must
accompany this claim and their titles or capacities must be stated. The Social
Security (or taxpayer identification) number and telephone number of the
beneficial owner may be used in verifying the claim. Failure to provide the
foregoing information could delay verification of your claim or result in
rejection of the claim.
- 2 -
<PAGE>
CLAIM FORM
1. Use Part II of this form entitled "Schedule of Transactions in
Hybrid Common Stock," to supply all required details of your transaction(s) in
these securities. If you need more space or additional schedules, attach
separate sheets giving all of the required information in substantially the same
form. Sign and print or type your name on each additional sheet.
2. On the schedules, provide all of the requested information with
respect to all of your purchases and all of your sales of Hybrid stock which
took place at any time between November 12, 1997 through and including June 17,
1998 (the "Settlement Class Period"), whether such transactions resulted in a
profit or a loss. Failure to report all such transactions may result in the
rejection of your claim.
3. List each transaction in the Settlement Class Period separately and
in chronological order, by trade date, beginning with the earliest. You must
accurately provide the month, day and year of each transaction you list.
4. The term "Purchase Price" means the amount paid for the securities
(including commissions and transfer taxes) and the term "Sales Price" means the
amount realized on the sale of the securities (net of commissions and transfer
taxes). The date of purchase or sale is the "contract" or "trade" date as
distinguished from the "settlement" date. The date of covering a "short sale" is
deemed to be the date of purchase of the security. The date of a "short sale" is
deemed to be the date of sale of the security.
5. Broker's confirmations or other documentation of your transactions
in Hybrid stock should be attached to your claim.
- 3 -
<PAGE>
Failure to provide this documentation could delay verification of your claim
or result in rejection of your claim.
- 4 -
<PAGE>
UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF CALIFORNIA
ROSENBERG, ET AL. V. HYBRID NETWORKS, INC.
No. C-98-20956-RMW
PROOF OF CLAIM
Must be Postmarked No Later Than:
, 1999
------------------
PLEASE TYPE OR PRINT
PART I: CLAIMANT IDENTIFICATION
- -------------------------------------------------------------------------------
Beneficial Owner's Name (First, Middle, Last)
- -------------------------------------------------------------------------------
Street Address
- ------------------------------ ------------------------------------
City State Zip Code
- ----------------------------- --------------------------------------
Foreign Province Foreign Country
Induvidual
- ----------------------------- --------
Social Security Number or
Taxpayer Identification Number Corporation/Other
--------
(work)
- ---------- -----------------
Area Code Telephone Number
(home)
- ---------- -----------------
Area Code Telephone Number
- -------------------------------------------------------------------------------
Record Owner's Name (if different from beneficial owner listed above)
- 5 -
<PAGE>
PART II: SCHEDULE OF TRANSACTIONS IN HYBRID COMMON STOCK
A) The number of shares of Hybrid common stock held at the
commencement of trading on November 12, 1997: _________
B) Purchases (November 12, 1997 - June 17, 1998, inclusive) of Hybrid
common stock
TRADE DATE NO. OF SHARES
MO DAY YEAR PURCHASED PURCHASE PRICE
1. $ .
------------- -------------- ---------- ---
2. $ .
------------- -------------- ---------- ---
3. $ .
------------- -------------- ---------- ---
C) Sales (November 12, 1997 - June 17, 1998, inclusive) of Hybrid
common stock
TRADE DATE
MO DAY YEAR NO. OF SHARES SOLD SALES PRICE
1. $ .
------------- -------------- ---------- ---
2. $ .
------------- -------------- ---------- ---
3. $ .
------------- -------------- ---------- ---
D) Number of shares of Hybrid common stock held at close of trading on
June 17, 1998:________________.
YOU MUST READ AND SIGN THE RELEASE ON PAGE____.
If you require additional space, attach extra schedules in the same format as
above. Copies of broker's confirmations or other documentation evidencing your
transactions in Hybrid stock should be attached.
- 6 -
<PAGE>
PART III: SUBMISSION TO JURISDICTION OF COURT AND ACKNOWLEDGMENTS
I submit this Proof of Claim and Release under the terms of the
Stipulation of Settlement described in the Notice. I also submit to the
jurisdiction of the United States District Court for the Northern District of
California with respect to my claim as a Settlement Class Member and for
purposes of enforcing the release set forth herein and any Judgment which may be
entered in the Class Action. I further acknowledge that I am bound by and
subject to the terms of any judgment that may be entered in the Class Action.
