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 March 31, 1998
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 May 8, 1998
- -------
Common Stock ($.01 par Value) 13,419,315
<PAGE>
BroadBand Technologies, Inc.
Index
<TABLE>
<CAPTION>
PAGE NO.
-------------
<S> <C>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Balance Sheets
March 31, 1998 and December 31, 1997 3
Condensed Statements of Income
Three Months Ended March 31, 1998 and 1997 5
Condensed Statements of Cash Flows
Three Months Ended March 31, 1998 and 1997 6
Notes to Condensed Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations 10
Item 3. Legal Proceedings 15
PART II - OTHER INFORMATION
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 21
SIGNATURE 22
</TABLE>
2
<PAGE>
BroadBand Technologies, Inc.
Condensed Balance Sheets
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
------------------- ------------------
<S> <C> <C>
(UNAUDITED) (AUDITED)
ASSETS
Current assets:
Cash, cash equivalents $ 58,197,748 $ 47,464,129
Restricted cash (Note 2) 3,000,000 3,000,000
Short-term investments (Note 3) 33,738,144 41,327,242
Accounts receivable, trade 3,552,255 2,371,133
Inventories (net) (Note 4) 2,744,406 3,214,361
Prepaid expenses and other current assets 1,016,909 1,546,464
------------------- ------------------
Total current assets 102,249,462 98,923,329
Long term investments (Note 3) 7,130,348 15,328,088
Restricted Cash (Note 2) 6,271,000 10,032,807
Property, plant and equipment, at cost 26,260,288 25,925,165
Less allowance for depreciation and amortization (17,858,636) (16,817,060)
------------------- ------------------
8,401,652 9,108,105
Deferred debt issuance costs
(net of accumulated amortization) (Note 8) 2,338,412 2,525,287
------------------ -----------------
Total assets $ 126,390,874 $ 135,917,616
================== =================
</TABLE>
SEE NOTES TO CONDENSED FINANCIAL STATEMENTS.
3
<PAGE>
BroadBand Technologies, Inc.
Condensed Balance Sheets
<TABLE>
<CAPTION>
<S> <C>
MARCH 31, DECEMBER 31,
1998 1997
-------------------- ------------------------
(UNAUDITED) (AUDITED)
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 9,485,879 $ 8,543,812
Accrued warranty reserve 4,534,517 4,940,427
Deposits 3,263,146 3,263,134
Deferred revenue 1,750,000 1,031,000
--------------------- -------------------------
Total current liabilities $ 19,033,542 $ 17,778,373
Long Term:
Deferred Revenue 13,000,000 13,000,000
Convertible Debt (Note 8) 115,000,000 115,000,000
Deferred Compensation (Note 2) 800,000 600,000
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;
13,409,796 shares issued and outstanding at March 31, 1998
and 13,380,243 issued an outstanding as of December 31, 1997
134,098 133,802
Additional paid-in capital 163,326,216 163,285,281
Deferred Compensation (Note 2) (800,000) (850,000)
Accumulated deficit (184,102,982) (173,029,840)
------------- -------------
Total stockholders' (deficit) equity (21,442,668) (10,460,757)
-------------- ----------------
Total liabilities and stockholders'(deficit) equity $ 126,390,874 $ 135,917,616
============== ================
</TABLE>
SEE NOTES TO CONDENSED FINANCIAL STATEMENTS.
4
<PAGE>
BroadBand Technologies, Inc.
Condensed Statements of Income
(Unaudited)
<TABLE>
<CAPTION>
<S> <C>
THREE MONTHS ENDED MARCH 31,
1998 1997
Net sales $ 2,507,223 $ 5,309,815
Cost and expenses:
Cost of sales 2,188,014 4,297,089
Research and development 6,252,950 6,199,240
Performance fees 0 300,000
Selling, general and administrative expenses 5,409,899 2,819,947
13,850,863 13,616,276
Loss from operations (11,343,640) (8,306,461)
Interest income 1,875,150 1,449,073
Interest expense (1,604,653) (1,604,745)
Loss before income taxes (11,073,143) (8,462,133)
Income taxes 0 0
Net Loss $ (11,073,143) $ (8,462,133)
Net loss per share (Note 5) $ (.83) $ (.64)
======================== ======================
Average number of shares and equivalents 13,390,012 13,253,244
======================== ======================
</TABLE>
SEE NOTES TO CONDENSED FINANCIAL STATEMENTS.
