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 September 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 November 7, 1997
- -------
Common Stock ($.01 par Value) 13,375,140
<PAGE>
BroadBand Technologies, Inc.
Index
<TABLE>
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<S> <C>
PAGE NO.
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Balance Sheets
September 30, 1997 and December 31, 1996 3
Condensed Statements of Income
Three Months Ended September 30, 1997 and 1996 5
Condensed Statements of Income
Nine Months Ended September 30, 1997 and 1996 6
Condensed Statements of Cash Flows 7
Nine Months Ended September 30, 1997 and 1996
Notes to Condensed Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial Condition and Results of 11
Operations
Item 3. Legal Proceedings 22
PART II - OTHER INFORMATION
Item 4. Other Information 23
Item 5. Exhibits and Reports on Form 8-K 23
SIGNATURE 24
</TABLE>
<PAGE>
BroadBand Technologies, Inc.
Condensed Balance Sheets
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
<S> <C> <C>
SEPTEMBER 30, DECEMBER 31,
1997 1996
---------------------- ------------------------
(UNAUDITED) (AUDITED)
ASSETS
Current assets:
Cash, cash equivalents and short term investments
(Note 3) $ 108,383,947 $ 130,032,203
Accounts receivable, trade 3,078,284 6,284,217
Inventories (net) (Note 5) 2,854,906 1,532,907
Prepaid expenses and other current assets 1,393,757 954,288
---------------- ------------------
Total current assets $ 115,710,894 138,803,615
Restricted Cash (Note 2) 4,793,000 0
Long term investments (Note 4) 16,393,837 18,725,698
Property, plant and equipment, at cost 25,299,346 23,731,900
Less allowance for depreciation and amortization (15,666,167) (13,186,825)
---------------- ------------------
9,633,179 10,545,075
Deferred debt issuance costs
(net of accumulated amortization) (Note 9) 2,712,162 3,272,787
---------------- ------------------
Total assets
$ 149,243,072 $ 171,347,175
================== ==================
</TABLE>
SEE NOTES TO CONDENSED FINANCIAL STATEMENTS.
3
<PAGE>
BroadBand Technologies, Inc.
Condensed Balance Sheets
<TABLE>
<CAPTION>
<S> <C> <C>
SEPTEMBER 30, DECEMBER 31,
1997 1996
-------------------- ------------------------
(UNAUDITED) (AUDITED)
LIABILITIES AND STOCKHOLDERS' (DEFICIT)/EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 11,004,413 $ 10,353,549
Accrued warranty reserve 6,249,072 5,934,027
Deposits 3,284,787 3,258,316
Deferred revenue 875,000 4,875,000
Current installments of capitalized leases 0 25,044
_______________ _______________
Total current liabilities $ 21,413,272 $ 24,445,936
Long Term:
Deferred Revenue 13,000,000 3,000,000
Convertible Debt (Note 9) 115,000,000 115,000,000
Deferred Compensation 329,926 0
Deferred Obligations 4,000,000 0
_______________ ______________
Total Long Term Liabilities $ 132,329,926 $ 118,000,000
Stockholders' (deficit)/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;
13,383,086 shares issued and outstanding at
September 30, 1997 and 13,249,480 issued an outstanding
as of December 31, 1996 133,831 132,495
Additional paid-in capital 163,245,770 161,977,629
Deferred compensation (Note 2) (904,097) 0
Accumulated deficit (166,975,630) (133,208,885)
------------- -------------
Total stockholders' (deficit)/equity (4,500,126) 28,901,239
------------- -------------
Total liabilities and stockholders' (deficit)/equity $ 149,243,072 $ 171,347,175
============= =============
</TABLE>
SEE NOTES TO CONDENSED FINANCIAL STATEMENTS.
4
<PAGE>
BroadBand Technologies, Inc.