I agree to furnish additional information to the Claims Administrator to
support this claim if required to do so.
PART IV: RELEASE
A. I hereby acknowledge full and complete satisfaction of, and do hereby
fully, finally and forever settle, discharge and release all Released Class
Claims and Unknown Claims against all Released Persons.
B. "Related Parties" means each of any Settling Defendants' past,
present or future directors, officers, employees, partnerships and partners,
principals, agents (except securities brokers and dealers), controlling
shareholders, any entity in which any Settling Defendant and/or any member(s) of
that Settling Defendant's immediate family has or have a controlling interest,
attorneys, accountants, auditors (except the Non-Settling Defendant), advisors,
personal or legal representatives, underwriters, syndicate members, banks,
investment banks or investment bankers, analysts, associates, insurers,
co-insurers and reinsurers, predecessors, successors, parents, subsidiaries,
- 7 -
<PAGE>
divisions, assigns, joint ventures and joint venturers, spouses, heirs,
executors, administrators, related or affiliated entities, any members of an
Individual Settling Defendant's immediate family, or any trust of which any
Settling Defendant is the settlor or which is for the benefit of any
Individual Settling Defendant and/or member(s) of his family. Related Parties
does not include the Non-Settling Defendant.
C. "Released Class Claims" means any and all claims, actions, demands,
rights, liabilities, suits, and causes of action of every nature and description
whatsoever, known or unknown, that were asserted or that could or might have
been asserted in any pleading or amended pleading by the Representative
Plaintiffs, by the Representative Plaintiffs on behalf of the class, or by any
of the other Settlement Class Members against Released Persons, based upon,
arising from, or in any way related to both the purchase of Hybrid common stock
by the Representative Plaintiffs or the other Settlement Class Members during
the Settlement Class Period and the facts, transactions, events, occurrences,
disclosures, statements, acts or omissions or failures to act which were or
could have been alleged in the Litigation; or any claim that the Settling
Defendants or their Related Parties improperly defended or settled the
Litigation and/or the Released Claims.
D. "Released Persons" means each and all of the Settling Defendants and
their respective Related Parties. Released Persons does not include the
Non-Settling Defendant.
E. "Settling Defendants" means Hybrid, Carl S. Ledbetter, Dan E.
Steimle, James R. Flach, Stephen E. Halprin, Gary M. Lauder, Douglas M. Leone,
Gustavo Ezcurra and Howard L. Strachman.
- 8 -
<PAGE>
F. "Unknown Claims" means any Released Class Claims which the
Representative Plaintiffs or any other Settlement Class Member do not know or
suspect to exist in their favor at the time of the release of the Released
Persons which, if known by them, might have affected their Settlement with
and release of the Released Persons, or might have affected their decision
not to object to this Settlement. With respect to any and all Released Class
Claims against the Released Persons, the Parties stipulate and agree that,
upon the Effective Date, the Representative Plaintiffs shall expressly waive
and relinquish, and the other Settlement Class Members shall be deemed to
have, and by operation of the Judgment shall have, expressly waived and
relinquished, to the fullest extent permitted by law, the provisions, rights,
and benefits conferred by Section 1542 of the California Civil Code, which
provides:
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
and by any law of any state or territory of the United States, or principle of
common law, or of international or foreign law, which is similar, comparable or
equivalent to Section 1542 of the California Civil Code. The Representative
Plaintiffs and the other Settlement Class Members may hereafter discover
facts in addition to or different from those which he, she or it now knows or
believes to be true with respect to the Released Class Claims, but hereby
stipulate and agree that upon the Effective Date, the Representative
Plaintiffs fully, finally and forever settle and release, and each other
Settlement Class Member shall be deemed to have, and by operation of the
Judgment shall have, fully, finally,
- 9 -
<PAGE>
and forever settled and released any and all Released Class Claims against
the Released Persons, known or unknown, suspected or unsuspected, contingent
or non-contingent, whether or not concealed or hidden, which now exist, or
heretofore have existed, upon any theory of law or equity now existing or
coming into existence in the future, including, but not limited to, conduct
which is negligent, intentional, with or without malice, or a breach of any
duty, law or rule, without regard to the subsequent discovery or existence of
such different or additional facts. The Settling Parties acknowledge that the
foregoing waiver was bargained for and a key element of the Settlement of
which this release is a part.
G. This release shall be of no force or effect unless and until the
Court approves the Stipulation of Settlement and the Stipulation becomes
Effective.
