<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ___ TO ___
COMMISSION FILE NUMBER: 0-23289
HYBRID NETWORKS, INC.
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(Exact name of registrant as specified in its charter)
Delaware 77-0252931
- ----------------------------------- ---------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6409 Guadalupe Mines Road, San Jose, California 95120
----------------------------------------------------------
(Address of principal executive offices)
(408) 323-6500
---------------------------------------------------------------
(Registrant's telephone number, including area code)
Not Applicable
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(Former name, former address and former fiscal year, if
changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Sections 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes /X/ No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Common shares outstanding at March 31, 2000: 14,463,454
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HYBRID NETWORKS, INC.
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE NO.
- ---------------------------------------------------- -------------
<S> <C>
ITEM 1. FINANCIAL STATEMENTS
Unaudited Condensed Balance Sheets as of
March 31, 2000 and December 31, 1999 3
Unaudited Condensed Statements of Operations for the
Three Months Ended March 31, 2000 and 1999 4
Unaudited Condensed Statements of Cash Flows for the
Three Months Ended March 31, 2000 and 1999 5
Notes to Unaudited Condensed Financial Statements 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS 10
ITEM 3. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK 22
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 23
SIGNATURES 24
</TABLE>
As used in this report on Form 10-Q, unless the context otherwise
requires, the terms "we," "us," "the Company" or "Hybrid" refer to Hybrid
Networks, Inc., a Delaware corporation.
2
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HYBRID NETWORKS, INC.
UNAUDITED CONDENSED BALANCE SHEETS
(in thousands, except per share data)
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999 *
ASSETS ----------- -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 9,538 $ 13,394
Accounts receivable, net of allowance for doubtful accounts
of $200 in 2000 and 1999 500 1,138
Inventories 5,649 3,755
Prepaid expenses and other current assets 160 234
----------- -----------
Total current assets 15,847 18,521
Property and equipment, net 2,000 2,244
Intangibles and other assets 445 387
----------- -----------
Total assets $ 18,292 $ 21,152
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Convertible debenture $ 5,500 $ 5,500
Current portion of capital lease obligations 257 336
Accounts payable 2,380 2,035
Accrued liabilities and other 2,969 4,623
----------- -----------
Total current liabilities 11,106 12,494
Convertible debentures - long term 18,510 18,327
Capital lease obligations, less current portion 4 29
Other long-term liabilities 126 122
----------- -----------
Total liabilities 29,746 30,972
----------- -----------
Contingencies
Stockholders' equity (deficit):
Convertible preferred stock, $.001 par value:
Authorized: 5,000 shares;
Issued and outstanding: no shares in 2000 and no shares in 1999 - -
Common stock, $.001 par value:
Authorized: 100,000 shares;
Issued and outstanding: 14,463 shares in 2000
and 11,481 shares in 1999. 14 11
Additional paid-in capital 82,205 75,823
Unrealized gain on available-for-sale securities 51 107
Accumulated deficit (93,724) (85,761)
----------- -----------
Total stockholders' equity (deficit) (11,454) (9,820)
----------- -----------
Total liabilities and stockholders' equity (deficit) $ 18,292 $ 21,152
=========== ===========
*Condensed from audited financial statements
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
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HYBRID NETWORKS, INC.
UNAUDITED CONDENSED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------------
2000 1999
----------- -----------
<S> <C> <C>
Gross sales $ 1,801 $ 4,123
Sales discounts $ 124 $ -
----------- -----------
Net sales $ 1,677 $ 4,123
Cost of sales 1,866 4,264
----------- -----------
Gross margin (loss) (189) (141)
----------- -----------
Operating expenses:
Research and development 1,393 1,379
Sales and marketing 3,005 618
General and administrative 3,124 912
----------- -----------
Total operating expenses 7,522 2,909
----------- -----------
Loss from operations (7,711) (3,050)
Interest income and other 209 5
Interest expense (461) (208)
----------- -----------
NET LOSS (7,963) (3,253)
Other comprehensive loss:
Realized gain on available-for-sale securities
included in net loss (56) -
----------- -----------
Total comprehensive loss $(8,019) $(3,253)
=========== ===========
Basic and diluted net loss per share $ (0.57) $ (0.31)
=========== ===========
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
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HYBRID NETWORKS, INC.
UNAUDITED CONDENSED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------------
2000 1999
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(7,963) $(3,253)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 300 349
Sales discounts recognized on issuance of warrants 2,507 -
Compensation recognized on issuance of stock and stock options 2,044 -
Interest added to principal of convertible debentures 183 -
Provision for excess and obsolete inventory 783 -
Beneficial conversion of convertible debentures 74 -
Change in unrealized gain on securities (56) -
Change in assets and liabilities:
Restricted cash - 515
Accounts receivable 638 817
Inventories (2,677) 2,160
Prepaid expenses and other assets (10) (345)
Accounts payable 345 (956)
Other long term liabilities 2 -
Accrued liabilities and other (351) 226
----------- -----------
Net cash used in operating activities (4,181) (487)
----------- -----------
Cash flows from investing activities:
Purchase of property and equipment (29) -
----------- -----------
Net cash used in investing activities (29) -
----------- -----------
Cash flows from financing activities:
Repayment of capital lease obligations (103) (128)
Net proceeds from issuance of common stock 457 1
----------- -----------
Net cash provided by (used in) financing activities 354 (127)
----------- -----------
Decrease in cash and cash equivalents (3,856) (614)
Cash and cash equivalents, beginning of period 13,394 3,451
----------- -----------
Cash and cash equivalents, end of period $ 9,538 $ 2,837
=========== ===========
SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING ACTIVITIES:
Common stock issued to settle class action liability $ 1,303 $ -
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid 345 $ 193
Income taxes paid 1 1
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
5
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HYBRID NETWORKS, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
BASIS OF PRESENTATION
The accompanying condensed financial statements of Hybrid Networks,
Inc. (the "Company" or "Hybrid") have been prepared in accordance with
generally accepted accounting principles for interim financial information
and with the instructions for Form 10-Q and Article 10 of Regulation S-X. The
balance sheet as of March 31, 2000, the statements of operations for the
three months ended March 31, 2000 and March 31, 1999 and the statements of
cash flows for the three month periods ended March 31, 2000 and March 31,
1999 are unaudited but include all adjustments (consisting only of normal
recurring adjustments) which the Company considers necessary for a fair
presentation of the financial position at such dates and the operating
results and cash flows for those periods. Although the Company believes that
the disclosures in the accompanying financial statements are adequate to make
the information presented not misleading, certain information normally
included in financial statements and related footnotes prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to the rules and regulations of the Securities and Exchange
Commission. The December 31, 1999 condensed balance sheet data included
herein were derived from audited financial statements but do not include all
disclosures required by generally accepted accounting principles. The
accompanying financial statements should be read in conjunction with the
financial statements as contained in the Company's Annual Report on Form 10-K
for the year ended December 31, 1999.
Results for any interim period are not necessarily indicative of
results for any other interim period or for the entire year.
The Company was organized in 1990 and has had operating losses since
then. The Company's accumulated deficit was $93,724,000 as of March 31, 2000
and $85,761,000 as of December 31, 1999. 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 near future.
