Securities and Exchange Commission
Washington, D.C. 20549
Form 10-Q
[x] Quarterly Report pursuant Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarterly Period Ended June 30, 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 August 7, 1998
Common Stock ($.01 par Value) 13,425,506
<PAGE>
BroadBand Technologies, Inc.
Index
PAGE NO.
--------
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Balance Sheets
June 30, 1998 and December 31, 1997 3
Condensed Statements of Operations
Three Months Ended June 30, 1998 and 1997 5
Condensed Statements of Operations
Six Months Ended June 30, 1998 and 1997 6
Condensed Statements of Cash Flows
Six Months Ended June 30, 1998 and 1997 7
Notes to Condensed Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
Item 3. Legal Proceedings 17
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Other Information 20
Item 6. Exhibits and Reports on Form 8-K 25
SIGNATURE 26
2
<PAGE>
BroadBand Technologies, Inc.
Condensed Balance Sheets
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
JUNE 30, DECEMBER 31,
1998 1997
-------------- ----------------
(UNAUDITED) (AUDITED)
ASSETS
Current assets:
Cash, cash equivalents $ 72,442,376 $47,464,129
Restricted cash (Note 2) 3,000,000 3,000,000
Short-term investments (Note 3) 24,347,215 41,327,242
Accounts receivable, trade, less
allowances $145,488 in 1998 and $0 in 1997 4,098,237 2,371,133
Inventories (net) (Note 4) 2,041,246 3,214,361
Prepaid expenses and other current assets 1,832,247 1,546,464
--------- ---------
Total current assets 107,761,321 98,923,329
Long term investments (Note 3) 8,361,763 15,328,088
Restricted Cash (Note 2) 10,062,903 10,032,807
Furniture, fixtures, and equipment, at cost 21,112,347 25,925,165
Less allowance for depreciation and
amortization (14,713,757) (16,817,060)
----------- -----------
6,398,590 9,108,105
Long-term receivables 2,000,000 0
Deferred debt issuance costs
(net of accumulated amortization) (Note 8) 2,151,537 2,525,287
--------- ---------
Total assets $136,736,114 $135,917,616
============ ============
SEE NOTES TO CONDENSED FINANCIAL STATEMENTS.
3
<PAGE>
BroadBand Technologies, Inc.
Condensed Balance Sheets
JUNE 30, DECEMBER 31,
1998 1997
------------ ----------------
(UNAUDITED) (AUDITED)
LIABILITIES AND STOCKHOLDERS' (DEFICIT)
Current liabilities:
Accounts payable and accrued expenses $ 9,325,375 $ 8,543,812
Accrued warranty reserve 4,135,041 4,940,427
Deposits 3,262,006 3,263,134
Deferred revenue 4,944,444 1,031,000
------------- -----------------
Total current liabilities 21,666,866 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) 1,000,000 600,000
------------- -----------------
Total Long Term Liabilities 129,000,000 128,600,000
Stockholders' (deficit):
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; 13,420,805 shares
issued and outstanding at June 30, 1998
and 13,380,243 issued an outstanding
as of December 31, 1997 134,208 133,802
Additional paid-in capital 163,384,189 163,285,281
Deferred Compensation (Note 2) (750,000) (850,000)
Accumulated deficit (176,699,149) (173,029,840)
------------- -------------
Total stockholders' (deficit) (13,930,752) (10,460,757)
------------- -------------
Total liabilities and
stockholders'(deficit) $ 136,736,114 $ 135,917,616
=========== ===============
SEE NOTES TO CONDENSED FINANCIAL STATEMENTS.
4
<PAGE>
BroadBand Technologies, Inc.
