<PAGE>
Securities and Exchange Commission
Washington, D.C. 20549
Form 10-Q
[x] Quarterly Report pursuant Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarterly Period Ended June 30, 1997
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Transition Period to .
----------------
Commission File Number 0-21766
BroadBand Technologies, Inc.
Delaware 56-1615990
(State of Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
4024 Stirrup Creek Drive, Durham, N.C. 27703
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (919) 544-0015
----------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes ___X___ No_______
Indicate the number of shares outstanding in each of the issuer's classes of
common stock, as of the latest feasible date.
Classes Outstanding as of August 8, 1997
Common Stock ($.01 par Value) 13,278,972
<PAGE>
BroadBand Technologies, Inc.
Index
<TABLE>
<CAPTION>
PAGE NO.
-------------
<S> <C>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Balance Sheets
June 30, 1997 and December 31, 1996 3
Condensed Statements of Income
Three Months Ended June 30, 1997 and 1996 5
Condensed Statements of Income
Six Months Ended June 30, 1997 and 1996 6
Condensed Statements of Cash Flows
Six Months Ended June 30, 1997 and 1996 7
Notes to Condensed Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations 11
Item 3. Legal Proceedings 20
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 21
Item 5. Other Information 22
Item 6. Exhibits and Reports on Form 8-K 22
SIGNATURE 23
</TABLE>
<PAGE>
BroadBand Technologies, Inc.
Condensed Balance Sheets
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
---------------------- ------------------------
(UNAUDITED) (AUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash, cash equivalents and short term investments
(Note 3) $ 112,170,186 $ 130,032,203
Accounts receivable, trade 3,590,025 6,284,217
Inventories (net) (Note 5) 2,611,719 1,532,907
Prepaid expenses and other current assets 1,048,303 954,288
---------------------- ------------------------
Total current assets 119,420,233 138,803,615
Restricted Cash (Note 2) 4,000,000 0
Long term investments (Note 4) 24,460,844 18,725,698
Property, plant and equipment, at cost 26,431,168 23,731,900
Less allowance for depreciation and amortization (15,303,319) (13,186,825)
---------------------- ------------------------
11,127,849 10,545,075
Deferred debt issuance costs
(net of accumulated amortization) (Note 9) 2,899,037 3,272,787
---------------------- ------------------------
Total assets $ 161,907,963 $ 171,347,175
====================== ========================
</TABLE>
SEE NOTES TO CONDENSED FINANCIAL STATEMENTS.
3
<PAGE>
BroadBand Technologies, Inc.
Condensed Balance Sheets
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
-------------------- ------------------------
(UNAUDITED) (AUDITED)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 10,116,790 $ 10,353,549
Accrued warranty reserve 7,301,535 5,934,027
Deposits 3,283,280 3,258,316
Deferred revenue 1,375,000 4,875,000
Current installments of capitalized leases 0 25,044
-------------------- ------------------------
Total current liabilities $ 22,076,605 $ 24,445,936
Long Term:
Deferred Revenue 13,000,000 3,000,000
Debt (Note 9) 115,000,000 115,000,000
Stockholders' equity:
Series A preferred stock, $.01 par value; 100,000 shares authorized; no
shares issued and outstanding
Convertible preferred stock, $.01 par value; 7,500,000
shares authorized; no shares issued and outstanding
Common stock, $.01 par value; 30,000,000 shares
authorized; 13,346,542 shares issued and
outstanding at June 30, 1997 and 13,249,480 issued
an outstanding as of December 31, 1996 133,465 132,495
Additional paid-in capital 163,113,708 161,977,629
Deferred compensation (Note 2) (950,000) 0
Accumulated deficit (150,465,815) (133,208,885)
-------------------- ------------------------
Total stockholders' equity 11,831,358 28,901,239
-------------------- ------------------------
Total liabilities and stockholders' equity $ 161,907,963 $ 171,347,175
==================== ========================
</TABLE>
SEE NOTES TO CONDENSED FINANCIAL STATEMENTS.
4
<PAGE>
BroadBand Technologies, Inc.
Condensed Statements of Income
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
1997 1996
-------------- -------------
<S> <C> <C>
Net sales $ 5,232,785 $ 5,514,917
Cost and expenses:
Cost of sales 4,042,482 5,223,483
Research and development 7,227,239 5,095,517
Selling, general and administrative expenses 3,214,822 2,315,260
-------------- -------------
14,484,543 12,634,260
-------------- -------------
Loss from operations (9,251,758) (7,119,343)
Interest income 2,076,273 1,393,787
Interest expense (1,619,314) (783,528)
-------------- -------------
Loss before income taxes (8,794,799) (6,509,084)
Income taxes 0 0
Net Loss $ (8,794,799) $ (6,509,084)
============== =============
Net loss per share (Note 6) $ (.66) $ (.49)
============== =============
Average number of shares and equivalents $ 13,262,168 $ 13,216,578
============== =============
</TABLE>
SEE NOTES TO CONDENSED FINANCIAL STATEMENTS.
5
<PAGE>
BroadBand Technologies, Inc.