The Company may seek additional financing during 2000 through debt,
equity or equipment lease financing or through a combination of financing
vehicles. 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 March 31, 2000, the Company's liquidity consisted of cash and
cash equivalents of $9,538,000 and working capital of $4,741,000. The
Company's principal indebtedness consisted of $24.0 million in convertible
debentures, of which $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 twelve months.
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.
Maintenance system support and service contracts are sold
separately from hardware and software. Maintenance revenue is recognized
ratably over the term of the maintenance system support and service contract,
generally on a straight-line basis. Other service revenue, primarily training
and consulting, is generally recognized at the time the service is performed.
As of March 31, 2000, the Company had recognized $124,000 as revenue from
sales to Sprint Corporation. An additional $668,000 in sales to Sprint and
$203,000 to other customers was deferred because the shipments were subject
to testing and acceptance conditions.
In September 1999, Sprint committed to purchase $10 million of the
Company's products subject to certain conditions. In connection with Sprint's
commitment, the Company issued to Sprint warrants to purchase up to
$8,397,873 in debentures that are
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convertible into 2,946,622 shares of our Common Stock at $2.85 per share. Ten
percent of the warrants will become exercisable on the scheduled shipment
dates when aggregate scheduled shipments of products and services pursuant to
purchase orders submitted by Sprint to the Company are at least $1 million.
With each additional $1 million of scheduled shipments, Sprint will be
entitled to exercise an additional 10% of the warrants until the aggregate
scheduled shipments is $10,000,000. In accordance with the Statement of
Financial Accounting Standards No. 123 (SFAS 123), "Accounting for
Stock-Based Compensation," transactions in equity instruments with
non-employees for goods or services are accounted for using the fair value
method prescribed by SFAS 123. SFAS 123 requires that in each period in which
the warrants are earned, a non-cash charge is recorded. Although the warrants
the Company issued to Sprint will not become exercisable until the scheduled
shipment date when aggregate scheduled shipments of products and services are
at least $1,000,000, which had not occurred as of March 31,2000, the Company
recorded discounts pursuant to SFAS 123 based on the proportionate amount of
warrants that would be exercisable based on the shipments scheduled during
the quarter, as if the $1 million minimum did not exist. The amount of such
shipments was $792,000, and, based on the warrants' conversion ratio, this
amount would give Sprint the right to exercise 233,392 shares of the
Company's common Stock under the warrants. The value of this purchase right,
using the Black-Scholes valuation model and taking into account the closing
price of the Company's Common Stock ($13.25) on March 31, 2000, was
$2,507,000. Of this amount, $124,000 was recorded as a direct sales discount
to offset sales to Sprint that were recognized as revenue during the quarter
and the balance of $2,383,000 was recorded as an operating expense of the
sales and marketing department.
The Company anticipates that Sprint will schedule additional
shipments in future quarters and that the Company will record substantial
non-cash charges, pursuant to SFAS 123, as additional portions of Sprint's
warrants become exercisable based on those shipments. The amounts of the
charges will depend primarily on the amounts of the scheduled shipments and
on the Company's stock price at the times the shipments are scheduled. If the
Company's stock price increases the relative amount of the charges will
increase; and if the Company's stock price decreases, the relative amount of
the charges will decrease. The Company also anticipates that it will not
recognize revenue on its shipments of products to Sprint (or on most of those
shipments) as and when those shipments are made. That is because Sprint's
orders are generally subject to testing and acceptance procedures. Revenue
will not be recognized unless and until those procedures are completed and
the products are accepted, which could take a number of months.
COMPUTATION OF BASIC AND DILUTED LOSS PER SHARE
Basic earnings per share excludes dilution and is computed by
dividing income available to common stockholders by the weighted average
number of shares of common stock outstanding for the period. Diluted earnings
per share reflects the potential dilution that could occur if securities or
other contracts to issue common stock were exercised or converted into common
stock or resulted in the issuance of common stock that then shared in the
earnings of the entity. All such securities or other contracts were
anti-dilutive for all periods presented and, therefore, excluded from the
computation of earnings per share.
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INVENTORIES
Inventories are comprised of the following (in thousands):
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
---------- ------------
<S> <C> <C>
Raw materials $1,825 $2,251
Work in progress 585 190
Finished goods 3,239 1,314
---------- ------------
$5,649 $3,755
========== ============
</TABLE>
The allowance for excess and obsolete inventory was $3,625,000 and $2,842,000
at March 31, 2000 and December 31, 1999, respectively. The allowance for
excess and obsolete inventory includes a reserve reflecting the lower of cost
or market price for modem inventory to be shipped to Sprint pursuant to the
Sprint purchase contract. The amount of the reserve with respect to modem
inventory was $1,435,000 and $402,000 at March 31, 2000 and December 31,
1999, respectively.
CONTINGENCIES
SEC INVESTIGATION
By a subpoena to the Company dated in October, 1998, the Securities
and Exchange Commission, Division of Enforcement ("SEC"), requested that the
Company provide a wide variety of documents to the SEC. The Company has
produced numerous documents in response to the subpoena. In addition, the SEC
took the testimony of numerous current and former employees of the Company.
In November 1999, SEC staff attorneys informed the Company in
writing that it intended to file a civil injunctive action and seek civil
monetary penalties against the Company for alleged violations of the federal
securities laws. In January 2000, without admitting or denying any
wrongdoing, the Company reached agreement with the staff that it 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.
The Company does not believe, based on current information, that the
proposed order will have a material adverse effect on the Company's future
business, financial condition or results of operations.
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 from the litigation), a
former officer and the Company's former auditors. 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
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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 been completed), that the outcome of this
litigation will not have a material adverse effect on the Company's financial
statements.
9
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THE DISCUSSION IN THIS ITEM SHOULD BE READ IN CONJUNCTION WITH THE
CONDENSED FINANCIAL STATEMENTS AND THE NOTES THERETO INCLUDED IN ITEM 1 OF
THIS REPORT ON FORM 10-Q. THE DISCUSSION IN THIS ITEM CONTAINS
FORWARD-LOOKING STATEMENTS RELATING TO FUTURE EVENTS OR FINANCIAL RESULTS,
SUCH AS STATEMENTS INDICATING THAT "WE BELIEVE," "WE EXPECT," "WE ANTICIPATE"
OR "WE INTEND" THAT CERTAIN EVENTS MAY OCCUR OR CERTAIN TRENDS MAY CONTINUE.
OTHER FORWARD-LOOKING STATEMENTS INCLUDE STATEMENTS ABOUT THE FUTURE
DEVELOPMENT OF PRODUCTS OR TECHNOLOGIES, MATTERS RELATING TO OUR PROPRIETARY
RIGHTS, FACILITIES NEEDS, OUR LIQUIDITY AND CAPITAL NEEDS AND OTHER
STATEMENTS ABOUT FUTURE MATTERS. ALL THESE FORWARD-LOOKING STATEMENTS INVOLVE
RISKS AND UNCERTAINTIES. YOU SHOULD NOT RELY TOO HEAVILY ON THESE STATEMENTS;
ALTHOUGH THEY REFLECT THE GOOD FAITH JUDGMENT OF OUR MANAGEMENT, THEY INVOLVE
FUTURE EVENTS THAT MIGHT NOT OCCUR. WE CAN ONLY BASE SUCH STATEMENTS ON FACTS
AND FACTORS THAT WE CURRENTLY KNOW. OUR ACTUAL RESULTS COULD DIFFER
MATERIALLY FROM THOSE IN THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF
VARIOUS FACTORS, INCLUDING THOSE SET FORTH UNDER "RISK FACTORS" AND ELSEWHERE
IN THIS REPORT ON FORM 10-Q.