H. I (we) hereby warrant and represent that I (we) have not assigned or
transferred or purported to assign or transfer, voluntarily or involuntarily,
any matter released pursuant to this release or any other part or portion
thereof.
I. I (we) certify that I am (we are) not subject to backup withholding
under the provisions of Section 3406(a)(1)(C) of the Internal Revenue Code.
NOTE: If you have been notified by the Internal Revenue Service that you are
subject to backup withholding, please strike out the language that you are not
subject to backup withholding in the certification above.
- 10 -
<PAGE>
I declare under penalty of perjury under the laws of the United States
of America that the foregoing information supplied by the undersigned is true
and correct and that this Proof of Claim and Release form was executed
this _____ day of _________________ in _____________________________________
(month) (year) (City, State, Country)
-----------------------------------
(Sign your name here)
------------------------------------
(Type or print your name here)
------------------------------------
(Capacity of persons signing,
e.g., Beneficial Purchaser,
Executor or Administrator)
ACCURATE CLAIMS PROCESSING TAKES A
SIGNIFICANT AMOUNT OF TIME
THANK YOU FOR YOUR PATIENCE
- 11 -
<PAGE>
Reminder Checklist:
1. Please sign the above release and declaration.
2. Remember to attach copies of your supporting documentation, if
available.
3. Do not send originals or copies of stock certificates.
4. Keep a copy of your claim form for your records.
5. If you desire an acknowledgment of receipt of your claim form,
please send it Certified Mail, Return Receipt Requested.
6. If you move, please send us your new address.
- 12 -
<PAGE>
MILBERG WEISS BERSHAD
HYNES & LERACH LLP
WILLIAM S. LERACH (68581)
KEITH F. PARK (54275)
600 West Broadway, Suite 1800
San Diego, CA 92101
Telephone: 619/231-1058
- and -
REED R. KATHREIN (139304)
KIMBERLY C. EPSTEIN (169012)
222 Kearny Street, 10th Floor
San Francisco, CA 94108
Telephone: 415/288-4545
COHEN, MILSTEIN, HAUSFELD
& TOLL, P.L.L.C.
STEVEN J. TOLL
KRISTOPHER A. KINKADE
999 Third Avenue, Suite 3600
Seattle, WA 98104
Telephone: 206/521-0080
Co-Lead Counsel for Plaintiffs
UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF CALIFORNIA
SAN JOSE DIVISION
MARK ALAN ROSENBERG, et al., On ) No. C-98-20956-RMW
Behalf of Themselves and All Others ) (Consolidated with No.
Similarly Situated, ) C-98-20888-RMW)
)
Plaintiffs, ) CLASS ACTION
)
vs. )
)
HYBRID NETWORKS, INC., et al., )
)
Defendants. )
)
- -----------------------------------
SUMMARY NOTICE OF PROPOSED SETTLEMENT
<PAGE>
EXHIBIT A-3
TO: ALL PERSONS WHO PURCHASED THE COMMON STOCK OF HYBRID NETWORKS,
INC. ("HYBRID") DURING THE PERIOD NOVEMBER 12, 1997 THROUGH JUNE 17,
1998, INCLUSIVE.
Class litigation has been pending in the United States District Court
for the Northern District of California against Hybrid and certain of its
present and former officers and directors. Certain of the parties to the action
have reached a proposed settlement.
You are hereby notified, pursuant to Court order, that a hearing will
be held on __________, 1999, at ____ _.m., before the Honorable Ronald M. Whyte,
United States District Judge, at the United States Courthouse, 280 South First
Street, San Jose, California (the "Settlement Hearing") to determine: (1)
whether the settlement of claims in the litigation in the amount of $8.8 million
in cash, plus accrued interest (the "Settlement Fund"), and 3.0 million shares
of Hybrid common stock (subject to certain terms and conditions) should be
approved as fair, just, reasonable and adequate to all the Settling Parties; (2)
whether the proposed Plan of Allocation is fair, just, reasonable and adequate;
(3) whether the application of plaintiffs' counsel for an award of attorneys'
fees and expenses should be approved; and, (4) whether the action should be
dismissed with prejudice as to the Settling Defendants as set forth in the
Stipulation of Settlement dated as of March 3, 1999, filed with the Court.
If you purchased Hybrid common stock during the period from November
12, 1997 through and including June 17, 1998, your rights may be affected by the
settlement of this action. To share in the distribution of the Settlement Fund,
you must establish your rights
- 1 -
<PAGE>
by filing a Proof of Claim and Release form on or before __________, 1999.
