================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
For the Fiscal Year Ended December 31, 1998
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the Transition Period From _______ to _______
Commission File No. 0-21766
-------------------------
BROADBAND TECHNOLOGIES, INC.
(Exact name of registrant as specified in its Charter)
Delaware 56-1615990
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4024 Stirrup Creek Dr.
Durham, North Carolina 27703
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:
(919) 544-0015
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock,
$.01 par value
(Title of Class)
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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. Yes ___ No _X_
The aggregate market value of voting stock held by nonaffiliates of the
registrant, as of March 29, 1999, was approximately $15,545,490 (based on the
last bid price of such stock as reported by the Over The Counter Bulletin Board
(OTCBB)).
The number of shares outstanding of the registrant's common stock, $.01 par
value, as of March 29, 1999, was 13,447,656.
================================================================================
<PAGE>
BROADBAND TECHNOLOGIES, INC.
ANNUAL REPORT
ON
FORM 10-K
Year Ended December 31, 1998
PART I
ITEM 1. BUSINESS
GENERAL
BroadBand Technologies, Inc. was organized in the state of North Carolina in
July 1988 and reincorporated in the state of Delaware in December 1988. As used
herein, the term "Company" refers to BroadBand Technologies, Inc. The Company's
executive offices are located at 4024 Stirrup Creek Drive, Durham, NC 27703. Its
telephone number is (919) 544-0015.
The Company is engaged principally in the design and engineering of a
sophisticated electronics and software platform for operators of local exchange
telephone networks principally in North America. The Company expects to begin
marketing efforts in 2000 in connection with expected completion of development
of its New Platform described below. The Company currently derives most of its
revenue from contract manufacturing and development projects.
The Company's initial product platform (the "FLX Platform") addressed the access
portion of the telephone network and provided operators of these local exchange
telephone networks the capability to transmit voice, video and data over fiber
optics and copper wire to provide a wide array of services, including voice and
private line and data service.
In 1998 the Company developed and began implementing a new strategy that again
focused on the communications network access markets while leveraging its
experience with advanced technologies. The Company's new strategic plan resulted
in executing several new agreements with Lucent Technologies, Inc. and a
strategic alliance with Bosch Telecom GmbH and Bosch Telecom, Inc. These
agreements resulted in several one-time revenues and cash payments to the
Company, product development revenues and revenue recognition of certain
non-refundable prepayments. In addition the Company began development of 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. The Company views this as an opportunity to utilize its
technology, experience and capital to address this market need.
RECENT DEVELOPMENTS
DELISTING BY NASDAQ
On February 11, 1999 the shares of Common Stock of the Company were delisted
from the Nasdaq National Market. The Company's shares are now traded on the Over
The Counter Bulletin Board (OTCBB), an electronic quotation service.
Approximately 10 broker-dealer firms are currently market-
1
<PAGE>
BROADBAND TECHNOLOGIES, INC.
ANNUAL REPORT
ITEM 1. BUSINESS (CONTINUED)
RECENT DEVELOPMENTS (CONTINUED)
DELISTING BY NASDAQ (CONTINUED)
makers for the Company's Common Stock. The Company does not expect it will
qualify for relisting its shares of Common Stock with Nasdaq in the near future,
even if it successfully completes the debt restructuring described below.
DEBT RESTRUCTURING ACTIVITIES
In late 1998, the Company and its financial advisor, CIBC Oppenheimer Corp.,
began negotiating a restructuring of the Company's $115 million 5% convertible
subordinated notes which do not become due, except for interest payments, until
May 2001. Through the debt restructuring negotiations, the Company is seeking to
extend the due dates for the $115 million of debt so that payments of principal
do not become due until after the Company has had an opportunity to introduce
its New Platform into the market. Prior to delisting by Nasdaq, the
restructuring negotiations were also a key element in the plan presented to
Nasdaq in October 1998 in an unsuccessful effort to satisfy Nasdaq's continued
listing requirements. The Company is actively continuing negotiations with a
committee representing a substantial majority of the convertible subordinated
noteholders. Implementation of a debt restructuring 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. 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.
LUCENT RESEARCH & DEVELOPMENT PROJECTS
On February 4, 1998, the Company entered into several agreements with Lucent
Technologies, Inc. ("Lucent") that established a new nonexclusive relationship
which replaced the exclusive relationship between the Company and Lucent entered
into in 1995 with respect to the Switched Digital Broadband Access System
(SDBAS) joint product, which related to the Company's FLX (Fiber Loop Access)
Platform. The terms of these agreements are summarized in detail in 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 the Company to develop
products for Lucent's new AnyMedia digital loop carrier product. On July 23,
1998, the Company and Lucent agreed to specific development projects under the R
& D Agreement, valued at approximately $15.3 million of the total $21 million
provided by the R & D Agreement. On December 17, 1998, the Company and Lucent
agreed on an additional $2.3 million development project. Accordingly, a total
of $17.6 million of the total $21 million contractual commitment by Lucent is
now reflected in specific development projects. During the year ending December
31, 1998 the Company recognized approximately $2.1 million of revenue resulting
from service revenues from development projects related to the R & D Agreement.
Although additional research and development projects and/or equivalent
activities are anticipated to be agreed upon by the Company and Lucent to
complete the $21 million commitment, there is no assurance that the remaining
balance will be agreed upon. Subject to certain contractual restrictions, the
Company has the right to use technology it develops for Lucent in the New
Platform the Company is currently developing. There can
2
<PAGE>
BROADBAND TECHNOLOGIES, INC.
ANNUAL REPORT
ITEM 1. BUSINESS (CONTINUED)
RECENT DEVELOPMENTS (CONTINUED)
LUCENT RESEARCH & DEVELOPMENT PROJECTS (CONTINUED)
be no assurance as to what percentage, if any, of the technology developed for
Lucent will be usable in the Company's New Platform.
LUCENT MANUFACTURING AGREEMENT
On February 4, 1998 the Company entered into a Manufacturing Agreement (the
"Agreement") with Lucent. Under the Agreement, if Lucent does not provide orders
for products in sufficient volume to absorb $18 million of the Company's
manufacturing overhead for three (3) years, Lucent will pay the Company the
amount that is not absorbed by Lucent's orders. In the second half of 1998, the
Company and Lucent identified a Lucent designed product for the Company to
manufacture. The Company performed a preliminary manufacturing review and
completed pricing quotations. Although final contract negotiations are
continuing, the Company shipped in January 1999 initial prototypes of the Lucent
designed product. There is no firm commitment at this time from Lucent to award
this contract to the Company and there is no guarantee, once awarded as to the
longevity, volume or profitability to the Company. During 1998, the Company
recognized $3.0 million of revenue and received payment of such in February 1999
for payments in lieu of production volume.
BOSCH AGREEMENT
On May 18, 1998, the Company entered into a strategic alliance with Bosch
Telecom to further develop and market the iFLX product, which is the
international version of the Company's FLX-2500 product. The Agreement provides
for the migration of the product towards full service access network standards
which are being developed by a large consortium of domestic and international
network operators. The Company will have exclusive rights to market the Full
Service Access Network (FSAN) product, if any, developed by Bosch in North
America for a specified period of time after its availability. The Agreement
positions the Company to participate in the North American FSAN market while
allowing the Company to focus its resources on the converging voice and data
access markets. The FSAN market, defined as "full service," focuses on
bandwidths sufficient to address voice, data, broadcast video as well as video
on demand. The FSAN concept was the core of the Company's prior strategy, but
due to lack of carrier demand and uncertain timing of market developments, the
Company initiated a change in its product strategy. The Bosch Agreement provides
the Company with the ability to stay current with FSAN technology, the
opportunity to sell to Bosch for resale to Portal Telephone and Telegraph (PTT)
its iFLX products, as well as potential for manufacturing volume or royalties
from Bosch's future FSAN product sales. The foregoing benefits to the Company
are dependent upon Bosch's determining that a market will develop to justify its
development expenses and the ability of Bosch to develop FSAN products that are
competitive in price, features and other factors and the ability of the Company
to adapt Bosch's product to the North American market.
3
<PAGE>
BROADBAND TECHNOLOGIES, INC.
ANNUAL REPORT
ITEM 1. BUSINESS (CONTINUED)
RECENT DEVELOPMENTS (CONTINUED)
MANAGEMENT TEAM
The Company continues to reorganize its management team. On December 9, 1998
John T. Autrey was appointed Vice President and Chief Financial Officer. Mr.
Autrey was previously one of two Interim Chief Financial Officers who had been
at the Company since July 1998.
PRODUCTS
The mission of the Company is to provide products and services for network and
service providers to implement a robust, flexible and economical electronic
connection providing residential and business customers with advanced voice
services, high speed data and digital video capability, to communicate, enable
e-commerce and to access on-line information, entertainment and other
multi-media services. The Company's FLX-2500 product was completed in 1997 for
customer evaluation and has been deployed in trials. However, continued
regulatory uncertainty and the announcement of new products and technology have
resulted in lack of demand for the FLX-2500. The Company has announced three
product development efforts, including optical network unit development for
Lucent's AnyMedia digital loop carrier, development of the New Platform, a new
generation access product, and an alliance with Bosch Telecom to deliver a
global access platform to meet the emerging FSAN specifications.
The Company's new generation access product that is currently under development
(the "New Platform") is aimed at the opportunity created by the demand for
higher speed Internet access and the convergence of narrowband and broadband
access products. The new development will combine the Company's core
technologies, Asynchronous Transfer Mode (ATM), xDigital Subscriber Line (xDSL)
and Optics, with technology gained through the Lucent development and technology
license agreements discussed herein and will position the Company for more
near-term market participation, which represents a significant change from the
prior efforts. The expected benefit is that the new product will allow the
Company to offer both narrowband and broadband services and allow the Company to
participate in the business sector where local service competition has begun to
emerge. At the same time, the Company will continue to position itself to
benefit from the competition for residential services, intended by the Telecom
Act of 1996.
