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, 1999
[ ] 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 10, 1999
- --------
Common Stock ($.01 par Value) 13,470,877
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BROADBAND TECHNOLOGIES, INC.
Index
PAGE NO.
---------
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Balance Sheets
June 30, 1999 and December 31, 1998 3-4
Condensed Statements of Operation
Three Months Ended June 30, 1999 and 1998 5
Condensed Statements of Operations
Six Months Ended June 30, 1999 and 1998 6
Condensed Statements of Cash Flows
Six Months Ended June 30, 1999 and 1998 7
Notes to Condensed Financial Statements 8-11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11-19
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 5. Other Information 19-24
Item 6. Exhibits and Reports on Form 8-K 24
SIGNATURES 24
2
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BROADBAND TECHNOLOGIES, INC.
Condensed Balance Sheets
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
JUNE 30, DECEMBER 31,
1999 1998
--------------- -----------------
(UNAUDITED) (AUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 10,128,355 $ 45,403,692
Restricted cash (NOTE 2) 1,050,000 7,283,500
Short-term investments (NOTE 3) 52,520,445 48,787,993
Accounts receivable, trade, less
allowances $150,725 in 1999 and $250,879
in 1998 8,562,056 7,638,024
Inventories (NOTE 4) 6,754,151 1,861,372
Prepaid expenses and other current assets 2,876,698 1,204,372
--------------- ----------------
Total current assets 81,891,705 112,178,953
Long-term investments (NOTE 3) 10,435,745 408,780
Restricted cash (NOTE 2) 4,150,220 4,146,563
Furniture, fixtures, and equipment:
Equipment 15,724,355 14,626,531
Software 5,218,535 4,804,929
Furniture and fixtures 729,802 723,411
Leasehold improvements 1,316,276 1,316,276
--------------- --------------
22,988,968 21,471,147
Accumulated depreciation and amortization (16,705,841) (15,381,974)
--------------- ---------------
Net furniture, fixtures and equipment 6,283,127 6,089,173
Deferred debt issuance costs (net of
accumulated amortization) and other
noncurrent assets (NOTE 5) 1,428,505 1,784,193
--------------- ---------------
Total assets $ 104,189,302 $124,607,662
=============== =============
SEE NOTES TO CONDENSED FINANCIAL STATEMENTS.
3
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BROADBAND TECHNOLOGIES, INC.
Condensed Balance Sheets
JUNE 30, DECEMBER 31,
1999 1998
------------ --------------
(UNAUDITED) (AUDITED)
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 7,865,963 $ 3,244,472
Accrued expenses 5,158,900 5,912,028
Deferred revenue 3,204,382 5,659,015
Deposits and other accrued liabilities 754,639 3,969,923
--------------- ---------------
Total current liabilities 16,983,884 18,785,438
Long-term liabilities:
Convertible debt (NOTE 5) 115,000,000 115,000,000
Deferred compensation (NOTE 2) 1,800,000 1,400,000
Other liabilities 130,000 2,300,000
--------------- ---------------
Total long-term liabilities 116,930,000 118,700,000
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;
13,467,002 and 13,436,686 shares
outstanding 134,669 134,367
Additional paid-in capital 156,146,429 163,428,408
Deferred compensation (NOTE 2) (550,000) (650,000)
Accumulated deficit (185,455,680) (175,790,551)
--------------- ---------------
Total stockholders' deficit (29,724,582) (12,877,776)
--------------- ---------------
Total liabilities and stockholders'
deficit $ 104,189,302 $ 124,607,662
=============== ===============
SEE NOTES TO CONDENSED FINANCIAL STATEMENTS.
4
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BROADBAND TECHNOLOGIES, INC.
Condensed Statements of Operations
(UNAUDITED)
THREE MONTHS ENDED JUNE 30,
1999 1998
------------- ---------------
Revenues:
Product sales and contract revenue $ 3,859,250 $ 2,473,210
Services revenue 1,865,872 333,334
Nonrefundable prepayment revenue (NOTE 6) 2,185,000 --
Technology transfer &
license agreement (NOTE 7) -- 17,000,000
------------- ---------------
Total revenues 7,910,122 19,806,544
Costs and expenses:
Cost of revenues 3,661,738 2,101,620
Research and development 4,587,677 4,707,910
Restructuring costs -- 2,577,678
Selling, general and administrative expenses 3,114,668 4,438,015
-------------- --------------
Total costs and expenses 11,364,083 13,825,223
-------------- -------------
Income (loss) from operations (3,453,961) 5,981,321
Interest income 805,985 2,390,528
Interest expense (1,623,907) (1,618,223)
Other income (expense) -- 650,207
-------------- --------------
Total other income (expense) (817,922) 1,422,512
-------------- -------------
Income (loss) before income taxes (4,271,883) 7,403,833
Income taxes -- --
-------------- --------------
Net income (loss) $ (4,271,883) $ 7,403,833
============== ==============
Net income (loss) per share (NOTE 8) $ (.32) $ .55
============== ==============
Average number of shares and equivalents 13,454,971 13,416,507
============== ==============
SEE NOTES TO CONDENSED FINANCIAL STATEMENTS.
5
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BROADBAND TECHNOLOGIES, INC.
Condensed Statements of Operations
(UNAUDITED)
SIX MONTHS ENDED JUNE 30,
1999 1998
------------- ---------------
Revenues:
Product sales and contract revenue $ 6,088,314 $ 4,069,891
Services revenue 3,820,633 555,556
Nonrefundable prepayment revenue (NOTE 6) 2,185,000 688,320
Technology transfer &
license agreement (NOTE 7) -- 17,000,000
------------- -------------
Total revenues 12,093,947 22,313,767
Costs and expenses:
Cost of revenues 5,648,256 4,289,634
Research and development 9,027,192 10,849,043
Restructuring costs -- 2,577,678
Selling, general and administrative
expenses 6,001,264 9,959,731
-------------- ---------------
Total costs and expenses 20,676,712 27,676,086
-------------- ---------------
Loss from operations (8,582,765) (5,362,319)
Interest income 2,165,342 4,265,678
Interest expense (3,247,707) (3,222,876)
Other income (expense) -- 650,207
-------------- ---------------
Total other income (expense) (1,082,365) 1,693,009
-------------- ---------------
Loss before income taxes (9,665,130) (3,669,310)
Income taxes -- --
-------------- ---------------
Net loss $ (9,665,130) $ (3,669,310)
============== ===============
Net loss per share (NOTE 8) $ (.72) $ (.27)
============== ===============
Average number of shares and equivalents 13,445,007 13,403,496
============== ===============
SEE NOTES TO CONDENSED FINANCIAL STATEMENTS.