Condensed Statements of Income
(Unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
1997 1996
--------------- -------------
<S> <C> <C>
Net sales $ 10,542,600 $ 9,511,562
Cost and expenses:
Cost of sales 8,339,571 9,480,134
Research and development 13,726,479 10,143,403
Selling, general and administrative expenses 6,034,769 5,241,905
--------------- -------------
28,100,819 24,865,442
--------------- -------------
Loss from operations (17,558,219) (15,353,880)
Interest income 3,525,346 2,093,422
Interest expense (3,224,059) (789,837)
--------------- -------------
Loss before income taxes (17,256,932) (14,050,295)
Income taxes 0 0
--------------- -------------
Net Loss $ (17,256,932) $ (14,050,295)
=============== =============
Net loss per share (Note 6) $ (1.30) $ (1.07)
=============== =============
Average number of shares and equivalents $ 13,256,164 $ 13,183,626
=============== =============
</TABLE>
SEE NOTES TO CONDENSED FINANCIAL STATEMENTS.
6
<PAGE>
BROADBAND TECHNOLOGIES, INC.
Condensed Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
1997 1996
------------ -----------------
OPERATING ACTIVITIES
<S> <C> <C>
Net cash provided by (used in) operating activities $ (7,607,436) $ (13,101,030)
INVESTING ACTIVITIES
Acquisitions of equipment (2,767,548) (1,485,247)
Disposal of equipment 68,279 0
------------ -----------------
Net cash used in investing activities (2,699,269) (1,485,247)
FINANCING ACTIVITIES
Issuance of common stock 137,050 897,703
Net proceeds from sale of Convertible Debt 0 111,212,267
Principal repayments on capital lease obligation (6,135) (176,632)
------------ -----------------
Net cash provided by (used in) financing activities 130,915 111,933,338
------------ -----------------
Increase/(Decrease) in cash and cash equivalents (10,175,790) 97,347,061
Cash and cash equivalents at beginning of period 107,221,929 65,350,943
------------ -----------------
Cash and cash equivalents at end of period $ 97,046,139 $ 162,698,004
============ =================
</TABLE>
SEE NOTES TO CONDENSED FINANCIAL STATEMENTS.
7
<PAGE>
BroadBand Technologies, Inc.
Notes to Condensed Financial Statements
June 30, 1997
1. BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for
the three and six months ended June 30, 1997 and 1996 are not necessarily
indicative of the results that may be expected for a full fiscal year. For
further information, refer to the financial statements and accompanying
footnotes for the year ended December 31, 1996 included in the Company's
Form 10-K submission.
2. EMPLOYMENT AGREEMENT AND RESTRICTED CASH
The Company has restricted cash of $4 million associated with executive
compensation for the new President and CEO, David Orr, who joined the
Company on April 1, 1997. Compensation expense of $4 million is being
recognized on a straight-line basis over the term of the employment
agreement of five years. Additionally, Mr. Orr is entitled to receive the
interest income earned by the $4 million. The compensation is payable on
the fifth anniversary of Mr. Orr's employment or based upon certain
triggering events that are detailed in Mr. Orr's employment contract with
the Company. Mr. Orr was also granted 80,000 shares of restricted common
stock valued at $1 million. Upon issuance of this stock, deferred
compensation equivalent to the market value at the date of grant, $1
million, has been charged to shareholders' equity and is being amortized as
compensation expense over the employment agreement period of five years.
3. CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of
three months or less when purchased, to be cash equivalents. Cash
equivalents consist principally of funds in demand deposit accounts, United
States Treasury Obligations, and commercial paper.
4. INVESTMENTS IN DEBT SECURITIES
Management determines the appropriate classification of its investments in
debt securities at the time of purchase. Debt securities for which the
Company has both the intent and ability to hold to maturity are classified
as held to maturity. These securities are carried at amortized cost. At
June 30, 1997, the Company had no investments that qualified as trading or
available for sale.
At June 30, 1997, the Company's investments in debt securities were
classified as cash and cash equivalents and both short and long-term
investments. The Company maintains these balances principally in demand
deposit accounts, United States Treasury Obligations and commercial paper
8
<PAGE>
BroadBand Technologies, Inc.
Notes to Condensed Financial Statements
June 30, 1997
4. INVESTMENTS IN DEBT SECURITIES (CONTINUED)
with various financial institutions. These financial institutions are
located in different areas of the U.S. and Company policy is designed to
limit exposure to any one institution, as well as credit and maturity
risks. The Company performs periodic evaluations of the relative standing
of those financial institutions that participate in the Company's
investment strategy.