Condensed Statements of Income
(Unaudited)
<TABLE>
<CAPTION>
<S> <C> <C>
THREE MONTHS ENDED SEPTEMBER 30,
1997 1996
-------------------- --------------------
Net sales $ 2,125,214 $ 5,706,049
Cost and expenses:
Cost of sales 1,877,022 5,312,621
Research and development 7,473,454 6,174,046
Performance fees and obsolete equipment 5,841,258 0
Selling, general and administrative expenses 3,790,150 2,928,640
------------------ ----------------
18,981,882 14,415,307
------------------ ----------------
Loss from operations (16,856,668) (8,709,258)
Interest income 1,987,379 1,858,960
Interest expense (1,640,526) (1,648,131)
------------------ -----------------
Loss before income taxes (16,509,815) (8,498,429)
Income taxes 0 0
------------------ -----------------
Net Loss $ (16,509,815) $ (8,498,429)
======================== ======================
Net loss per share (Note 6) $ (1.24) $ (.64)
======================== ======================
Average number of shares and equivalents 13,279,367 13,241,090
======================== ======================
</TABLE>
SEE NOTES TO CONDENSED FINANCIAL STATEMENTS.
5
<PAGE>
BroadBand Technologies, Inc.
Condensed Statements of Income
(Unaudited)
<TABLE>
<CAPTION>
<S> <C> <C>
NINE MONTHS ENDED SEPTEMBER 30,
1997 1996
-------------------- --------------------
Net sales $ 12,667,814 $ 15,217,611
Cost and expenses:
Cost of sales 10,216,593 14,792,755
Research and development 20,199,933 16,317,449
Performance Fees and obsolete equipment 6,841,258 0
Selling, general and administrative expenses 9,824,917 8,170,545
-------------------- ------------------------
47,082,699 39,280,749
-------------------- ------------------------
Loss from operations (34,414,885) (24,063,138)
Interest income 5,512,725 3,952,382
Interest expense (4,864,586) (2,437,968)
-------------------- ------------------------
Loss before income taxes (33,766,746) (22,548,724)
Income taxes 0 0
-------------------- ------------------------
Net Loss $ (33,766,746) $ (22,548,724)
======================== ======================
Net loss per share (Note 6) $ (2.55) $ (1.71)
======================== ======================
Average number of shares and equivalents 13,264,014 13,194,579
======================== ======================
</TABLE>
SEE NOTES TO CONDENSED FINANCIAL STATEMENTS.
6
<PAGE>
BROADBAND TECHNOLOGIES, INC.
Condensed Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
<S> <C> <C>
NINE MONTHS ENDED SEPTEMBER 30,
1997 1996
-------------- -------------
OPERATING ACTIVITIES
Net cash used in operating activities $ (28,972,058) $ (19,413,989)
INVESTING ACTIVITIES
Acquisitions of equipment (3,288,603) (2,807,826)
Disposal of equipment 42,115 0
-------------------- ---------------
Net cash used in investing activities (3,246,488) (2,807,826)
FINANCING ACTIVITIES
Issuance of common stock 365,380 969,222
Net proceeds from sale of Convertible Debt 0 111,212,267
Principal repayments on capital lease obligation (25,044) (251,445)
-------------------- ---------------
Net cash provided by financing activities 340,337 111,930,044
-------------------- ---------------
(Decrease)/Increase in cash and cash equivalents (31,878,209) 89,708,229
Cash and cash equivalents at beginning of period 107,221,929 65,350,943
-------------------- ---------------
Cash and cash equivalents at end of period $ 75,343,720 $ 155,059,172
==================== ================
</TABLE>
SEE NOTES TO CONDENSED FINANCIAL STATEMENTS.
7
<PAGE>
BroadBand Technologies, Inc.
Notes to Condensed Financial Statements
September 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 nine months ended September 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
September 30, 1997, the Company had no investments that qualified as
trading or available for sale.
At September 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
8
<PAGE>
BroadBand Technologies, Inc.