6
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BROADBAND TECHNOLOGIES, INC.
Condensed Statements of Cash Flows
(UNAUDITED)
SIX MONTHS ENDED JUNE 30,
1999 1998
------------- ---------------
OPERATING ACTIVITIES
Net (loss) $ (9,665,130) $ (3,669,310)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation 1,323,842 1,942,695
Other noncash charges 889,628 873,750
Changes in operating assets (7,507,199) (1,366,203)
Changes in operating liabilities (3,986,554) 3,888,493
---------------- ----------------
Net cash used in operating activities (18,945,413) 1,669,425
INVESTING ACTIVITIES
Acquisitions of furniture, fixtures, and
equipment (1,517,795) (706,748)
Disposal of furniture, fixtures, and
equipment -- --
Net decrease (increase) in investments (13,759,417) 23,946,352
--------------- ----------------
Net cash provided by (used in) investing
activities (15,277,212) 23,239,604
FINANCING ACTIVITIES
Settlement of put option (NOTE 2) (7,346,370) --
Issuance of common stock 63,815 99,314
Decrease (increase) in restricted cash 6,229,843 (30,096)
--------------- -----------------
Net cash provided by (used in) financing
activities (1,052,712) 69,218
Increase (decrease) in cash and cash
equivalents (35,275,337) 24,978,247
Cash and cash equivalents at beginning of
period 45,403,692 47,464,129
-------------- -----------------
Cash and cash equivalents at end of period $ 10,128,355 $ 72,442,376
============== ==================
SEE NOTES TO CONDENSED FINANCIAL STATEMENTS.
7
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BROADBAND TECHNOLOGIES, INC.
Notes to Condensed Financial Statements
June 30, 1999
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, 1999 and
1998 are not necessarily indicative of the results that may be expected for a
full fiscal year. Certain items in the 1998 financial statements have been
reclassified to conform to the 1999 presentation. For further information, refer
to the financial statements and accompanying footnotes for the year ended
December 31, 1998 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 $1.0
million at June 30, 1999, which expires in March 2000. This letter of credit is
collateralized by restricted cash of the same amount. The Company also has
$50,000 restricted cash on deposit with its primary bank collateralizing a
corporate procurement card.
The Company has restricted cash of $4.0 million associated with executive
compensation for the President and CEO, David E. Orr, who joined the Company on
April 1, 1997. Compensation expense of $4.0 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
$4.0 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. Subsequent to the second quarter,
the employment agreement was amended to convert the $4.0 million executive
compensation to a secular trust with all income earned after the effective date
to be paid annually to Mr. Orr on January 1 thereafter. All other terms of the
employment agreement were unchanged, including the term of the employment
agreement. The secular trust was established in early August 1999. Mr. Orr was
also granted 80,000 shares of restricted common stock valued at $1.0 million.
Upon issuance of this stock, deferred compensation equivalent to the market
value at the date of grant, $1.0 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 put and call options for the purchase of
up to 1.0 million shares of common stock outstanding. The options expired April
15, 1999. To settle its option obligations, the Company paid the holder of the
options $3.0 million from restricted cash during the first quarter and $4.3
million from restricted cash during the second quarter. All payments were
recorded as a reduction of additional paid-in capital. All option obligations
have been settled and the Company has no further obligations under the original
agreement.
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.
8
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BROADBAND TECHNOLOGIES, INC.
Notes to Condensed Financial Statements
3. CASH AND CASH EQUIVALENTS (CONTINUED)
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, 1999, the
Company had no investments that qualified as trading or available for sale.
At June 30, 1999, 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, 1999 and
December 31, 1998:
JUNE 30, DECEMBER 31,
1999 1998
------------ ---------------
Cash and cash equivalents:
Demand deposit accounts $ 6,966,961 $ 13,019,247
Commercial paper 3,161,394 13,228,613
U.S. Treasury Obligations -- 19,155,832
-------------- ---------------
$ 10,128,355 $ 45,403,692
=============== ================
Short-term investments:
Commercial paper $ 43,659,093 $ 46,255,410
U.S. Treasury Obligations 8,861,352 2,532,583
--------------- ----------------
$ 52,520,445 $ 48,787,993
=============== ================
Long-term investments:
Commercial paper $ 8,419,895 $ 408,780
U.S. Treasury Obligations 2,015,850 --
=============== ================
$ 10,435,745 $ 408,780
=============== ================
The estimated fair value of each investment approximates the amortized cost and,
therefore, there are no unrealized gains or losses as of June 30, 1999 and
December 31, 1998.
4. INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or market. The
components of inventory consist of the following:
9
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BROADBAND TECHNOLOGIES, INC.
Notes to Condensed Financial Statements
4. INVENTORIES (CONTINUED)
JUNE 30, DECEMBER 31,
1999 1998
------------- ----------------
Electronic parts and other components $ 7,552,815 $ 4,264,671
Work in process 1,386,554 291,310
Finished goods 1,976,218 1,490,287
------------ ------------
10,915,587 6,046,268
Inventory reserves (4,161,436) (4,184,896)
------------ ------------
$ 6,754,151 $ 1,861,372
============ ============
5. LONG-TERM DEBT
The Company issued on May 17, 1996 $115.0 million of 5% convertible subordinated
notes due May 15, 2001 that entitle 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 of $41.48 per share. The notes were not
redeemable by the Company prior to May 15, 1999. Thereafter, the Company can
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. The Company is actively continuing
negotiations to restructure the convertible subordinated notes. (See Item 2,
Management's Discussion and Analysis of Financial Conditions and Results of
Operations: Recent Developments.)