If you desire to be excluded from the Class, you must file a request
for exclusion by _____________, 1999, in the manner and form explained in the
detailed Notice referred to below. All members of the Settlement Class who have
not requested exclusion from the Settlement Class will be bound by any judgment
entered in the action pursuant to the settlement agreement.
Any objection to the settlement must be filed no later than
_____________, 1999 and show due proof of service on each of:
Keith F. Park
MILBERG WEISS BERSHAD
HYNES & LERACH LLP
600 West Broadway, Suite 1800
San Diego, CA 92101
Steven J. Toll
COHEN, MILSTEIN, HAUSFELD
& TOLL, P.L.L.C.
1100 New York Avenue, N.W.
West Tower, Suite 500
Washington, DC 20005-3964
Counsel for Plaintiffs
Jordan Eth, Esq.
MORRISON & FOERSTER
425 Market Street
San Francisco, CA 94105-2482
Counsel for Settling Defendants
If you are a member of the Settlement Class and have not received a
detailed printed Notice of Pendency and Partial Settlement of Class Action and
Settlement Hearing and a Proof of Claim and Release form, you may obtain copies
by writing to: HYBRID NETWORKS, INC. SECURITIES LITIGATION, c/o Gilardi & Co.,
P.O. Box 5100, Larkspur, CA 94977-5100. Please do not contact the Court or the
Clerk's office for information.
- 2 -
<PAGE>
Any inquiries about this action can be made in WRITING to counsel for
the Settlement Class, Keith F. Park, Milberg Weiss Bershad Hynes & Lerach LLP,
600 W. Broadway, Suite 1800, San Diego, California 92101 and Steven J. Toll,
Cohen, Milstein, Hausfeld & Toll, P.L.L.C., 1100 New York Avenue, N.W., West
Tower, Suite 500, Washington, DC 20005-3964.
DO NOT TELEPHONE THE COURT REGARDING THIS NOTICE.
DATED: ____________ BY ORDER OF THE UNITED STATES
DISTRICT COURT FOR THE NORTHERN
DISTRICT OF CALIFORNIA
- 3 -
<PAGE>
UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF CALIFORNIA
SAN JOSE DIVISION
MARK ALAN ROSENBERG, et al., On ) No. C-98-20956-RMW
Behalf of Themselves and All Others ) (Consolidated with No.
Others Similarly Situated, ) C-98-20888-RMW)
)
Plaintiffs, ) CLASS ACTION
) ____________
vs. )
)
HYBRID NETWORKS, INC., et al., )
)
Defendants. )
)
- -----------------------------------
[PROPOSED] FINAL JUDGMENT AND ORDER OF DISMISSAL
EXHIBIT B
<PAGE>
This matter came on for hearing on ___________, 1999, upon the
application of the Settling Parties for approval of the Settlement set forth in
the Stipulation of Settlement (the "Stipulation") dated as of March 3, 1999. Due
and adequate notice having been given to the Settlement Class, and the Court
having considered the Stipulation, all papers filed and proceedings had herein
and all oral and written comments received regarding the proposed Settlement,
and having reviewed the entire record in the Action, and good cause appearing:
IT IS HEREBY ORDERED, ADJUDGED AND DECREED AS FOLLOWS:
1. The Court, for purposes of this Final Judgment and Order of
Dismissal (the "Final Judgment"), adopts all defined terms as set forth in the
Stipulation.
2. Pursuant to Rule 23 of the Federal Rules of Civil Procedure, this
Court has certified a Settlement Class of all Persons who purchased Hybrid
Networks, Inc. common stock between November 12, 1997 and June 17, 1998,
inclusive. Excluded from the Class are the Defendants named in the Litigation,
members of the immediate families of the Individual Defendants, any entity in
which any Defendant has a controlling interest, and the legal representatives,
heirs, successors, or assigns of the Defendants. Also excluded from the
Settlement Class are those Persons (identified in Exhibit 1 hereto) who have
timely and validly requested exclusion from the Settlement Class pursuant to the
Notice of Pendency and Settlement of Class Action sent to the Settlement Class.
3. With respect to the Settlement Class, this Court finds and concludes
that: (a) the members of the Class are so numerous
- 1 -
<PAGE>
that joinder of all Class members in the class action is impracticable; (b)
there are questions of law and fact common to the Class which predominate
over any individual questions; (c) the claims of the Representative
Plaintiffs are typical of the claims of the Class; (d) the Representative
Plaintiffs and their counsel have fairly and adequately represented and
protected the interests of the Class members; and (e) a class action is
superior to other available methods for the fair and efficient adjudication
of the controversy, considering: (i) the interests of the members of the
Class in individually controlling the prosecution of the separate actions,
(ii) the extent and nature of any litigation concerning the controversy
already commenced by members of the Class, (iii) the desirability or
undesirability of continuing the litigation of these claims in this
particular forum, and (iv) the difficulties likely to be encountered in the
management of the class action.