Condensed Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
<S> <C>
THREE MONTHS ENDED JUNE 30,
1998 1997
-------- --------
Product sales and contract revenue $ 2,806,544 $ 5,232,785
Technology transfer & license agreement (Note 9) 17,000,000 0
---------- ------------
Total revenue 19,806,544 5,232,785
Cost and expenses:
Cost of sales 2,101,620 4,042,482
Research and development 4,759,291 6,527,239
Performance fees 0 700,000
Restructuring costs 2,577,678 0
Selling, general and administrative expenses 4,386,634 3,214,822
---------- ------------
13,825,223 14,484,543
---------- ------------
Income (Loss) from operations 5,981,321 (9,251,758)
Interest income 2,390,528 2,076,273
Interest expense (1,618,223) (1,619,314)
Other income 650,207 0
---------- ------------
Income (Loss) before income taxes 7,403,833 (8,794,799)
Income taxes 0 0
---------- ------------
Net Income (Loss) $ 7,403,833 $ (8,794,799)
============== ==============
Net income (loss) per share (Note 5) $ .55 $ (.66)
============== ==============
Average number of shares and equivalents 13,416,507 13,262,168
============== ==============
</TABLE>
SEE NOTES TO CONDENSED FINANCIAL STATEMENTS.
5
<PAGE>
BroadBand Technologies, Inc.
Condensed Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
<S> <C>
SIX MONTHS ENDED JUNE 30,
1998 1997
--------------- ---------------
$ $
Product sales and contract revenue 5,313,767 10,542,600
Technology transfer & license agreement (Note 9) 17,000,000 0
--------------- ---------------
Total revenue 22,313,767 10,542,600
Cost and expenses:
Cost of sales 4,289,634 8,339,571
Research and development 11,012,241 12,726,479
Performance fees 0 1,000,000
Restructuring costs 2,577,678 0
Selling, general and administrative expenses 9,796,533 6,034,769
--------------- ---------------
27,676,086 28,100,819
--------------- ---------------
Loss from operations (5,362,319) (17,558,219)
Interest income 4,265,678 3,525,346
Interest expense (3,222,876) (3,224,059)
Other income 650,207 0
--------------- ---------------
Loss before income taxes (3,669,310) (17,256,932)
Income taxes 0 0
--------------- ---------------
Net Loss $ (3,669,310) $(17,256,932)
=============== ===============
Net Loss per share (Note 5) $ ( 0.27) $ (1.30)
=============== ===============
Average number of shares and equivalents 13,403,496 3,256,164
=============== ===============
</TABLE>
SEE NOTES TO CONDENSED FINANCIAL STATEMENTS.
6
<PAGE>
BroadBand Technologies, Inc.
Condensed Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
<S> <C>
SIX MONTHS ENDED JUNE 30,
1998 1997
--------------- ---------------
OPERATING ACTIVITIES
Net cash provided by (used in) operating activities $ 1,669,425 $ (5,539,609)
INVESTING ACTIVITIES
Acquisitions of furniture, fixtures, and equipment (706,748) (2,767,548)
Disposal of furniture, fixtures, and equipment 0 68,279
Net decrease in investments 23,946,352 1,500,039
--------------- ---------------
Net cash provided by (used in) investing activities 23,239,604 (1,199,230)
FINANCING ACTIVITIES
Issuance of common stock 99,314 137,050
Increase in restricted cash (30,096) (3,548,957)
Principal repayments on capital lease obligation 0 (25,044)
--------------- ---------------
Net cash provided by (used in) financing activities 69,218 (3,436,951)
--------------- ---------------
Increase/(decrease) in cash and cash equivalents 24,978,247 (10,175,790)
Cash and cash equivalents at beginning of period 47,464,129 107,221,929
--------------- ---------------
Cash and cash equivalents at end of period $ 72,442,376 $ 97,046,139
=============== ===============
</TABLE>
SEE NOTES TO CONDENSED FINANCIAL STATEMENTS.
7
<PAGE>
BroadBand Technologies, Inc.
Notes to Condensed Financial Statements
June 30, 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 and six
months ended June 30, 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 an outstanding stand-by letter of credit in the amount of
$3,000,000 at June 30, 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 $4.12 at June 30, 1998, the
Company has restricted cash in the amount of $6,062,903 in connection with
this agreement. This amount will fluctuate based upon the market value of the
stock. If at April 15, 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.
8
<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 June 30,
1998, the Company had no investments that qualified as trading or available
for sale.