The following is a summary of cash and cash equivalents and both short and
long-term investments by balance sheet classification for June 30, 1997 and
December 31, 1996:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
-------------- --------------
<S> <C> <C>
Cash and cash equivalents:
Demand deposit accounts $ 54,372,688 $ 78,899,019
Commercial paper 31,435,553 25,332,655
U.S. Treasury Obligations 11,237,898 2,990,254
Restricted Cash 0 451,043
-------------- --------------
$ 97,046,139 $ 107,672,971
============== ==============
Short-term investments:
Commercial paper $ 10,968,457 $ 20,293,691
U.S. Treasury Obligations 4,155,590 2,065,541
-------------- --------------
$ 15,124,047 $ 22,359,232
============== ==============
Long-term investments:
Commercial paper $ 20,383,614 $ 13,669,688
U.S. Treasury Obligations 4,077,230 5,056,010
============== ==============
$ 24,460,844 $ 18,725,698
============== ==============
</TABLE>
The estimated fair value of each investment approximates the amortized cost
and, therefore, there are no unrealized gains or losses as of June 30,
1997.
9
<PAGE>
BroadBand Technologies, Inc.
Notes to Condensed Financial Statements
5. INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or
market. The components of inventory consists of the following:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
---------------- ----------------
<S> <C> <C>
Electronic parts and other components $ 3,378,874 $ 2,583,074
Work In Process 689,863 603,601
Finished goods 2,141,797 1,681,971
---------------- ----------------
6,210,534 4,868,646
Inventory Reserve (3,598,815) (3,335,739)
$ 2,611,719 $ 1,532,907
================ =================
</TABLE>
6. NET LOSS PER SHARE
The net loss per share is governed by APB 15. Under this guidance, options,
warrants, convertible debt and securities and other common stock
equivalents are considered as outstanding only if their effect is dilutive
(i.e. increasing the net loss per share).
7. WARRANTS
The Company received on April 28, 1995, $7 million for six-year Warrants
that entitles Holder of Warrant Certificates to purchase 1,000,000 shares
of the Company's Common Stock for $41.75 per share.
8. STOCK OPTIONS
The Company accounts for its employee stock option plans in accordance with
Accounting Principles Board Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO
EMPLOYEES ("APB 25"). Under APB 25, no compensation expense has been
recognized since the exercise price of the Company's employee stock options
equals the market price of the underlying stock on the date of grant.
9. LONG-TERM DEBT
The Company issued on May 17, 1996, $115 million of 5% Convertible
Subordinated Bonds Securities due May 15, 2001, that entitles Holder of
Bond Certificates to convert into shares of the Company's Common Stock.
Interest is payable on May 15th and November 15th of each year, commencing
on November 15, 1996. Each $1,000 bond is convertible into 24.1080 shares
of common stock of the Company at a conversion price $41.48 per share. The
bonds are not redeemable by the Company prior to May 15, 1999. Thereafter,
the Company may redeem the bonds initially at 102%, and at decreasing
prices thereafter to 100% at maturity, in each case together with accrued
interest. Costs associated with this financing have been deferred and are
being amortized on a straight-line basis over the term of the debt.
10
<PAGE>
BroadBand Technologies, Inc.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RECENT DEVELOPMENTS
SBC: The Company and its partner, Lucent Technologies, continue to go
forward with SBC on the Richardson field trial of advanced telephony
services. SBC is finding the telephony-first application of the FLX
platform attractive, as it has turned up nearly 2,000 customers in its
42,000 customer field trial in Richardson, Texas. SBC's broadband strategy
will initially focus on high-speed data in Richardson, as evidenced by its
recently announced suspension of video trials attributed to Federal
regulatory actions which force SBC to sell its wireline services and
network to new competitors at prices below actual cost. Suspension of the
video trial by SBC will lead to less revenue for the Company per home
passed than was originally anticipated for the Richardson trial.
KOREA TELECOM: BroadBand and its international partner, Samsung,
successfully completed a digital video demonstration in Korea; however,
Korea Telecom elected to use traditional analog technology for its
near-term deployment of video. Samsung and BroadBand continue to market the
FLX-2500 platform to Korea Telecom for possible full service network
deployments in the future.
PRODUCT DEVELOPMENT
SECOND GENERATION PRODUCT:
Lucent has experienced delays in delivering the Switched Digital Broadband
Access System (SDBAS) platform to customers who are requiring additional
development based upon initial testing of the product. The Company is not
aware of any major impediments to successful deployment of the SDBAS
platform in the majority of customer configurations. However, sales of the
Company's second generation product may be delayed until the joint SDBAS
platform is ready for commercial deployment. The Company is engaging in
further development work on broadband video and data modules that enable
the use of longer and older drop cables in the customers' installed base,
as well as additional software features. The Company's second-generation
product, supporting telephony and broadband services, the FLX 2500 System,
has been delivered in the U. S. and globally to network operators, system
integrators and peripheral equipment suppliers for system integration and
testing.
In addition to further product development of the FLX 2500, Lucent's
digital loop carrier (DLC) product, with which the Company's second
generation product is integrated in the U. S., also requires further
development. Although Lucent has assured the Company that it is devoting
substantial efforts to completing its development, the Company is not at
this time able to predict when Lucent's digital loop carrier will be ready
for commercial deployment. Further delays in development of Lucent's
digital loop carrier will have a material adverse effect on the revenues of
the Company during the next quarter and possibly beyond and could cause
customers to seek other suppliers to fulfill their long-term requirements.