6. LUCENT SETTLEMENT AGREEMENT
In late 1998, as a result of the agreements with Lucent and the decrease in the
demand for the Switched Digital Broadband Access Systems (SDBAS) joint product,
the Company recognized as revenue the $13.0 million of nonrefundable prepayments
received in prior years net of $2.3 million relating to certain potential
contractual obligations. On April 1, 1999 the Company and Lucent agreed that due
to the continued lack of demand for the SDBAS joint product from certain
customers and Lucent's new product development, AnyMedia, future contractual
obligations are unlikely to occur; therefore, the Company recognized $2.2
million of one-time revenue in the second quarter of 1999 from the remaining
$2.3 million liability. At June 30, 1999, a liability of $115,000 still existed
for certain potential canceled purchase orders.
7. STRATEGIC ALLIANCE AND TECHNOLOGY TRANSFER AGREEMENT
In the second quarter of 1998, the Company recognized one-time revenue of $12.0
million for cross transfer of intellectual property related to the alliance 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 and
perpetual cross license agreement with Next Level Communications. (See Item 2,
Management's Discussion and Analysis of Financial Conditions and Results of
Operations: Recent Developments.)
8. NET INCOME/(LOSS) PER SHARE
All income/(loss) per share amounts for all periods have been presented to
conform to Financial Accounting Standards Board issued Statement No. 128,
"Earnings per Share" ("SFAS 128"). Due to the cumulative net losses for the
periods
10
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BROADBAND TECHNOLOGIES, INC.
Notes to Condensed Financial Statements
8. NET INCOME/(LOSS) PER SHARE (CONTINUED)
presented, potential common shares are considered antidilutive and therefore did
not require restatement of prior periods.
9. BUSINESS SEGMENT INFORMATION
The Company is engaged in a single business segment consisting of the
development, manufacture, marketing and service of electronic equipment for the
telecommunications industry. Regional Bell Operating Companies (RBOCs),
independent telephone companies and competitive local exchange carriers are the
primary users of the Company's products. In 1998, the Company entered into
several agreements with Lucent, which utilized the Company's research and
development and manufacturing resources. Revenues from Lucent, direct sales to
RBOCs and others as a percentage of the Company's total revenues are as follows:
JUNE 30
1999 1998
-------- --------
Lucent 95.0% 6.0%
RBOCs 3.0% 2.0%
Others 2.0% 92.0%
-------- --------
100.0% 100.0%
======== ========
The following customers' accounts receivable balances as a percentage of the
Company's total accounts receivable as of June 30, 1999 and December 31, 1998
are as follows:
1999 1998
---------- --------
Lucent 69.0% 62.0%
Bosch 28.0% 32.0%
RBOCs 3.0% 6.0%
---------- -------
100.0% 100.0%
========== ========
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RECENT DEVELOPMENTS
DEBT RESTRUCTURING ACTIVITIES
In late 1998, the Company and its financial advisor, CIBC Oppenheimer Corp.,
began negotiating a restructuring of the Company's $115.0 million 5% convertible
subordinated notes, which do not become due, except for interest payments, until
May 2001. Through the debt restructuring negotiations and resulting transaction,
the Company is seeking to extend the due date for a significant portion of the
debt, which may result in the debt holders receiving a combination of cash and
equity and/or debt securities with an extended maturity date. The Company is
negotiating to have the maturity date of a significant portion of the principal
extended until after the Company has had an opportunity to introduce its new
generation access product (the "New Platform") into the market. The Company is
actively continuing negotiations with a committee representing a substantial
majority of the convertible subordinated noteholders. Significant progress has
been made on defining the structure, terms and conditions related to the
restructuring of the subordinated notes. To
11
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BROADBAND TECHNOLOGIES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
RECENT DEVELOPMENTS (CONTINUED)
DEBT RESTRUCTURING ACTIVITIES (CONTINUED)
date, however, the Company and the noteholders have not entered into an
agreement on all terms of a restructuring plan. There can be no assurance the
Company will be successful in implementing a debt-restructuring plan that will
meet the financial goals of the Company. Implementation of a debt-restructuring
plan is likely to result in a significant reduction of the cash resources of the
Company, dilution of the equity of the Company and/or other adverse
consequences.
LUCENT MANUFACTURING AGREEMENT
On March 22, 1999 the Company and Lucent agreed upon a Product Letter related to
the Company's 1998 Manufacturing Agreement (the "Agreement") with Lucent which
details the product specifications, pricing and other terms and conditions of
the product the Company will manufacture for a Lucent customer. The Product
Letter, among other provisions, provides that the Company shall be reimbursed by
Lucent for the cost of any reasonable excess inventories that result in a
forecast change or failure to order product. There is no firm commitment at this
time from Lucent regarding the longevity and volume to the Company; however,
Lucent did provide an initial purchase order in late April 1999 and initial
volume production units began shipment in May 1999. During the second quarter of
1999, the Company shipped $1.5 million of product under the Product Letter and
recognized $1.5 million of revenue for payments in lieu of production volume,
offset by a minimal amount of manufacturing overhead absorption due to the
production shipments prior to June 30, 1999. If Lucent cancels the Product
Letter, the Company would still receive the remaining payments under the
Manufacturing Agreement.
LUCENT R & D PROJECTS
During the second quarter of 1999, the Company recognized $1.9 million of
revenue resulting from service revenue from development projects under the
February 4, 1998 Research & Development Agreement with Lucent. To date, Lucent
and the Company have agreed on projects valued at approximately $17.6 million of
the $21.0 million called for under the agreement, and the Company has recognized
revenue of approximately $5.6 million since inception of this contract. No
additional specific development projects have been agreed upon. Subject to
certain restrictions, the Company has the right to use technology it develops
for Lucent in the New Platform the Company is currently developing. There can be
no assurance as to what percentage, if any, of the technology developed for
Lucent will be usable in the Company's New Platform.
