Securities and Exchange Commission
Washington, D.C. 20549
Form 10-Q
[x] Quarterly Report pursuant Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarterly Period Ended September 30, 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
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(State of Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
4024 Stirrup Creek Drive, Durham, N.C. 27703
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (919) 544-0015
----------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes ___X___ No_______
Indicate the number of shares outstanding in each of the issuer's classes of
common stock, as of the latest feasible date.
Classes Outstanding as of November 6, 1998
- ------- ----------------------------------
Common Stock ($.01 par Value) 13,434,795
<PAGE>
BroadBand Technologies, Inc.
Index
Page No.
---------
Part I - Financial Information
Item 1. Financial Statements:
Condensed Balance Sheets
September 30, 1998 and December 31, 1997 3
Condensed Statements of Operations
Three Months Ended September 30, 1998 and 1997 5
Condensed Statements of Operations
Nine Months Ended September 30, 1998 and 1997 6
Condensed Statements of Cash Flows
Nine Months Ended September 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 12
Part II - Other Information
Item 1. Legal Proceedings 20
Item 5. Other Information 20
Item 6. Exhibits and Reports on Form 8-K 27
Signature 28
2
<PAGE>
BroadBand Technologies, Inc.
Condensed Balance Sheets
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
<CAPTION>
September 30,1998 December 31,1997
(Unaudited) (Audited)
------------- -------------
<S> <C> <C>
Assets
Current assets:
Cash, cash equivalents $ 56,214,629 $ 47,464,129
Restricted cash (Note 2) 11,081,152 3,000,000
Short-term investments (Note 3) 36,314,940 41,327,242
Accounts receivable, trade, less
allowances $150,122 in 1998 and $0 in 1997 2,520,087 2,371,133
Inventories (net) (Note 4) 1,716,380 3,214,361
Prepaid expenses and other current assets 2,891,730 1,546,464
------------- -------------
Total current assets 110,738,918 98,923,329
------------- -------------
Long term investments (Note 3) 8,515,905 15,328,088
Restricted cash (Note 2) 4,000,000 10,032,807
Furniture, fixtures, and equipment, at cost 20,656,866 25,925,165
Less allowance for depreciation and
amortization (14,845,536) (16,817,060)
------------- -------------
Net furniture, fixtures, and equipment 5,811,330 9,108,105
------------- -------------
Deferred debt issuance costs
(net of accumulated amortization) (Note 8) 1,964,662 2,525,287
------------- -------------
Total assets $ 131,030,815 $ 135,917,616
============= =============
</TABLE>
See notes to condensed financial statements.
3
<PAGE>
BroadBand Technologies, Inc.
Condensed Balance Sheets
September 30, December 31,
1998 1997
------------- -------------
(Unaudited) (Audited)
Liabilities and stockholders' deficit
Current liabilities:
Accounts payable and accrued expenses $ 9,568,257 $ 8,543,812
Accrued warranty reserve 3,562,494 4,940,427
Deposits 3,001,110 3,263,134
Deferred revenue 5,274,216 1,031,000
------------- -------------
Total current liabilities 21,406,077 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) 1,200,000 600,000
------------- -------------
Total long term liabilities 129,200,000 128,600,000
------------- -------------
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; 13,431,403 shares
issued and outstanding at September
30, 1998 and 13,380,243 issued an
outstanding as of December 31, 1997 134,314 133,802
Additional paid-in capital 163,411,540 163,285,281
Deferred compensation (Note 2) (700,000) (850,000)
Accumulated deficit (182,421,116) (173,029,840)
------------- -------------
Total stockholders' deficit (19,575,262) (10,460,757)
------------- -------------
Total liabilities and stockholders'
deficit $ 131,030,815 $ 135,917,616
============= =============
See notes to condensed financial statements.
4
<PAGE>
BroadBand Technologies, Inc.