OVERVIEW
GENERAL
Hybrid Networks, Inc., based in San Jose, CA, is a worldwide
supplier of broadband fixed wireless systems that provide high speed access
to the Internet for both 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.
With more than 20,000 wireless routers in use in nearly 50 markets around the
world, we have the largest installed base of two-way wireless data access
equipment in its industry. Our technology and products are focused in the
MMDS and WCS spectrum in the United States and similar spectrum available
abroad. Our customers include telecommunications companies, wireless systems
operators and some cable systems providers.
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.
To date, our products have been sold primarily in the United States,
although international sales have been increasing. A small number of
customers have 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 we expect it to become longer as our customer base becomes
increasingly concentrated in a few large customers. Potential sales are
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. 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 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. 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.
REVENUE RECOGNITION
We normally ship our products based upon a bona fide purchase order
and volume purchase agreement. We
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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. As of March 31, 2000, we had recognized revenue from sales to
Sprint Corporation in the amount of $124,000. An additional $668,000 in
shipments to Sprint and $203,000 to other customers were deferred because the
shipments were subject to testing and acceptance conditions.
Maintenance system support and service contracts are sold separately
from hardware and software. Maintenance revenue is recognized ratably over
the term of the maintenance system support and service contract, generally on
a straight-line basis. Other service revenue, primarily training and
consulting, is generally recognized at the time the service is performed.
In September 1999, Sprint committed to purchase $10 million of the
Company's products subject to certain conditions. In connection with Sprint's
commitment, the Company issued to Sprint warrants to purchase up to
$8,397,873 in debentures that are convertible into 2,946,622 shares of our
Common Stock at $2.85 per share. Ten percent of the warrants will become
exercisable on the scheduled shipment dates when aggregate scheduled
shipments of products and services pursuant to purchase orders submitted by
Sprint to the Company are at least $1 million. With each additional $1
million of scheduled shipments, Sprint will be entitled to exercise an
additional 10% of the warrants until the aggregate scheduled shipments is
$10,000,000. In accordance with the Statement of Financial Accounting
Standards No. 123 (SFAS 123), "Accounting for Stock-Based Compensation,"
transactions in equity instruments with non-employees for goods or services
are accounted for using the fair value method prescribed by SFAS 123. SFAS
123 requires that in each period in which the warrants are earned, a non-cash
charge is recorded. Although the warrants the Company issued to Sprint will
not become exercisable until the scheduled shipment date when aggregate
scheduled shipments of products and services are at least $1,000,000, which
had not occurred as of March 31, 2000, the Company recorded discounts
pursuant to SFAS 123 based on the proportionate amount of warrants that would
be exercisable based on the shipments scheduled during the quarter, as if the
$1 million minimum did not exist. The amount of such shipments was $792,000,
and, based on the warrants' conversion ratio, this amount would give Sprint
the right to exercise 233,392 shares of the Company's common Stock under the
warrants. The value of this purchase right, using the Black-Scholes valuation
model and taking into account the closing price of the Company's Common Stock
($13.25) on March 31, 2000, was $2,507,000. Of this amount, $124,000 was
recorded as a direct sales discount to offset sales to Sprint that were
recognized as revenue during the quarter and the balance of $2,383,000 was
recorded as an operating expense of the sales and marketing department.
We anticipate that Sprint will schedule additional shipments in
future quarters and that we will record substantial non-cash charges,
pursuant to SFAS 123, as additional portions of Sprint's warrants become
exercisable based on those shipments. The amounts of the charges will depend
primarily on the amounts of the scheduled shipments and on our stock prices
at the times the shipments are scheduled. If our stock price increases, the
amount of the charges will increase; and if our stock price decreases, the
amount of the charges will decrease. We also anticipate that we will not
recognize revenue on our shipments of products to Sprint (or on most of those
shipments) as and when those shipments are made. That is because Sprint's
orders are generally subject to testing and acceptance procedures. Revenue
will not be recognized unless and until those procedures are completed and
the products are accepted, which could take a number of months.
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:
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<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------------
2000 1999
------------ ----------
<S> <C> <C>
Net Sales 100.0% 100.0%
Cost of sales 111.3% 103.4%
------------ ----------
Gross margin -11.3% -3.4%
------------ ----------
Operating expenses
Research and development 83.1% 33.5%
Sales and marketing 179.2% 15.0%
General and administrative 186.3% 22.1%
------------ ----------
Total operating expenses 448.6% 70.6%
------------ ----------
Loss from operations -459.9% -74.0%
------------ ----------
Interest income and other expense, net 12.5% 0.1%
Interest expense -27.5% -5.0%
------------ ----------
Net loss -474.9% -78.9%
============ ==========
</TABLE>
NET SALES. Our net sales decreased by 59.4% to $1,677,000 for the
quarter ended March 31, 2000 from $4,123,000 for the quarter ended March 31,
1999. The decrease was due primarily to decreased shipments to customers and
the recording of non-cash sales discounts in connection with shipments to
Sprint during the first quarter of 2000 (described under the heading "Revenue
Recognition" above). We furnished $792,000 in products and services to Sprint
during the quarter, but we recognized as revenue only $124,000. The balance
of our shipments to Sprint were subject to testing and acceptance procedures
and, accordingly, will not be recognized until testing and final acceptance
is complete. The recognized revenue of $124,000 has been offset in full by a
sales discount related to the equipment purchase agreement with Sprint (see
"Revenue Recognition"). In addition to the $668,000 of unrecognized sales to
Sprint, an additional $203,000 was carried as unrecognized revenue with
respect to shipments to two other customers due to right of return and
acceptance criteria issues. The total sales to Sprint and other customers
currently being carried as unrecognized revenue due to acceptance and right
of return issues was $871,000.
For the three months ended March 31, 2000, broadband wireless
systems operators and cable system operators accounted for 88.5% and 11.5% of
net sales, respectively. During the same period in 1999, broadband wireless
system operators accounted for 52% of net sales and cable system operators
accounted for 48% of net sales. Three customers accounted for 22%, 17% and
15% of net sales during the first quarter of 2000 compared to three customers
who accounted for 20%, 19% and 17% of net sales during the first quarter of
1999. International sales (primarily to Canadian customers) accounted for 22%
of net sales during the three months ended March 31, 2000 and 0% for the
comparable period in 1999.
GROSS MARGIN. Gross margin was a negative 11.3% and a negative 3.4%
of net sales for the quarters ended March 31, 2000 and 1999, respectively.
The decrease in gross margin was primarily a result of an increase in the
reserve for excess and obsolete inventory of $783,000.