5
<PAGE>
BroadBand Technologies, Inc.
Condensed Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
<S> <C>
THREE MONTHS ENDED MARCH 31,
1998 1997
---- ----
OPERATING ACTIVITIES
Net cash provided by (used in) operating activities $ (8,523,802) $ 4,186,019
INVESTING ACTIVITIES
Acquisitions of furniture, fixtures, and equipment (335,892) (1,264,448)
Disposal of furniture, fixtures, and equipment 218 42,115
Net increase in investments 15,786,838 4,962,741
---------- ---------
Net cash provided by investing activities 15,451,164 3,740,408
FINANCING ACTIVITIES
Issuance of common stock 44,450 66,788
Decrease in restricted cash 3,761,807 0
Principal repayments on capital lease obligation 0 (18,909)
-------------- --------------
Net cash provided by financing activities 3,806,257 47,879
--------- ------
Increase in cash and cash equivalents 10,733,619 7,974,306
Cash and cash equivalents at beginning of period 47,464,129 107,221,929
-------------- --------------
Cash and cash equivalents at end of period $ 58,197,748 $ 115,196,235
============== ==============
</TABLE>
SEE NOTES TO CONDENSED FINANCIAL STATEMENTS.
6
<PAGE>
BroadBand Technologies, Inc.
Notes to Condensed Financial Statements
March 31, 1998
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 months ended March 31, 1998 and 1997 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, 1997 included in the Company's
Form 10-K submission.
2. EMPLOYMENT AGREEMENT AND RESTRICTED CASH
The Company has outstanding stand-by letters of credit in the amount of
$3,000,000 at March 31, 1998. This letter of credit is collaterized by
restricted cash of the same amount.
The Company has restricted cash of $4 million associated with executive
compensation for the President and CEO, David E. 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 period of five years.
During the first quarter of 1997, the Board of Directors authorized the
initiation of a stock repurchase program and entered into an agreement with
an investment banker that utilizes equity options for the purchase of up to
10% or 1.3 million shares of common stock outstanding. 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.
In the event that the Company's stock price falls below the put option
price of $9.11, the Company is required to reflect the differential as
restricted cash on its balance sheet. Given a stock price of $7.75 at March
31, 1998, the Company has restricted cash in the amount of $2,271,000 in
connection with this agreement. This amount will fluctuate based upon the
market value of the stock. 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.
7
<PAGE>
BroadBand Technologies, Inc.
Notes to Condensed Financial Statements
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.
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
March 31, 1998, the Company had no investments that qualified as trading or
available for sale.
At March 31, 1998, 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
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. 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 March 31, 1998
and December 31, 1997:
<TABLE>
<CAPTION>
<S> <C>
MARCH 31, DECEMBER 31,
1998 1997
---- ----
Cash and cash equivalents:
Demand deposit accounts $ 21,212,348 $ 11,090,313
Commercial paper 19,273,645 17,225,114
U.S. Treasury Obligations 17,711,755 19,148,702
-------------- -------------
$ 58,197,748 $ 47,464,129
============== =============
Short-term investments:
Certificate of Deposit 0 $ 2,505,293
Commercial paper $ 33,738,144 34,800,200
U.S. Treasury Obligations 0 4,021,749
-------------- --------------
$ 33,738,144 $ 41,327,242
=============== ==============
Long-term investments:
Commercial paper $ 5,008,149 $ 13,296,211
U.S. Treasury Obligations 2,122,199 2,031,877
-------------- -------------
$ 7,130,348 $ 15,328,088
============== =============
</TABLE>
8
<PAGE>
BroadBand Technologies, Inc.