Condensed Statements of Operations
(Unaudited)
Three months ended September 30,
1998 1997
------------ ------------
Product sales and contract revenue $ 1,597,022 $ 2,125,214
Services revenue 1,420,228 0
------------ ------------
Total revenues 3,017,250 2,125,214
------------ ------------
Costs and expenses:
Cost of revenues 1,952,518 1,877,020
Research and development 3,778,800 7,473,454
Performance fees and obsolete equipment 0 5,841,258
Selling, general and administrative
expenses 3,105,926 3,790,150
------------ ------------
Total costs and expenses 8,837,244 18,981,882
------------ ------------
Loss from operations (5,819,994) (16,856,668)
Interest income 1,735,567 1,987,379
Interest expense (1,656,173) (1,640,526)
Other income 18,631 0
------------ ------------
Total other income (expense) 98,025 346,853
============ ============
Loss before income taxes (5,721,969) (16,509,815)
Income taxes 0 0
------------ ------------
Net loss $ (5,721,969) $(16,509,815)
============ ============
Net loss per share (Note 5) $ (.43) $ (1.24)
============ ============
Average number of shares and equivalents 13,423,598 13,279,367
============ ============
See notes to condensed financial statements.
5
<PAGE>
BroadBand Technologies, Inc.
Condensed Statements of Operations
(Unaudited)
Nine months ended September 30,
1998 1997
------------ -------------
Product sales and contract revenue $ 6,355,233 $ 12,667,814
Services revenue 1,975,784 0
Technology transfer & license agreement
(Note 9) 17,000,000 0
------------ ------------
Total revenues 25,331,017 12,667,814
------------ ------------
Costs and expenses:
Cost of revenues 6,242,152 10,216,593
Research and development 14,791,040 20,199,931
Performance fees and obsolete equipment 0 6,841,258
Restructuring costs 2,577,678 0
Selling, general and administrative
expenses 12,902,459 9,824,917
------------ ------------
Total costs and expenses 36,513,329 47,082,699
------------ ------------
Loss from operations (11,182,312) (34,414,885)
Interest income 6,001,245 5,512,725
Interest expense (4,879,048) (4,864,586)
Other income 668,838 0
------------ ------------
Total other income (expense) 1,791,035 648,139
------------ ------------
Loss before income taxes (9,391,277) (33,766,746)
Income taxes 0 0
------------ ------------
Net loss $ (9,391,277) $(33,766,746)
============ ============
Net loss per share (Note 5) $ (0.70) $ (2.55)
============ ============
Average number of shares and equivalents 13,407,937 13,264,014
============ ============
See notes to condensed financial statements.
6
<PAGE>
BroadBand Technologies, Inc.
Condensed Statements of Cash Flows
(Unaudited)
Nine months ended September 30,
1998 1997
------------- -------------
Operating activities
Net loss $ (9,391,277) $ (33,766,746)
Adjustments to reconcile net loss to net
cash provided by (used in) operating
activities:
Depreciation 2,642,255 3,323,868
Other non cash charges 2,716,750 6,387,734
Changes in operating assets 511,064 875,798
Change in operating liabilities 3,627,704 6,992,380
------------- -------------
Net cash provided by (used in) operating
activities $ 106,496 $ (16,186,966)
------------- -------------
Investing activities
Acquisitions of furniture, fixtures, and
equipment (1,258,907) (3,286,699)
Disposal of furniture, fixtures, and
equipment 0 42,115
Net decrease(increase) in investments 11,824,485 (8,349,134)
------------- -------------
Net cash provided by (used in) investing
activities 10,565,578 (11,593,718)
------------- -------------
Financing activities
Issuance of common stock 126,771 269,477
Increase in restricted cash (2,048,345) (4,341,957)
Principal repayments on capital lease
obligation 0 (25,044)
------------- -------------
Net cash used in financing activities (1,921,574) (4,097,524)
------------- -------------
Increase/(decrease) in cash and cash
equivalents 8,750,500 (31,878,208)
Cash and cash equivalents at beginning of
period 47,464,129 107,221,928
------------- -------------
Cash and cash equivalents at end of period $ 56,214,629 $ 75,343,720
============= =============
See notes to condensed financial statements.
7
<PAGE>
BroadBand Technologies, Inc.
Notes to Condensed Financial Statements
September 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 nine months ended September 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 September 30, 1998 which expires in November 1998. This letter
of credit is collaterized by restricted cash of the same amount. The Company
also has $.2 million restricted cash on deposit with its main bank for the
implementation of a corporate procurement card.
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 1.0
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 $2.81 at September 30, 1998, the
Company has restricted cash in the amount of $7.9 million 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 $9.1 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
September 30, 1998, the Company had no investments that qualified as trading
or available for sale.