The Company's new access product can be defined as an advanced generation of
digital loop carrier, traditionally used in telephone network access, and a new
network access product commonly referred to as Digital Subscriber Lines Access
Multiplexer (DSLAM), which is used to deploy higher bandwidth services,
integrated into a single product offering. In concept, the product will afford
network operators the ability to provide traditional voice communications as
well as advanced data oriented communications. The product is intended to
support migration of services over time from today's voice-centric,
circuit-based networks to tomorrow's data-centric, cell-based networks. The new
product will support both copper based as well as fiber optic based transmission
mediums, which is a significant change in strategy from the Company's prior
products, which depended on customers deploying fiber optic based transmission
networks. Reflecting another change in strategy, the New Platform is a product
that can be sold by the Company independent of Lucent's new AnyMedia digital
loop carrier product, compared to the Company's FLX-2500 which was part of a
joint BBT/Lucent product called SDBAS.
4
<PAGE>
BROADBAND TECHNOLOGIES, INC.
ANNUAL REPORT
ITEM 1. BUSINESS (CONTINUED)
PRODUCTS (CONTINUED)
Under the R & D Agreement the Company and Lucent Technologies entered into in
February 1998, Lucent has committed to pay the Company at least $21 million over
a three year period for the Company to develop components for Lucent's new
AnyMedia digital loop carrier product. The Company and Lucent will co-own the
technology developed by the Company under the R & D Agreement with certain
restrictions on its use, including restrictions against licensing third parties
and producing products that are plug compatible with the products of the other
party and limitations on use by the Company solely with the access platform
products the Company is developing. The projects involve development of an
optical network unit for the AnyMedia system including telephony and data
interfaces. Some of the technology developed in these projects will be reused by
the Company in its own new generation access platform development. The ability
of the Company to reuse technology developed for Lucent in the Company's
products will depend upon a number of factors, including the products Lucent
wants the Company to design, how alike the products of the Company and Lucent
will be, and the design schedules for the products of Lucent and the Company.
There can be no assurance as to the amount, if any, of development for Lucent's
products that will be reusable in the Company's access platform products. If the
Company is not able to reuse substantial amounts of the technology developed for
Lucent, the R & D Agreement will have less value to the Company than the Company
expected.
The Company and Lucent also entered into a Technology Transfer Agreement and
Element Manager Agreement on February 4, 1998 pursuant to which certain Lucent
technology is licensed to the Company. Under the Technology Transfer Agreement,
Lucent has granted the Company licenses to certain existing narrowband
technology with certain restrictions on its use, including restrictions against
licensing third parties and producing products that are plug compatible with the
products of the Lucent and limitations on use by the Company solely with the
Company's access platform products. The Company believes this narrowband
technology will enable the Company to increase the cost efficiency of its
digital loop carrier products and will save the Company substantial development
time and development cost. Under the Element Manager Agreement, Lucent has paid
the Company $2 million to support the development of its element manager.
The R & D Agreement and the Technology Transfer Agreement described above all
contain provisions that would enable Lucent to terminate the agreements on
certain conditions in a bankruptcy of the Company, material breach by the
Company or a "Change in Control" of the Company. The Change in Control provision
terminates February 4, 2003. Change in Control is very broadly defined in the
agreements and may cause the Company to have to choose to forego the benefits of
its agreements with Lucent to acquire another company, sell itself to another
company or enter into a strategic alliance with another company, unless Lucent
approves of the transaction. In addition, the Company could lose the benefits of
the agreements with Lucent if a company acquires a control position in the
Company stock through market purchases without the Company's consent. If a
change of control occurs, the Company would have 18 months to redesign the parts
of its access platform product that include Lucent's intellectual property.
On May 18, 1998, the Company entered into an Alliance Agreement with Bosch
Telecom GmbH and Bosch Telecom, Inc. (collectively "Bosch"). On June 8, 1998,
the Company and Bosch closed the transactions contemplated by the Alliance
Agreement. Pursuant to the Alliance Agreement, Bosch has agreed to pay
approximately $14 million, and has agreed to pay royalty payments to the
Company.
5
<PAGE>
BROADBAND TECHNOLOGIES, INC.
ANNUAL REPORT
ITEM 1. BUSINESS (CONTINUED)
PRODUCTS (CONTINUED)
Pursuant to the Alliance Agreement, the Company transferred intellectual
property, employees and equipment to Bosch. Also, Bosch agreed to develop new
intellectual property for FSAN products and to license the new intellectual
property back to the Company, although completion of development of an FSAN
product by Bosch is contingent upon Bosch determining that a market will develop
that justifies Bosch's development expenses. International manufacturing and
distribution agreements, as well as future cross supply agreements, are also
contemplated by the Alliance Agreement.
FSAN is a global standard being developed by a 23 member interest group which
includes twelve international and eleven U.S. telephone operating companies and
equipment manufacturers, including SBC, BellSouth and GTE, as well as Bosch and
the Company. The FSAN initiative is creating requirement specifications for
access systems that provide both broadband and narrowband services. The FSAN
standard is very similar to the architecture of the Company's existing iFLX(TM)
product. Both architectures incorporate high bandwidth, ATM, passive optical
network (PON) and xDigital Subscriber Line (xDSL) technologies. By using the
iFLX platform as the broadband foundation for the FSAN products and investing in
additional development, the companies expect to have a distinct time-to-market
advantage in developing FSAN-compliant products if an FSAN product market
develops. (See Item 1 Business: Recent Developments.)
FLX(R)-2500
In 1997, the Company completed the development of the FLX-2500, a
second-generation FLX System. Units have been delivered for system integration
and testing, and are being trialed at SBC and RCN for telephony services and
Telus in Canada for data services. The FLX-2500 product consists of the switched
digital architecture which supports both broadband and telephony elements of a
local access system that have been designed to be integrated with the telephony
and analog video elements of other telecommunications systems suppliers. The
resulting single, integrated full service system allows customers to build
fiber-to-the-curb local distribution networks that combine the improved switched
digital broadband features of the Company's platform with the telephony and
analog video features of established telecommunications systems suppliers.
Continued regulatory uncertainty and the announcement of new products and
technology have resulted in lack of demand for the product. The Company is
maintaining minimal support capability to serve existing customers in the
expectation that the FLX-2500 product will never be widely deployed.
MARKET
GENERAL
The Company's existing products and market focus has been telecommunications
companies that operate or plan to operate Broadband/Fiber to the Curb (BB/FTTC)
systems offering switched digital video and wideband based services or companies
building distribution networks to provide transmission capacity to residential
and business customers. This market is dominated by the large Incumbent Local
Exchange Carriers (ILECs), including the Regional Bell Operating Companies
(RBOCs) and GTE. Prior to the strategic redirection announced in 1998, the
Company devoted substantially all its resources to
6
<PAGE>
BROADBAND TECHNOLOGIES, INC.
ANNUAL REPORT
ITEM 1. BUSINESS (CONTINUED)
MARKET (CONTINUED)
GENERAL (CONTINUED)
configuring its products (the FLX Platform) for, and marketing to, ILECs. ILECs
and facility based Competitive Local Exchange Carriers (CLECs) interested in
trialing and/or deploying a broadband only and/or full service network in
competition with the incumbent communications carriers, are included or are
potentially in the market for the Company's New Platform.
TELEPHONE INDUSTRY EVALUATION AND PURCHASING PROCEDURES
The telephone industry generally evaluates new equipment and software through a
lengthy and multi-tiered process. Evaluation can take as little as a few months
for products that are only a small change from existing products in the
telephone network, and can take as long as several years for complex products
based on completely new technologies. Products that facilitate the deployment of
fiber optic cable in the local distribution network, including the Company's FLX
System and the Company's New Platform currently under development, are in the
latter category. The process may vary to some extent depending on the telephone
company and the product being evaluated, the priorities of the telephone
companies, budgets and the efficiency with which decisions are made about
priorities and new products.
NORTH AMERICA MARKET HISTORY
The Company delivered its First Generation FLX-1100 system to SBC, Inc. for a
video trial in Richardson, Texas and secured its first volume purchase agreement
with Bell Atlantic Network Services. The Company has sold its FLX-1100 system
and related products to other domestic operating companies and overseas
telephony companies for field trial evaluation. This relationship fostered a
supply agreement with Bell Atlantic resulting in several applications in New
Jersey for digital video services using the FLX-1100 system as well as a
distance learning program in New Jersey and small telephony deployments in
Pennsylvania and Virginia.
The Company, in 1997, released to the market its Second Generation FLX product,
the FLX-2500 system. Based on a customer's desire for an integrated full service
platform which can provide both cost effective telephony as well as high speed
data and broadband services, the Company aligned with Lucent Technologies in
North America to incorporate FLX-2500 as part of Lucent's digital loop carrier
system; the integrated system was named Switched Digital Broadband Access System
(SDBAS). SBC, Inc. has deployed SDBAS for telephony services in Richardson,
Texas as part of a 30,000 home field evaluation. Additionally, RCN Corporation
has deployed SDBAS for telephony services in Massachusetts and New Jersey, as
well as Telus for a video and data system trial in Alberta, Canada.
As is discussed above in Business - Products, the FLX-1100 and the FLX-2500 were
positioned to take advantage of telephone companies competing with cable
television companies by offering a wide range of advanced video products over
telephone networks. While these systems continue to be supported, merger
activity and regulatory uncertainty have delayed large-scale deployment of full
service access networks and particularly broadband services in the ILEC market.
The explosive growth of the Internet, growing telecommuting (work at home)
market and development of new standards, technologies and
7
<PAGE>
BROADBAND TECHNOLOGIES, INC.