Notes to Condensed Financial Statements
The estimated fair value of each investment approximates the amortized cost
and, therefore, there are no unrealized gains or losses as of March 31,
1998.
4. 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>
MARCH 31, DECEMBER 31,
1998 1997
--------- ------------
Electronic parts and other components $ 3,756,937 $ 3,882,876
Work In Process 117,241 626,008
Finished goods 2,587,713 2,245,958
----------------- ---------------
6,461,891 6,754,842
Inventory Reserve (3,717,485) (3,540,481)
----------------- ---------------
$ 2,744,406 $ 3,214,361
================= ===============
</TABLE>
5. NET LOSS PER SHARE
In 1997, the Financial Accounting Standards Board issued Statement No. 128
Earnings per Share ("SFAS 128"). SFAS 128 replaced the calculation of
primary and fully diluted earnings per share with basic and diluted
earnings per share. Unlike primary earnings per share, a basic earnings per
share excludes any dilutive effects of options, warrants and convertible
securities. Diluted earnings per share is very similar to the previously
expected fully dilutive earnings per share. All loss per share amounts for
all periods have been presented to conform to SFAS 128. Due to the net
losses for each of the periods presented, potential common shares are
considered antidilutive and therefore did not require restatement of prior
periods.
6. 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.
7. 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
<PAGE>
BroadBand Technologies, Inc.
Notes to Condensed Financial Statements
8. LONG-TERM DEBT
The Company issued on May 17, 1996, $115 million of 5% convertible
subordinated notes due May 15, 2001, that entitles the holder to convert
the notes into shares of the Company's common stock. Interest is payable on
May 15 and November 15 of each year. Each $1,000 note is convertible into
24.1080 shares of common stock of the Company at a conversion price $41.48
per share. The notes are not redeemable by the Company prior to May 15,
1999. Thereafter, the Company may redeem the notes 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 notes.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RECENT DEVELOPMENTS
PATENT LITIGATION SETTLEMENT
On April 29, 1998, the Company, Next Level Communications, L.P. and General
Instrument Corporation announced that they had ended their patent litigation. In
March 1997, the Company filed a complaint in the federal district court in North
Carolina against General Instrument while Next Level filed a complaint the next
day against the Company in the federal district court in California. Both
complaints involved patent and patent infringement issues. As part of the
settlement, both complaints were dismissed with prejudice.
As part of the settlement, Next Level agreed to pay the Company $5 million, and
the Company and Next Level have entered into a perpetual cross license of
patents applied for or issued currently or during the next five years. General
Instrument also agreed to grant the Company a covenant not to sue on all General
Instrument patents applied for, or issued currently or over the next five years.
(See Item 3. Legal Proceedings)
NEW BUSINESS STRATEGY
On February 5, 1998, the Company announced a new three part business strategy to
leverage its core loop electronics and broadband competencies in local loop
infrastructure and improve the Company's financial position. The strategy
includes agreements with Lucent and the FSAN effort described below. The final
initiative of the Company's strategy is a plan to introduce a digital loop
carrier access product into the rapidly growing, $2 billion loop access market
which is driven by demand for new phone lines created by increasing volumes of
Internet and data traffic. Failure to implement any one or more of the parts of
the business strategy would have a material adverse effect on the Company.
10
<PAGE>
BroadBand Technologies, Inc.
Notes to Condensed Financial Statements
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
RECENT DEVELOPMENTS (CONTINUED)
NEW LUCENT RELATIONSHIP
On February 4, 1998, the Company entered into several agreements with Lucent
Technologies, Inc. ("Lucent") that establish a new nonexclusive relationship
which replaces the exclusive relationship between the Company and Lucent entered
into in 1995 with respect to the SDBAS joint product. The terms of these
agreements are summarized in greater detail in a Form 8-K filed by the Company
dated March 5, 1998.