4. The Court has jurisdiction over the subject matter of the Action,
the Representative Plaintiffs, the other Members of the Settlement Class, and
the Settling Defendants.
5. The Court finds that the distribution of the Notice of Pendency and
Settlement of Class Action and Settlement Hearing, Proof of Claim and Release,
and publication of the Summary Notice as provided for in the Order Preliminarily
Approving Settlement constituted the best notice practicable under the
circumstances to all Persons within the definition of the Settlement Class, and
fully met the requirements of Rule 23 of the Federal Rules of Civil Procedure,
due process, the United States Constitution, and any other applicable law.
- 2 -
<PAGE>
6. Pursuant to and in accordance with the requirements of Rule 23 of
the Federal Rules of Civil Procedure, the Court approves the Settlement of the
above-captioned action set forth in the Stipulation, each of the releases and
other terms, as fair, just, reasonable and adequate as to the Settling Parties.
The Parties to the Stipulation are directed to perform in accordance with the
terms set forth in the Stipulation.
7. The Court finds that the settlement set forth in the Stipulation is
fair and adequate to the Settling Parties, the Non-Settling Defendant, and to
all persons who may be alleged or determined to be joint tortfeasors or
co-obligors with the Settling Defendants, within the parameters of Rule 23 of
the Federal Rules of Civil Procedure and other applicable federal law.
8. Except as to any individual claim of those Persons (identified in
Exhibit 1 hereto) who have validly and timely requested exclusion from the
Settlement Class, the Action and all claims contained therein, including all of
the Released Claims against the Released Persons are dismissed with prejudice as
to the Representative Plaintiffs and the other Members of the Settlement Class,
and the Parties are to bear their own costs, except as otherwise provided in the
Stipulation.
9. Upon the Effective Date, the Representative Plaintiffs hereby fully,
finally, and forever release, relinquish and discharge all Released Claims
(including Unknown Claims) against each and all of the Released Persons.
10. Upon the Effective Date, each and all Settlement Class Members
shall be deemed to have fully, finally, and forever released, relinquished and
discharged all Released Claims
- 3 -
<PAGE>
(including Unknown Claims) against each and all of the Released
Persons, whether or not such Settlement Class Member executes and delivers
the Proof of Claim and Release.
11. Upon the Effective Date, each of the Settling Defendants shall
fully, finally, and forever release, relinquish and discharge the Representative
Plaintiffs and each and all of the other Settlement Class Members, and
Representative Plaintiffs' Counsel, from all claims (including "Unknown Claims")
arising out of, relating to, or in connection with the institution, prosecution,
assertion or resolution of the Action or the Released Claims.
12. The Court bars and permanently enjoins all Settlement Class Members
from instituting or prosecuting an action or proceedings against the Settling
Defendants arising out of or relating in any way to the Released Claims upon the
Effective Date.
13. Only those Settlement Class Members filing valid and timely Proof
of Claim and Release forms shall be entitled to participate in the Settlement
and receive a distribution from the Settlement Fund. The Proof of Claim and
Release to be executed by the Settlement Class Members shall release all
Released Claims against the Released Persons. All Settlement Class Members shall
be bound by the releases set forth herein whether or not they submit a valid and
timely Proof of Claim and Release.
14. Upon the Effective Date, each of the Settling Defendants hereby
fully, finally, and forever releases, relinquishes and discharges against each
of the other Settling Defendants the following: all claims arising out of,
relating to, or in connection with (1) the Released Claims; (2) the payments
provided for in PARA1.29 of the Stipulation; and (3) the payment of attorneys'
- 4 -
<PAGE>
fees, costs and expenses incurred in defense of this Litigation. Specifically
excluded from the releases in this paragraph are:(i) any claims, rights,
demands, causes of action, liabilities, and suits arising out of the claims that
are or may be asserted by any Person falling within the definition of the
Settlement Class who validly and timely requests to be excluded from the
Settlement of the Litigation as provided for in the Stipulation; and (ii) any
obligation on the part of Hybrid to indemnify its present and former officers
and directors to the extent required by Hybrid's articles of incorporation and
by-laws, any existing agreements, or any resolution or otherwise, by the Board
of Directors of Hybrid.