See also "Risk Factors" for a discussion of risks associated with the
Company's relationship with Lucent.
11
<PAGE>
BroadBand Technologies, Inc.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
As is customary with large network operators, customer satisfaction at each
step of the laboratory testing, field trial, first office or service
application stages are conditions to the start of commercial deployment of
the joint Lucent/BBT SDBAS product. The Company also continues its efforts
on developing product features, increased reliability and lowering product
cost to maintain its leadership position in switched digital broadband
technology and address emerging competition from other suppliers of
switched digital broadband products and technologies. Deployment in a
certain number of the customers targeted areas is subject to the Company's
ability to deliver broadband video and data modules capable of working over
existing, extremely complex, copper cable networks. Failure of the Company
to demonstrate this product capability could have a material adverse affect
on one of the Company's major customer relationships. There can be no
assurance that the Company can develop this product capability, or when
this capability will be commercially available.
NET SALES AND NET LOSS
Net sales for the second quarter ended June 30, 1997 were $5.2 million,
compared to $5.5 million for the same period in 1996. Net sales for the
six-month period ended June 30, 1997, were $10.5 million, compared to $9.5
million for the same period in 1996. Sales for the quarter included the
Company's Second Generation platform and related software plus some
shipments of the Company's First Generation product. Sales for 1997 will
primarily be composed of the Company's second-generation platform, the
FLX-2500 and related software. The net loss for the second quarter was $8.8
million or $.66 per share, compared with $6.5 million or $.49 per share for
the same period in 1996. The net loss for the six-month period ended June
30, 1997, was $17.3 million or $1.30 per share, compared with $14.1 million
or $1.07 per share for the same period in 1996. Net losses include the
Company's continued investment in research and development to ensure it is
well positioned to deliver the Second Generation product as well as the
impact of higher net interest expense.
Sales of the Company's products in the U. S. are substantially dependent on
sales of the Lucent digital loop carrier with which the Company's second
generation product is integrated resulting in the SDBAS product. In the
near term, the Company's sales of its second generation product in the U.S.
are expected to be materially adversely affected by delays in completion
of development of the digital loop carrier of Lucent Technologies and the
Company's FLX-2500. Consequently, net sales and net loss for the second
quarter should not be viewed as indicative of net sales and net loss in
future periods as revenues are expected to be substantially lower than
second quarter revenues. In addition the Company was assessed approximately
$0.2 million of performance penalties during the first half of 1997. Since
then penalties that exceed the $1.0 million annual cap have been assessed
and reserved, and overages will be carried over to 1998. The Company's
agreement with Lucent provides for a total cap of $6.0 million over the
life of the agreement. The Company may continue to be assessed penalties
during future periods because the Company's contract with Lucent provides
for Lucent and the Company to share responsibility for all penalties
associated with the joint product and these penalties may be material even
if its product meets all customers specifications. Sales of the Company's
second-generation product in the U. S. may be materially
12
<PAGE>
BroadBand Technologies, Inc.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
adversely affected in the long run by the competitiveness of the SDBAS
platform compared to competing digital loop carrier products of Lucent and
its competitors. See "Product Development" and "Risk Factors".
COST OF SALES
Cost of sales for the three-month and six-month periods ended June 30,
1997, was $4.0 million and $8.3 million, respectively, compared to $5.2
million and $9.5 million for the same periods in 1996. The gross margin
resulting from the cost of sales as a percent of net sales for the
three-month and six-month periods ended June 30, 1997, was a positive 22.7%
and 20.9% compared to a positive 5.3% and .3% for the same periods of 1996.
The improved gross margin for the period is a result of a change in product
mix, software and development fees compared to the prior year. Gross margin
is expected to decline materially due to lower software and development
fees during the second half of 1997 and into 1998. The Company expects that
price competition could have an adverse impact on the Company's margins.
The Company's ability to continue to meet its cost reduction goals could
have a material effect on the Company's profitability.
RESEARCH AND DEVELOPMENT EXPENSE
Research and development expenses for the three-month and six-month periods
ended June 30, 1997 were approximately $7.2 million and $13.7 million,
respectively, compared to $5.1 million and $10.1 million for the same
periods in 1996. The Company continues to invest in the development of the
hardware and software for its Second Generation platform and enhancements,
support for its First Generation platform, and the assembly of an end to
end system to support Competitive Local Exchange Carriers. The Company has
been assessed more than its annual cap of $1 million for penalties which
represent the Company's share of penalties a customer has assessed against
Lucent. (See "Net Sales and Net loss" for further explanation). It is
expected that research and development expense may increase in future
periods due to penalties referred to above, competitive engineering salary
pressure in the market place and additional development cost.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses for the three-month and
six-month periods ended June 30, 1997, were approximately $3.2 million and
$6.0 million, respectively, compared to $2.3 million and $5.2 million for
the same periods in 1996. These expenses include support of field service,
sales and marketing resources as well as administrative requirements. It is
expected that selling, general and administrative expenses may increase in
future periods as the Company incurs executive compensation expense, legal
fees and expense related to its patent litigation. See Item 3 (Legal
Proceedings).