ANNUAL REPORT
ITEM 1. BUSINESS (CONTINUED)
MARKET (CONTINUED)
NORTH AMERICA MARKET HISTORY (CONTINUED)
products such as xDSL offering higher bandwidth, speed and reliability than
previously available using the existing twisted pair infrastructure to service
the customers communication needs, has delayed or superseded the requirement for
fiber based broadband access solutions, particularly in North America.
Additionally, the failure of the RBOCs to make the anticipated significant
strategic shift toward digital video services in competition with CATV operators
has lowered the demand for bandwidth to a level that xDSL over copper wire can
meet. As a result, the Company does not expect wide deployment of its FLX
product. Since early 1998, the Company has been focusing its resources on
developing the New Platform to compete in the North American digital loop
carrier and DSLAM markets. The Company expects to introduce its New Platform in
early 2000.
INTERNATIONAL MARKET STATUS
Leading network operators and equipment suppliers from around the world are
working to define a global specification for access systems supporting a full
range of narrowband and broadband services. The FLX-2500 system was designed to
operate as a global telecommunications platform. The iFLX system is an
international standards-based broadband system derived from the FLX-2500. This
product generally fits the requirements of the FSAN initiative begun in 1995.
The purpose of the FSAN initiative is to expedite the introduction of full
service networks. The initial participating operating companies include 12 of
the world largest telephone companies and serve more than 300 million access
lines. International operating companies include British Telecom, France
Telecom, Deutsche Telecom, Telefonica, NTT, Telstra and Swisscom. North American
operators, many of which own and/or operate telecommunications networks
overseas, include Bell Canada, Bell South, GTE and SBC. The initiative is
supported by equipment manufacturers including Lucent, BroadBand Technologies,
Bosch, Alcatel, Nortel and Siemens.
The first phase of the initiative from July 1995 to June 1996 identified
technical and economic barriers to broadband access network introduction and
defined a common FSAN architecture and key components. The second phase, from
July 1996 to February 1997, concentrated on devising a common set of
requirements. The third and current phase focuses on completing the
specification and heading toward field trials. To accomplish this activity, two
working groups looking at Fiber to the Home (FITH) and Fiber to the Cabinet
(FITC) were established. The FSAN architecture solution reviews a service
independent access network between service nodes and network terminal devices
based on an ATM passive optical network.
In order to best capitalize on the Company's prior product development and
marketing activities of the iFLX system internationally and the systems
potential to be adapted to meet the FSAN system architecture, the Company
decided to secure a strategic partner to take over further development and
marketing of the iFLX and allow the Company to focus on the high growth loop
access market domestically.
8
<PAGE>
BROADBAND TECHNOLOGIES, INC.
ANNUAL REPORT
ITEM 1. BUSINESS (CONTINUED)
MARKET (CONTINUED)
NEW CORPORATE STRATEGY
In February 1998, BroadBand announced a three-part strategy to improve its
financial position and target emerging communications service needs in the
established high growth loop access equipment market.
The first of the initiatives resulted in signing multiple agreements with Lucent
Technologies for R & D and manufacturing overhead absorption over three years.
Included in these agreements is a settlement agreement and mutual releases by
BroadBand and Lucent of all liabilities arising prior to February 4, 1998. The
settlement agreement terminates the Switched Digital Video (SDV) Supply
Agreement No. LGC-A65-D dated November 15, 1995, as amended July 12, 1996,
relating to development and sale of the joint SDBAS product. While the Company
will continue to supply Lucent its FLX-2500 for existing customers, the Company
is free to market its FLX-2500 product independent of the joint SDBAS product
should the Company determine that new developments will lead to a market
opportunity that warrants the significant investment of resources that would be
required to create and penetrate a commercial market for the FLX-2500.
The second initiative involved the Company's intention to form a strategic
alliance to evolve the iFLX platform (the international version of the FLX-2500)
to meet the emerging FSAN standard. As a result of this initiative, the Company
and Bosch Telecom entered into an Alliance Agreement effective May 1, 1998. This
agreement assigns Bosch certain rights, including iFLX worldwide sales rights
(non-US/Canada), development and manufacturing rights and transfer of personnel
associated with the iFLX product. This agreement provides for ongoing
development and support of the platform and provides the Company financial
remuneration and certain rights to future FSAN products for sale/distribution in
the US and Canada.
The third initiative is the development of the New Platform, a next generation
integrated access platform that is expected to capitalize on the Company's core
competencies in ATM, fiber based broadband access and xDSL as well as
intellectual property it has licensed from Lucent. This new corporate strategy
establishes a foundation for the Company to leverage its technical strengths to
target the high growth converging loop access and data markets while gravitating
toward more independence and less reliance on video demand over an integrated
platform and regulatory reform. The new integrated access platform is initially
targeted toward the ILEC market and facility-based and on-net CLECs who require
not only a cost effective telephony and data platform to compete effectively in
the business and residential markets with the ILECs but also a seamless
migration to provide access for frame relay, ethernet, xDSL services and other
ATM and IP (Internet Protocol) based services. The 1998 loop access market that
the Company's New Platform could address includes the DLC, NGDLC, NB/FITL and
ADSL markets which comprise 67 million access lines or $2.3 billion in annual
revenue. It is estimated that this market segment will increase to $4.0 billion
in annual revenue by 2002 for a 13.3% annual growth rate. The Company's product
will eventually address most of the U.S. loop access market.
9
<PAGE>
BROADBAND TECHNOLOGIES, INC.
ANNUAL REPORT
ITEM 1. BUSINESS (CONTINUED)
COMPETITION
The Company's current market competition is divided between the Broadband/FITL
(Fiber in the Loop), in which the Company's FLX product line is positioned, and
the narrowband and ADSL market which is addressed by the new generation access
product currently under development.
The Broadband/FITL market, which has been slow to develop based on regulatory,
price and impact of mergers among the large ILECs, is dominated primarily by
NextLevel, RelTec, Lucent and DSC (now Alcatel). These competitors offer
broadband capability, although the market is still predominantly deploying Plain
Old Telephone Service (POTS) with plans to utilize Very High Speed Digital
Subscriber Line (VDSL) for broadband lines in the future.
The broadband/FITL market is largely dependent upon incumbent local exchange
carriers' entry into the broadcast video and video on demand markets. Failure of
this market to develop was the principal reason for the Company to redirect its
investment from continued pursuit of this market. The Company's alliance with
Bosch is aimed at improving the FLX product in anticipation of future
development of the North American broadband/FITL market. The Company's FLX-2500,
which is the broadband platform of the Lucent SDBAS product offering, has been
deployed by North American operators in very limited quantities and is being
used to deliver voice, data and video services.
The Company's new product will compete in the Digital Loop Carrier (DLC) and
DSLAM markets. Competitors in the North American DLC market include DSC (now
Alcatel), Lucent, Nortel, Reltec, AFC and others. The North American DSLAM
market competitors consist of Alcatel, Diamond Lane (now Nokia), Copper Mountain
and many other smaller companies.
The Company's New Platform will combine the functionality of these two product
categories into a single platform. This new hybrid access product offering has
been referred to in the telecommunications industry as a Next Generation DLC or
as an Integrated Access Platform/Multiplexer. The new "combination platforms"
are being developed with the belief that demand for bandwidth is and will
continue to grow and that an integrated product platform will provide a more
price competitive solution compared to stand-alone products. Competitors likely
to enter this market are Nortel, Lucent, Alcatel, AFC, Reltec and several other
smaller companies such as Fibex Systems, Mainsail and Cerent Corporation. The
Company's new product will attempt to segment this market and provide a solution
based upon the needs of emerging CLECs and smaller ILECs. The Company's choice
of architecture is intended to provide a competitive product offering to these
market segments.
The segment of the telecommunications industry in which the Company competes is
characterized by fast change, rapid growth and intense competition, not only
among vendors but also increasingly among service providers. These
characteristics provide both positive and negative attributes. Segments of the
market (particularly the large CLECs) are attracted to competitors, which have a
total system solution including switching, transport, access, financing and
turnkey services. Other particular customers want the ability to pick and choose
products and services to meet their particular service or market situations
without being tied to a single large network vendor who may not be as
responsive, or offer the latest technology in a particular product area or do
not need the financing and overhead costs associated with vendor provided
turnkey services.
10
<PAGE>
BROADBAND TECHNOLOGIES, INC.
ANNUAL REPORT
ITEM 1. BUSINESS (CONTINUED)
REGULATIONS
The Company's ability to compete is dependent upon several factors including
product features, innovation, quality, reliability services support, strategic
partnerships and price. Other key criteria for competition will be flexibility,
services revenue generation capability, product packaging, efficient network
management and compatibility with existing network switching, customer financing
capabilities, transport and Customer Premises Equipment (CPE). The Company's new
product is being designed to accommodate a wide variety of deployment options
for network topologies, which have become popular with emerging competitive
carriers. Additionally, the Company is developing an array of transmission and
service interfaces to expand the product applicability in the targeted market
segment. The Company's prior experience in developing access architectures based
on ATM and DSL technologies is key to its new product development. The Company's
prior development activity and knowledge gained from both development and
product in the field experience with advanced access networks is being leveraged
in the new product development. In addition, the Company is investing in the
development and implementation of business enterprise systems for leading edge
order fulfillment and after sales service and support systems.
A competing concept to the Company's new hybrid access platform is a full
conversion of voice traffic to IP based access systems. Development of voice
over IP systems is occurring. The Company's new product can accommodate a
transition to voice over IP but is not optimized for an all IP solution. The
Company's new product supports a transition from traditional communications
access networks to cell-based networks and the co-existence of circuit and
cell-based services. Potential competitors pursuing cell-based network access
solutions include, but are not limited to, Cisco Systems.