COMPANY IS IN DISCUSSIONS WITH GLOBAL TELECOMMUNICATIONS EQUIPMENT SUPPLIER FOR
GLOBAL ACCESS DEVELOPMENT
The Company is in discussions with an international telecommunications equipment
supplier to develop a global access product that meets an emerging global access
standard known as FSAN, Full Service Access Network. The FSAN consortium is
developing the global standard and the group consists of 12 international and
domestic telephone companies representing over 310 million access lines and 11
leading international telecommunications equipment providers. The FSAN
architecture is a high bandwidth, asynchronous transfer mode, xDSL and passive
optical network similar to the international version of the FLX-2500
architecture, the iFLX. The Company's management believes that the iFLX can be
positioned to evolve to meet the FSAN standard if the Company finds a partner to
fund further development. There can be no assurance that current discussions
will lead to an agreement for a partner to fund development.
MANAGEMENT CHANGES
The Company continues to reorganize its management team. Timothy K. Oakley,
Chief Financial Officer of the Company, resigned from the Company effective
April 18, 1998. On April 18, 1998, Dale C. Kirkland, formerly the Company's
Director of Business Planning and Investor Relations, was appointed Interim
Chief Financial Officer until a permanent CFO is appointed. Effective April 27,
1998, Alan E. Negrin accepted an offer to join the Company's Board of Directors.
Mr. Negrin has over 30 years of related industry experience and is a
Telecommunications Industry Consultant and formerly served as President and CEO
of E/O Networks, and Vice President and General Manager for DSC Communications
Corporation. In connection with the Company's decision to discontinue the active
direct marketing of its FLX-2500 (See Net Sales and Net Loss), James L.
Chitkowski, Vice President of Sales and Marketing departed the Company effective
May 8, 1998. (See "Executive Officers of Registrant" following Item 4 of the
Company's 1997 10-K for a description of the foregoing and other recent
management changes).
11
<PAGE>
BroadBand Technologies, Inc.
Notes to Condensed Financial Statements
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
NET SALES AND NET LOSS
Net sales for the first quarter of 1998 were $2.5 million, compared to $5.3
million for the same period in 1997. Sales for the quarter included the
Company's Second-Generation platform, related software and fees from Lucent
Technologies. Sales for the first quarter of 1998 were composed of fees from
Lucent for element manager fees and $1.4 million from sales of the Company's
Second-Generation platform and related software. In 1997, sales were primarily
composed of sales from the Company's Second-Generation platform and related
software plus some shipments of the Company's First Generation product. The net
loss for the quarter was $11.1 million or $.83 per share, compared with $8.5
million or $.64 per share for the same period in 1997. Net losses resulted from
a number of factors, including reduced sales volume of the Company's
Second-Generation platform, continued investment in product development and
expenses associated with the Company's patent litigation and other matters.
Sales of the Company's FLX-2500 product in the U.S. are substantially dependent
on sales of Lucent's Switched Digital Broadband Access System (SDBAS) product.
Lucent's new AnyMedia product will provide Lucent's customers with an
alternative to SDBAS. The Company expects sales in the U.S. of the FLX-2500 (the
Company's part of SDBAS) to continue to be materially adversely affected due to
the announcement of AnyMedia, the competitiveness of the SDBAS product, the long
evaluation and implementation process typical of major communications
infrastructure changes, and regulatory uncertainties. In light of the foregoing,
the Company has ceased devoting resources to actively market its
Second-Generation product. As part of the Company's recently announced business
strategy, the Company is engaged in development of a new digital loop carrier
product that should decrease the Company's dependence on Lucent for U.S. sales
upon the product's completion which is currently expected in late 1999-to-early
2000. The Company's sales during the development period of its new digital loop
carrier product are likely to be substantially composed of fees from Lucent for
AnyMedia development and contract manufacturing fees. In the second quarter, the
Company expects to show a reduction in net losses as a result of receipt of $5
million in its recently announced patent litigation settlement. If the Company
is able to conclude an agreement for an international alliance to develop FSAN
products, the Company expects further reductions in net losses to occur in the
second or third quarter. Such reductions in the second or third quarter are
expected by the Company to be offset in part by restructuring charges related to
the implementation of the Company's new business strategy. There can be no
assurance as to the Company's ability to conclude an agreement for an alliance
to develop FSAN products. See "Recent Developments".