At June 30, 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 June 30, 1998 and
December 31, 1997:
JUNE 30, DECEMBER 31,
1998 1997
----------- -----------
Cash and cash equivalents:
Demand deposit accounts $25,017,482 $11,090,313
Commercial paper 28,175,695 17,225,114
U.S. Treasury Obligations 19,249,199 19,148,702
--------------- ----------------
$72,442,376 $47,464,129
=============== ================
Short-term investments:
Certificate of Deposit $72,577,332 $ 2,505,293
Commercial paper 19,585,664 34,800,200
U.S. Treasury Obligations 2,184,219 4,021,749
--------------- ----------------
$24,347,215 $41,327,242
=============== ================
Long-term investments:
Commercial paper $ 8,361,763 $13,296,211
U.S. Treasury Obligations 0 2,031,877
--------------- ----------------
$ 8,361,763 $15,328,088
=============== ================
9
<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 June 30, 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:
JUNE 30, DECEMBER 31,
1998 1997
--------------- ---------------
Electronic parts and other components 3,518,251 3,882,876
Work In Process 351,927 626,008
Finished goods 1,920,468 2,245,958
---------------- ---------------
5,790,646 6,754,842
Inventory Reserve (3,749,400) (3,540,481)
---------------- ---------------
$ 2,041,246 $ 3,214,361
---------------- ---------------
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 cumulative net losses for 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.
10
<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.
9. RECENT DEVELOPMENTS
As more fully discussed in Management's Discussion and Analysis of Financial
Condition and Results of Operations, the Company recognized one-time revenue
of $12.0 million in connection with the transfer of technology associated
with the Alliance Agreement with Bosch Telecom GbH and Bosch Telecom, Inc.
and $5.0 million of revenue for the license agreement associated with the
settlement of patent litigation with Next Level Communications.
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
11
<PAGE>
BroadBand Technologies, Inc.
Notes to Condensed Financial Statements
financial position. The strategy includes agreements with Lucent and the
strategic alliance with Bosch Telecom under which the companies will evolve
BroadBands' iFLX platform to meet the Full Service Access Network (FSAN)
standard 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.
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. One of the agreements, a Research and Development Agreement
(the "R&D Agreement") was for BBT to develop products for Lucent's new AnyMedia
digital loop carrier product. On July 23, 1998, BBT and Lucent identified and
agreed to specific development projects under the R&D Agreement, worth
approximately $15 million out of the total $21 million.
BOSCH RELATIONSHIP
On May 18, 1998, the Company entered into an Alliance Agreement with Bosch
Telecom GmbH and Bosch Telecom, Inc. (collectively "Bosch"). On June 8, 1998,
BBT and Bosch closed the transactions contemplated by the Alliance Agreement.
The terms of the Company's agreements with Bosch are summarized in a Form 8-K
filed by the Company dated June 25, 1998.
MANAGEMENT CHANGES
The Company continues to reorganize its management team. On July 20, 1998, John
T. Autrey and Kay M. Burgess, partners of Tatum CFO Partners, LLP, were
appointed Interim Chief Financial Officers 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.
NASDAQ LISTING
NASDAQ has notified the Company that it intends to review the Company's
eligibility for continued listing on NASDAQ in light of declines in the market
price of the Company's Common Stock and has requested the Company to file a plan
for meeting the listing standards. The Company intends to take all reasonable
measures to preserve its NASDAQ listing, but there can be no assurance of
success due to the limited ability of the Company to control the market price of
it securities. See Item 5 "Other Information - Risk Factors" for further
discussion of the Company's NASDAQ listing.
12
<PAGE>
BroadBand Technologies, Inc.