GOVERNMENT REGULATIONS
Telephone companies are subject to extensive regulations. Both the federal and
state govements regulate the provision of basic and other telecommunications
services. The 1996 Telecommunications Reform Act was intended to liberalize the
regulations that govern the telephone companies, which constitute the Company's
primary market. In addition, this law permits the entry of other network
operators into the telecommunications marketplace. The expectation of increased
competition for local residential narrowband and broadband services has failed
to occur, resulting in, along with other factors, delayed deployment of the
Company's FLX-2500 product. Some progress has been made in providing a
regulatory environment that encourages telephone companies to modernize their
networks. The FCC has recognized that current rules are discouraging
modernization and are now proposing changed rules to improve the situation.
Progress has been slow and the Company does not expect change to occur in the
near term. Prior to using the Company's FLX-2500 product to provide video
programming in their service territories, telephone companies are required
either to obtain cable television franchises from the relevant local governments
or comply with federal statutory and regulatory requirements governing "open
video system" operators. Telephone companies offer data services today and
require no special government approval to deliver such services other than the
normal state and federal regulations for basic and other telecommunications
services. Therefore, the Company expects regulatory barriers to market demand
for the Company's New Platform will be lower than was the case with the
Company's FLX Platform.
11
<PAGE>
BROADBAND TECHNOLOGIES, INC.
ANNUAL REPORT
ITEM 1. BUSINESS (CONTINUED)
RESEARCH AND PRODUCT DEVELOPMENT
As discussed earlier, the Company's strategy entails three development efforts.
The first initiative is a Research and Development Agreement (the "R & D
Agreement") with Lucent, for the Company to develop products for Lucent's new
AnyMedia digital loop carrier product. Under the R & D Agreement, Lucent has
committed to pay the Company at least $21 million over a three year period for
specific development projects completed by the Company. The Company and Lucent
will co-own the technology developed by the Company, subject to certain
restrictions on use by the Company. The second initiative involves a partnership
of the Company and Bosch Telecom to develop a global new generation access
product that meets an emerging global access standard known as FSAN (Full
Service Access Network). The FSAN architecture is a high bandwidth, asynchronous
transmission, and passive optical network similar to the FLX-2500 architecture,
which will be used as the foundation for the new product. Last, the Company is
developing its own advanced access platform which will combine the Company's
core technologies, ATM, xDSL and Optics, with technology gained through the
Company's AnyMedia development for Lucent and technology license agreements
discussed earlier. The new generation access product is being developed to be
complementary to the AnyMedia product line and is intended to position the
Company for more near-term revenue opportunity based on current telephone
business models once the product is completed. This new product approach
represents a significant change from prior efforts, which were based on the
assumption that telephone companies would enter the video business using an
integrated platform. The AnyMedia, FSAN and the Company's new access platform
products are in the design process with market introductions expected within 12
months for the AnyMedia and internally developed access platform, and 24 months
or more for the FSAN platform. The Company's access platform development is on
schedule and early milestones have been successfully achieved. Early product
prototypes are scheduled for mid 1999. There can be no assurances as to the
success of these products or the timely achievement of the Company's development
schedule. If the development projects underway for Lucent's AnyMedia product are
delayed or significant development milestones are not reached, the Company would
not receive payments under the R & D Agreements. (See Products Section.)
In 1997, the Company completed the development of the FLX-2500, a
second-generation Fiber Loop Access (FLX) System, although there were
substantial development delays for the FLX-2500. Units have been delivered for
system integration and testing, and are being trialed at SBC and RCN for
telephony services and Telus in Canada for data services. The Company will
support the FLX-2500 product with sustaining engineering resources but has
reallocated most of its engineering talent to support AnyMedia product
development for Lucent and the development of its own advanced access platform,
as well as analyzing the impact of the FSAN global access effort.
The Company's products are expected to continue to evolve because (1) advances
in technology and applications of its technology will result in cost and
reliability improvements; (2) constant evaluation and implementation of customer
application requirements in the form of new features and feature enhancements;
and (3) development of spin-off products to support the SDB broadband network
deployment or deployment of the new products that could provide additional
sources of revenue. To further penetrate the market and expand into other areas
of telecommunications, the Company engages in a continuing program of research
and product development. The success of future development efforts will depend
on, among other factors, the Company's ability to attract and retain qualified
design and
12
<PAGE>
BROADBAND TECHNOLOGIES, INC.
ANNUAL REPORT
ITEM 1. BUSINESS (CONTINUED)
RESEARCH AND PRODUCT DEVELOPMENT (CONTINUED)
development personnel who are in great demand and limited supply. There can be
no assurance as to the success of the Company's research and development effort,
nor the timing of such effort leading to products being available for customer
shipments.
The Company's research and product development costs charged to expense were
approximately $18.7 million, $28.1 million, and $22.8 million for the years
ended December 31, 1998, 1997, and 1996, respectively. Approximately $1.5
million of AnyMedia research and development costs were charged to cost of sales
in 1998. No software development costs were capitalized in 1998, 1997, or 1996.
SALES, MARKETING AND CUSTOMER SUPPORT
As a result of implementation of the Company's strategic initiatives, the sales
and marketing organization has been realigned. As part of the new agreement with
Lucent, the Company provides marketing and customer services support to Lucent
for SDBAS to fulfill existing customer requirements. Additionally, the Company's
marketing is focused on evaluation and management of product synergies between
the Lucent AnyMedia system and the Company's new generation access product under
development. The Company will continue to support the Bosch FSAN initiative as
part of the recent Alliance Agreement. As both Lucent and Bosch have direct
sales responsibility within their target markets for the Company's existing
products, the Company's direct sales force requirements have been diminished in
the near term and the sales organization has been realigned appropriately. The
Company's sales and marketing resources maintain contact with the existing
customer base as well as key personnel in new companies in the CLEC markets and
potential ILEC customers relating to making and implementing business decisions,
technical and operational decisions and purchasing, evaluating and deploying
loop access systems.
The Company's sales, marketing and customer services personnel have substantial
prior experience marketing products to the RBOCs, GTE, Sprint, other ILECs, CLEC
and IXC (Interexchange Carrier) market places. The Company believes that the
knowledge within these organizations about the personnel, business plans and
operating procedures of the ILEC, CLEC and IXC companies are important factors
in the Company's sales and marketing efforts. Retaining key marketing personnel
will be a substantial challenge while the Company lacks a marketable product.
The Company's customer services organization's primary responsibility is to
provide support to the customers in engineering, installing, maintaining and
operating the Company's existing products. This involves close coordination with
technical and operational personnel of the telephone companies.
Customer support personnel also assist the Company's marketing and research and
development groups by conveying to both groups the needs of the telephone
companies that have been communicated by telephone company operations personnel.
In addition, customer support personnel provide documentation, training and
technical assistance to the Company's customers.
MANUFACTURING AND SUPPLIES
The Company depends on third party suppliers for the continued availability of
components, materials, and services including most printed circuit board
assemblies. In large part, final assembly and testing are
13
<PAGE>
BROADBAND TECHNOLOGIES, INC.
ANNUAL REPORT
ITEM 1. BUSINESS (CONTINUED)
MANUFACTURING AND SUPPLIES (CONTINUED)
performed by the Company's personnel at the Company's manufacturing facility.
The Company tests its products extensively prior to shipment to the customer,
using automated testing equipment and processes that incorporate proprietary
procedures. The Company has the in-house capability to test all of its
components and products for compliance to design specifications, with emphasis
on simulation of electrical and optical signals as they relate to the commercial
market place. Furthermore, the Company possesses substantial knowledge,
equipment and processes for reliability, testing a broad range of thermal
variation as the products may be subjected to from time to time.
Many of the components used in the Company's products are standard parts
available from multiple sources. However, certain electronic, mechanical
electro-optic components used in the Company's products are currently primarily
available only from single sources, and other components are available from only
a limited number of sources. The Company continues to actively review its
supplier base to meet and upgrade its technological and service requirements.
New suppliers are carefully evaluated; however, some may prove to be unreliable
sources of supply.
To date, the Company has experienced minimal supply problems, all of which have
been managed positively, although the Company has never sold sufficient volumes
of products to require large volumes of parts or materials. The Company expects
to continue, for the foreseeable future, its strategy of having its products'
subsystems and components manufactured by third parties.
On February 4, 1998 the Company and Lucent executed a Manufacturing Agreement,
an agreement for Lucent to act as an Original Equipment Manufacturer (OEM)
supplier to the Company and an agreement for the Company to act as an OEM to
Lucent. Neither Lucent nor the Company has identified any products to be
manufactured under their respective OEM Agreements. Furthermore, there is no
firm commitment by either party to any volume, although both parties continue to
evaluate the feasibility of the arrangement from time to time. Commercial
considerations, not limited to price, quality and competition, shall govern
these decisions.
The Manufacturing Agreement is the only agreement between the Company and Lucent
that contains guaranteed volumes or cash payments in lieu of volume. The
Manufacturing Agreement provides the Company with contract manufacturing of
Lucent products to absorb $18 million of the cost to the Company of maintaining
its manufacturing operations for three years. If Lucent fails to provide orders
for products in sufficient volume to absorb $18 million, Lucent will pay the
Company the amount that is not absorbed by Lucent's orders. In the second half
of 1998, the Company and Lucent identified a Lucent designed product for the
Company to manufacture. The Company has performed a preliminary
manufacturability review, and pricing quotation and contractual negotiations are
underway between the parties. There is no firm commitment at this time from
Lucent to award this contract to the Company and there is no guarantee, once
awarded, as to the longevity, volume, or financial impact to the Company.
The Company continues to investigate other partners to increase utilization of
its manufacturing resources and supplier base, although at this time no
guarantees of volume exist from any such business relationships.
14
<PAGE>
BROADBAND TECHNOLOGIES, INC.