COST OF SALES
Cost of sales for the three months ending March 31, 1998, was $2.2 million
compared to $4.3 million for the same period in 1997. The gross margin resulting
from the cost of sales as a percent of net sales for the first quarter of 1998
was a positive 12.7% compared to a positive 19.1% for the same period of 1997.
The decreased gross margin for the period is a result of a change in the revenue
mix and less
12
<PAGE>
BroadBand Technologies, Inc.
Notes to Condensed Financial Statements
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
COST OF SALES (CONTINUED)
revenue to absorb manufacturing overhead compared to the prior year. The Company
expects that price competition will have an adverse impact on the Company's
margins. There can be no assurance that the Company can meet product
modification requests, customers feature requests, or customers' business cases.
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 months ended March 31, 1998 were
approximately $6.3 million compared to $6.2 million for the same period in 1997.
Research and development expenses during the first quarter of 1998 were composed
of the development of the hardware and software for its Second Generation
platform and enhancements, support for its First Generation platform, as well as
development of the Company's new digital loop carrier product. The Company
expects its research and development expenses to decline in future periods as
part of its recently announced business strategy. However, continued engineering
salary pressure in the market place could make development more expensive.
PERFORMANCE FEES
Delays by Lucent and the Company in delivering the SDBAS product to Bell
Atlantic caused the Company to pay approximately $1 million of performance fees
in 1997, of which $.3 million were recognized in the first quarter of 1997. An
additional $5 million of performance fees were reserved in the third quarter of
1997 and subsequently released in the fourth quarter of 1997 as a result of the
Company's new agreement with Lucent, which redefined their relationship. Under
the agreement terms, the $5 million of penalties accrued in the third quarter of
1997 were forgiven and the Company reversed these liabilities in the fourth
quarter of 1997.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses for the three months ending March
31, 1998 were approximately $5.4 million compared to $2.8 million for the same
period in 1997. These expenses include support of field service, sales and
marketing resources, legal expenses, executive severance costs as well as
administrative requirements. It is expected that selling, general and
administrative expenses will decrease in future periods due to reduced direct
sales activity by the Company of SDBAS as part of the Company's new agreement
with Lucent and reduced legal fees resulting from the settlement in the second
quarter of the Company's patent infringement lawsuit against Next Level
Communications, L.P. and General Instrument Corporation (See Item 2 Recent
Developments and Item 3 Legal Proceedings)
13
<PAGE>
BroadBand Technologies, Inc.
Notes to Condensed Financial Statements
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 (expense) for the three month period ended March 31,
1998 was approximately $.3 million in income compared to expense of $.2 million
for the same period in 1997. Interest income is the result of investing
activities of the cash balance available during the period. The increase in
interest income for the period ended March 31, 1998 compared to the same period
last year was the result of higher yields from the proceeds of the May 1996 bond
offering. The Company expects interest (expense) to begin to exceed interest
income in future periods as the Company continues to invest its cash resources
in the marketing and development of its own digital loop carrier product.
LIQUIDITY AND CAPITAL RESOURCES
The ending cash and cash equivalents, restricted cash, and short and long-term
investment balances on March 31, 1998, were $108.3 million compared to a balance
of $117.2 million at December 31, 1997. The decrease was primarily due to
ongoing operating activities. Of the total cash balance, $4 million is
restricted pursuant to an executive employment agreement and $2.3 million is
restricted as part of the Company's stock repurchase program. The Company also
has an outstanding stand-by letter of credit in the amount of $3 million, which
is collateralized by restricted cash of the same amount.
The Company has restricted cash of $4 million associated with executive
compensation for its 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.