RESEARCH AND DEVELOPMENT. Research and development expenses include
ongoing headend, software and cable modem development expenses, as well as
design expenditures associated with product cost reduction programs and
improving manufacturability of existing products. Research and development
expenses
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increased 1.0% to $1,393,000 for the quarter ended March 31, 2000 from
$1,379,000 for the quarter ended March 31, 1999. Research and development
expenses as a percentage of net sales were 83.1% and 33.5% for the first
quarters of 2000 and 1999, respectively. Personnel and related costs
decreased during the quarter ending March 31, 2000 compared to the first
quarter of 1999. This decrease was offset in part by a charge of $125,000 to
recruitment expense representing the fair value of stock options issued in
connection with the recruitment of a new Vice President of Engineering.
During the three months ended March 31, 2000, compensation recognized on the
vesting of stock options with exercise prices at below fair market value for
employees engaged in research and development amounted to $145,000.
SALES AND MARKETING. Sales and marketing expenses consist of
salaries and related payroll costs for sales and marketing personnel,
commissions, advertising, promotions and travel. Sales and marketing expenses
increased 386.2% to $3,005,000 for the quarter ended March 31, 2000 from
$618,000 for the quarter ended March 31, 1999. Sales and marketing expenses
as a percentage of net sales were 179.2% and 15.0% for the first quarters of
2000 and 1999, respectively. The largest component of the sales and marketing
expenses for the first quarter of 2000 was the non-cash discount of
$2,383,000 resulting from scheduled shipments to Sprint during the quarter
and the potential effect of those shipments on a portion of warrants we
issued to Sprint in September 1999. This discount and the related sales
discount are described under the heading "Revenue Recognition" above. In
addition to amounts charged as customer acquisition expense, $162,000 was
charged to recruitment expense representing the fair value of stock options
issued in connection with the recruitment of a new Vice President of Sales
and Marketing. During the three months ended March 31, 2000, compensation
recognized on the vesting of stock options with exercise prices at below fair
market value for employees engaged in sales and marketing amounted to $15,000.
GENERAL AND ADMINISTRATIVE. General and administrative expenses
consist primarily of executive personnel compensation, provision for doubtful
accounts, travel expenses, legal fees and costs of outside services. General
and administrative expenses increased 242.5% to $3,124,000 for the quarter
ended March 31, 2000 from $912,000 for the quarter ended March 31, 1999.
General and administrative expenses as a percentage of net sales were 186.3%
and 22.1% for the first quarters of 2000 and 1999, respectively. In January
2000, the Company entered into a separation agreement with a director whereby
the Company accelerated vesting of 109,668 options. The value of the options
was remeasured on the date the separation agreement was entered into,
resulting in a charge to General and Administrative compensation expense of
$1,304,000. In addition, $198,000 was charged to recruitment expense
representing the fair value of options issued in connection with the
recruitment of a new President and Chief Executive Officer. During the three
months ended March 31, 2000, compensation recognized on the vesting of stock
options with exercise prices at below fair market value for employees engaged
in administration amounted to $70,000.
INTEREST INCOME (EXPENSE) AND OTHER EXPENSE, NET. We incurred net
interest expense of $251,000 for the three months ended March 31, 2000
(constituting interest on our debentures) compared to net interest expense of
$203,000 for the three months ended March 31, 1999.
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
over $35 million in net proceeds from our initial public offering. 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 are convertible into Common Stock at the option of the respective
holders at any time and will be convertible into Common Stock at 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 March 31, 2000,
the debentures, including accrued interest added to the principal, would be
convertible into 6,494,717 shares of Common Stock at the current conversion
price of $2.85.
In September 1999, at the time of Sprint's purchase of our
debentures, we issued to Sprint warrants to purchase up to $8.4 million of
additional convertible debentures (subject to Sprint scheduling the shipment
of up to $10 million of products and services pursuant to purchase orders)
which debentures will be convertible into up to 2,946,622 shares of our
Common Stock on the same terms and conditions as the convertible debentures
referred to above.
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Assuming that as of March 31, 2000 Sprint converted all its
convertible debentures and exercised all its warrants, it would own 6,893,475
shares of our Common Stock, representing approximately 32.3% of the
21,356,929 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 March
31, 2000 all other security holders exercised their options, warrants and
conversion privileges as well as Sprint, Sprint would own approximately 22.1%
of the 31,217,036 fully diluted shares of our Common Stock that would then be
outstanding. In addition, under the terms of our agreements with Sprint,
Sprint has substantial rights with respect to our corporate governance. Two
of our five directors are Sprint designees, and we cannot issue any
securities (with limited exceptions) or, in most cases, take any material
corporate action without Sprint's approval. Sprint has other rights and
privileges as well, including pre-emptive rights and a right of first refusal
in the case of any proposed change of control transaction, which right of
first refusal is assignable by Sprint to any third party.
Net cash used in operating activities was $4,181,000 and $487,000
during the first quarters of 2000 and 1999, respectively. The net cash used
in operating activities in the first quarter of 2000 was primarily the result
of our net loss of $7,963,000, an increase in inventories of $2,677,000 and a
decrease in other accrued liabilities of $351,000, offset by noncash charges
attributable to (i) sales discounts recognized on the issuance of warrants of
$2,507,000 (see "Revenue Recognition"), (ii) compensation of $2,044,000
recognized on the issuance of stock and the vesting of stock options and
(iii) an increase in the provision for excess and obsolete inventory of
$783,000, all described above. Net cash used in operating activities in the
first quarter of 1999 was primarily due to our net loss of $3,253,000,
partially offset by a reduction in inventories of $2,160,000 and a decrease
in net current assets related to operating activities and to non-cash charges.
Net cash used in investing during the first quarter of 2000 and was
$29,000 used for purchases of property and equipment (primarily computers,
and engineering test equipment). There were substantially no investing
activities during the first quarter of 1999. 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
March 31, 2000, we did not have any material commitments for capital
expenditures.
Net cash provided by financing activities in the first quarter of
2000 was $354,000 compared to net cash used by financing activities of
$127,000 during the first quarter of 1999. Net cash provided by financing
activities during the first quarter of 2000 was primarily due to the exercise
of stock options by employees and others offset by the repayment of capital
lease obligations. Net cash used by financing activities in the first quarter
of 1999 was primarily the result of repayment of capital lease obligations,
partially offset by net proceeds from issuance of common stock resulting from
the exercise of stock options.
At March 31, 2000, our liquidity consisted of cash and cash
equivalents of $9,538,000 and working capital of $4,741,000. We had no
available line of credit or other source of borrowings or financing. Our
principal indebtedness consisted of the $24.0 million of convertible
debentures referred to above, of which only $5.5 million will be payable
within the next 12 months. While 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
requirements over the next twelve months, we may be required to cut back
substantially on our expenditures if we do not raise additional capital this
year. 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-Q BEFORE INVESTING IN OUR COMMON STOCK.