13
<PAGE>
BroadBand Technologies, Inc.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
OTHER INCOME (EXPENSE)
Other income (expense) consists primarily of interest income and interest
expense. Net other income for the three-month and six-month periods ended
June 30, 1997, was approximately $.5 million and $.3 million compared to
income of $.6 million and $1.3 million for the same periods in 1996.
Interest income is the result of investing activities of the cash balance
available during the period. The decrease in net interest income for the
period ended June 30, 1997, compared to the same period last year was the
result of a lower cash balance. However, the higher interest income from
the proceeds of the May 1996 bond offering, was offset by accrued interest
and bond amortization expenses on the convertible bond offering, resulting
in the decrease of net other income from prior year. Recently, interest
income has usually exceeded interest expense, however, as the Company
continues to invest in the marketing, development and delivery of its
second-generation platform, net interest expense should increase net losses
for the Company.
LIQUIDITY AND CAPITAL RESOURCES
For the six-month period ended June 30, 1997, Cash and Cash Equivalents,
which consists of investments in demand deposits, commercial paper and U.S.
Treasury Obligations with maturities of less than 90 days and short-term
investments, which consists of commercial paper and U.S. Treasury
Obligations with maturities of less than 360 days, decreased approximately
$17.9 million.
The ending cash and short and long-term investment balance is $140.7
million compared to a balance of $148.8 at December 31, 1996. Of the total
cash balance, $4 million is restricted pursuant to an executive employment
agreement. At June 30, 1997, the Company had net tangible assets of $11.8
million.
During the first quarter, the Board of Directors authorized the initiation
of a stock repurchase program that utilizes equity options for up to 10% or
1.3 million shares of common stock. The actual number of shares to be
purchased and the timing of the purchase will be based on the Company's
stock price, general market conditions and additional factors. The Company
substantially completed the option transaction supporting the share
repurchase during the first quarter of 1997. In the event that the
Company's stock price falls below the put option strike price of $9.11, the
Company would be required to reflect the differential as restricted cash on
its balance sheet. If at April 17, 1999, the market value of the stock is
below $9.11 (strike price), the Company would be obligated to pay the
option holder the difference between the strike price and the lower market
price at that time. The Company's maximum obligation would not exceed $11.9
million under the terms of the option agreement.
Management expects that cash and cash equivalents at June 30, 1997 and cash
generated from the sale of the Company's products will be adequate to fund
operating requirements and property and equipment expenditures for at least
the next twelve (12) months based on current projections of operations.
However, management recognizes the dynamic nature of the telecommunications
industry and will consider financing alternatives when and if market
conditions are deemed to be available on favorable terms.
14
<PAGE>
BroadBand Technologies, Inc.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
OTHER FINANCIAL INFORMATION
The Company's backlog includes sales orders received by the Company that
have a scheduled delivery date prior to June 30, 1998. The aggregate sales
price of orders received and included in backlog was approximately $.5
million at June 30, 1997. The decrease in the Company's backlog is
attributable to product development delays. (See also "Product
Development".) The Company believes that the orders included in the backlog
are firm orders that will be shipped prior to June 30, 1998. However, some
orders may be canceled by the customer without penalty where management
believes it is in the Company's best interest to do so.
PATENTS AND PROTECTION OF OTHER PROPRIETARY INFORMATION
The Company has been awarded patents in the United States. BBT's patent
portfolio covers the basic technology for implementing switched digital
broadband systems. The issued patents cover systems using a main site (HDT)
and a remote site (ONU) interconnected by fiber, providing downstream
digital broadband and video information to subscriber locations in response
to upstream signals requesting a given channel. An approach for
multicasting one channel to multiple subscribers is also covered by a
patent that the Company was issued as U.S. Patent No. 5,619,498 on
April 8, 1997.
In 1996 as competitors have announced competing products, the Company began
to focus greater attention on assessing its intellectual property. The
Company is continuing such efforts and intends to protect its intellectual
property in a manner that maximizes its business opportunity. The Company
believes that its patents provide a competitive advantage over other
providers of switched digital broadband products. There can be no
assurance, however, that the patents of the Company will be enforceable or
that competitors will not be able to develop products that do not infringe
upon the patents of the Company.
Additional patent applications are pending in the United States and certain
foreign countries. There can be no assurance that any of these applications
will result in the award of a patent or that the Company would be
successful in defending its patent rights in any subsequent infringement
actions.
RISK FACTORS
In connection with the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995, readers of this document
are advised that this document contains both statements of historical
facts and forward looking statements, which include statements about
the Company's Second Generation Product and the Lucent DLC with which
it is paired, the expected action of customers, corporate partners,
and competitors and future financial requirements. Forward looking
statements herein, are subject to certain risks and uncertainties
that could cause actual results to differ materially from those
indicated by the forward looking statements. To remain competitive,
the Company must continue to invest
15
<PAGE>
BroadBand Technologies, Inc.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
RISK FACTORS (CONTINUED)
substantial resources in research and development and to achieve
development results in its Second-Generation product and future products
that meet the specific needs of customers, including product performance,
features, reliability and price competitiveness. There can be no assurance
the Company will be successful in such effort. In a fourth quarter 1996 RFP
decision, the Company believes an alternative or new supplier of switched
digital broadband had underbid the Company and expects price competition to
be an important competitive factor, together with other factors, including
experience, product performance, features, reliability, partner performance
and supplier strength. Failure of the Company to meet its development goals
could have a material adverse effect on the Company and non-performance
could result in material contractual penalties. Notwithstanding such
investment, competitors may develop competing technology and products that
are more attractive to customers than are the technologies and products of
the Company and may offer such products at materially lower prices.