Notes to Condensed Financial Statements
September 30, 1997
4. INVESTMENTS IN DEBT SECURITIES (CONTINUED)
commercial paper 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 September 30,
1997 and December 31, 1996:
<TABLE>
<CAPTION>
<S> <C> <C>
SEPTEMBER 30, DECEMBER 31,
1997 1996
Cash and cash equivalents:
Demand deposit accounts $ 12,332,428 $ 78,899,019
Commercial paper 63,011,292 25,332,655
U.S. Treasury Obligations 0 2,990,254
Restricted Cash 0 451,043
---------------------- -----------------------
$ 75,343,720 $ 107,672,971
====================== =======================
Short-term investments:
Commercial paper $ 26,815,227 $ 20,293,691
U.S. Treasury Obligations 6,225,000 2,065,541
---------------------- -----------------------
$ 33,040,227 $ 22,359,232
====================== =======================
Long-term investments:
Commercial paper $ 16,393,837 $ 13,669,688
U.S. Treasury Obligations 0 5,056,010
---------------------- -----------------------
$ 16,393,837 $ 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 September 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>
<S> <C> <C>
SEPTEMBER 30, DECEMBER 31,
1997 1996
----------------- ----------------
Electronic parts and other components $ 3,860,263 $ 2,583,074
Work In Process 396,109 603,601
Finished goods 2,502,940 1,681,971
---------------- ----------------
6,759,312 4,868,646
Inventory Reserve (3,904,406) (3,335,739)
---------------- ----------------
$ 2,854,906 $ 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 nine-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
CUSTOMER ACTIVITY
BELL ATLANTIC. The Switched Digital BroadBand Access System (SDBAS) has
performed sufficiently in Bell Atlantic laboratory tests to enable Bell
Atlantic to begin turning up small numbers of lines in Philadelphia. The
Company believes additional development by Lucent Technologies is required to
improve performance for the telephony application of the SDBAS System. It is
anticipated that Bell Atlantic will deploy only small volumes of the product
until it determines whether the product performs well under various types of
field conditions and whether construction costs, operational savings, and
demand for services validate the business case for larger deployments. Further
product development by the Company and/or Lucent may be necessary to achieve
Bell Atlantic's business case. Bell Atlantic's evaluation process will continue
to affect the Company's revenues in future periods.
SBC: The Company and its partner, Lucent Technologies, continue to go forward
with SBC on the Richardson field trial of advanced telephony services. SBC has
turned up service for nearly 5,500 customers and completed construction of the
platform to 30,000 homes in the first phase of the Richardson trial. The
additional 12,000 homes in the North Dallas area originally identified as part
of the initial Richardson Trial, are now targeted for possible build out in the
future. SBC's broadband strategy will initially focus on high speed data in
Richardson, as evidenced by its midyear announcement to suspend video trials
attributed to Federal regulatory actions which force SBC to sell its wireline
services and network access, including new technology investments such as
SDBAS, 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. The Company believes
additional development by Lucent Technologies is required to improve
performance for the telephony application of the SDBAS System.
CLECS. A Competitive Local Exchange Carrier (CLEC) and an independent telephone
company have selected the FLX platform and are negotiating purchase agreements
with Lucent. Related Company revenues will depend upon Lucent finalizing these
agreements. To date, Lucent has delayed entering into such contracts and there
can be no assurance of completion, particularly in light of other issues
arising between the Company and Lucent. See "Lucent Relationship" and "Risk
Factors."
LUCENT RELATIONSHIP
The Company's 1995 agreement with Lucent requires Lucent to provide the Company
with 18 months notice prior to initial availability of a next generation Lucent
digital loop carrier with SDV capability that does not include participation by
the Company. Lucent has provided a form of notice under the 1995 agreement and
announced a new digital loop carrier product, AnyMedia, at the NFOEC trade show
in September. The same notice letter that indicated Lucent's intent for BBT not
to participate also invited BBT to discuss how BBT might participate in the
AnyMedia product. Lucent's notice frees BroadBand from its contractual
exclusivity requirement to only provide BBT's Switched Digital Broadband
technology to Lucent and BBT may now work with other digital loop carrier
vendors in the
11
<PAGE>
BroadBand Technologies, Inc.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RECENT DEVELOPMENTS (CONTINUED)
U.S. and Canada. If the Company were to partner with other digital loop carrier
vendors, the Company would be required to do further development work to change
the product's interfaces. Lucent continues to have a contractual exclusive
commitment to purchase all its Switched Digital Broadband requirements for its
current generation of digital loop carrier from BroadBand through November 1,
2000 despite the Company being freed from its exclusivity obligation to Lucent.