ANNUAL REPORT
ITEM 1. BUSINESS (CONTINUED)
BACKLOG
The Company's backlog includes sales orders received by the Company that have a
scheduled delivery date prior to December 31, 1999. The aggregate sales price of
orders received and included in backlog was approximately $.3 million and $.9
million on December 31, 1998 and December 31, 1997, respectively. The decrease
in backlog is due to the change in strategy due to regulatory environments which
resulted in low demand for the product, as well as to customer delays in moving
into the video business, the Company's current product development cycle for its
new product to be introduced in early 2000 and Lucent's transition to its
AnyMedia product. The Company believes that the orders included in the backlog
are firm orders and will be shipped prior to December 31, 1999. However, some
orders may be canceled by the customer without penalty where management believes
it is in the Company's best interest to do so.
PATENTS AND PROTECTION OF OTHER PROPRIETARY INFORMATION
The Company has been awarded patents in the United States. Additional patent
applications are pending in the United States and certain foreign countries.
There can be no assurance that any of these applications will result in the
award of a patent or that the Company would be successful in defending its
patent rights in any subsequent infringement actions.
In 1996, as competitors announced competing products, the Company began to focus
greater attention on assessing its intellectual property. The Company is
continuing such efforts and intends to protect its intellectual property in a
manner that maximizes its business opportunity. The Company believes that its
patents provide a competitive advantage over other providers of switched digital
broadband products.
There can be no assurance, however, that the patents of the Company will be
enforceable or that competitors will not be able to develop products that do not
infringe upon the patents of the Company. The Company, on March 18, 1997,
brought an infringement action against General Instrument Corporation. On
March 19, 1997, Next Level Communications, a subsidiary of General Instrument
Corporation, commenced a legal action against the Company in the U.S. District
Court for the Northern District of California. (Next Level Communications v.
BroadBand Technologies, Inc., Civil Action No. C-97-0960), seeking, among other
things, to have the Company's U.S. Patent No. 5,457,560 ("the 560 patent")
declared invalid and unenforceable, alleging antitrust violations based upon the
suit against General Instrument, alleging that the Company is infringing two
patents of General Instrument Corporation relating to the encoding and decoding
of digital video and seeking an injunction against further infringement. The
Company on February 18, 1998 counterclaimed against Next Level Communications
for infringement of the 560 patent.
On April 29, 1998, the Company, Next Level Communications and General Instrument
Corporation announced they had ended their patent litigation. As part of the
settlement, both complaints were dismissed with prejudice. As part of the
settlement, Next Level agreed to pay the Company $5 million and the Company and
Next Level have entered into a perpetual cross license of patents applied for,
issued currently, or issued during the next five years. General Instruments also
agreed to grant the Company a covenant not to sue on all General Instruments
patents applied for, currently issued, or issued during the next five years.
15
<PAGE>
BROADBAND TECHNOLOGIES, INC.
ANNUAL REPORT
ITEM 1. BUSINESS (CONTINUED)
PATENTS AND PROTECTION OF OTHER PROPRIETARY INFORMATION (CONTINUED)
The Company's patent portfolio covers the basic technology for implementing
switched digital broadband systems in the context of a fiber to the curb
architecture. The issued patents cover systems using a main site (HDT) and a
remote site (ONU) interconnected by fiber, providing downstream digital
broadband and video information to multiple subscriber locations in response to
upstream signals requesting a given channel. An approach for multicasting one
channel to multiple subscribers is also covered by a patent that was recently
issued to the Company as U.S. Patent No. 5,619,498.
The Company transferred to Bosch ownership rights to its international patents
and international patent applications, co-ownership rights to its US and
Canadian patents, and co-ownership rights to other intellectual property used in
the Company's iFLX(TM) product, which is the international version of its
FLX-2500 product. In return for the transfer of intellectual property rights for
its iFLX(TM) product, Bosch paid the Company $10 million and agreed to pay an
additional $2 million upon the earlier of completion of Bosch's first FSAN
product or August 31, 1999, whichever occurs first.
The Company is continuing to pursue patent protection for its intellectual
property. In the course of developing its advanced access platform, several
potential patent applications have been identified and are being pursued.
Because of the existence of a large number of patents in the telecommunications
field and the rapid rate of issuance of new patents, some components of the
Company's products may be covered by existing patents, without the Company's
knowledge. If so, the Company believes that, based upon industry practices,
necessary licenses or rights under such patents may be obtained on terms that
would not have a materially adverse financial affect on the Company.
The Company has received Notice of Publication for registration for "BBT," "FLX"
and "BroadBand Technologies" as trademarks for use in the United States. In
addition to the patent protection described above, the Company protects its
software through contractual arrangements with its customers and through
copyright protection procedures.
EMPLOYEES
As of December 31, 1998, the Company had a total of 234 employees. The Company
is not a party to any collective bargaining agreement.
ENVIRONMENTAL AFFAIRS
The Company's manufacturing operations are subject to numerous federal, state,
and local laws and regulations designed to protect the environment. There are no
administrative or judicial proceedings pending or threatened against the Company
alleging violations of such environmental laws or regulations. Compliance with
these laws and regulations has not had, and is not expected to have, a material
effect upon the capital expenditures, earnings, and competitive position of the
Company.
16
<PAGE>
BROADBAND TECHNOLOGIES, INC.
ANNUAL REPORT
ITEM 1. BUSINESS (CONTINUED)
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 a new generation access
product, the New Platform, that can compete in the market on price,
architecture, features and other factors. Development of such a new generation
access 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 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.
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 affect 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 FLX-2500 product, 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
17
<PAGE>
BROADBAND TECHNOLOGIES, INC.
ANNUAL REPORT
ITEM 1. BUSINESS (CONTINUED)
RISK FACTORS (CONTINUED)
BOSCH RELATIONSHIP (CONTINUED)
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.
LUCENT RELATIONSHIP
Although management believes the new relationship with Lucent has provided
certain revenue opportunities to 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. There can be no
assurances the new relationship with Lucent will not also 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 affect 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.
CONVERTIBLE SUBORDINATED DEBENTURES
In May 1996, the Company sold $115 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 affect 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 currently negotiating with representatives of a majority of the
convertible notes to restructure the debt. Although progress has been made on
defining the issues related to the restructuring of the subordinated notes, to
date the Company and the noteholders have not been able to agree upon 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 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.
18
<PAGE>
BROADBAND TECHNOLOGIES, INC.
ANNUAL REPORT
ITEM 1. BUSINESS (CONTINUED)
RISK FACTORS (CONTINUED)
CONVERTIBLE SUBORDINATED DEBENTURES (CONTINUED)
Failure to implement a debt restructuring plan could result in customers,
partners, employees, and vendors questioning the ability of the Company to meet
its commitments and its ability to implement its business plan, which would have
a material adverse affect on the Company. In addition, if the noteholders and
the Company fail to agree upon a restructuring plan, the noteholders may seek
through legal action or other means to prevent the Company from expending
further resources to implement its business plan.
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
(OTCBB). 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
makes resales of stock by employees more difficult. The foregoing could have a
material adverse affect 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 affect 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 these risks have had and
are likely to have a material adverse affect 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.
19
<PAGE>
BROADBAND TECHNOLOGIES, INC.
ANNUAL REPORT
ITEM 1. BUSINESS (CONTINUED)
RISK FACTORS (CONTINUED)
SALES OF THE SDBAS PRODUCT
Sales of the joint BroadBand/Lucent SDBAS product in the United States and
Canada are substantially dependent on the competitiveness and performance 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. 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 will support the FLX-2500 product with sustaining
engineering resources but has reallocated most of its engineering talent to
support AnyMedia product development for Lucent and the development of its own
advanced access platform, as well as analyzing the impact of the FSAN global
access effort.
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 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, the Company is not required to market its planned new
generation access product through Lucent.
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 the R & D development contracts,
contract manufacturing and potential OEM revenues from the new agreements with
Lucent, the Company anticipates low product sales volume until its new
generation access product is introduced into the market in early 2000.
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 generation access product 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 effort.
Failure of the Company to meet its development goals will have a material
adverse affect on the Company. Notwithstanding successful development by the
Company, competitors already are selling products to customers in the market
targeted by the Company and competitors may develop new competing technology and
products that are more attractive to customers than are the technologies and
20
<PAGE>
BROADBAND TECHNOLOGIES, INC.
ANNUAL REPORT
ITEM 1. BUSINESS (CONTINUED)
RISK FACTORS (CONTINUED)
OTHER FACTORS (CONTINUED)
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 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 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 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 generation access products.
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 affect 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.
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 that may
substantially precede recognition of associated revenues. Moreover, in return
for larger, longer-term purchase commitments, customers often demand more
stringent acceptance criteria, which can also cause revenue recognition delays
and potential penalties for non-performance. For example, customers have
requested that products be priced based on volume estimates of customers' future
requirements, but the failure of such customers to take delivery of product
comparable to volume anticipated could result in negative margins on product
sales. Certain multi-year contracts may relate to new technologies, which may
not have been previously deployed on a large-scale commercial basis. The Company
may incur significant initial cost overruns and losses on such contracts, which
would be recognized in the quarter in which they became ascertainable. Future
estimates on such contracts are revised periodically over the lives of the
contracts, and such revisions can have a significant impact on reported earnings
in any one quarter.
The Company competes against many larger companies that have significantly
greater resources than the Company. The Company, which has an accumulated
deficit of approximately $175.8 million as of
21
<PAGE>
BROADBAND TECHNOLOGIES, INC.
ANNUAL REPORT
ITEM 1. BUSINESS (CONTINUED)
RISK FACTORS (CONTINUED)
OTHER FACTORS (CONTINUED)
December 31, 1998, 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 is dependent upon Lucent for greater than 80% 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 affect
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 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
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 prepared a formal plan that
mitigates the exposure. The Company anticipates that 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 affect on
the Company's results of operations and financial condition. However, there can
be no assurance that there will not be a delay in, or increased costs associated
with, the implementation of corrections as the formal plan is implemented.