SETTLEMENT OF EQUITY PUT OPTIONS
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 put and call options for the purchase of
up to 1.0 million shares of common stock outstanding. The options expired April
15, 1999. To settle its option obligations, the Company paid the holder of the
options $3.0 million from restricted cash during the first quarter and $4.3
million from restricted cash during the second quarter. All payments were
recorded as a reduction of additional paid-in capital. All option obligations
have been settled and the Company has no further obligations under the 1997
agreement.
12
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BROADBAND TECHNOLOGIES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
RECENT DEVELOPMENTS (CONTINUED)
BELL ATLANTIC SETTLEMENT AGREEMENT
On March 31, 1999, the Company and Bell Atlantic agreed to the following
settlement of certain hardware and software supply agreements entered into in
1993 and 1996 regarding the Company's FLX-1100 and FLX-2500 products: (a) In
April 1999, the Company paid to Bell Atlantic $3.2 million in prepayments
advanced to the Company in prior years, (b) Bell Atlantic's license rights were
terminated, and (c) The Company and Bell Atlantic mutually released each other
from any current and future liabilities and claims related to such agreements.
The $3.2 million obligation had been classified as a current liability in prior
years by the Company and will have no impact on current period or future period
operating costs and expenses.
LUCENT SETTLEMENT AGREEMENT
In late 1998, as a result of the agreements with Lucent and the decrease in the
demand for the SDBAS joint product, the Company recognized as revenue the $13.0
million of nonrefundable prepayments received in prior years net of $2.3 million
relating to certain potential contractual obligations. On April 1, 1999 the
Company and Lucent agreed that due to the continued lack of demand for the SDBAS
joint product from certain customers and Lucent's new AnyMedia product
development, future contractual obligations are unlikely to occur. Therefore,
the Company recognized $2.2 million of one-time revenue in the second quarter of
1999 from the remaining $2.3 million liability. At June 30, 1999, a liability of
$115,000 still existed for certain potential canceled purchase orders. On April
8, 1999, the Company notified Lucent of its decision to discontinue
manufacturing of the SDBAS joint product in twelve months.
TOTAL REVENUES
HISTORICAL
Total revenues for the second quarter of 1999 were $7.9 million compared to
$19.8 million for the same period in 1998. Included in revenue for the second
quarter of 1999 were $2.2 million of nonrefundable prepayments received from
Lucent in prior years. Revenue recognition of the $2.2 million resulted from the
1998 Lucent Settlement Agreement and decreased demand for the SDBAS joint
product. One-time revenues of $17.0 million were recorded in the second quarter
of 1998: (a) $12.0 million related to the alliance with Bosch Telecom GbH and
Bosch Telecom, Inc., and (b) $5.0 million of revenue for the license agreement
associated with the settlement of patent litigation and perpetual cross license
agreement with Next Level Communications. (See Recent Developments: Lucent
Settlement Agreement.)
Excluding the one-time revenues explained above, revenues of $5.7 million for
the quarter increased from $2.8 million for the same period of 1998. These
revenues included $3.9 million of contractual manufacturing payments from Lucent
and product sales. Included in product sales was the initial production of a
Lucent product, which the Company began to manufacture in the second quarter.
This is a direct outcome of the 1998 Manufacturing Agreement with Lucent.
Product revenues for the second quarter of 1999 included less than $1.0 million
in sales of the Company's Second Generation platform (FLX-2500), while the prior
year included $2.0 million. Services revenue of $1.9 million for the three-month
period increased from $0.3 million for the same period last year due to revenue
recognition from the Company's 1998 $21.0 million R & D Agreement with Lucent.
Service revenue has been accounted for under the percentage of completion method
of accounting. These development projects are on schedule and the Company
anticipates maintaining the same level of revenue recognition in subsequent
quarters.
13
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BROADBAND TECHNOLOGIES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
TOTAL REVENUES (CONTINUED)
HISTORICAL (CONTINUED)
Total revenues for the first six months of 1999 were $12.1 million compared to
$22.3 million for the same period in 1998. Excluding the one-time revenues
explained above, revenues of $9.9 million for the six-month period increased
from $5.3 million for the same period of 1998. Product sales and contract
revenues of $6.1 million for the six-month period increased from $4.1 million
for the same period last year and were primarily comprised of revenue from the
Lucent product and the 1998 Manufacturing Agreement with Lucent. Services
revenue of $3.8 million increased from $0.6 million for the six-month period due
to revenue recognition from the Lucent R&D development projects. (See Recent
Developments: Lucent Manufacturing Agreement and Lucent R&D Projects.)
FUTURE EXPECTATIONS
The Company is developing a new generation access product (the "New Platform")
to address the new trends in the network access market - the convergence of
traditional voice and higher speed Internet access. In 1998, the Company ceased
devoting resources to actively market its FLX Platform product and does not
expect significant future revenues from the FLX-2500 or the FLX-1100. The
Company does not anticipate initial revenues from its New Platform until second
quarter 2000 and does not expect substantial revenue from its FLX-2500 or
FLX-1100 products. (See Recent Developments: Lucent Settlement Agreement.)
COST OF REVENUES AND GROSS MARGIN
Cost of revenues for the three- and six-month periods ended June 30, 1999 was
$3.7 million and $5.6 million respectively, compared to $2.1 million and $4.3
million respectively for the same periods in 1998. Cost of product revenue for
the three- and six-month periods of 1999 was $2.8 million and $4.0 million
respectively. Cost of services revenue in 1999 was $0.9 million and $1.6 million
for the three- and six-month periods, respectively. Cost of revenues for the
same periods of 1998 were all related to product revenues. The gross margin of
$2.1 million, excluding one-time revenue of $2.2 million, for the second quarter
of 1999 was 36% compared to 25% for the same period of 1998, excluding one-time
revenue of $17.0 million. Gross margin of $4.3 million, excluding $2.2 million
one-time revenue, for the six-month period ended June 30, 1999 was 43% compared
to 19% for the same period of 1998, excluding one-time revenue of $17.0 million.