During the first quarter of 1997, the Board of Directors authorized the
initiation of a stock repurchase program and entered into an agreement with an
investment banker that utilizes equity options for the purchase of up to 10% or
1.3 million shares of common stock outstanding. 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. Whenever the Company's
stock price is below the put option price of $9.11, the Company is required to
reflect the differential as restricted cash on its balance sheet. The Company
had restricted cash in the amount of $6 million at December 31, 1997 and $2.3
million at March 31, 1998, based upon a market value of the stock of $4.12 and
$7.75 per share, respectively, in connection with this agreement. If at April
17, 1999 or such earlier date as the Company chooses, the market value of the
stock is below $9.11 (strike price), the Company would be
14
<PAGE>
BroadBand Technologies, Inc.
Notes to Condensed Financial Statements
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
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 March 31, 1998 and cash
generated from fees and 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 March 31, 1999. The aggregate sales price of
orders received and included in backlog was approximately $1.0 million at March
31, 1998. The Company believes that the orders included in the backlog are firm
orders that will be shipped prior to March 31, 1999. 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.
ITEM 3. LEGAL PROCEEDINGS
On March 18, 1997, the Company commenced a legal action against General
Instrument Corp. 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"). The Complaint alleges, among other things, that General Instrument had
made, tested and used a broadband access system that infringes the 560 Patent
(the "Infringing System"), had offered the Infringing System for sale, had
contracted to sell the Infringing System to NYNEX, and had induced others to
infringe the 560 patent. 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
15
<PAGE>
BroadBand Technologies, Inc.
Notes to Condensed Financial Statements
ITEM 3. LEGAL PROCEEDINGS (CONTINUED)
Court for the Northern District of California (Next Level Communications v.
BroadBand Technologies, Inc., Civil Action No. C-97-0960 SI), seeking, among
other things, to have the Company's 560 Patent declared invalid and
unenforceable alleging antitrust violation based upon the suit against General
Instrument, alleging that the Company is infringing two patents of General
Instrument Corporation relating to the encoding and decoding of digital video
and seeking an injunction against further infringement. The Company on February
2, 1998 counterclaimed against Next Level Communications for infringement of the
560 Patent.
On April 29, 1998, the Company, Next Level Communications, L.P. and General
Instrument Corporation announced that they had ended their patent litigation. As
part of the settlement, both complaints were dismissed with prejudice.
As part of the settlement, Next Level agreed to pay the Company $5 million and
the Company and Next Level have entered into a perpetual cross license of
patents applied for, issued currently or issued during the next five years.
General Instrument also agreed to grant the Company a covenant not to sue on all
General Instrument patents applied for, currently issued or issued during the
next five years.
The Company has invested substantial amounts in developing its technology and
intends to continue to protect its intellectual property in a manner that
maximizes its business opportunity.
PART II - OTHER INFORMATION
ITEM 5. OTHER INFORMATION
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. Such statements include communications about the Company's prior and
new relationships with Lucent, the Company's FLX-1100 and FLX-2500 products and
Lucent's DLC with which the FLX-2500 is paired, a new digital loop carrier
product the Company plans to develop, migration of the FLX-2500 to FSAN and
discussions with a potential corporate partner, 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. These risks include, but are
not limited to the following:
Although management believes the relationship with Lucent offers certain
opportunities to the Company, the relationship includes certain risks as well.
As disclosed in prior filings, the relationship between the Company and Lucent
relating to SDBAS arising out of the November 1995 exclusive agreement did not
meet the Company's expectations and resulted in substantially lower than
expected sales volume. There can be no assurances the new relationship with
Lucent will not fail to meet the
16
<PAGE>
BroadBand Technologies, Inc.
Notes to Condensed Financial Statements
ITEM 5. OTHER INFORMATION
RISK FACTORS (CONTINUED)
Company's expectations. The Company's relationship with Lucent also may
adversely affect the prospect for partnership with others in the
telecommunications industry, especially in light of certain restrictions
contained in the new Lucent agreements including change of control requirements.
Decisions by Lucent or rumors of a decision by Lucent that changes Lucent's
relationship with the Company may have an adverse effect on the market price of
the stock of the Company. In addition, Lucent is a vendor of digital loop
carrier products and the Company's product may compete with Lucent in some
circumstances. Such competition could adversely affect the ability of the
Company and Lucent to cooperate to the extent required under the new agreements.