Failure to implement such changes could have an adverse affect on future results
of operations. The Company has sought confirmation from its suppliers and
customers that Year 2000 problems will not disrupt their relationships with the
Company. Many vendors have not provided the Company with adequate assurances
that their Year 2000 problems will not delay shipments to the Company. The
Company does not know whether the inability of vendors to provide assurance
results from real problems of vendors, the desire of vendors not to make
representations that may later subject them to liability exposure or other
reasons. Therefore, there can be no assurance that the Year 2000 problems of
vendors will not have an adverse affect on the Company.
22
<PAGE>
BROADBAND TECHNOLOGIES, INC.
ANNUAL REPORT
ITEM 1. BUSINESS (CONTINUED)
RISK FACTORS (CONTINUED)
YEAR 2000 (CONTINUED)
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 or higher
operating expenses by potential customers resulting from their Year 2000
problems.
ITEM 2. PROPERTIES
The Company leases approximately 97,000 square feet in an office park located
outside of Research Triangle Park, North Carolina. Substantially all of the
business operations of the Company are conducted at this facility. The lease had
an original term, which commenced in April 1993 and terminated in December 1998,
with two three-year renewal options. In June 1998, the Company entered into a
five year noncancelable sublease agreement for 19,300 square feet of its office
space with Bosch. The Company renewed the facility lease on December 28, 1998
for a five year term ending in December 2003. The Company believes that the
above described facilities are suitable and adequate to meet the Company's
requirements.
ITEM 3. LEGAL PROCEEDINGS
The Company is not currently involved in any material litigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of 1998.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDERS
MATTERS
The Company's Common Stock, $.01 par value, is traded in the over-the-counter
market and is quoted on the Over The Counter Bulletin Board under the symbol
"BBTK." Prior to February 12, 1999, the Company was quoted on the Nasdaq
National Market System, also under the symbol "BBTK." The following tables set
forth the high and low daily bid prices for each quarter during the past two
fiscal years as reported by Nasdaq. Such quotations reflect inter-dealer prices
without markup, markdown or commissions and may not necessarily represent actual
transactions.
23
<PAGE>
BROADBAND TECHNOLOGIES, INC.
ANNUAL REPORT
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDERS
MATTERS (CONTINUED)
1998 LOW HIGH
- ---- --- ----
First Quarter $3.75 $8.25
Second Quarter 4.12 9.12
Third Quarter 2.12 5.18
Fourth Quarter 1.19 4.94
1997 LOW HIGH
- ---- --- ----
First Quarter $8.75 $17.75
Second Quarter 6.63 11.00
Third Quarter 7.37 11.50
Fourth Quarter 3.50 8.75
No cash dividends have been declared or paid by the Company, and the Company has
no present intention of declaring a cash dividend.
As of March 26, 1999, there were approximately 8,000 holders of record and
beneficiary shareholders of the Company's Common Stock.
ITEM 6. SELECTED FINANCIAL DATA
The following is a summary of certain condensed statement of income and balance
sheet information of the Company for the five years ended December 31, 1998.
This summary should be read in conjunction with the financial statements and
notes thereto appearing elsewhere in this report. All amounts, except per share
amounts, are presented in thousands. No cash dividends have been declared or
paid in any of the years presented.
24
<PAGE>
BROADBAND TECHNOLOGIES, INC.
ANNUAL REPORT
ITEM 6. SELECTED FINANCIAL DATA (CONTINUED)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Statement of Income Data
Revenues
Product sales & contract revenues $8,276 $15,012 $23,144 $22,705 $27,012
Services revenue 3,341 -- -- -- --
Nonrefundable prepayment revenue 10,700 -- -- -- --
Technology transfer & license agreement 17,000 -- -- -- --
---------------------------------------------------------------------
Net Revenues $39,317 $15,012 $23,144 $22,705 $27,012
Costs & Expenses
Cost of sales $7,105 $12,297 $21,744 $23,917 $27,908
Research and development 18,747 28,062 22,785 19,434 15,422
Selling, general & administrative 14,623 13,725 11,648 11,627 11,284
Restructuring costs 2,578 -- -- -- --
Performance fees & obsolete equipment -- 1,841 -- -- --
---------------------------------------------------------------------
Total Expenses $43,053 $55,925 $56,177 $54,978 $54,614
Operating Loss ($3,736) (40,913) (33,033) (32,273) (27,602)
Other Income(Expense), Net 975 1,092 2,014 4,371 3,432
---------------------------------------------------------------------
Net Loss ($2,761) ($39,821) ($31,019) ($27,902) ($24,170)
=====================================================================
Average Common Outstanding Shares 13,411 13,278 13,200 13,092 13,030
=====================================================================
Loss Per Share ($0.21) ($3.00) ($2.35) ($2.13) ($1.85)
=====================================================================
Balance Sheet Data (Dec. 31)
Cash, Cash Equivalents & Investments, including
restricted cash $106,030 $117,152 $148,758 $65,351 $80,290
Total Assets 124,608 135,918 171,347 85,958 96,371
Long-term debt $115,000 115,000 115,000 43 331
Total Stockholders' (Deficit) Equity ($12,878) ($10,461) $28,901 $58,868 $79,379
=====================================================================
</TABLE>
25
<PAGE>
BROADBAND TECHNOLOGIES, INC.
ANNUAL REPORT
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
REVENUES
Net revenues in 1998 were $39.3 million, compared to $15.0 million in 1997 and
$23.1 million in 1996. Revenues for 1998 reflect the recognition of $27.7
million of one-time items including: a) $13.0 million from nonrefundable
prepayments received in prior years, offset by $2.3 million of certain potential
contractual obligations incurred as a result of the February 4, 1998 agreement
with Lucent Technologies; b) $5.0 million of revenue associated with the
settlement of the patent litigation and perpetual cross license agreement with
Next Level Communications; and c) $12.0 million for cross transfer of
intellectual property relating to the alliance with Bosch Telecom GmbH and Bosch
Telecom, Inc. Revenues for 1998 also include $3.3 million of services revenue
from development projects from the new agreements with Lucent Technologies. (See
Recent Developments - Lucent R & D Projects and Bosch Relationship)
Product sales and contract revenues from the FLX-2500 platform and related
software plus some shipments from the Company's First Generation product were
$8.3 million for 1998, compared to $15.0 million in 1997 and $23.1 million in
1996. The decline in product sales and contract revenues reflect the reduced
demand of the FLX-2500, which is dependent upon sales of Lucent's Switched
Digital Broadband Access System (SDBAS). Lucent's new AnyMedia product will
provide Lucent's customers with an alternative to SDBAS. The demand for the
FLX-2500 product, as well as the Company's first generation product, the
FLX-1100, has been adversely affected due to the long evaluation and
implementation process typical of major communication infrastructure changes,
regulatory uncertainties and other factors. In light of the foregoing, the
Company has 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. (See Item 1, Business: Recent Developments and Risk Factors.)
COST OF REVENUES AND GROSS MARGIN
Cost of sales for 1998 were $7.1 million, compared to $12.3 million in 1997 and
$21.7 million in 1996. Gross margin as a percent of revenues was 39% in 1998,
excluding the $27.7 million one-time revenues, compared to 18% in 1997 and 6% in
1996. The improved gross margin for 1998 reflects the services revenue
attributed to the Lucent R & D and Manufacturing Agreements and reductions to
warranty reserves no longer required as a result of the Company's new corporate
strategy. The gross margin improvement was partially offset by the establishment
of an inventory reserve for most of the FLX-2500 inventory related to Lucent's
SDBAS product. The improved gross margin for 1997 is a result of a change in
product mix and higher fee revenues as compared to the prior years.
The Company has also forward priced certain contracts in anticipation of large
volumes, which may or may not occur. Consequently, the Company expects that
price competition could have an adverse impact on the Company's margins. The
Company's ability to continue to meet its cost reduction goals on current and
future products could have a material affect on the Company's profitability. The
Company's margins are expected to fluctuate due to the uncertainty of shipments
of the existing and new products under development, as well as a higher mix of
services revenue from the Lucent Agreements. (See Item 1, Business: Risk
Factors.)
26
<PAGE>
BROADBAND TECHNOLOGIES, INC.
ANNUAL REPORT
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses for 1998 were $18.8 million, compared to $28.1
million in 1997 and $22.8 million in 1996. The decrease in 1998 was due
primarily to the cost savings associated with the transfer of 44 engineering
employees as part of the Bosch alliance consummated during the second quarter of
1998. (See Item 1 - Business.) 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 favorably impacted research and development expenses. Increases in
research and development expenses for 1997 and 1996 were primarily the result of
additional resources engaged in the development of the hardware and software for
the Company's FLX-2500 platform, and enhancements and support for its FLX-1100
product. These resources have since been redirected in accordance with the
Company's new product development.
The Company anticipates that research and development expenses will increase in
1999 as development of its new generation access product continues, and those
expenses will likely be pressured by a continued tight labor market in the
Research Triangle Park area of North Carolina and extremely competitive
engineering salaries for its development staff. (See Item 1, Business: Recent
Developments and Risk Factors.)
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses for 1998 were $14.6 million,
compared to $13.7 million in 1997 and $11.6 million in 1996. These expenses
include support of service, sales, marketing resources, legal expenses, and
executive severance costs as well as administrative requirements. The increase
in 1998 was due primarily to increased legal expenses 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, lower selling expenses partially offset this increase resulting from
reduced sales activity by the Company of the Company's FLX-2500 in connection
with Lucent's SDBAS product as part of the Company's new agreement with Lucent.
The increase in expenses in 1997 over 1996 resulted from patent litigation
costs, consulting and legal fees for the Lucent agreements, as well as
additional compensation expenses associated with the Company's appointment of a
new Chief Executive Officer effective April 1, 1997.
Selling expenses are expected to increase in the second half of 1999 as the
Company reestablishes a sales force for its New Platform access product.