Notes to Condensed Financial Statements
NET REVENUE AND NET LOSS
HISTORICAL
Total Revenues for the second quarter of 1998 were $19.8 million, compared to
$5.2 million for the same period in 1997. Net revenues for the first six months
of 1998 were $22.3 million compared to $10.5 million for the same period in
1997. Total revenues for the second quarter of 1998 include $12 million of
revenue associated with the transfer of technology resulting from the closing of
BroadBand's new alliance with Bosch and $5 million of revenue for the license
agreement associated with the settlement of the patent litigation with Next
Level Communications. Product Sales and Contract Revenue from the Company's
second-generation platform and related software plus some shipments of the
Company's first-generation product were $2.8 million for the second quarter and
$5.3 million for the first six months of 1998. (See "Recent Developments -
Patent Litigation Settlement" and "Recent Developments - Bosch Relationship.")
In 1997, net revenues were primarily composed of Product Sales and Contract
Revenue from the Company's Second-Generation platform and related software plus
some shipments of the Company's First Generation product.
Other income of $0.7 million is a gain on the sale of equipment resulting from
Bosch strategic alliance. The $2.6 million restructuring expense is related to
the implementation of the Company's new strategy and includes charges for
write-off of obsolete inventory, test and lab equipment, and computer equipment,
as well as employee transfer and severance expenses. (See "Recent Developments
New Business Strategy", Other Income (Expense) and Restructuring Costs).
As a result of the foregoing one-time revenue, other income, and restructuring
charge during the second quarter of 1998, the Company posted its first
profitable quarter with net income of $7.4 million, or $.55 per share, during
the second quarter. The net loss for the first six months of 1998 was $3.7
million, or $.27 per share. The Company had a net loss of $8.8 million, or $.66
per share, for the second quarter of 1997 and a net loss $17.3 million, or $1.30
per share, for the first six months of 1997.
After adjusting for the one time Technology Transfer and License Agreement
Revenue, the restructuring charge, and the other income, the Company had a net
loss of $7.7 million during the second quarter of 1998 and a net loss of $18.7
million during the first six months of 1998. 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 association
with the Company's patent litigation and other matters.
FUTURE EXPECTATIONS
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
13
<PAGE>
BroadBand Technologies, Inc.
Notes to Condensed Financial Statements
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, although there can be no assurance the Company will
successfully develop a product or that there will not be delays in development.
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.
Results for the second quarter do not reflect all of the financial benefits of
the company's new strategy. In the third quarter of 1998 and beyond, the Company
expects to show a reduction in net losses as a result of an anticipated
reduction in payroll expense due to transfer of approximately 44 engineering
employees to Bosch, as well as subleasing and support services which will be
paid by Bosch, and the reduction in legal expenses due to settlement of the
patent litigation with Next Level and completion of the alliances with Lucent
and Bosch. See Item 5 "Other Information - Risk Factors" for information
important to evaluate the reliability of the Company's future expectations and
other forward looking information contained herein.
YEAR 2000 ISSUES
The Company anticipates that in 1998 and 1999 it will incur total pre-tax
expenses of less than $200,000 in connection with correction of year 2000
problems, including products that have been deployed, as well as internal
systems. See Item 5. "Other Information - Risk Factors" for further discussion
of Year 2000 Issues.
COST OF SALES
Cost of sales for the three months and six months periods ended June 30, 1998,
was $2.1 million and $4.3 million, respectively, compared to $4.0 million and
$8.3 million for the same periods in 1997. The gross margin resulting from the
cost of sales as a percent of net Product Sales and Contract Revenue for the
second quarter and first six months of 1998 was 25% and 19%, respectively,
compared to a 23% and 21% for the same periods of 1997. The slight increased
gross margin for the second quarter is a result of a change in the revenue mix
as 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 and six months periods
ended June 30, 1998 were approximately $4.8 million and $11.0 million,
respectively, compared to $6.5 million and $12.7 million for the same periods in
1997. Research and development expenses during the second quarter and first six
months of 1998 were composed of the development of the hardware and software for
its
14
<PAGE>
BroadBand Technologies, Inc.
Notes to Condensed Financial Statements
Second Generation platform and enhancements, support of 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 primarily due
to cost savings associated with the transfer of 44 engineering employees as part
of the Bosch alliance during the second quarter; 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 $0.3 million were recognized in the first quarter of 1997 and
$.7 million in the second 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.