THE RISKS DESCRIBED BELOW ARE NOT THE ONLY ONES WE FACE. ADDITIONAL RISKS
THAT WE ARE AWARE OF OR THAT WE CURRENTLY BELIEVE ARE IMMATERIAL MAY BECOME
IMPORTANT FACTORS THAT AFFECT OUR BUSINESS. IF ANY OF THE FOLLOWING RISKS
OCCUR, OR IF OTHERS OCCUR, OUR BUSINESS, OPERATING RESULTS AND FINANCIAL
CONDITION COULD BE SERIOUSLY HARMED AND THE PRICE OF OUR COMMON STOCK COULD
DECLINE.
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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 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 twelve months, we may be required to cut back substantially on
our expenditures if we do not raise additional capital this year. We have
agreed with Sprint Corporation to manufacture and ship certain quantities of
products this year, to assist Sprint in testing and installation of the
products, to perform maintenance and other services and to develop certain
new products and enhance existing products. We will be required to spend
substantial amounts in order to meet these requirements, and this will
accelerate and increase our need for capital.
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 may not
ourselves have sufficient capital or other resources necessary to meet the
requirements of Sprint and other large customers in the future. Accordingly,
we may be obliged to seek strategic alliances with other companies to assist
in the development of further products and services. We might not be able to
form such alliances at all or on terms that are beneficial for us.
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. 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 be substantially dependent upon orders from Sprint or from
companies selling to Sprint. Sprint will use our products in connection with
the first phase of its roll-out of wireless Internet access services. We have
only a small number of other customers.
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 March 31, 2000
approximately 32.3% of our common stock on a beneficial ownership basis and
22.1% of our Common Stock on a fully diluted basis. Under the terms of our
agreements with Sprint, we cannot issue any securities (with limited
exceptions) 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, which right of first refusal is assignable by
Sprint to any third party. 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).
After months of negotiating, we have entered into an equipment
purchase agreement with Sprint whereby Sprint has agreed to purchase this
year $10 million of our products and services subject to certain conditions.
The equipment purchase agreement does not require Sprint to make any
additional purchases, but it imposes substantial requirements on us. We must
meet Sprint's schedule for the manufacture and shipment of products; we must
develop certain new products and enhance existing products according to
Sprint's schedule and specifications; we must perform substantial
installation and maintenance services; and we have agreed to the "open
architecture" principle whereby we will license our technology to qualified
third parties. In addition, Sprint's obligation to purchase our products is
subject to extensive testing and acceptance procedures. If we fail to meet
the requirements of the agreement, we could be subject to heavy penalties,
including the obligation to
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license our intellectual property rights to Sprint on a royalty-free basis.
WE HAVE NOT BEEN PROFITABLE TO DATE, AND WE MAY NEVER BE PROFITABLE. WE
EXPECT CONTINUING LOSSES FOR THE FORESEEABLE FUTURE.
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
$93,724,000 as of March 31, 2000 and $85,761,000 as of December 31, 1999. 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 experienced price
pressure on sales of our products in the past and these pressures continue.
We expect to incur losses for the foreseeable future.
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WE MUST DEVELOP NEW PRODUCTS AND ENHANCEMENTS QUICKLY AND DEPLOY OUR
PRODUCTS ON A MUCH LARGER SCALE THAN WE HAVE IN THE PAST, AND WE MIGHT
NOT BE ABLE TO MEET THESE CHALLENGES.
In order to meet the existing and future demands of the market, we
will be required to develop new products and enhance our existing products.
In addition, Sprint and other potential large scale customers will require us
to demonstrate that our system can be successfully deployed on a much larger
scale than it has been in the past. We might not be able to meet these
challenges.
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. 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. 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 under-capitalization. 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 are 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.
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.
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 is 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 credibility from its MMDS, WCS and UHF
transmitter division (formerly known as ITS Corp.); COM21, which is
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attempting to adapt its proprietary cable system for wireless; Newbridge,
which acquired much of Stanford Telecom, a manufacturer of QPSK products, and
which has itself been acquired by Alcatel: and Nortel, which has developed
products for the cable market, and has recently announced that it is
developing products for the wireless market as well. 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. Lucent has 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.
We have agreed with Sprint that in the future we will allow third
parties to license our technology and offer products in competition with
ours, using our technology. This could generate significant new competitive
challenges for us.
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 we have tentatively settled potential litigation with the
SEC, the settlement is subject to negotiation and documentation of a final
agreement with the SEC staff attorneys, the acceptance of the agreement by
the SEC and the approval of the federal district court. We continue to face
litigation with Pacific Monolithics (see Item 1 "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.
MARKET PRESSURE TO REDUCE PRICES HAS HURT OUR BUSINESS AND THE PRESSURE
IS
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LIKELY TO INCREASE.
The market has historically demanded increasingly lower prices for
our products, and we expect downward pressure on the prices of our products
to continue and increase. 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. Sprint and other
large scale customers have increased the downward pressure on our prices. 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.
WE RELY ON A SINGLE MANUFACTURER FOR OUR END-USER PRODUCTS AND ON
SINGLE-SOURCE COMPONENTS, AND SOME OF THE COMPONENTS ARE BECOMING
OBSOLETE.
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 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 CyberManager 2000 Router is built on the Sparc 5/Sun workstation
computer, which Sun is no longer producing. As an interim measure, we have
been purchasing re-manufactured substitute units from a third party, but Sun
is not supporting them. Accordingly, we are in the process of modifying our
software to be able to use another workstation, and there is no assurance
that we will be able to do so successfully. In addition, certain of our
products use chips manufactured by National Semiconductor that have been
discontinued. While National Semiconductor has continued to supply these
chips to us, there is no assurance that they will do so indefinitely.
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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. OUR SALES CYCLE MAY WELL GET LONGER.
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.
Over the last year, our marketplace has consolidated so that our
principal customers and potential customers are large telcos. This
consolidation has greatly increased our selling expenses and lengthened our
sales cycle.
These factors, together with the other factors referred to in this
"Risk Factors" section, tend to cause our operating results to vary
substantially from quarter to quarter. These fluctuations have adversely
affected the prices of our Common Stock in the past and may adversely affect
such prices in the future.
WE DEPEND ON KEY PERSONNEL AND WE ARE IN A TIGHT JOB MARKET WHICH MAKES
HIRING THE PEOPLE WE NEED DIFFICULT.
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. We are in an
extremely tight labor market, and competition for such personnel is intense.
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 prevent us from
meeting our product development goals and could have an extremely adverse
effect on our business.
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REDUCTIONS 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
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, 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
21
<PAGE>
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 to permit flexible use for upstream and
downstream paths may adversely affect our future growth. If the FCC changes
its decision to open the MMDS spectrum for full utilization, the future
growth of the wireless industry could be limited.
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. 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.
In the past, sales of our products outside of the United States have
not represented a significant portion of our net sales, but this may be
changing. In the first quarter of 2000, international sales accounted for 22%
of our net sales, compared to the first quarter of 1999 in which we had no
international 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
and reduced intellectual property protection.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
22
<PAGE>
PART II. OTHER INFORMATION
II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The following exhibits are filed as part of this report:
<TABLE>
<CAPTION>
<S> <C>
Exhibit No. Description of Exhibit
10.01 Employment Letter dated January 12, 2000 from the Registrant to Michael D. Greenbaum.
10.02 Letter dated January 28, 2000 from the Registrant to Carl S. Ledbetter regard the terms
of his separation.