Other risk factors include the possibility that telephone companies may not
widely deploy all or part of the Company's products in their local
distribution networks. For example, SBC recently decided to discontinue the
video portion of its 42,000 home SDB/FTTC trial in Richardson, Texas, which
was attributed to Federal regulatory actions which force SBC to sell its
wireline services and network to new competitors at prices below actual
cost (see Recent Developments, SBC). Also, the Company must complete the
development of the new products that will be integrated with Lucent
Technologies' digital loop carrier and the joint SDBAS product must meet
the industry standards established by Bell Communications Research and must
be compatible with the products of other telephone company suppliers,
including competitors of the Company. The provisions of the Company's
agreement with Lucent Technologies makes sales of the Company's products in
the United States and Canada substantially dependent on the competitiveness
and performance of Lucent's product capability as well and their marketing
and sales efforts. Lucent Technologies will continue to market alternative
technology in competition with the joint Lucent Technologies/BroadBand
Technologies SDBAS product. In recent years, the purchasing behavior of the
Company's large customers has increasingly been characterized by the use of
fewer, larger contracts. This trend is expected to intensify, and
contributes to the variability of the Company's results. Such larger
purchase contracts typically involve longer negotiating cycles, require the
dedication of substantial amounts of working capital and other Company
resources and in general, require investments, which may substantially
precede recognition of associated revenues. Moreover, in return for larger,
longer-term purchase commitments, customers often demand more stringent
acceptance criteria, which can also cause revenue recognition delays and
potential penalties for non-performance. For example, customers have
requested that products be priced based on volume estimates of customers'
future requirements, but the failure of such customers to take delivery of
product comparable to volume anticipated, could result in negative margins
on product sales. Certain multi-year contracts may relate to new
technologies, which may not have been previously deployed on a large-scale
commercial basis. The Company may incur significant initial cost overruns
and losses on such contracts, which would be recognized in the quarter in
which they became ascertainable. Future estimates on such contracts are
revised periodically over
16
<PAGE>
BroadBand Technologies, Inc.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
RISK FACTORS (CONTINUED)
the lives of the contracts, and such revisions can have a significant
impact on reported earnings in any one-quarter.
As the Company or its partners announce succeeding generations of its
products to better meet the changing requirements of customers, customers
may delay orders of existing products until the next generation product is
available for shipment, or until small volumes of next generation products
are adequately field tested.
The Company competes against many larger companies that have significantly
greater resources than the Company. The Company, which has an accumulated
deficit of approximately $150 million as of June 30, 1997, has never been
profitable and may never achieve profitability. The Company may require
additional capital and may not be able to raise such capital or may be able
to raise such capital only on unfavorable terms. In May 1996, the Company
sold $115 million of 5% convertible five-year notes. Failure to pay
principal and interest when due would have a material adverse effect on the
Company.
Currently, the Company is dependent upon two primary customers in North
America, which if lost would deprive the Company of substantially all its
revenue. As the Company's market is dominated by fewer large potential
customers, the Company may not have sufficient bargaining power to sell its
products on favorable terms. If the Company is successful in expanding its
sales, growth will place significant strain on its operational resources
and systems. In some cases, the Company depends on single source suppliers
or parts, which are available only from a limited number of sources. Delays
in filling orders of the Company's customers resulting from supplier delays
may cause customer dissatisfaction. The Company relies upon technology
developed by third party suppliers to provide key product enabling
capability that allows the marketability of the Company's broadband product
to service providers with longer, older and more complex copper "drop"
cable networks. There can be no assurance that the Company can obtain such
technology from its suppliers, which would have a material adverse affect
on the Company's business and results from operations. If the "drop"
technology is not available from third parties, the Company has internal
resources and expertise that may be able to provide the necessary required
technology. However, internal development would further delay product
availability (See also "Product Development").
The customers of the Company are subject to substantial government
regulation, which could affect their ability and desire to utilize the
products of the Company (Also see "Recent Developments, SBC"). The ability
of the Company to complete development projects on schedule and to
otherwise compete effectively depends upon its ability to attract and
retain highly skilled engineering, manufacturing, marketing and managerial
personnel, which in the current environment are becoming increasingly
difficult to recruit and retain. The patent and other proprietary rights of
the Company may not prevent the competitors of the Company from developing
non-infringing technology and products that are more attractive to
customers than the
17
<PAGE>
BroadBand Technologies, Inc.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
RISK FACTORS (CONTINUED)
technology and products of the Company. The technology and products of the
Company could be determined to infringe the patents or other proprietary
rights of others. Continued pursuit of international markets exposes the
Company to increased risks of currency fluctuations and controls, political
and social risks, trade barriers, new competitors and other risks
associated with international markets (See also "Recent Developments,
Korea").