RESTRUCTURING COSTS
The Company determined that a restructuring charge of $2.6 million was required
to cover the cost of implementing its new strategy and includes charges of $0.7
million for FLX-2500 inventory reserves, write-off of $0.6 million for obsolete
test and lab equipment and computer equipment, as well as $1.2 million for
employee transfer and severance expenses and $0.1 million of other costs.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expense for the three months and six months
periods ended June 30, 1998 were approximately $4.4 million and $9.8 million,
respectively, compared to $3.2 million and $6.0 million for the same periods in
1997. These expenses include support of field service, sales and marketing
resources, legal expense, 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).
OTHER INCOME (EXPENSE)
Other income (expense) during the second quarter of 1998 and the first six
months of 1998 consists primarily of interest income and interest expense, plus
$0.7 million from the gain on the sale of equipment resulting from the closing
of the Bosch strategic alliance. Net interest income (expense) for the three
month periods and six months periods ended June 30, 1998 was approximately $0.7
million and $1.0 million, respectively, in income compared to $0.5 million and
$0.3 million for the same
15
<PAGE>
BroadBand Technologies, Inc.
Notes to Condensed Financial Statements
periods in 1997. The increase in interest income for the period ended June 30,
1998 compared to the same period of 1997 was the result of higher yields.
Interest income is the result of investing activities of the cash balance
available during the period. 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 June 30, 1998, were $118 million compared to a balance of
$117 million at December 31, 1997. The increase of $1 million was primarily due
to the one-time Technology Transfer and License Agreement Revenue payments
offsetting the ongoing operating activities. Of the total cash balance, $4
million is restricted pursuant to an executive employment agreement and $6
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 $6
million at June 30, 1998, based upon a market value of the stock of $4.12 per
share, respectively, in connection with this agreement. As of August 5, 1998
restricted cash increased to $6.9 million, based upon a market price of $3.0625
per share as of that date. If at April 15, 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 obligated to pay the option holder the difference between
the strike price and the lower market price at that time. The Company's maximum
obligation would not exceed $11.9 million under the terms of the option
agreement.
Management expects that cash and cash equivalents at June 30, 1998 and cash
generated from fees and Product Sales and Contract Revenues 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.
16
<PAGE>
BroadBand Technologies, Inc.
Notes to Condensed Financial Statements
OTHER FINANCIAL INFORMATION
The Company's backlog includes sales orders received by the Company that have a
scheduled delivery date prior to June 30, 1999. The aggregate sales price of
orders received and included in backlog was approximately $0.6 million at June
30, 1998. The Company believes that the orders included in the backlog are firm
orders that will be, shipped prior to June 30, 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. 5-97CV-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 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.
17
<PAGE>
BroadBand Technologies, Inc.
Notes to Condensed Financial Statements
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 19, 1998, the Annual Meeting of Stockholders of the Registrant was
held at which the following matters were submitted to and voted on by the
stockholders, with the results set forth below:
PROPOSAL 1 -- SETTING THE NUMBER OF DIRECTORS
a.)The Stockholders voted to set the number of Board of Directors at nine
until such number is increased or decreased by the Board of Directors or
Stockholders in accordance with the bylaws of the Company.
VOTES VOTES VOTES
FOR AGAINST ABSTAINING
Votes to set at 9 the
Number of Directors 11,899,317 84,250 21,275
PROPOSAL 2 -- ELECTION OF DIRECTORS
b.)Two members of the Board of Directors were elected to fill positions as
Class II directors, whose terms will expire at the 2001 Annual Meeting of
the Stockholders. The following persons were elected to the Board of
Directors. Each person received the number of votes set forth next to
their name below:
VOTES VOTES VOTES
FOR AGAINST ABSTAINING
Richard P. Clark 11,599,817 0 405,025
Dr. J. Richard Jones 11,553,465 0 451,377
PROPOSAL 3 -- ADOPTION OF AN EQUITY COMPENSATION PLAN
c.)The Stockholders approved the adoption of an Equity Compensation Plan.