10.03 Amendment dated April 28, 2000 to the Warrant Agreement dated September 9, 1999 between
the Registrant and Sprint Corporation. (The Warrant Agreement was filed as Exhibit 10.2
to the Registrant's Current Report on Form 8-K dated September 9, 1999.)
10.04 Purchase of Equipment and Service Agreement dated as of May 1, 2000 between the
Registrant and Sprint Corporation (incorporated by reference to Exhibit 10.1 of
the Registrant's Current Report on Form 8-K dated May 1, 2000).
27.1 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K
The following Current Reports on Form 8-K have been filed by the
Company during the quarter for which this report is filed:
1. On January 20, 2000, the Company reported under Item 5 "Other
Events" the appointment of Michael D. Greenbaum as president
and Chief Executive Officer.
2. On February 2, 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 of Directors.
23
<PAGE>
HYBRID NETWORKS, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: May 11, 2000 HYBRID NETWORKS, INC.
/s/ Michael D. Greenbaum
--------------------------
Michael Greenbaum
Chief Executive Officer
/s/ Thara Edson
--------------------------
Thara Edson
Chief Financial Officer
(Principal Accounting Officer)
24
<PAGE>
EXHIBIT 10.01
[HYBRID LOGO]
January 12, 2000
Michael Greenbaum
1 Arrowhead Way
Weston, Connecticut 06883
Dear Michael,
I am delighted to offer you a position as President and Chief Executive
Officer for Hybrid Networks, Inc. at an annual base salary of $275,000
reporting to the Board of Directors. You are also being nominated as a member
of the Board of Directors. You will be eligible for a bonus depending upon
performance targeted at 50% of your annual base salary; this bonus will be
subject to the terms of a bonus program which will be established subsequent
to your date of hire. In addition, the Board of Directors has authorized that
you be granted an incentive stock option to purchase 500,000 shares of common
stock under the terms of the Company's 1999 Stock Option Plan. These options
will vest over four years. Your stock option price will be the market value
on the trading day immediately preceding the date of your employment.
In addition, Hybrid Networks will loan you up to $80,000 for the expenses to
relocate your family and household goods from Connecticut to the Bay Area.
Repayment of the loan, together with interest at a rate sufficient to avoid
imputed interest for tax purposes, will be forgiven on a pro-rata basis
during the first year of employment. This forgiveness of repayment is subject
to applicable taxes and withholding. In the event you voluntarily resign from
your position within the first year of employment with Hybrid, or are
terminated for cause as defined in your stock option agreement, you will be
required to repay the relocation loan on a pro-rata basis, as provided in the
attached Promissory Note.
If Hybrid terminates your employment without "cause" (as defined in your
stock option agreement) at any time, you will continue to receive as
severance monthly payments for 12 months equal to one year of your then
current base salary, subject to withholding and other charges, provided you
sign Hybrid's normal form of severance agreement releasing Hybrid from any
claims based on your employment or the termination. In addition, upon such a
termination and execution of such severance agreement, the vesting of your
Hybrid stock options will accelerate so that those options which would have
vested over the next 18 months from the termination date will vest
immediately. This will be spelled out in our standard form stock option
agreement. Note that such acceleration may result in a portion of the options
no longer qualifying as incentive stock options. You will not be entitled to
any other severance.
Subject to the terms of the benefit plans as a full-time employee of Hybrid,
you will be eligible to participate in all Company sponsored benefits. These
currently
<PAGE>
include medical, dental and life insurance, short and long term disability,
Personal Time Off, Company recognized holidays, our 401(k) Plan and our
Section 125 Cafeteria Plan.
Employment with Hybrid is not for a specific term and can be terminated by
you or by the Company at any time for any reason, with or without cause, at
will. Any contrary representations that may have been made or that may be
made to you are superseded by this offer. Even though other policies and
practices of the Company may change from time to time, our policy of at-will
employment may only be changed by a written agreement that is signed by the
President or Chief Executive Officer of Hybrid.
The parties agree that, to the fullest extent permitted by law, any and all
disputes arising out of the terms of this Agreement, your employment, and/or
the termination thereof, will be resolved by final and binding arbitration in
Santa Clara County, California under the auspices and rules of JAMS/ENDISPUTE.
Should any of the provisions of this Agreement be determined to be invalid by
a court or government agency of competent jurisdiction, it is agreed that
such determination will not affect the enforceability of the other provisions.
This Agreement constitutes the entire agreement between you and Hybrid
concerning its terms and supersedes any and all prior agreements, promises or
inducements. This Agreement may be modified only by a formal writing, signed
by you and the Chairman of Hybrid's Board of Directors.
Your employment pursuant to this offer is contingent on the completion of
Hybrid's Employment Application, executing our standard Employee
Confidentiality and Inventions Agreement, and providing the Company with
legally required proof of your identity and authorization to work in the
United States.
Please return to me a signed copy of this letter if you accept the
above-described offer. This offer, if not accepted, will expire on January
20, 2000. If you have any questions please call me at (650) 614-4814. I am
looking forward to having you join our team as we build Hybrid into a strong
and successful corporation.
Sincerely,
James R. Flach
Chief Executive Officer
/s/ JAMES R. FLACH
- ----------------------------------- -------------------------------
Accepted By Date of Acceptance
accepted by: /s/ MICHAEL GREENBAUM 13 JANUARY 2000
<PAGE>
PROMISSORY NOTE
I, Michael D. Greenbaum, understand and agree that Hybrid Networks, Inc. will
provide me a relocation loan in the amount of up to $80,000, conditioned upon
the following terms.
The loan will be funded by reimbursement of actual expenses. The forgiven
relocation loan will be considered taxable income, and payroll taxes will be
withheld. Payment of the full amount of the relocation loan is considered an
advance. The relocation loan will bear interest at the rate of 6% per annum
(based on a 360 day year). I understand that I will earn a relocation bonus
in the amount of the relocation loan, together with accrued interest therein,
on a monthly pro rata basis over a one year period from my date of hire. I
understand and agree that if I voluntarily resign my employment with Hybrid,
or if my employment with Hybrid is terminated for cause (as that term is
defined in my Stock Option Agreement with Hybrid) prior to completing one
year of employment, I will be responsible to pay to Hybrid the pro rata
portion of the relocation loan that is not earned, together with interest. I
agree to make this payment no later than 30 days after my resignation, unless
a different repayment agreement is mutually agreed upon in writing with
Hybrid.
Dated: JANUARY 13, 2000 /s/ MICHAEL D. GREENBAUM
------------------------------ ----------------------------------
<PAGE>
EXHIBIT 10.02
CARL LEDBETTER
346 MADISON STREET
DENVER, CO 80206-4437
303-377-5913
January 28, 2000
To: The Board of Directors of Hybrid Networks, Inc. (the "COMPANY")
6409 Guadalupe Mines Road
San Jose, CA 95120-5000
Gentlemen:
I hereby resign as chairman of the board of directors and as a
director of the Company effective at the opening of business on January 31,
2000.