In regard to the Bell Atlantic contract, Lucent is required to purchase all its
Switched Digital Broadband requirements for Lucent's current generation digital
loop carrier from the Company through 2002. The Company believes that until the
evolutionary relationship between SDBAS and AnyMedia is clearly presented,
customers may be confused and delay purchases. The Company and Lucent have
commenced negotiations over the Company's participation in AnyMedia. To date,
however, the level of participation in AnyMedia that Lucent has offered the
Company has not assured the Company of a level of participation equivalent to
the Company's role in the SDBAS product. The Company and Lucent are engaged in
the contractually provided process of dispute resolution. There can be no
assurance, however, that agreement can be reached with Lucent and the Company
is evaluating all its options relating to Lucent and its other business
alternatives. See "Risk Factors."
SECOND GENERATION PRODUCT.
As discussed above, Bell Atlantic has commenced small volume deployment of the
SDBAS platform. 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.
The ONU, or Optical Network Unit, is the element of the platform that houses the
telephony and broadband electronics at the curb. The ONU may require further
development and possible re-design in order to meet customer requests for a
portfolio of ONU sizes, even though the ONU meets the current contractual
requirements. There can be no assurance that if additional development is
required, the Company, and/or its partner Lucent, would re-design the ONU. If
the ONU were redesigned, the development may be significant and require
additional resources and time to bring the new ONU(s) to the market, resulting
in a material impact to Company's expenses and revenues. In addition, Lucent's
DLC product, with which the Company's second generation product is integrated in
the U. S., also requires further development, testing and monitoring to provide
product improvements for commercial deployment of telephony services.
Announcement of a new digital loop carrier product, AnyMedia, by Lucent may
result in development and marketing resources being shifted by Lucent away from
the current SDBAS product which could have a material adverse effect on sales of
SDBAS and the revenues of the Company. See also "Risk Factors" for a discussion
of risks associated with the Company's relationship with Lucent.
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 in addition to the development referred to above.
12
<PAGE>
BroadBand Technologies, Inc.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
SECOND GENERATION PRODUCT (CONTINUED)
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.
PERFORMANCE FEES.
Delays by Lucent and the Company in delivering the SDBAS product to Bell
Atlantic have caused the Company to accrue approximately $5 million of
penalties in the third quarter. Under its agreement with Lucent the Company is
responsible for 30% of the penalties incurred by Lucent (without regard to
whether Lucent or the Company was at fault) up to a maximum of $6 million over
the life of the agreement. The maximum penalty has now been recognized and is
payable in annual installments of $1 million with a balloon payment upon
termination of the agreement. (See Performance Fees and Obsolete Equipment)
NET SALES AND NET LOSS
Net sales for the third quarter ended September 30, 1997 were $2.1 million,
compared to $5.7 million for the same period in 1996. Net sales for the
nine-month period ended September 30, 1997, were $12.7 million, compared to
$15.2 million for the same period in 1996. Sales for the quarter included the
Company's second-generation platform and related software. 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 third quarter was $16.5 million or
$1.24 per share, compared with $8.5 million or $.64 per share for the same
period in 1996. $5 million of the loss was attributable to the accrual of
performance fees resulting from product delivery delays for the Bell Atlantic
agreement and an additional $.9 million due to the write-off of obsolete test
equipment (See Recent Developments). Adjusted for these one time charges net
loss for the third quarter would have been $10.7 million or $.80 per share. The
net loss for the nine-month period ended September 30, 1997, was $33.8 million
or $2.55 per share, compared with $22.5 million or $1.71 per share for the same
period in 1996. Adjusted for one time charges net loss for the nine-month period
ended September 30, 1997 would have been $26.9 million or $2.03 per share. Net
losses include the one-time charges and the Company's continued investment in
research and development to ensure it is well positioned to deliver the
Second-Generation product as well as reduced volumes from product delays by
Lucent and the Company.