To maximize the value of the new agreements with Lucent, the Company must
develop its own digital loop carrier product. Development of such a new digital
loop carrier product by the Company will be subject to significant technical and
other challenges and will require a substantial investment of money and time.
There can be no assurance that the Company will be able to develop a digital
loop carrier product or that any product it develops will be attractive to
customers and price competitive with the products of competitors, including
Lucent.
Given the current regulatory and customer environment as well as prior product
delays, sales volume for the Company's only current product, the FLX-2500, are
expected to remain low. Accordingly, except for development, contract
manufacturing, element manager system fees and potential OEM revenues from the
new agreements with Lucent, the Company anticipates low product sales volume
until its new digital loop carrier products are introduced into the market in
the next 18 to 24 months. (See Net Sales and Net Losses)
To be competitive, the Company must continue to invest substantial resources in
research and development and to achieve development results in its current
products and future products, including the new digital loop carrier product the
Company is planning to develop, as well as upgrades to the Company's products
that meet the specific needs of customers, including product performance,
features, reliability and price competitiveness. Development efforts are at the
end of the planning stage and many challenges exist to successful development.
In particular, the Company will need to attract additional engineers who have
hardware experience in digital loop carrier products. The Company will also be
managing multiple, concurrent projects that will require critical program
management expertise to efficiently allocate scarce engineering resources among
competing initiatives. There can be no assurance the Company will be successful
in such effort.
Failure of the Company to meet its development goals could have a material
adverse effect on the Company. Notwithstanding successful development by the
Company, 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. The Company expects
price competition to be an important competitive factor, together with other
factors, including experience, product performance, features, reliability,
partner performance and supplier strength.
17
<PAGE>
BroadBand Technologies, Inc.
Notes to Condensed Financial Statements
ITEM 5. OTHER INFORMATION (CONTINUED)
RISK FACTORS (CONTINUED)
Other risk factors include the possibility that telephone companies may not
widely deploy all or part of the Company's current or future products in their
local distribution networks or may require expensive upgrades to the Company's
current product. For example, during 1997 SBC decided 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 Second Quarter 1997 10Q -
Recent Developments, SBC). Also, the Company's current and future products 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. Additionally regulatory delays may continue to
impede competition in the local loop, which may delay the rollout of the
Company's new access products.
Sales of the joint BroadBand/Lucent SDBAS product in the United States and
Canada are substantially dependent on the competitiveness of Lucent's product
capability. Under its new agreement with Lucent, the Company has no active
distribution role and is totally dependent upon Lucent for the sales and
marketing of the SDBAS product in the United States and Canada. Lucent has no
obligation to actively market its SDBAS product and is foregoing SDBAS marketing
so that resources can be allocated to Lucent's new AnyMedia products. If
customers require the Company to produce small volumes of its current FLX-2500
product or to upgrade its current FLX-2500 product without placing large volume
orders, the Company may incur expenses substantially in excess of revenues
generated. The Company's current contracts with Lucent are forward priced
requiring the Company to deliver its FLX-2500 products at prices, and to invest
to upgrade its product, such that sales of the FLX-2500 products will be
profitable only at high volumes.
Other than the manufacturing agreement, the new contracts with Lucent contain no
minimum volume purchase commitment and regulatory/market factors make it
unlikely that high volume demand will develop in the near term. In addition,
although the Company will not be required to market its planned digital loop
carrier product through Lucent, successful marketing of the Company's planned
digital loop carrier product may be impacted in part by market acceptance of
Lucent's AnyMedia product.
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, are currently
having this effect. The Company expects their adverse affect on sales of its
FLX-2500 product to continue or to increase. (See Net Sales and Net Losses)
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
18
<PAGE>
BroadBand Technologies, Inc.
Notes to Condensed Financial Statements
ITEM 5. OTHER INFORMATION (CONTINUED)
RISK FACTORS (CONTINUED)
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.