The increased gross margin for the second quarter and year to date reflects the
services revenue attributed to the Lucent R & D Agreement and contract revenue
associated with the Lucent Manufacturing Agreement.
The Company expects that price competition, as well as rapidly changing
technology developments in the telecommunications industry, could have an
adverse impact on the Company's costs and 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. The Company's margins are expected to fluctuate due to the
uncertainty of shipments of the existing products and New Platform under
development, as well as a higher mix of services revenue from the Lucent
Agreements. (See Recent Developments: Lucent Manufacturing Agreement.)
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses for the three- and six-month periods ended
June 30, 1999 were $4.6 million and $9.0 million respectively, compared to $4.7
million and $10.8 million for the same period in 1998. The $0.1 million
14
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BROADBAND TECHNOLOGIES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
RESEARCH AND DEVELOPMENT EXPENSES (CONTINUED)
and $1.8 million decreases were due primarily to the cost savings associated
with the transfer of 44 engineering employees as part of the Bosch alliance
consummated in June of 1998 and a more focused engineering development effort
related to the New Platform under development. Also, the Company's ability to
reduce development expenses associated with the Company's New Platform access
product by incorporating some costs into the New Platform technology being
developed with Lucent has affected favorably research and development expenses.
However, as the development team continues hardware and software integration and
testing during the third quarter of the year, the Company does anticipate
research and development expenses to increase from the current levels. A
continued tight labor market in the Research Triangle Park area and severe
competitive engineering salary pressure in the market place could make
development more expensive. (See Item 5, Other Information: New Platform
Development.)
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses for the three- and six-month
periods ended June 30, 1999 were $3.1 million and $6.0 million respectively,
compared to $4.4 million and $10.0 million respectively for the same period in
1998. These expenses include support of field service, sales and marketing
resources, legal expense, as well as administrative requirements. This 30%
reduction for the second quarter was due primarily to a $0.4 million decrease in
legal fees, lower payroll costs, and tighter expense controls. The 40% reduction
for the six-month period was due primarily to a $1.7 million decrease in legal
fees and lower payroll costs, partially offset by purchased services related to
development of the New Platform access product. Selling expenses are expected to
increase in the third quarter as the company reestablishes a sales force for the
planned release of its New Platform access product in the first quarter of the
year 2000. Additionally, the Company has incurred and expects to continue to
incur a significant increase in legal and financial advisory fees in connection
with its current efforts to restructure the $115.0 million 5% convertible
subordinated notes due in May 2001, whether or not its efforts are successful.
These expenses are classified as prepaid expenses at June 30, 1999 and will be
charged against any gain or loss on completion of the debt restructuring. If a
restructuring is not consummated, these costs will be expensed at such time.
(See Recent Developments: Debt Restructuring Activities.)
In the second quarter of 1998, the Company recorded a restructuring charge of
$2.6 million to cover the cost of implementing its new business strategy. This
charge includes $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.
OTHER INCOME (EXPENSES)
Other income (expenses) during the second quarter of 1999 consists primarily of
interest income and interest expense. Net interest income (expense) for the
three- and six-month periods ended June 30, 1999 was approximately $0.8 million
and $1.1 million, respectively, in expense compared to $0.7 million and $1.0
million, respectively, in income for the same period in 1998. Other income in
the three- and six-month periods of 1998 included $0.7 million from the gain on
the sale of equipment resulting from the closing of the Bosch strategic
alliance. The decrease in interest income for the three- and six-month periods
ended June 30, 1999 compared to the same periods of 1998 was the result of lower
cash and investment balances and a slightly lower yield. Interest income is the
result of investment of the cash balances available during the period. The
Company expects interest expense to continue to exceed interest income in future
periods as the Company's cash is reduced by operating losses and capital
expenditures during the development period of its New Platform.
15
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BROADBANDd TECHNOLOGIES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
NET INCOME (LOSS)
The net loss for the second quarter of 1999 was $4.3 million or $.32 per share
as compared to $7.4 million in net income or $.55 per share for the same period
in 1998. After adjusting for the one-time revenues in 1999 and 1998 and the 1998
restructuring charge, the net loss was $6.5 million or $0.48 per share, compared
with $7.7 million or $0.57 per share. This improvement in net loss for the
second quarter reflected the increase in services revenue and the decrease in
operating expenses resulting from the Company's new strategy. The net loss for
the first six months of 1999 was $9.7 million or $.72 per share as compared to
$3.7 million or $.27 per share for the same period in 1998. After adjusting for
the one-time revenues in 1999 and 1998 and the 1998 restructuring charge, the
net loss for the six-month period was $11.9 million or $0.88 per share, compared
with $18.7 million or $1.40 per share in 1998.
The Company's results continue to reflect both an unfavorable regulatory
environment for its current product and the development stage of the Company's
New Platform access product. The Company has completed the fourth full quarter
of implementation of its new business strategy announced in early 1998 and it
expects to continue to incur substantial losses in future periods.
LIQUIDITY AND CAPITAL RESOURCES
The ending cash and cash equivalents, restricted cash, and short- and long-term
investment balances on June 30, 1999 were $78.3 million compared to a balance of
$106.0 million at December 31, 1998. The decrease of $27.7 million was due
primarily to $18.9 million used in operations and $7.3 million paid as
settlement of the put equity option more fully described in Note 2 (Employment
Agreement and Restricted Cash) of the Condensed Financial Statements.
Approximately $4.9 million of the $18.9 million cash used in operations resulted
from an increase in inventories, due primarily to the increase in electronic
parts and components related to the anticipated manufacturing resulting from the
signing of the Product Letter with Lucent in late March 1999. The Product
Letter, among other provisions, provides that the Company shall be reimbursed by
Lucent for the cost of any reasonable excess inventories that result in a
forecast change or failure to order product. Payments to Bell Atlantic of $3.2
million to settle certain hardware and software supply agreements is also
included in the $18.9 million operating use of cash. Activities related to the
development of the Company's New Platform accounted for a substantial portion of
the $1.5 million increase in equipment and software during the first half of
1999. (See Recent Developments: Lucent Manufacturing Agreement and Bell
Atlantic Settlement Agreement.)