Additionally, the Company expects to incur a significant increase in legal and
financial advisory fees in connection with its current efforts to restructure
the $115 million 5% convertible subordinated notes due in May 2001, whether or
not its efforts are successful. (See Item 1, Business: Recent Developments and
Risk Factors.)
RESTRUCTURING COSTS
The Company determined in 1998 that a restructuring charge of $2.6 million was
required to cover the cost of implementing its new strategy. This amount
includes charges of $0.7 million for FLX-2500 inventory reserves, a write-off of
$0.6 million for lab and computer equipment, as well as $1.2 million
27
<PAGE>
BROADBAND TECHNOLOGIES, INC.
ANNUAL REPORT
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
RESTRUCTURING COSTS (CONTINUED)
for employee transfer and severance expenses and $0.1 million of other costs.
(See Item 1, Business: Recent Developments.)
PERFORMANCE FEES AND OBSOLETE EQUIPMENT
In 1997, 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. Additionally, in 1997, the Company recorded a one-time charge of
approximately $.9 million for the write-off of obsolete test equipment.
OTHER INCOME AND (EXPENSE)
The other income (expense) consists primarily of net interest income earned on
cash, cash equivalents and both short and long-term investment balances during
1998 of $1.0 million, compared to $1.1 million and $2.0 million in 1997 and
1996, respectively. Included in the 1998 balance of $1.0 million is $0.7 million
of other income from the gain on the sale of equipment resulting from the
closing of the Bosch Strategic Alliance. Excluding this gain, the actual net
interest income actually decreased from 1997 due to lower available cash
balances and lower short-term and long-term interest rates. The increase in
interest income for 1997 as compared to 1996 was the result of higher average
cash balances than the prior year. The increase in interest expense for 1998 and
1997, as compared to 1996, was the result of interest expense on the convertible
note offering in May 1996. The Company expects interest expense to begin to
exceed interest income in future periods as the Company's cash balance is
reduced. A restructuring of the Company's $115 million of convertible notes
would also be likely to result in a substantial increase in interest expense.
(See Item 1, Business: Recent Developments.)
NET LOSS
The net loss for 1998 was $2.8 million or $0.21 per share, compared to a net
loss of $39.8 million or $3.00 per share in 1997 and $31.0 million or $2.35 per
share in 1996. The improvement in the 1998 net loss over 1997 was primarily due
to the $27.7 million of one-time revenue and the warranty reserve reduction,
which were partially offset by the FLX-2500 inventory reserve, and the
restructuring charge. Exclusion of these items would have resulted in a net loss
of $31.5 million or $2.35 per share for 1998, compared to $37.9 million or $2.86
per share for 1997, which included $1.9 million in performance fees and obsolete
equipment. On an adjusted basis, the 1998 reduced loss is due primarily to
reduced research and development expenses. The 1997 net loss increased from
1996, due primarily to lower product sales and increased research and
development expenses, as well as selling, general and administrative expenses.
The Company's operating results continue to reflect an unfavorable regulatory
environment for its current product and the development stage of the Company's
New Platform access product. The Company has completed only the second 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.
28
<PAGE>
BROADBAND TECHNOLOGIES, INC.
ANNUAL REPORT
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES
Total cash and cash equivalents, short-term investments, and long-term
investments decreased by $11.1 million during 1998 to $106.0 million at the end
of 1998, compared to $117.2 million at the end of 1997 and $148.8 million at the
end of 1996. The 1998 decrease was due primarily to net cash of $8.9 million
used in operations and $2.4 million for acquisitions of equipment and software.
The 1997 decrease was due primarily to $28.0 million of cash used for operations
and $3.9 million used for acquisitions of equipment and software.
The Company had total restricted cash, included in the above amounts, of $11.4
million at the end of 1998, $13.0 million at the end of 1997 and $0.5 million at
the end of 1996. The 1998 restricted cash balance consists of $0.2 million for a
corporate procurement card, $4.1 million associated with executive compensation
for its President and CEO, David E. Orr, and $7.1 million associated with the
equity put option agreement entered into April 1997. The details of these
restricted cash balances are more fully described in Note 4 (Employment
Agreement and Restricted Cash) of the audited financial statements. The 1997
restricted cash balance consisted of a $3.0 million outstanding letter of
credit, $4.1 million associated with executive compensation of the Company's
President and CEO, and $6.0 million associated with the equity put option.
As more fully described in Note 4 (Employment Agreement and Restricted Cash) of
the audited financial statements, the $7.1 million associated with the equity
put option agreement will fluctuate based upon the market value of the stock.
The restricted cash of $7.1 million is based upon a stock price of $2.94 at
December 31, 1998 and in the event the stock price declines further below the
put option price of $9.11, the Company is required to reflect the differential
as restricted cash on its balance sheet. On April 15, 1999, the expiration date
of the put option, the Company will be obligated to pay the put option holder
the difference between the $9.11 strike price and the lower market price at that
time. The Company's maximum obligation would not exceed $9.1 million, assuming
the Company purchased and took delivery of the 1.0 million shares hedged under
the option agreement; however, if the Company decides not take delivery of those
shares and the holder of the put option sells the shares it holds, the
obligation could be less than $9.1 million. The delisting of the Company's stock
from Nasdaq is likely to have a negative impact on the stock price and thus to
increase the Company's obligation under the equity put option due to lower
market prices and lower trading volume.
Management expects that cash and cash equivalents, short-term investments at
December 31, 1998 and cash generated from the sales of the Company's products
and services revenue from the Lucent agreements will be adequate to fund
operating requirements and property and equipment expenditures in 1999 and 2000,
based on current projections of operations.
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. Additional details on the convertible subordinated
29
<PAGE>
BROADBAND TECHNOLOGIES, INC.
ANNUAL REPORT
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
notes is more fully described in Note 8 (Long-Term Debt) of the audited
financial statements. The Company is current on all interest payments and
anticipates making such payments in the future.
The Company expects, however, that additional equity and/or debt financing will
be required to repay the $115 million of notes when they become due. Failure to
pay principal and interest when due would have a material adverse affect 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 currently negotiating with representatives of a majority of the
convertible notes to restructure the debt. Although progress has been made on
defining the issues related to the restructuring of the subordinated notes, to
date the Company and the noteholders have not been able to agree upon 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 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.
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.
YEAR 2000
STATE OF READINESS
The Company has adopted a Year 2000 compliance plan and formed a team for the
task of identifying and resolving any Year 2000 issues that may affect its
business. The Company's compliance plan has four phases: inventory, assessment,
remediation and testing. The Company has completed an inventory of all its
computer systems, computer related equipment and products. The Company has
conducted a structured review of its products and internal systems with regard
to Year 2000 compliance. The Company has designed and tested the field-deployed
versions of its products to be Year 2000 compliant. With respect to its internal
systems, the Company has completed an assessment and is taking steps to prepare
its systems for the Year 2000 date change. The Company expects to substantially
complete these efforts by the end of the first quarter of 1999, with extensive
testing to continue through 1999.
In addition, the Company faces risks to the extent that suppliers of products,
service and systems purchased by the Company and others with whom the Company
transacts business do not have business systems or products that comply with the
Year 2000 requirements. The Company is in the process of obtaining assurances
from key suppliers with regard to Year 2000 compliance of their products and
services to the Company. To date, adequate assurances have not been obtained
from many vendors. If such vendors cannot provide the Company with products,
services or systems that are Year 2000
30
<PAGE>
BROADBAND TECHNOLOGIES, INC.
ANNUAL REPORT
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
YEAR 2000 (CONTINUED)
STATE OF READINESS (CONTINUED)
compliant in a timely manner, the Company's operating results could be
materially adversely affected. (See Item 1 - Business: Risk Factors.)
COSTS
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 correction of the Company's products that have been
deployed, as well as internal systems. Although the Company does not believe
that it will incur any material costs or experience material disruptions in its
business associated with modifications of internal systems or products for the
Year 2000, there can be no assurances that the Company will not experience
serious unanticipated negative consequences and/or material costs caused by
undetected errors or defects in the technology used in its internal systems,
which are composed of third-party software and third-party hardware that
contains embedded software.
YEAR 2000 RISKS
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
non-compliance of third parties with whom the Company interacts. Furthermore,
than can be no assurance that there will not be a delay in, or increased costs
associated with, the implementation of corrections as the Year 2000 compliance
plan is performed, such as unexpected costs of correcting equipment that has not
yet been fully evaluated. If realized, these risks could result in adverse
affect on the business, results of operations and financial condition.
CONTINGENCIES
Contingency plans are being evaluated on a case-by-case basis and may vary
considerably depending upon the Year 2000 issue to be addressed. The Company's
expectations as to the extent and timeliness of modifications required in order
to achieve Year 2000 compliance is a forward-looking statement subject to risks
and uncertainties. Actual results may vary materially as a result of a number of
factors, including, among others those described in the paragraphs above. There
can be no assurance that the Company will be able to successfully modify on a
timely basis its products, services and internal systems to comply with Year
2000 requirements, which failure could have a material adverse affect on the
Company's operating results.
NEW PRODUCT RELEASE
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
31
<PAGE>
BROADBAND TECHNOLOGIES, INC.
ANNUAL REPORT
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
YEAR 2000 (CONTINUED)
NEW PRODUCT RELEASE (CONTINUED)
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.
ITEM 7A. 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 December 31,
1998. 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 12/31/98
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Assets:
Short-term investments $48,788 -- -- -- -- $48,788 $48,788
Long-term investments -- 409 -- -- -- 409 409
Average interest rate 5% 6%
Liabilities:
Long-term debt -- -- $115,000 -- -- $115,000 $42,000
Average interest rate 5%
</TABLE>
Qualitative Disclosures
The Company's investments are held for non-trading purposes and subject to
market risk for interest rates. The Company maintains its short and long-term
investments principally in U.S. Treasury Obligations and commercial paper with
various financial institutions. These institutions are located in different
areas of the United States and the Company's policy is designated to limit
exposure to any one institution, as well as credit and maturity risks. The
Company performs periodic evaluations of the relative standing of those
financial institutions that participate in the Company's investment strategy.