13
<PAGE>
BroadBand Technologies, Inc.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
NET SALES AND NET LOSS (CONTINUED)
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. have
been and will continue 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, the competitiveness of Lucent's DLC component of SDBAS,
as well as the announcement by Lucent of its new product, AnyMedia, as well as
merger activity among the Company's major customers, the long evaluation and
implementation process typical of major communications infrastructure changes,
and regulatory uncertainties. Consequently, the Company does not expect
substantial improvement in net sales and net loss in the near term as compared
to third quarter results and declines are possible. Net sales and net loss in
the future may also be materially adversely affected in the long run. See
"Product Development" and "Risk Factors".
COST OF SALES
Cost of sales for the three-month and nine-month periods ended September 30,
1997, was $1.9 million and $10.2 million, respectively, compared to $5.3 million
and $14.8 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 nine-month
periods ended September 30, 1997, was a positive 11.7% and 19.3% compared to a
positive 6.9% and 2.8% for the same periods of 1996. Actual gross margins
declined due to lower product volumes. The improved gross margin percentage for
the period results from a change in product mix, software and development fees
and warranty reserves compared to the prior year. Gross margin is expected to
decline materially due to lower software and development fees during the fourth
quarter of 1997 and into 1998. The Company expects that price competition could
have an adverse impact on the Company's margins. There can be no assurance that
the Company can meet product modifications, customer feature requests, as well
as customers' business case. 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 nine-month periods
ended September 30, 1997 were approximately $7.5 million and $20.2 million,
respectively, compared to $6.2 million and $16.3 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 support of Competitive Local Exchange Carriers.
The Company is evaluating other product development opportunities, which if the
Company decides to pursue are expected to affect research and development
expense in future periods. In addition, competitive engineering salary pressure
in the market place is expected to make development more expensive.
14
<PAGE>
BroadBand Technologies, Inc.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses for the three-month and nine-month
periods ended September 30, 1997, were approximately $3.8 million and $9.8
million, respectively, compared to $2.9 million and $8.2 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).
PERFORMANCE FEES AND OBSOLETE EQUIPMENT
Delays by Lucent and the Company in delivering the SDBAS product to Bell
Atlantic have caused the Company to accrue approximately $5 million of
penalties in the third quarter. Under its agreement with Lucent the Company is
responsible for 30% of the penalties incurred by Lucent up to a maximum of $6
million over the life of the agreement. The maximum penalty has now been
recognized and is payable in annual installments of $1 million with a balloon
payment upon termination of the agreement. Additionally, the Company has taken
a one-time charge of approximately $.9 million for the write-off of obsolete
test equipment. (See Recent Developments)
OTHER INCOME (EXPENSE)
Other income (expense) consists primarily of interest income and interest
expense. Net other income for the three-month and nine-month periods ended
September 30, 1997, was approximately $.3 million and $.6 million compared to
income of $.2 million and $1.5 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
September 30, 1997, compared to the same period last year was the result of a
lower cash balance. The higher interest income resulting 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, but, 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
The cash and short and long-term investment balance as of September 30, 1997 was
$129.6 million compared to a balance of $148.8 million at December 31, 1996. Of
the total cash balance, $4 million is restricted pursuant to an executive
employment agreement and $.8 million is restricted in connection
15
<PAGE>
BroadBand Technologies, Inc.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
with stock repurchase plan. At September 30, 1997, the Company had net tangible
assets of $(4.5) million. For the nine-month period ended September 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 $21.6 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. Given the stock price of $8.50 on
September 30, 1997 approximately $793,000 of cash was restricted in connection
with the stock repurchase program. At November 8, 1997, given a stock price of
$6.06 approximately $4 million of cash was restricted under the program. 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 September 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.