At September 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 September 30, 1998
and December 31, 1997:
September 30, December 31,
1998 1997
----------- -----------
Cash and cash equivalents:
Demand deposit accounts $18,203,672 $11,090,313
Commercial paper 24,187,141 17,225,114
U.S. Treasury Obligations 13,823,816 19,148,702
----------- -----------
$56,214,629 $47,464,129
=========== ===========
Short-term investments:
Certificate of Deposit $ 2,614,195 $ 2,505,293
Commercial paper 24,719,305 34,800,200
U.S. Treasury Obligations 8,981,440 4,021,749
----------- -----------
$36,314,940 $41,327,242
=========== ===========
Long-term investments:
Commercial paper $ 8,515,905 $13,296,211
U.S. Treasury Obligations 0 2,031,877
----------- -----------
$ 8,515,905 $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 September 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:
September 30, December 31,
1998 1997
----------- -----------
Electronic parts and other components $ 2,652,705 $ 3,882,876
Work In Process 87,692 626,008
Finished goods 2,009,161 2,245,958
----------- -----------
4,749,558 6,754,842
Inventory Reserve (3,033,178) (3,540,481)
----------- -----------
$ 1,716,380 $ 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
in the second quarter of 1998 of $12.0 million in connection with the
transfer of technology associated with the Alliance Agreement with Bosch
Telecom GmbH 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.
11
<PAGE>
BroadBand Technologies, Inc.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Recent Developments
Cost Savings Resulting From 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. During the third
quarter the Company began to recognize substantial cost savings as a result of
its new business strategy, thereby reducing its costs and expenses by 33% in the
third quarter of 1998 as compared to 1997. The strategy includes agreements with
Lucent and the strategic alliance with Bosch Telecom under which the companies
will evolve BroadBand's 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.
Lucent R&D Projects
On February 4, 1998, the Company entered into several agreements with Lucent
Technologies, Inc. ("Lucent") that establish a new nonexclusive relationship
which replaced 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 agreed to
specific development projects under the R&D Agreement, worth approximately $15
million out of the total $21 million covered by the R&D Agreement. During the
quarter ending September 30, 1998, the Company recognized approximately $1.4
million of revenue resulting from service revenues from development projects
from its new agreements with Lucent. (See Net Revenues and Loss - Historical).
The Company believes a substantial amount of the technology developed for Lucent
will be reusable by the Company in its own new digital loop carrier product,
which will advance the Company's new business strategy.
12
<PAGE>
BroadBand Technologies, Inc.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations - continued
NASDAQ -Listing
The Company was notified on August 7, 1998 by NASDAQ that it no longer meets the
market capitalization requirements for continued listing on the NASDAQ National
Market under Maintenance Standard #2. Maintenance Standard #2 requires among
other maintenance criteria a market capitalization of at least $50 million. At
that date and until the date hereof, the Company's market capitalization has not
exceeded $50 million. At November 6, 1998 the Company's market capitalization
was approximately $39.5 million.
On August 19, 1998 the Company responded in a letter to NASDAQ with supporting
documentation requesting an exemption to Maintenance Standard #2. The Company
requested NASDAQ to consider several factors: an average daily trading volume of
147,681 shares, 16 to 19 active market makers following the Company's stock,
coverage by 4 analysts, 13.4 million shares in public float and $136.7 million
in tangible assets. On August 28, 1998 after NASDAQ's staff initially denied the
Company's request for an exemption the Company applied for an oral hearing with
a panel authorized by NASDAQ's Board of Governors. The Company presented its
plan to NASDAQ and the oral hearing was held on October 23, 1998. The Company is
awaiting notice from NASDAQ of the decision of the panel. The Company is unable
to predict when NASDAQ will rule on its request, but it is likely to be within
one month of the hearing date.
When the plan discussed above is implemented (See "Liquidity and Capital
Resources"), the Company believes it will enable the Company to satisfy the
requirements of Maintenance Standard #1 for NASDAQ National Market Securities by
increasing the Company's net tangible assets through a restructuring of the
Company's indebtedness. The Company is optimistic that, with implementation of
the new plan, it will be able to meet the NASDAQ maintenance listing criteria;
however, the Company has requested NASDAQ to grant the Company time to implement
its plan during which period the Company will not meet the listing criteria and
there can be no assurance that NASDAQ will not delist the Company prior to
implementation of its plan. Furthermore, there can be no assurance that the
Company will be able to implement its plan.