The Company had total restricted cash, included in the above amounts, of $5.2
million as of June 30, 1999. The restricted cash balance consists of $4.2
million associated with executive compensation for its President and CEO, David
E. Orr, an outstanding stand-by letter of credit in the amount of $1.0 million,
which is collateralized by restricted cash of the same amount and expires March
31, 2000, and $50,000 restricted cash on deposit with its primary bank for the
implementation of a corporate procurement card. The details of these restricted
cash balances are more fully described in Note 2 (Employment Agreement and
Restricted Cash) of the Condensed Financial Statements.
Restricted cash in the amount of $7.1 million at December 31, 1998 is included
in the Company's cash balance as of that date based upon a market value of the
stock of $2.94 per share, in connection with the equity put option agreement. As
more fully described in Note 2 (Employment Agreement and Restricted Cash) of the
Condensed Financial Statements, settlement payments of $3.0 million were made in
the first quarter of 1999 and $4.3 million in the second quarter of 1999 to
settle the Company's obligations. All option obligations have been settled and
the Company has no further obligation under the 1997 agreement. There was no
restricted cash related to this transaction at June 30, 1999.
16
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BROADBAND TECHNOLOGIES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
The Company has issued $115.0 million of 5% convertible subordinated notes which
do not become due, except for interest payments, until May 15, 2001. Interest is
payable on May 15 and November 15 of each year. Additional details on the
convertible subordinated notes are more fully described in Note 5 (Long-Term
Debt) of the Condensed Financial Statements. The Company is current on all
interest payments and is capable of making such payments in the future.
The Company expects, however, that additional equity and/or debt financing will
be required to repay the $115.0 million of notes when they become due. Failure
to pay principal and interest when due would have a material adverse effect on
the Company. If the Company's new business strategy fails to generate investor
confidence in the Company's ability to generate future revenue and profits, the
Company would not be able to obtain the additional financing it will require to
repay the notes when the notes become due, or will not obtain such financing on
terms favorable to the Company and its shareholders.
The Company is continuing negotiations with representatives of a majority of the
convertible notes to restructure the debt. Significant progress has been made on
defining the structure, terms and conditions related to the restructuring of the
subordinated notes, and the restructuring transaction may include a combination
of cash and equity and/or debt securities with extended maturity dates. To date,
however, the Company and the noteholders have not entered into an agreement on
all terms of a restructuring plan. There is no assurance that the Company will
be successful in implementing a debt-restructuring plan that will meet the
financial goals of the Company. Implementation of a debt-restructuring plan is
likely to result in a significant reduction of the cash resources of the
Company, dilution of the equity of the Company and/or other adverse
consequences. Management recognizes the dynamic nature of the telecommunications
industry and the possibility that the Company's product initiatives might
increase working capital and capital equipment requirements. In such event, the
Company would consider appropriate financing alternatives. (See Recent
Developments: Debt Restructuring Activities.)
Management expects that cash and cash equivalents at June 30, 1999 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
at least through the fourth quarter of 2000 based on current forecasted
operations. Management will be actively considering financing alternatives when
and if market conditions and the Company's progress in implementing its business
plan are deemed to cause financing to be available on favorable terms, as to
which there can be no assurance.
OTHER FINANCIAL INFORMATION
BACKLOG
The Company's backlog includes sales orders received by the Company that have a
scheduled delivery date prior to June 30, 2000. The aggregate sales price of
orders received and included in backlog was approximately $7.7 million at June
30, 1999. The Company believes that the orders included in the backlog are firm
orders that will be shipped prior to June 30, 2000. 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. A portion of this backlog relates to
commitments by Lucent for contract manufacturing. If canceled, the Product
Letter provides that the Company shall be reimbursed by Lucent for failure to
order product and the Company would continue to receive the contractual amounts
due under the Manufacturing Agreement. The Company also has backlog of
approximately $11.4 million in specific development projects with Lucent.
17
<PAGE>
BROADBAND TECHNOLOGIES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
OTHER FINANCIAL INFORMATION (CONTINUED)
YEAR 2000 ISSUES
To address Year 2000 issues, the Company had established a compliance plan
consisting of four elements: inventory, assessment, remediation and testing. The
Company completed substantially all of the efforts around these phases in late
April 1999, with extensive testing and obtaining assurances from key suppliers
with regard to Year 2000 compliance of their products and services to the
Company to continue through 1999. During the first quarter, the Company
completed the upgrade of its major accounting and manufacturing and material
requirements planning systems to meet Year 2000 requirements. Costs associated
with the correction of Year 2000 problems for the prior year and 1999, including
correction of the Company's products that have been deployed as well as internal
systems, will not exceed $175,000.
Although the Company believes that its Year 2000 compliance plan is adequate to
address Year 2000 concerns, there can be no assurance that the Company will not
experience negative consequences as a result of undetected defects or the
noncompliance of third parties with whom the Company interacts. Furthermore,
there can be no assurance that there will not be a delay in, or increased costs
associated with, the implementation of corrections, such as unexpected costs of
correcting equipment that has not yet been fully evaluated. If realized, as the
Year 2000 compliance plan is performed these risks could result in adverse
effects on the business, results of operations and financial condition.
The Company plans to begin marketing its New Platform in 2000. If potential
customers for the New Platform are experiencing problems related to Year 2000
issues, the Company's marketing efforts may be adversely affected by customers
expending resources to address Year 2000 problems or by revenue losses by
potential customers resulting from their Year 2000 problems.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Quantitative Disclosures
The following table provides information about the Company's financial
instruments that are sensitive to changes in interest rates. For investment
securities and debt obligations, the table presents principal cash flows and
related interest rates by expected maturity dates. The Company's investments are
classified as both short- and long-term investments. All short-term investments
are scheduled to mature within twelve (12) months subsequent to June 30, 1999.
The Company's long-term investment is scheduled to mature in year 2000.