15. The Court hereby enters a bar order pursuant to Section 21D of
the Securities Exchange Act of 1934 (the "Exchange Act"), 15 U.S.C. Section
78u-4(f)(7) and FRANKLIN V. KAYPRO CORP., 884 F.2d 1222 (9th Cir. 1989) with
respect to the claims asserted under the Exchange Act and the Securities Act
of 1933, constituting the final discharge of all obligations to plaintiffs of
the Settling Defendants arising out of the action (the "Contribution Bar
Order"). This Order and Judgment bars and permanently enjoins all persons,
including but not limited to the Non-Settling Defendant, from instituting or
prosecuting any action or proceeding against the Settling Defendants for
equitable, partial, comparative, or complete contribution, subrogation, or
indemnity, however denominated, arising out of or relating in any way to the
Released Claims. The Court finds that all such claims are extinguished,
discharged, satisfied and made unenforceable.
- 5 -
<PAGE>
16. During the course of the Action no Settling Party or their
respective counsel violated any of the requirements of Rule 11(b) of the Federal
Rules of Civil Procedure.
17. Neither the Stipulation nor the Settlement contained therein, nor
any act performed or document executed pursuant to or in furtherance of the
Stipulation or the Settlement: (i) is or may be deemed to be or may be used as
an admission of, or evidence of, the validity of any Released Claim, or of any
wrongdoing or liability of the Settling Defendants, or (ii) is or may be deemed
to be or may be used as an admission of, or evidence of, any fault or omission
of any of the Settling Defendants in any civil, criminal or administrative
proceeding in any court, administrative agency or other tribunal. Released
Persons may file the Stipulation and/or the Judgment from this Action in any
other action that may be brought against them in order to support a defense or
counterclaim based on principles of RES JUDICATA, collateral estoppel, release,
good faith settlement, judgment bar or reduction of any theory of claim
preclusion or issue preclusion or similar defense or counterclaim. Settling
Defendants have denied and continue to deny each and all of the claims alleged
in the Action. The Representative Plaintiffs or any other Member of the
Settlement Class may file the Stipulation in any proceeding brought to enforce
any of its terms or provisions.
18. The Court reserves exclusive and continuing jurisdiction over the
Action, the Representative Plaintiffs, the Settlement Class and the Released
Persons for the purposes of: (1) supervising the implementation, enforcement,
construction, and interpretation of the Stipulation, the Plan of Allocation, and
this
- 6 -
<PAGE>
Judgment; (2) hearing and determining any application by Class Counsel for an
award of attorney's fees, costs, and expenses; and (3) supervising the
distribution of the Settlement Fund.
19. There being no just reason to delay entry of this Judgment, the
Clerk of the Court is ordered, pursuant to Rule 54(b) of the Federal Rules of
Civil Procedure, to enter this judgment forthwith.
DATED: __________________ ______________________________
THE HONORABLE RONALD M. WHYTE
UNITED STATES DISTRICT JUDGE
Submitted by:
MILBERG WEISS BERSHAD
HYNES & LERACH LLP
WILLIAM S. LERACH
KEITH F. PARK
- ------------------------------
KEITH F. PARK
600 West Broadway, Suite 1800
San Diego, CA 92101
Telephone: 619/231-1058
MILBERG WEISS BERSHAD
HYNES & LERACH LLP
REED R. KATHREIN
KIMBERLY C. EPSTEIN
222 Kearny Street, 10th Floor
San Francisco, CA 94108
Telephone: 415/288-4545
COHEN, MILSTEIN, HAUSFELD
& TOLL, P.L.L.C.
STEVEN J. TOLL
KRISTOPHER A. KINKADE
999 Third Avenue, Suite 3600
Seattle, WA 98104
Telephone: 206/521-0080
Co-Lead Counsel for Plaintiffs
- 7 -
<PAGE>
Exhibit 23.01
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement
(333-40027) on Form S-8 of Hybrid Networks, Inc. of our report dated February
10, 2000 relating to the balance sheets as of December 31, 1999 and 1998 and
the related statements of operations, stockholders' equity (deficit), and cash
flows for each of the years in the three year period ended December 31, 1999,
which report appears in the December 31, 1999 annual report on Form 10-K of
Hybrid Networks, Inc.
/s/ Hein + Associates LLP
Hein + Associates LLP
Certified Public Accountants
Orange, California
March 24, 2000
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