If the temporary exception requested by the Company is not granted by NASDAQ or
if the temporary exemption is granted but the Company fails to complete
implementation of its plan within the period afforded by the exemption, it is
expected that the Company's Common Stock would be delisted from NASDAQ.
Subsequently, quotes for its shares would be available on the OTC Bulletin
Board. The Company intends to take all reasonable measures to preserve its
NASDAQ listing, but there can be no assurance of success. (See Item 5 "Other
Information - Risk Factors" for further discussion of the Company's NASDAQ
listing.)
13
<PAGE>
BroadBand Technologies, Inc.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations - continued
Management Changes
The Company continues to reorganize its management team. On October 19, 1998
Craig Swinn joined the Company as Vice-President of Marketing and Sales. On
September 15, 1998 Julia Lacolle was elected Assistant Treasurer and on July 21,
1998 Loretta Woodall was appointed Vice-President of Human Resources. 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.
Net Revenue and Net Loss
Historical
Total Revenues for the third quarter of 1998 were $3.0 million, compared to $2.1
million for the same period in 1997. Revenues for the quarter included $1.6
million from 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 and $1.4 million of services revenue from
development projects from its new agreements with Lucent Technologies, Inc.
Services revenue has been accounted for under the percentage of completion
method of accounting. (See "Recent Developments -Lucent R&D Projects")
Total revenues for the first nine months of 1998 were $25.3 million compared to
$12.7 million for the same period in 1997. Total revenues for the first nine
months of 1998 included $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 $6.4
million for the first nine months of 1998 and $12.7 million for the first nine
months of 1997. 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. Service
revenue from development projects were $1.4 million for the first nine months of
1998 and none for the first nine months of 1997.
For the first nine months (during the second quarter of 1998), other income of
$0.7 million resulted from a gain on the sale of equipment in connection with
the Bosch strategic alliance. $2.6 million of 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
Cost Savings Resulting from New Business Strategy" and Other Income (Expense)
and Restructuring Costs). As a result of the foregoing one-time revenue, other
14
<PAGE>
BroadBand Technologies, Inc.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations - continued
Net Revenue and Net Loss - continued
Historical - continued
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 third quarter of 1998 was $5.7 million or $.43 per share as
compared to $16.5 million or $1.24 per share for the same period in 1997. The
net loss for the first nine months of 1998 was $9.4 million or $.70 per share as
compared to $33.8 million or $2.55 per share for the same period in 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 $24.5 million during the first nine 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 associated 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 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 third quarter began to reflect the financial benefits of the
Company's new strategy. The Company showed a 33% reduction in costs and expenses
as a result of a reduction in payroll expense due to transfer of approximately
44 engineering employees to Bosch, as well as subleasing and support services
which were paid by Bosch, and the reduction in legal expenses due to settlement
of the patent
15
<PAGE>
BroadBand Technologies, Inc.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations - continued
Future Expectations - continued
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.) The Company expects net losses to
continue until the Company completes development of its new digital loop carrier
product and begins volume shipments of its new product.
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 Revenue
Cost of revenues for the three months and nine months periods ended September
30, 1998, was $1.9 million and $6.2 million, respectively, compared to $1.9
million and $10.2 million for the same periods in 1997. The gross margin
resulting from the cost of revenues as a percent of net product sales and
contract and service revenues for the third quarter and first nine months of
1998 was 35.3% and 25.1%, respectively, compared to a 11.7% and 19.4% for the
same periods of 1997. The increased gross margin for the third 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 nine months periods
ended September 30, 1998 were approximately $3.8 million and $14.8 million,
respectively, compared to $7.5 million and $20.2 million for the same periods in
1997. Research and development expenses during the third quarter and first nine
months of 1998 were composed of the development of the hardware and software for
its 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 reduced research and development expenses to
continue 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,
management does not anticipate future expense reductions will be as significant
as those afforded by the Bosch transaction and which are reflected in third
quarter performance. Continued engineering salary pressure in the market place
could make development more expensive.
16
<PAGE>
BroadBand Technologies, Inc.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations - continued
Performance Fees and Obsolete Equipment
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. Additionally, the Company had taken a one-time charge of approximately $.9
million for the write-off of obsolete test equipment in third quarter 1997.