Lucent Technologies has exclusive U.S. and Canadian market rights to
purchase the Company' second generation product, the FLX-2500, for
combination with a next generation digital loop carrier. As such, the
FLX-2500 product can interface only with Lucent's digital loop carrier
without further product development. As discussed elsewhere, sales of the
Company's products for the third quarter of 1997 are expected to be
materially adversely affected by delays in development of the SDBAS product
(See also Net Sales and Net Losses). Continuation of such delays could also
materially adversely affect sales in future periods and could cause
customers to seek other suppliers to fulfill their long-term requirements
(See also Net Sales and Net Loss). Upon completion of development of the
SDBAS product, sales of the Company's products in the U. S. will depend
upon the competitiveness of the Lucent's DLC and the Company's FLX-2500 as
a joint product in a number of areas, including price, reliability and
adaptation to the needs of customers. SDBAS is a fiber-to-the-curb product,
which has been configured to provide maximum broadband access to residences
and small businesses. Although the joint product was architected as a
broadband multiple service access platform, it was configured at a time
when industry analysts were predicting telephone companies would move
aggressively to compete with cable television companies to provide movies
and other television programming. The current regulatory climate and market
environment has resulted in announcements and predictions of substantial
cutbacks and delays in the telephone companies entering this line of
business (See also "Recent Developments, SBC"). The Company plans to
continue to market its products to telephone companies and CLECs interested
in competing with cable television companies, but is also positioning the
product as a broadband data access product for companies seeking to offer
their customers greater bandwidth for data and internet applications. There
can be no assurance, however, that the joint BBT-Lucent product will be
competitive with other digital loop carrier products of Lucent and its
competitors, some of which have been or are being designed to meet the
current telephony needs of customers with later upgradability to broadband
capability. Competitiveness in this market may depend upon the willingness
of Lucent and the Company to accept lower margins associated with selling a
current broadband ready product in competition with broadband "upgradable"
models. The Company is substantially dependent on Lucent, and Lucent's
failure to devote sufficient financial, technical, marketing and other
resources to the joint BroadBand/Lucent product would have a material
adverse effect on the Company. The Company is not satisfied that Lucent has
devoted sufficient resources to the joint product to date and without
further attention and improvements it would result in material adverse
effects on the Company. The Company is engaged in discussions
18
<PAGE>
BroadBand Technologies, Inc.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
RISK FACTORS (CONTINUED)
with Lucent about their future relationship, joint future product
development efforts, the extent of each companies' participation, and the
terms thereof. Negotiation of successful joint future efforts with Lucent
will depend on many factors. Under the terms of the Company's agreement
with Lucent, Lucent is required to give a significant amount of notice if
they intend to develop Switched Digital Broadband products that do not
materially include the Company's participation. Should the Company not
reach agreement with Lucent, the Company would be required to pursue other
options, including, but not limited to, developing its own digital loop
carrier product or partnering with one or more digital loop carrier
suppliers. Development of its own digital loop carrier would be expected to
take several years and there can be no assurance either that the Company
would have sufficient monetary and technical resources to successfully
develop such a product or that the product, if developed, would be
competitive with other digital loop carrier products. Nor can there be any
assurance that the Company could partner with another digital loop carrier
supplier. Whether or not the Company participates with Lucent or another
digital loop carrier supplier for the next generation product, customers
may decide to delay orders for the current generation of products, which
could have a material adverse effect on the Company.
The market price of the Company's securities is affected by many factors
other than the Company's products and performance. For example, NASDAQ has
maintenance criteria that must be met in order to continue to be listed as
a NASDAQ National Market security. These criteria include a minimum number
of shareholders, minimum market value of equity float, minimum bid prices,
and tangible net asset requirements (See Liquidity and Capital Resources).
In the event that the Company fails to meet such criteria, the Company's
securities may no longer be traded on the NASDAQ National Market. In this
event, the Company will seek an exemption to the requirements. There can be
no guarantee that the Company will be successful in obtaining an exemption
and if such exemption could not be obtained, the Company would trade on the
NASDAQ SmallCap Market. In the event that the Company's securities are no
longer traded on the NASDAQ National Market, the value of the Company's
securities could be materially adversely affected. The market price of the
Company's securities has been very volatile as a result of many factors,
some of which are outside the control of the Company, including, but not
limited to, quarterly variations in financial results, announcements by the
Company, its competitors, partners, customers, potential customers or
government agencies and predictions by industry analysts, as well as
general economic conditions. Sales by the Company's existing stockholders,
trading by short-sellers and other market factors may adversely affect the
market price of the Company's securities. Any or all these risks could have
a material adverse affect on the market price of the securities of the
Company.
19
<PAGE>
BroadBand Technologies, Inc.