The Company competes against many larger companies that have significantly
greater resources than the Company. The Company, which has an accumulated
deficit of approximately $184 million as of March 31, 1998, 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 in May 2001 would have a material adverse effect on the Company. If the
Company's new business strategy fails to generate the expectation of sufficient
revenues, or if expenses are greater than expected, the Company will require
additional financing to repay its debt. There can be no assurance additional
financing will be available to the Company.
Currently, the sales of the Company's current products are substantially
dependent upon two of Lucent's primary customers in North America, which if lost
would deprive the Company of substantially all its SDBAS revenue. These
customers are subject to substantial government regulation, which could affect
their ability and desire to utilize the products of the Company. It is expected
that these customers are likely not to purchase material quantities of the
Company's current FLX-2500 product. As fewer large potential customers dominate
the Company's market, 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
19
<PAGE>
BroadBand Technologies, Inc.
Notes to Condensed Financial Statements
ITEM 5. OTHER INFORMATION (CONTINUED)
RISK FACTORS (CONTINUED)
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's
availability.
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. This is true for new personnel the Company will require to implement
its plan to develop a digital loop carrier product. In addition, the Company's
inability to sell its current product has caused valuable employees to leave the
Company.
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 supplier.
Development of its own digital loop carrier, designed to interface with the
FLX-2500, would be expected to take up to 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 access 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 or produces its own
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
tangible asset requirements (See Liquidity and Capital Resources). The Company
does not meet the minimum net tangible asset requirements of NASDAQ and its
continued listing on NASDAQ will depend upon meeting the minimum bid requirement
of $5.00 per share. In the event that the Company
20
<PAGE>
BroadBand Technologies, Inc.
Notes to Condensed Financial Statements
ITEM 5. OTHER INFORMATION (CONTINUED)
RISK FACTORS (CONTINUED)
fails to meet the minimum bid or other criteria, the Company's securities may no
longer be traded on the NASDAQ National Market. In this event, the Company will
seek an exception to the requirements. There can be no guarantee that the
Company will be successful in obtaining an exception and if such exception could
not be obtained, the Company would cease to trade on the NASDAQ National Market.
In the event that the Company's securities are no longer traded on the NASDAQ
National Market, the market 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.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits -- none
b) Reports on Form 8-K
o Form 8-K dated March 5, 1998
On February 4, 1998, the Company entered into several
agreements with Lucent Technologies, Inc. which established
a new nonexclusive relationship, that replaces the exclusive
relationship between the Company and Lucent Technologies
entered into in 1995 with respect to the SDBAS joint
product.
21
<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.
May 13, 1998 /S/ David E. Orr
------------------
David E. Orr
President and
Chief Executive Officer
22
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000904898
<NAME> BROADBAND TECHNOLOGIES
<MULTIPLIER> 1
<CURRENCY> 0
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<EXCHANGE-RATE> 1
<CASH> 61,197,748
<SECURITIES> 47,139,492
<RECEIVABLES> 3,552,255
<ALLOWANCES> 0
<INVENTORY> 2,744,406
<CURRENT-ASSETS> 1,016,909
<PP&E> 26,280,288
<DEPRECIATION> (17,858,636)
<TOTAL-ASSETS> 124,052,462
<CURRENT-LIABILITIES> 19,033,542
<BONDS> 115,000,000
0
0
<COMMON> 134,098
<OTHER-SE> (21,576,766)
<TOTAL-LIABILITY-AND-EQUITY> 112,590,874
<SALES> 2,507,223
<TOTAL-REVENUES> 2,507,223
<CGS> 2,188,014
<TOTAL-COSTS> 2,188,014
<OTHER-EXPENSES> 11,662,849
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (270,497)
<INCOME-PRETAX> (11,073,143)
<INCOME-TAX> 0
<INCOME-CONTINUING> (11,073,143)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (11,073,143)
<EPS-PRIMARY> (0.83)
<EPS-DILUTED> (0.83)
</TABLE>