Restructuring Costs
The Company determined that a restructuring charge of $2.6 million was required
in the second quarter of 1998 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 nine months
periods ended September 30, 1998 were approximately $3.1 million and $12.9
million, respectively, compared to $3.8 million and $9.8 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. Until the Company begins marketing its new digital
loop carrier product, it is expected that selling, general and administrative
expenses will remain at current lower levels 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. However, the
Company recently retained CIBC Oppenheimer to assist the Company to develop and
implement a debt restructuring plan. Implementation of such a plan may increase
legal and administrative expenses in future periods.
17
<PAGE>
BroadBand Technologies, Inc.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations - continued
Other Income (Expense)
Other income (expense) during the third quarter of 1998 and the first nine
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 in the first nine months of 1998. Net interest
income (expense) for the three month periods and nine months periods ended
September 30, 1998 was approximately $0.1 million and $1.1 million,
respectively, in income compared to $0.4 million and $0.6 million for the same
periods in 1997. The increase in interest income for the period ended September
30, 1998 compared to the same period of 1997 was the result of higher yields.
Interest income is the result of investment 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's cash is reduced.
Liquidity and Capital Resources
The ending cash and cash equivalents, restricted cash, and short and long-term
investment balances on September 30, 1998, were $116 million compared to a
balance of $117 million at December 31, 1997. The decrease of $1 million would
have been substantially greater, but for the one-time technology transfer and
license agreement revenue payments offsetting the ongoing operating losses.
Of the total cash balance, $4 million is restricted pursuant to an executive
employment agreement and $8 million is restricted as part of the Company's stock
repurchase program. The Company has an outstanding stand-by letter of credit in
the amount of $3 million, which is collateralized by restricted cash of the same
amount and expires November 1998. The Company also has $.2 million restricted
cash on deposit with its main bank for the implementation of a corporate
procurement card.
Also included in the Company's cash balance is 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 1.0 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. Therefore, restricted
cash in the amount of $6 million at December 31, 1997 and $8 million at
September 30, 1998 is included in the Company's cash balance as of such dates
based upon a market value of the stock of $2.81 per share,
18
<PAGE>
BroadBand Technologies, Inc.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations - continued
Liquidity and Capital Resources - continued
respectively, in connection with this agreement. As of November 6, 1998
restricted cash was $7 million, based upon a market price of $2.94 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 $9.1 million under the terms of the option
agreement.
The Company has issued $115 million of 5% convertible subordinated notes which
do not become due, except for interest payments, until May 15, 2001. The Company
recently retained CIBC Oppenheimer Corp. to assist in developing and
implementing a financial plan to strengthen the Company's balance sheet through
a possible restructuring of its indebtedness while continuing to invest its cash
in its new business strategy. Although the Company has approximately two and one
half years before the Notes become due, the Company's financial advisor believes
the current financial markets may make this a favorable time for the Company to
consider restructuring the indebtedness. There can be no assurance the Company
will be successful in implementing a financial plan that meets the goals of the
Company. Implementation of a financial plan may result in the reduction of the
cash resources of the Company, dilution of the equity of the Company, an
increase in interest payments by the Company and/or other adverse consequences.
(See Item 5 "Other Information - Risk Factors")
Management expects that cash and cash equivalents at September 30, 1998 and cash
generated from fees and product sales and contract and service revenues will be
adequate to fund operating requirements and property and equipment expenditures
for at least the next twelve (12) months based on current forecasted operations.
However, management recognizes the dynamic nature of the telecommunications
industry and will consider financing alternatives when and if market conditions
are deemed to be available on favorable terms.
Other Financial Information
The Company's backlog includes sales orders received by the Company that have a
scheduled delivery date prior to September 30, 1999. The aggregate sales price
of orders received and included in backlog was approximately $0.3 million at
September 30, 1998. The Company believes that the orders included in the backlog
are firm orders that will be, shipped prior to September 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. The Company also has backlog of
approximately $14 million in specific development projects with Lucent.
19
<PAGE>
BroadBand Technologies, Inc.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company currently has no material litigation pending.
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, financial
planning, future financial requirements and efforts to retain the Company's
listing as a NASDAQ National Market Security. 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.