ITEM 3. LEGAL PROCEEDINGS
On March 18, 1997, the Company commenced a legal action against General
Instrument, Corporation in the U.S. District Court for the Eastern District
of North Carolina (BroadBand Technologies, Inc. vs. General Instrument
Corp. Civil Action No. 5.97-CB-173BR(2) for infringement of the Company's
United States Patent No. 5,457,560 (the "560 Patent") titled "Fiber Optic
Telecommunication System Employing Continuous Downlink, Burst Uplink
Transmission Format and Preset Uplink Guardband." The Complaint alleges,
among other things, that General Instrument, has made, tested and used a
broadband access system that infringes the 560 Patent (the "Infringing
System"), has offered the Infringing System for sale, has contracted to
sell the Infringing System to NYNEX, and has induced others to infringe the
560 patent. The Company is seeking to enjoin General Instrument from
further acts infringing the 560 Patent and to recover compensatory damages
and treble damages. On March 19, 1997, Next Level Communications, a
subsidiary of General Instrument Corporation, commenced a legal action
against the Company in the U.S. District Court for the Northern District of
California. (Next Level Communications v. BroadBand Technologies, Inc.,
Civil Action No. C-97-0960), among other things, seeking to have the
Company's U.S. Patent No. 5,457,560 declared invalid, alleging that the
Company is infringing two patents of General Instrument Corporation
relating to the transmission of digital video and seeking an injunction
against further infringement. Management does not believe that the Company
is infringing on General Instrument's patents. The Company filed a motion
on July 25, 1997, in the Northern District of California to transfer Next
Level's legal action to the Eastern District of North Carolina for
consolidation with the Company's original legal action against General
Instrument.
There can be no assurance as to success of the Company's infringement
action or the amount of damages recovered if the Company is successful.
Nevertheless, the Company has invested substantial amounts in developing
its technology and intends to protect its intellectual property in a manner
that maximizes its business opportunity.
20
<PAGE>
BroadBand Technologies, Inc
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 20, 1997, the Annual Meeting of Stockholders of the Registrant was
held at which the following matters were submitted to and voted on by the
stockholders, with the results set forth below:
PROPOSAL 1 -- SETTING THE NUMBER OF DIRECTORS
a.) The Stockholders voted to set the number of Board of Directors at
eight until such number is increased or decreased by the Board of
Directors or Stockholders in accordance with the bylaws of the
Company.
VOTES VOTES VOTES
FOR AGAINST ABSTAINING
Votes to set at 8 the
Number of Directors 11,999,412 41,349 7,344
PROPOSAL 2 -- ELECTION OF DIRECTORS
b.) Three members of the Board of Directors were elected to fill
positions as Class I directors, whose terms will expire at the 2000
Annual Meeting of the Stockholders. The following persons were
elected to the Board of Directors. Each person received the number of
votes set forth next to their name below:
VOTES VOTES VOTES
NAME FOR AGAINST ABSTAINING
David E. Orr 12,011,483 0 36,622
John R. Hutchins, III 12,012,883 0 35,222
Lawrence A. McLernon 12,012,483 0 35,622
PROPOSAL 3 -- INDEPENDENT ACCOUNTANT
c.) The Stockholders ratified the selection of Ernst and Young LLP to
serve as the independent accountants of the Registrant for the audit
of the 1997 financial statements of the Registrant. The votes cast
for and against and the number of abstentions are set forth below:
VOTES VOTES VOTES
FOR AGAINST ABSTAINING
12,032,005 11,800 4,300
21
<PAGE>
BroadBand Technologies, Inc
PART II - OTHER INFORMATION
ITEM 5. OTHER INFORMATION - NONE
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits -- none
b) Reports on Form 8-K -- none
22
<PAGE>
BroadBand Technologies, Inc.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant duly caused this Report of Form 10-Q to be signed on its behalf by
the undersigned, thereunto duly authorized.
August 8, 1997 /S/ Timothy K. Oakley
------------------------
Timothy K. Oakley
Vice President and
Chief Financial Officer
23
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 116,170,186
<SECURITIES> 24,460,844
<RECEIVABLES> 3,590,025
<ALLOWANCES> 0
<INVENTORY> 2,611,719
<CURRENT-ASSETS> 1,048,303
<PP&E> 26,431,168
<DEPRECIATION> (15,303,319)
<TOTAL-ASSETS> 161,907,963
<CURRENT-LIABILITIES> 22,076,605
<BONDS> 115,000,000
<COMMON> 133,465
0
0
<OTHER-SE> 11,697,893
<TOTAL-LIABILITY-AND-EQUITY> 161,907,963
<SALES> 10,542,600
<TOTAL-REVENUES> 10,542,600
<CGS> 8,339,571
<TOTAL-COSTS> 8,339,571
<OTHER-EXPENSES> 19,761,248
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (301,287)
<INCOME-PRETAX> (17,256,932)
<INCOME-TAX> 0
<INCOME-CONTINUING> (17,256,932)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (17,256,932)
<EPS-PRIMARY> (1.30)
<EPS-DILUTED> (1.30)
</TABLE>