An aggregate of 250,000 shares will be available to be issued pursuant to
the awards granted under the Equity Compensation Plan. The votes cast for
and against and the number of abstentions are set forth below:
VOTES VOTES VOTES
FOR AGAINST ABSTAINING
Votes to adopt Equity
Compensation Plan 11,340,753 645,072 19,017
18
<PAGE>
BroadBand Technologies, Inc.
Notes to Condensed Financial Statements
PROPOSAL 4 -- AMENDMENT AND RESTATEMENT TO THE 1988 INCENTIVE STOCK OPTION PLAN
d.)The Stockholders approved an amendment and restatement of the 1988
Incentive Stock Option (ISO) Plan of the Company to increase to 2,350,000
the number of shares of Common Stock issuable pursuant to the Plan. The
votes cast for and against and the number of abstentions are set forth
below:
VOTES VOTES VOTES
FOR AGAINST ABSTAINING
Votes to increase
(ISO) Plan 10,897,261 978,960 24,107
PROPOSAL 5 -- AMENDMENT AND RESTATEMENT TO THE 1992 NONQUALIFIED STOCK OPTION
PLAN
e.)The Stockholders approved an amendment and restatement of the 1992
Nonqualified Stock Option Plan of the Company to increase to 800,000 the
number of shares of Common Stock issuable pursuant to the Plan. The votes
cast for and against and the number of abstentions are set forth below:
VOTES VOTES VOTES
FOR AGAINST ABSTAINING
Votes to increase
Nonqualified Plan 11,125,736 723,120 51,472
PROPOSAL 6 -- INDEPENDENT ACCOUNTANT
f.)The Stockholders ratified the selection of Ernst and Young LLP to serve
as the independent accountants of the Registrant for the audit of the
1998 financial statements of the Registrant. The votes cast for and
against and the number of abstentions are set forth below:
VOTES VOTES VOTES
FOR AGAINST ABSTAINING
11,927,100 43,535 34,207
19
<PAGE>
BroadBand Technologies, Inc.
Notes to Condensed Financial Statements
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 and Bosch, 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,
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:
LUCENT RELATIONSHIP
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 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 supplier 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.
BOSCH RELATIONSHIP
Although management believes the Alliance Agreement with Bosch offers certain
opportunities to the Company, the relationship includes certain risks as well.
There can be no assurances the new relationship with Bosch will meet the
Company's expectations. The Company's relationship with Bosch, which was
designed to leverage The Company's intellectual property and other resources,
may also adversely affect the prospect for partnership with others in the
telecommunications industry,
20
<PAGE>
BroadBand Technologies, Inc.
Notes to Condensed Financial Statements
especially in light of restrictions contained in the Alliance Agreement relating
to a change of control of the Company and restrictions on the Company
sublicensing. Decisions by Bosch or rumors of a decision by Bosch that changes
Bosch's relationship with the Company may have an adverse effect on the market
price of the stock of the Company. In addition, although initially there will be
geographic restrictions on where the Company and Bosch can sell FSAN products,
the Alliance Agreement provides these restrictions will terminate and eventually
the FSAN products of the Company and Bosch will compete with one another in the
same markets. There can be no assurance the Company will be able to compete with
Bosch, which has substantially greater resources than the Company. Such
competition could adversely affect the Company.
Given the current regulatory and customer environment which have delayed market
acceptance of the Company's current product, the FLX-2500, there can be no
assurance that there will be market demand for any FSAN products of either the
Company or Bosch. Under the Alliance Agreement, there is no commitment by Bosch
to complete development of FSAN products, if sufficient market demand does not
develop. In such case, Bosch is free to cease its development efforts, in which
case, the Company will not achieve all the benefits contemplated by this
Agreement. If Bosch completes its development of FSAN products, there can be no
assurance such products will be competitive with the FSAN and other products of
other telecommunications equipment suppliers.
GENERAL
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 for the
Company's new digital loop carrier product 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 the technologies and products of the Company and
may offer such products at materially lower prices. The Company
21
<PAGE>
BroadBand Technologies, Inc.