I have enjoyed my association with each of you and with the people of Hybrid
over the last four years. Although there were difficult and challenging times
during the crisis we encountered in 1998, the effort of the board and the
employees has now clearly succeeded in positioning the Company to lead in
creating a vibrant new wireless broadband industry, which was our shared
vision and objective. With Hybrid's stock now having recovered to near its
all-time high and with strong new management and board members in place, I
feel this an appropriate time to end my formal association with the Company
and go on to other challenges.
As I leave I want to express my thanks for the help and support given to me
by all of the current board members, and especially Jim Flach, who stepped in
on numerous occasions to do more than his share. I also want to express
thanks to our former board members, Steve Halprin and Doug Leone, to Ed Lowe,
and to the members of the Hybrid management team I worked with for so long. I
am sure the Company will do well under the outstanding leadership it now has
in place.
Sincerely,
/s/ CARL S. LEDBETTER
----------------------------------
Carl S. Ledbetter
Ledbetter to Hybrid 01/28/00
<PAGE>
Carl S. Ledbetter
346 Madison Street
Denver, CO 80206-4437
303-377-5913
303-377-5921 Fax
303-888-1227 Cell
January 28, 2000
Thara Edson
Chief Financial Officer
Hybrid Networks, Inc.
6409 Guadalupe Mines Road
San Jose, CA 95120-5000
Dear Thara:
1. RESIGNATION. I have decided to resign from the board of directors of
Hybrid and as chairman of the board effective January 31, 2000 and will
tender my resignation to Hybrid in a form acceptable to you prior to
that date, which resignation will take effect automatically at the
opening of business on that date.
2. ACCELERATED VESTING; EXTENSION OF EXERCISE PERIOD. In recognition of my
service to Hybrid over more than four years and in consideration of my
agreement in the following paragraph to reduce my beneficial ownership
of Hybrid stock, Hybrid has agreed to accelerate the vesting of my
unvested stock options by one year: those unvested options that would
have vested during the period commencing February 1, 2000 and ending
January 31, 2001 will vest immediately upon my resignation on January
31, 2000. Further, Hybrid agrees that I will have an extra 90 days
beyond the 90 days usually allowed following my resignation, to exercise
those accelerated options. This means that I will have 90 days after
January 31, 2000, or until May 1, 2000, to exercise options for a total
of 573,041 shares that will have vested by then (449,045 of these
options will be ISOs and 123,996 will be NQSOs), and that I will have
180 days after January 31, 2000, or until July 31, 2000, to exercise the
additional 109,668 options that accelerate on January 31, 2000 (all of
which will be treated as NQSOs).
3. REDUCTION IN BENEFICIAL OWNERSHIP. Hybrid and I have agreed as follows:
I will (a) promptly reduce my beneficial ownership of Hybrid common
stock by commencing a stock selling program with Salomon Smith Barney
("SSB"), whereby SSB will begin selling my shares of Hybrid stock
(including the 1,097 shares of stock I already own plus the 682,709
vested options), forthwith with the objective of reducing my beneficial
Ownership of Hybrid stock (owned
<PAGE>
Carl Ledbetter to Thara Edson page 2
shares plus vested options) to below 5% of the sum of my total then
vested and unexercised options plus the then issued and outstanding
shares of Hybrid common stock by May 1, 2000 (except that, to the extent
that market conditions do not permit the orderly sale of the full number
of shares necessary to meet this objective, SSB will sell any remaining
shares necessary to meet the 5% objective as soon as is practicable
thereafter, and in no event after July 31, 2000) and that SSB will do so
through an orderly managed selling program; and (b) further reduce, by
January 31, 2001, my beneficial ownership of Hybrid common stock
(including only my owned shares, since the period for exercising vested
options will have expired by this date), to no more than 1% of the then
outstanding shares of Hybrid common stock, and that SSB will engage in
an orderly stock sale program over the next twelve months in order to
reach this 1% level no later than January 31, 2001. I will meet these
objectives through a program to exercise options and sell shares as set
forth below, for which I have agreement with SSB as indicated below.
SELLING PROGRAM THROUGH SSB. In order to accomplish this objective, I have
agreed with SSB and would like to put in place with Hybrid the following
arrangements to insure the timely exercise of the options and execution of
the stock transfers and stock sales.
i) I will exercise ISOs on 90,000 shares of Hybrid common stock, from
the pool of 353,103 vested and exercisable options from the grant on
January 23, 1996, on January 31, 2000, coincident with tendering my
resignation. The exercise price for these options is $48,600, and I
(or my broker on my behalf) will submit a check for this amount to
Hybrid on January 31, 2000, the same day I submit my resignation.
ii) In expectation of this, Hybrid will have its transfer agent promptly
transmit to my broker, Angela Sutter at SSB, the certificates for
these shares and any and all shares I subsequently exercise during
either the 90 or 180 day exercise periods.
iii) I will submit to SSB a letter indicating that I resign from the
board of directors of Hybrid effective January 31, 2000 (and supply
a copy of the letter of resignation). Hybrid will notify its
transfer agent, in advance, that my resignation will take effect at
the opening of business on January 31, 2000 and that, upon
notification by Hybrid of the exercise of any of my then vested
options for 682,709 shares, certificates for the shares should be
issued without restrictive legends. I understand that the resale of
my currently outstanding 1,097 shares will not be free of any
restrictions until three months after my resignation is effective.
Hybrid will work with SSB as necessary to enable SSB to submit any
required forms reporting my exercise of options, purchase of stock
or the sale or anticipated sale of stock for which reporting is
required, for this transaction and for any other transactions
throughout the entire period for which such reporting is necessary.
This is to assist SSB in conducting and completing its research to
determine what filings are necessary and to comply with
<PAGE>
Carl Ledbetter to Thara Edson page 3
reporting requirements so that SSB can promptly commence the orderly
selling program without undue delay or additional research. Hybrid
will also work with SSB and the transfer agent to arrange for the
prompt delivery of certificates or electronic transfers to SSB
consistent with the selling program outlined herein.
iv) I understand that Hybrid has approximately 10.7 million shares
issued and outstanding as of January 31, 2000. When this is added to
the total of 682,709 vested but unexercised options I will have as
of January 31, 2000 plus the 1,097 shares I already own, the total
number of shares and options subject to the 5% measurement will be
about 11.4 million shares. Therefore, the 5% objective above is met
when my total of shares plus vested options falls below
approximately 570,000 shares. My total of shares plus vested options
as of January 31, 2000 will be 683,806 (1,097 owned plus 682,709
vested options before the exercise of the 90,000 options; 91,097
owned and 592,709 vested but unexercised options after the exercise
of the 90,000 options on January 31, 2000), so that the sale of
approximately 120,000 shares will bring the total comfortably below
the 5% requirement. This number may change if other options are
exercised, warrants converted, or the shares in the class action
settlement are distributed, but any of these will make the required
number of shares to be sold lower than the total above. In any event
I will instruct SSB to commence and continue its selling program to
insure that the 5% and 1% tests can be met by the applicable dates.