OTHER FINANCIAL INFORMATION
The Company's backlog includes sales orders received by the Company that have a
scheduled delivery date prior to September 30, 1998. The aggregate sales price
of orders received and included in backlog was approximately $1 million at
September 30, 1997 as compared to $5.5 million at September 30, 1996. The
decrease in the Company's backlog is attributable to product development delays
and other factors. (See also "Product Development" and "Net Sales and Net
Loss".) The Company believes that the orders included in the backlog are firm
orders that will be shipped prior to September 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.
16
<PAGE>
BroadBand Technologies, Inc.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
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 relationship with
Lucent, 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
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 RFP decisions during the fourth quarter
1996 and third quarter of 1997, 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.
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.
17
<PAGE>
BroadBand Technologies, Inc.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
RISK FACTORS (CONTINUED)
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 decided earlier in the year to discontinue the video
portion of its 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. Such dependence continues in actual
practice despite the recent lifting of exclusivity provisions of the Lucent
Agreement. (See "Recent Developments-Lucent Relationship"). Lucent Technologies
will continue to market alternative technology in competition with the joint
Lucent Technologies/BroadBand Technologies SDBAS product, including Lucent's
recently announced new product, AnyMedia. (See "Recent Developments-Lucent
Relationship"). 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 contributes to the variability of the Company's results
and is expected to intensify, accelerated by merger activity among the
Company's major customers and network operators. 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 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 new products to better meet the
changing requirements of customers, customers may delay orders of existing
products until the new products are available for shipment, or until small
volumes of new products are adequately field tested. Recent announcements by
Lucent Technologies of its new digital loop carrier product, AnyMedia, may have
this effect.
The Company competes against many larger companies that have significantly
greater resources than the Company. The Company, which has an accumulated
deficit of approximately $167 million as of September 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
18
<PAGE>
BroadBand Technologies, Inc.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
RISK FACTORS (CONTINUED)
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. It is expected that these customers are likely not to purchase
material quantities of the company's product in the near term but will continue
to evaluate the system for performance and validation of their business case
assumptions. 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 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.
Until recently, Lucent Technologies had exclusive U.S. and Canadian market
rights to purchase the Company's SDB capability for digital loop carrier
applications. As such, the FLX-2500 product can interface only with Lucent's
digital loop carrier without further product development and interfaces would
have to be changed to partner with any other digital loop carrier vendors. Sales
of the Company's products for the fourth quarter of 1997 and later periods are
expected to be materially
19
<PAGE>
BroadBand Technologies, Inc.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
RISK FACTORS (CONTINUED)
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). 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, including adaptations that have been requested by
customers and future requests. 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 and Lucent are engaged in the contractually
provided process of dispute resolution. In addition, the Company and Lucent are
engaged in discussions about their future relationship, joint future product
development efforts, the extent of each companies' participation, resolution of
disputes and the terms thereof. Settlement of existing disputes and negotiation
of successful joint future efforts with Lucent will depend on many factors.
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.
20
<PAGE>
BroadBand Technologies, Inc.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
RISK FACTORS (CONTINUED)
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.
21
<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. and General Instrument Corporation of Delaware, Civil Action No.
5-97-CV-173-BR (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 with
Present Uplink Guard Band." 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, at the time, 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). This suit, as subsequently amended, seeks, among other things, to
have the Company's 560 Patent declared invalid, alleges that the Company is
infringing two patents of General Instrument Corporation relating to the
transmission of digital video and seeks an injunction against further
infringement. Management does not believe that the Company is infringing on
General Instrument's patents. Both litigations are currently in the
discovery phase.
There can be no assurance as to the success of the Company's infringement
action or as to 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.
22
<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
23
<PAGE>
BROADBAND TECHNOLOGIES, INC.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant duly caused this report on Form 10-Q to be signed on its behalf by
the undersigned , thereunto duly authorized.
November 10, 1997 /S/ Timothy K. Oakley
Timothy K. Oakley
Vice President and
Chief Financial Officer
24
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