EXPECTED MATURITY DATES
<TABLE>
<CAPTION>
Fair
Value
(dollars in 000's) 1999 2000 2001 2002 2003 Total @ 6/30/99
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Assets:
Short-term
investments $52,520 - - - - $52,520 $52,520
Long-term
investments - $10,436 - - - $10,436 $10,436
Average interest
rate 5.1% 5.3%
Liabilities:
Long-term debt - - $115,000 - - $115,000 $42,000
Average interest rate 5.0%
</TABLE>
18
<PAGE>
BROADBAND TECHNOLOGIES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
OTHER FINANCIAL INFORMATION (CONTINUED)
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK (CONTINUED)
Qualitative Disclosures
There have been no changes in the nature of the Company's investments since June
30, 1999 and December 31, 1998 or the various financial institutions which hold
those investments.
On March 11, 1999, the Company entered into an agreement with an investment
banker to undertake an early exercise (unwinding) of the equity put option which
the Company had initiated in 1997. The unwinding of this equity put option
resulted in cash payments made from restricted cash of $3.0 million in the
quarter ended March 31, 1999 and $4.3 million in the quarter ended June 30,
1999. (See Note 2 "Employment Agreement and Restricted Cash" in the Notes to the
Condensed Financial Statements.)
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. Forward looking statements contained in this document include
statements about the Company's relationship with Lucent, Lucent's new AnyMedia
product, the Company's relationship with Bosch, the future of the Company's
FLX-1100 and FLX-2500 products, the Company's New Platform (a new generation
access product the Company is developing), migration of the FLX-2500 to FSAN,
the regulatory environment in which the Company's customers operate, the
expected action of customers, corporate partners and competitors, future expense
reductions, restructuring negotiations with creditors 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:
NEW PLATFORM DEVELOPMENT
To survive, the Company must develop on schedule the New Platform, a new
generation access product, that can compete in the market on price,
architecture, features and other factors. Development of the New Platform
product by the Company will be subject to significant technical and other
challenges and will require a substantial investment of money and time. Although
the Company believes that the development of the first release of the New
Platform product is on schedule for market introduction in first quarter of
2000, there can be no assurance that the Company will be able to develop a new
generation access product, or that any product it develops will be attractive to
customers and priced competitively with the products of competitors, including
Lucent. The Company anticipates that substantial customer orders will not occur
until the Company upgrades the first release of its New Platform product. The
second release of its New Platform is currently forecasted for no earlier than
fourth quarter of 2000.
19
<PAGE>
BROADBAND TECHNOLOGIES, INC.
PART II - OTHER INFORMATION (CONTINUED)
ITEM 5. OTHER INFORMATION (CONTINUED)
NEW PLATFORM DEVELOPMENT (CONTINUED)
Competition for Internet/data services is growing between the traditional
telephone communication carriers and the cable television operators. The cable
television operators, including AT&T, will be deploying a technology referred to
as cable modem as a solution to voice, data and video services. The Company's
New Platform product utilizes Digital Subscriber Lines (DSL) technology to
enhance the traditional telephone wiring plant to provide enhanced services such
as high-speed Internet access. Should the cable television operators deploy
cable modem technology successfully, the market for DSL technology would be
diminished as well as the demand for the Company's New Platform product.
CONVERTIBLE SUBORDINATED DEBENTURES
In May 1996, the Company sold $115.0 million of 5% convertible five-year notes
due May 15, 2001, with interest payable on May 15 and November 15 of each year.
The Company expects that additional equity and/or debt financing will be
required to repay the notes when they become due. Failure to pay principal and
interest when due would have a material adverse effect on the Company. If the
Company's new business strategy fails to generate investor confidence in the
Company's ability to generate future revenue and profits, the Company would not
be able to obtain the additional financing it will require to repay the notes
when the notes become due, or will not obtain such financing on terms favorable
to the Company and its shareholders.
The Company is continuing negotiations with representatives of a majority of the
convertible notes to restructure the debt. Significant progress has been made on
defining the structure, terms and conditions related to the restructuring of the
subordinated notes, and the restructuring transaction may include a combination
of cash and equity and/or debt securities with extended maturity dates. To date,
however, the Company and the noteholders have not entered into an agreement on
all terms of a restructuring plan. There is no assurance that the Company will
be successful in implementing a debt-restructuring plan that will meet the
financial goals of the Company. Implementation of a debt-restructuring plan is
likely to result in a significant reduction of the cash resources of the
Company, dilution of the equity of the Company and/or other adverse
consequences.
NASDAQ DELISTING/OVER THE COUNTER BULLETIN BOARD
On February 12, 1999, the Company's shares of Common Stock were delisted from
the NASDAQ National Market for failure to achieve compliance with continued
listing criteria.
The Company's shares are now traded on the Over The Counter Bulletin Board. The
OTCBB is a regulated quotation service that displays real-time quotes and volume
information in over-the-counter (OTC) equity securities. The OTCBB does not
impose listing standards or requirements, does not provide automatic trade
executions and does not maintain relationships with quoted issuers. Stocks
traded on the OTCBB may face a loss of market makers, lack of readily available
bid and ask prices for its stock, experience a greater spread between the bid
and ask price of its stock and a general loss of liquidity with its stock. In
addition, certain investors have policies against purchasing or holding OTC
securities. Both trading volume and the market value of the Company's securities
have been, and will continue to be, materially adversely affected by the
delisting and subsequent trading on the OTCBB.
In addition, the value of stock options of the Company's management and
employees has declined as a result of the delisting, along with other financial
reasons, both as a result of lower market prices and lower trading volume, which
20
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BROADBAND TECHNOLOGIES, INC.
PART II - OTHER INFORMATION (CONTINUED)
ITEM 5. OTHER INFORMATION (CONTINUED)
NASDAQ DELISTING/OVER THE COUNTER BULLETIN BOARD (CONTINUED)
makes resale of stock by employees more difficult. The foregoing could have a
material adverse effect on the ability of the Company to recruit and retain key
personnel unless the Company provides other recruiting and retention incentives,
which will be expensive. Failure to recruit and retain key employees, however,
would have a material adverse effect on the Company's ability to implement its
business plan, including its ability to develop its New Platform.