v) I have instructed SSB to commence selling the Hybrid shares on
January 31, 2000 on confirmation by me that i have resigned. The
selling program will begin with the sale of the 90,000 shares to be
exercised on January 31, 2000. I have instructed SSB to sell these
shares in an orderly and managed way at the rate of approximately
3,000 shares per day, market conditions permitting, in blocks of 500
to 2,000 shares, until these 90,000 shares are sold, which would
occur on or about March 15, 2000 if market conditions allow. At the
conclusion of this program I will have 593,806 shares and options
remaining, a number which will be near the 5% target, and may be
below the target depending on what additional shares Hybrid has
issued by then.
vi) Upon the completion of the sale of these 90,000 shares on or about
March 15, 2000 I intend to exercise options for 383,875 shares
(353,380 ISOs and 30,495 NQSOs), consisting of all of the 263,103
remaining vested shares in the grant from January 23, 1996 (241,034
ISOs and 22,069 NQSOs) and all of the options for 120,772 shares
that vested prior to the January 31, 2000 acceleration from the
grant of July 8, 1996 (112,346 ISOs and 8,426 NQSOs). These shares
all have a strike price of $0.54 per share, so the total strike
price is $207,292.50. I understand that there will be withholding on
the exercise of the NQSOs equal to 42% of the spread between the
aggregate strike prices of those options and the market price on the
date of exercise and that I (or my broker on my behalf) must deliver
<PAGE>
Carl Ledbetter to Thara Edson page 4
to Hybrid a check for this amount, and for the aggregate strike
price) at the time of exercise.
vii) This will leave as vested but unexercised options the following:
options for 99,166 (5,665 ISOs and 93,501 NQSOs) from the grants on
September 16, 1997 (excluding the options that accelerate on January
31, 2000) at a strike price of $11.04 per share; and the options for
109,668 shares that accelerate on January 31, 2000 (all NQSOs):
options for 14,043 shares from the grant on July 8, 1996 at a strike
price of $0.54 per share, options for 42,500 shares from the grant
of September 16, 1997 at $11.04 per share and options for 53,125
shares from the grant on August 17, 1999 at a strike price of $3.625
per share. Therefore, after the second exercise, I will have
remaining vested but unexercised options for 208,834 shares, of
which 5,665 will be ISOs and 203,169 will be NQSOs.
viii) I will ask SSB to continue the orderly selling program given above
for the sale of the 383,875 shares until we can be sure that the 5%
target is met as described above, and then to continue it beyond
that date until we can be sure of meeting the 1% target by January
31, 2001.
ix) I will plan to exercise the remaining options for 99,166 shares that
vested prior to the January 31, 2000 acceleration, with a strike
price of $11.04 per share (5,665 ISOs and 93,501 NQSOs), on or
before May 1, 2000 for $1,094,792.64 if the market price of Hybrid
is above $11.04 per share at the time of the planned exercise. I
understand that there will be withholding on the exercise of the
NQSOs equal to 42% of the spread between the aggregate strike prices
of those options and the market price on the date of exercise and
that I (or my broker on my behalf) must deliver to Hybrid a check
for this amount, and for the aggregate strike price) at the time of
exercise.
x) I will exercise the remaining options (all NQSOs and all accelerated
as of January 31, 2000) for 109,668 shares for $669,361.35 ($0.54
times 14,043 shares plus $11.04 times 42,500 shares plus $3.625
times 53,125 shares) on or before July 31, 2000, if these options
are above water at the time they are exercised. I understand that
there will be withholding on the exercise of the NQSOs equal to 42%
of the spread between the aggregate strike prices of those options
and the market price on the date of exercise and that I (or my
broker on my behalf) must deliver to Hybrid a check for this amount,
and for the aggregate strike price) at the time of exercise.
xi) I have instructed SSB to continue the managed selling program as
outlined above until we are certain of meeting the 1% objective by
January 31, 2001.
4. INDEMNIFICATION. Hybrid reconfirms its contractual commitment to
continue to honor its obligations to me under my indemnification
agreement with Hybrid, and commits to prompt payment of reasonable
attorneys' fees and related expenses incurred in connection with my
defense in respect of the current SEC proceedings and the Pacific
Monolithics lawsuit, and any other matters which might be covered by my
indemnification agreement with Hybrid. The
<PAGE>
Carl Ledbetter to Thara Edson page 5
budget for these fees that as been submitted by my attorneys over the
next three months is acceptable Hybrid.
Sincerely,
/s/ CARL S. LEDBETTER
Carl S. Ledbetter
Agreed to and Accepted:
Dated: January 28, 2000
Hybrid Networks, Inc.
By: /s/ THARA EDSON
---------------------------------------------
Thara Edson, Chief Financial Officer
and Vice President, Finance
CC: Jim Flach, Accel Partners
Gerald Boltz, Bryan Cave LLP
Ed Lowe, Fenwick & West LLP
Angela Sutter, Salomon Smith Barney
<PAGE>
EXHIBIT 10.03
AMENDMENT TO WARRANT AGREEMENT
This Amendment (the "AMENDMENT") is entered into as of April 28,
2000 between Sprint Corporation, a Kansas corporation (the "PURCHASER"), and
Hybrid Networks, Inc., a Delaware Corporation (the "COMPANY"), and amends the
Warrant Agreement dated as of September 9, 1999 between the Purchaser and the
Company (the "WARRANT AGREEMENT"). Except as otherwise defined herein, the
capitalized terms herein shall have the same meanings as those terms have in
the Warrant Agreement.
The parties hereto agree as follows:
1. The first three sentences of Section 2(b) of the Warrant
Agreement are hereby amended in their entirety as follows:
(b) None of the Warrants shall be exercisable until the
earliest date on which the shipment of at least $1,000,000 of
products is scheduled to occur pursuant to the terms of one or more
Orders (as defined in the Equipment Purchase Agreement) issued by
Sprint in connection with the Equipment Purchase Agreement. On such
date, 10% of the Warrants (rounded to the nearest whole Warrant)
shall become exercisable. Thereafter, an additional 10% of the
Warrants (rounded to the nearest whole Warrant) shall become
exercisable for each additional $1,000,000 of shipments as are
scheduled to be made pursuant to the terms of one or more Orders
issued by Sprint in connection with the Equipment Purchase
Agreement, such that that entire amount of Warrants shall be
exercisable when $10,000,000 of such shipments have been so
scheduled to be made.
2. No other amendment is made to the Warrant Agreement. The
Warrant Agreement, as amended as provided in Section 1, continues in full
force and effect.
The effective date of the amendment is September 9, 1999.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to
be executed by their respective officers thereunto duly authorized as of the
day and year first above written.
HYBRID NETWORK. S, INC.
By: /s/ MICHAEL D. GREENBAUM
------------------------------------
Michael D. Greenbaum
Chief Executive Officer
SPRINT CORPORATION
By: /s/ TIMOTHY S. SUTTON
------------------------------------
Timothy S. Sutton
President, Broadband Wireless Group
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
3/31/2000 BALANCE SHEET AND THE STATEMENT OF OPERATIONS FOR THE THREE MONTHS
THEN ENDED AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 9,538
<SECURITIES> 0
<RECEIVABLES> 700
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0
0
<COMMON> 14
<OTHER-SE> (11,468)
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<INCOME-PRETAX> (7,963)
<INCOME-TAX> 0
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<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,963)
<EPS-BASIC> (0.57)
<EPS-DILUTED> (0.57)
</TABLE>