However, forward-looking statements are beyond the ability of the Company to
control and in many cases the Company can not predict all factors that would
cause actual results and on-going cost reductions 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 contemplated under the new
agreements.
20
<PAGE>
BroadBand Technologies, Inc.
Item 5. Other Information - continued
Lucent Relationship - continued
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, 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.
21
<PAGE>
BroadBand Technologies, Inc.
Item 5. Other Information - continued
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 Revenue and Net Loss)
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 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.
22
<PAGE>
BroadBand Technologies, Inc.
Item 5. Other Information - continued
General - continued
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 Revenue and Net Loss) In
recent years, the purchasing behavior of the Company's large customers has
increasingly been characterized by the use of fewer, larger contracts. This
trend contributes to the variability of the Company's results and is expected to
intensify, accelerated by merger activity among the Company's major customers
and network operators. Such larger purchase contracts typically involve longer
negotiating cycles, require the dedication of substantial amounts of working
capital and other Company resources and in general, require investments, which
may substantially precede recognition of associated revenues. Moreover, in
return for larger, longer-term purchase commitments, customers, often demand
more stringent acceptance criteria, which can also cause revenue recognition
delays and potential penalties for 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.
23
<PAGE>
BroadBand Technologies, Inc.
Item 5. Other Information - continued
General - continued
The Company competes against many larger companies that have significantly
greater resources than the Company. The Company, which has an accumulated
deficit of approximately $182 million as of September 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, 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.
24
<PAGE>
BroadBand Technologies, Inc.
Item 5. Other Information - continued
General - continued
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 currently does not meet Maintenance Standard #1 for NASDAQ-National
Market Securities because the Company does not have net tangible assets of at
least $4 million. Although the Company had tangible assets of $131.0 million at
September 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 $19.6 million.
The minimum closing bid price of the Company's common stock has been less than
the $5 per share price required by NASDAQ's Maintenance Standard #2 since June
19, 1998. At November 6, 1998, the minimum bid price for the Company's Common
Stock was $2.94 per share. Also, due to the decrease in the market price of the
Company's Common Stock, the market capitalization of the Company was $39.5
million at November 6, 1998, which is less than the $50 million market
capitalization requirement of Maintenance Standard #2.
On October 23, 1998 the Company and its financial and legal advisors met with a
NASDAQ panel to discuss the Company's request for time to implement a financial
plan which would cause the Company to become in compliance with Maintenance
Standard #1 by increasing the tangible net worth of the Company (See Item 2
Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources). There can be no assurance
however, that NASDAQ will grant the Company's request for time to implement the
Company's financial plan, or that if granted time, that the Company will
ultimately be able to implement a plan that brings the Company into compliance
with NASDAQ Maintenance Standard #1 within the time period afforded by NASDAQ
for compliance while meeting the Company's need to preserve sufficient cash to
implement its business strategy. If the Company is successful in avoiding
delisting by complying with the tangible net assets requirements of NASDAQ
Maintenance Standard # 1, the Company must continue to meet the other
requirements of Maintenance
25
<PAGE>
BroadBand Technologies, Inc.
Item 5. Other Information - continued
NASDAQ Listing - continued
Standard #1, which include maintaining a minimum bid price of $1.00 or more for
the Company's Common Stock.
The Company intends to take all reasonable measures to preserve its NASDAQ
listing consistent with remaining able to implement its business plan, but there
can be no assurance of success due to the limited ability of the Company to
control the market price of its securities. In the event that the Company fails
to meet the listing criteria, the Company's securities will no longer be traded
on the NASDAQ. Subsequently, quotes for its shares would be available on the OTC
Bulletin Board. 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.
Year 2000
The Company has conducted a 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 has identified its potential year
2000 problems and is preparing a formal plan that mitigates the exposure. 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 during 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.
26
<PAGE>
BroadBand Technologies, Inc.
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits - none
b) Reports on Form 8-K
o Form 8-K dated October 13, 1998
On October 9, 1998 BroadBand Technologies, Inc. ("BBT")
submitted a plan for achieving and maintaining NASDAQ National
Market Maintenance Standards. To assist in the evaluation and
execution of various alternatives to enhance shareholder
value, BBT retained CIBC Oppenheimer Corp. as its financial
advisor.
27
<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.
November 6, 1998 /S/ David E. Orr
--------------------
David E. Orr
President and
Chief Executive Officer
28
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