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 of these risks have had and
are likely to have a material adverse effect on the market price of the
securities of the Company. With the substantially lower trading volumes that
have occurred since delisting and are likely to occur in the future, the
foregoing factors are likely to have a greater adverse impact on the market
price of the Company's securities.
LUCENT RELATIONSHIP
Although management believes the new relationship with Lucent has provided
certain revenue opportunities for the Company and will continue to do so, 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. On April 8,
1999, the Company notified Lucent of its decision to discontinue manufacturing
of the SDBAS joint product in twelve months. There can be no assurances that the
new relationship with Lucent also 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 provisions. Decisions by Lucent or rumors
of a decision by Lucent that changes Lucent's relationship with the Company may
have an adverse effect on the market price of the stock of the Company. In
addition, Lucent is a vendor of digital loop carrier products and the Company's
product may compete with Lucent in some circumstances. Such competition could
adversely affect the ability of the Company and Lucent to cooperate to the
extent required under their agreements. The Company expects that Lucent will
re-evaluate continually its relationship with the Company as business conditions
change for both Lucent and the Company.
BOSCH RELATIONSHIP
Although management believes the Alliance Agreement with Bosch offers certain
opportunities for the Company, the relationship includes certain risks as well.
There can be no assurances that the 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's 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
21
<PAGE>
BROADBAND TECHNOLOGIES, INC.
PART II - OTHER INFORMATION (CONTINUED)
ITEM 5. OTHER INFORMATION (CONTINUED)
BOSCH RELATIONSHIP (CONTINUED)
price of the Company's stock. In addition, although initially there will be
geographic restrictions on where the Company and Bosch can sell FSAN products,
the Alliance Agreement provides that 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.
OTHER FACTORS
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 New Platform products are introduced into the market in early 2000.
Substantial sales volume is not expected until introduction of the second
release of the New Platform product. (See Item 2, Management's Discussion and
Analysis of Financial Condition and Results of Operations: Total Revenues.)
To remain 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 Platform products the Company is
developing, as well as upgrades to the Company's products that meet the specific
needs of customers, including product performance, features, reliability and
price competitiveness. Development efforts are in place and many challenges
exist to successful development. In particular, the Company will need to attract
additional engineers who have hardware and software experience in digital loop
carrier products, as well as retain its current key engineers. The Company is
also 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 efforts.
Failure of the Company to meet its development goals will have a material
adverse effect on the Company. Notwithstanding successful development by the
Company, competitors already are selling products to customers in the market
targeted by the Company; competitors may develop new competing technology and
products that are more attractive to customers than are the technologies and
products of the Company, and may offer such products at materially lower prices.
The Company expects price competition to be an important competitive factor,
together with other factors, including experience, product performance,
features, reliability, partner performance and supplier strength.
22
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BROADBAND TECHNOLOGIES, INC.
PART II - OTHER INFORMATION (CONTINUED)
ITEM 5. OTHER INFORMATION (CONTINUED)
OTHER FACTORS (CONTINUED)
Other 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. This move was attributed to federal
regulatory actions, which forced SBC to sell its wireless services and network
to new competitors at prices below actual cost. Also, the Company's current and
future products must meet the industry standards established by Telcordia
Technologies, Inc. (formerly BELLCORE) 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 generation access
products.
The failure of telephone companies to widely deploy broadband networks is also
increasing the risk that cable television networks, due to the broader bandwidth
capabilities of their coaxial cable networks, will become more competitive with
telephone companies for transmission of voice and data information. During the
past year substantially greater interest and investment in broadband cable
television networks has occurred and the trend appears to be accelerating.
Failure by the telephone companies to successfully meet competition from coaxial
cable-based telecommunications networks would have a material adverse effect on
the Company.
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. Announcements by Lucent of its new digital
loop carrier product, AnyMedia, had this adverse effect on sales of the
Company's FLX-2500 product and the same could occur in the future with respect
to the New Platform the Company is developing.
The Company competes against many larger companies that have significantly
greater resources than the Company. The Company, which has an accumulated
deficit of approximately $185.5 million as of June 30, 1999, has never been
profitable on an annual basis and may never achieve profitability. The Company
will require additional capital and may not be able to raise such capital or may
be able to raise such capital only on unfavorable terms.
The Company was dependent upon Lucent for greater than 95.0% of its revenues for
the six months ended June 30, 1999 and greater than 85.0% of its projected 1999
revenue, and will remain substantially dependent upon Lucent until the Company
develops and successfully markets its New Platform. Failure by the Company or
Lucent to comply with existing agreements would have a material adverse effect
on the Company.
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 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
23
<PAGE>
BROADBAND TECHNOLOGIES, INC.
PART II - OTHER INFORMATION (CONTINUED)
ITEM 5. OTHER INFORMATION (CONTINUED)
OTHER FACTORS (CONTINUED)
or other proprietary rights of others. 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.
YEAR 2000
Although the Company believes that its Year 2000 compliance plan is adequate to
address Year 2000 concerns, there can be no assurance that the Company will not
experience negative consequences as a result of undetected defects or the
noncompliance of third parties with whom the Company interacts. Furthermore,
there can be no assurance that there will not be a delay in, or increased costs
associated with, the implementation of corrections, such as unexpected costs of
correcting equipment that has not yet been fully evaluated. If potential
customers for the New Platform product that the Company anticipates introducing
in first quarter 2000 are experiencing problems related to Year 2000 issues, the
Company's marketing efforts may be adversely affected by customers expending
resources to address Year 2000 problems or by revenue losses by potential
customers resulting from their Year 2000 platforms. If realized, as the Year
2000 compliance plan is performed these risks could result in adverse effects on
the business, results of operations and financial condition.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits - None.
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 13, 1999 /s/ John T. Autrey
------------------
John T. Autrey
Vice President and Chief Financial
Officer
24
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