Notes to Condensed Financial Statements
expects price competition to be an important competitive factor, together with
other factors, including experience, product performance, features, reliability,
partner performance and supplier strength.
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 10-Q - Item
2 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
22
<PAGE>
BroadBand Technologies, Inc.
Notes to Condensed Financial Statements
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 nonperformance. 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 $177 million as of June 30, 1998, has never been
profitable and may never achieve profitability; however, as a result of the one
time revenue from the Lucent and Bosch strategic alliances the Company achieved
profitability in the second quarter of 1998. 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 features. 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. 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,
23
<PAGE>
BroadBand Technologies, Inc.
Notes to Condensed Financial Statements
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.
NASDAQ LISTING
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.
NASDAQ - National Market maintenance standards require the Company to meet
either one of two sets of maintenance standards. These criteria include a
minimum number of shareholders, minimum capitalization, minimum equity float,
minimum bid prices and net tangible asset requirements.
The Company does not meet Maintenance Standard 1 because the Company does not
have net tangible assets of at least $4 million. Although the Company had
tangible assets of $136.7 million at June 30, 1998, the Company has $115 million
of debt payable in May 2001, which with other obligations caused the Company to
have negative net tangible assets of ($13.9 million).
For the 32 trading days prior to August 6, 1998 the minimum bid price of the
Company's Common Stock was less than the $5 per share price required by
Maintenance Standard 2. At August 6, 1998, the minimum bid price for the
Company's Common Stock was $3.25 per share. Also, due to the decrease in the
market price of the Company's Common Stock, the market capitalization of the
Company was $43.6 million at August 6, 1998, which is less than the $50 million
market capitalization requirement of Maintenance Standard 2.
NASDAQ has notified the Company that it intends to review the Company's
eligibility for continued listing on NASDAQ and has requested the Company to
file a plan for meeting the listing standards. The Company intends to take all
reasonable measures to preserve its NASDAQ listing, but there can be no
assurance of success due to the limited ability of the Company to control the
market prices of it securities. In the event that the Company fails to meet the
listing criteria, the Company's securities may no longer be traded on the
NASDAQ. In this event, the Company will seek an exception to the
24
<PAGE>
BroadBand Technologies, Inc.
Notes to Condensed Financial Statements
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. In the event that the Company's securities
are no longer traded on the NASDAQ, 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.
YEAR 2000
The Company has conducted an informal review of its products and internal
systems with regard to year 2000 compliance, and is developing corrections to
minor problems that have been identified to date. The Company is preparing a
formal plan to identify and remedy year 2000 problems that may affect the
Company, which will include procedures to identify problems, to develop plans to
remedy problems, and to test and implement corrections of the problems before
the year 2000. Where practical, the Company will be soliciting assurances from
critical suppliers with regard to year 2000 compliance of their products and of
those systems that might affect delivery of their products and services to the
Company. The Company anticipates that 1998 and 1999 it will incur total pre-tax
expenses of less than $200,000 in connection with correction of year 2000
problems, including products that have been deployed as well as internal
systems. Based on information available at this time, the Company does not
believe that the cost of remedial actions will have a material adverse effect on
the Company's results of operations and financial condition. There can be no
assurance, however, that there will not be a delay in, or increased costs
associated with, the implementation of corrections as the formal plan is
prepared and performed. Failure to implement such changes could have an adverse
effect on future results of operations.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits - none
b) Reports on Form 8-K
o Form 8-K dated June 25, 1998
On May 18, 1998, BroadBand Technologies, Inc. ("BBT")
entered into an Alliance Agreement with Bosch Telecom GmbH
and Bosch Telecom, Inc. (collectively "Bosch"). On June 8,
1998, BBT and Bosch closed the transactions contemplated by
the Alliance Agreement.
25
<PAGE>
BroadBand Technologies, Inc.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant duly caused this Report of Form 10-Q to be signed on its behalf by
the undersigned, thereunto duly authorized.
August 11, 1998 /S/ David E. Orr
--------------------
David E. Orr
President and
Chief Executive Officer
26
<PAGE>
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