While the Company cannot predict or manage future interest rates, management
continues to evaluate its investment positions on an ongoing basis.
32
<PAGE>
BROADBAND TECHNOLOGIES, INC.
ANNUAL REPORT
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
QUALITATIVE DISCLOSURES (CONTINUED)
The long-term debt, which accrues interest at a fixed rate of 5%, is subject to
market risk for interest rates. The 5% fixed rate may no longer approximate
current market prices for such instruments. The Company is currently in the
process of negotiating a restructuring of this debt.
The Company is obligated under a stock repurchase agreement with an investment
banker for the purchase of up to 1.0 million shares of the Company's Common
Stock. The actual number of shares to be purchased and the timing of the
purchase are based on the Company's stock price, general market conditions and
additional factors. If at April 15, 1999 the market value of the Company's
Common Stock is below $9.11, the Company will be obligated to pay the difference
between $9.11 and the lower market price at that time. The Company's maximum
obligation would not exceed $9.1 million. The Company's obligation under the
stock repurchase agreement is subject to market risk regarding the Company's
Common Stock. The Company cannot predict or manage market conditions that affect
the Company's stock value.
33
<PAGE>
BROADBAND TECHNOLOGIES, INC.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
BROADBAND TECHNOLOGIES, INC. - INDEX TO FINANCIAL STATEMENTS
A. Financial Statements
Report of Independent Auditors ...........................................35
Statements of Operations for the years ended
December 31, 1998, 1997 and 1996 .........................................36
Balance Sheets as of December 31, 1998 and 1997........................37-38
Statements of Stockholders' (Deficit) Equity for the years ended
December 31, 1998, 1997 and 1996 .........................................39
Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996..........................................40
Notes to Financial Statements .........................................41-53
B. Supplemental Financial Information - Unaudited............................54
34
<PAGE>
REPORT OF INDEPENDENT AUDITORS
THE BOARD OF DIRECTORS AND STOCKHOLDERS
BROADBAND TECHNOLOGIES, INC.
We have audited the accompanying balance sheets of BroadBand Technologies, Inc.
as of December 31, 1998 and 1997, and the related statements of operations,
stockholders' deficit, and cash flows for each of the three years in the period
ended December 31, 1998. Our audits also included the financial statement
schedule listed in the Index at Item 14(a). These financial statements and
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and schedule based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of BroadBand Technologies, Inc. at
December 31, 1998 and 1997 and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1998 in conformity
with generally accepted accounting principles. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic financial
statements, taken as a whole, presents fairly in all material respect, the
information set forth therein.
January 25, 1999
Raleigh, North Carolina
35
<PAGE>
BROADBAND TECHNOLOGIES, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year ended December 31
1998 1997 1996
------------------------------------------------------
<S> <C> <C> <C>
Revenues:
Product sales and contract revenues $ 8,276,105 $ 15,012,117 $ 23,144,003
Services revenue 3,340,985 -- --
Nonrefundable prepayment revenue (Note 2) 10,700,000 -- --
Technology transfer & license agreement (Notes 3 & 9) 17,000,000 -- --
------------------------------------------------------
Net revenues 39,317,090 15,012,117 23,144,003
Costs and expenses:
Cost of sales 7,105,515 12,296,689 21,744,255
Research and development 18,746,581 28,062,349 22,784,948
Selling, general and administrative 14,623,444 13,725,044 11,647,386
Restructuring costs (Note 3) 2,577,678 -- --
Performance fees and obsolete equipment -- 1,841,258 --
------------------------------------------------------
43,053,218 55,925,340 56,176,589
------------------------------------------------------
Loss from operations (3,736,128) (40,913,223) (33,032,586)
Other income (expense):
Interest expense (6,500,563) (6,508,486) (4,063,372)
Interest income 6,627,467 7,600,754 6,077,545
Other income (Note 3) 848,513 -- --
------------------------------------------------------
Net loss $ (2,760,711) $(39,820,955) $(31,018,413)
======================================================
Net loss per share $ (.21) $ (3.00) $ (2.35)
======================================================
Average number of shares used in per share calculations 13,411,208 13,277,735 13,200,312
======================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
36
<PAGE>
BROADBAND TECHNOLOGIES, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31
1998 1997
---------------------------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 45,403,692 $ 47,464,129
Restricted cash (Note 4) 7,283,500 3,000,000
Short-term investments (Note 5) 48,787,993 41,327,242
Accounts receivable, trade, less allowances
$250,879 in 1998 and $0 in 1997 5,638,024 2,371,133
Account receivable other (Note 3) 2,000,000 --
Inventories (Note 6) 1,861,372 3,214,361
Prepaid and other current assets 1,210,778 1,546,464
---------------------------------------
Total current assets 112,185,359 98,923,329
Long-term investments (Note 5) 408,780 15,328,088
Restricted cash (Note 4) 4,146,563 10,032,807
Furniture, fixtures and equipment:
Equipment 14,626,531 19,124,144
Software 4,804,929 4,794,490
Furniture and fixtures 723,411 709,884
Leasehold improvements 1,316,276 1,296,647
---------------------------------------
21,471,147 25,925,165
Accumulated depreciation and amortization (15,381,974) (16,817,060)
---------------------------------------
Net furniture, fixtures and equipment 6,089,173 9,108,105
Deferred debt issuance costs, (net of accumulated
amortization of $1,959,713 in 1998 and $1,212,213 in
1997) (Note 8)
1,777,787 2,525,287
---------------------------------------
Total assets $ 124,607,662 $ 135,917,616
=======================================
</TABLE>
37
<PAGE>
BROADBAND TECHNOLOGIES, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31
1998 1997
----------------------------------
<S> <C> <C>
Liabilities and stockholders' deficit
Current liabilities:
Accounts payable $ 3,244,472 $ 2,590,271
Accrued expenses 5,912,028 5,953,541
Deferred revenue (Note 2) 5,659,015 1,031,000
Deposits 3,245,072 3,263,134
Accrued warranty reserve 724,851 4,940,427
----------------------------------
Total current liabilities 18,785,438 17,778,373
Long-term:
Deposits (Note 2) -- 13,000,000
Convertible debt (Note 8) 115,000,000 115,000,000
Deferred compensation (Note 4) 1,400,000 600,000
Other liabilities (Note 2) 2,300,000 --
----------------------------------
Total long-term liabilities 118,700,000 128,600,000
Commitments (Notes 4, 7, & 9) -- --
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;
13,436,686 and 13,380,243 shares outstanding 134,367 133,802
Additional paid-in capital 163,428,408 163,285,281
Deferred compensation (Note 4) (650,000) (850,000)
Accumulated deficit (175,790,551) (173,029,840)
----------------------------------
Total stockholders' deficit (12,877,776) (10,460,757)
==================================
Total liabilities and stockholders' deficit $ 124,607,662 $ 135,917,616
==================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
38
<PAGE>
<TABLE>
<CAPTION>
BROADBAND TECHNOLOGIES, INC.
STATEMENTS OF STOCKHOLDERS' (DEFICIT) EQUITY
Common Additional
Stock Paid-In Deferred Accumulated
Par Value Capital Compensation Deficit Total
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1995 $ 131,512 $ 160,927,240 $ -- $(102,190,472) $ 58,868,280
Exercise of stock options for 89,225 shares 892 846,929 -- -- 847,821
Issuance of 9,119 shares under 401(k) plan 91 203,460 -- -- 203,551
Net loss for the year -- -- -- (31,018,413) (31,018,413)
---------------------------------------------------------------------------------
Balance at December 31, 1996 $ 132,495 $ 161,977,629 -- $(133,208,885) $ 28,901,239
Exercise of stock options for 25,097 shares 251 73,840 -- -- 74,091
Issuance of 25,635 shares for 401(k) Plan 256 234,612 -- -- 234,868
Restricted stock grant, 80,000 shares 800 999,200 (1,000,000) -- --
Amortization of restricted stock grant -- -- 150,000 -- 150,000
Net loss for the year -- -- -- (39,820,955) (39,820,955)
---------------------------------------------------------------------------------
Balance at December 31, 1997 $ 133,802 $ 163,285,281 $ (850,000) $(173,029,840) $ (10,460,757)
---------------------------------------------------------------------------------
Exercise of stock options for 26,900 shares 269 6,621 -- -- 6,890
Issuance of 28,912 shares for 401(k) Plan 289 126,320 -- -- 126,609
Restricted stock grant, 1,892 shares 19 27,033 -- -- 27,052
Amortization of restricted stock grant -- -- 200,000 -- 200,000
Restricted stock surrendered (12) (16,847) -- -- (16,859)
Net loss for the year -- -- -- (2,760,711) (2,760,711)
---------------------------------------------------------------------------------
Balance at December 31, 1998 $ 134,367 $ 163,428,408 $ (650,000) $(175,790,551) $ (12,877,776)
=================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
39
<PAGE>
BROADBAND TECHNOLOGIES, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended December 31
1998 1997 1996
---------------------------------------------------------
<S> <C> <C> <C>
Operating activities
Net loss $ (2,760,711) $ (39,820,955) $ (31,018,413)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation 3,295,953 4,486,273 5,490,625
Amortization of debt issuance costs 747,500 747,500 464,713
Amortization of deferred compensation 800,000 600,000 --
Amortization of restricted stock grant 200,000 150,000 --
Increase in inventory reserve 644,415 204,742 1,416,848
Loss (gain) on disposal of equipment 2,118,495 850,518 (377,918)
Changes in operating assets and liabilities:
Accounts receivable, trade and other, net (5,266,891) 3,913,084 (1,970,752)
Inventories 708,574 (1,886,196) (942,393)
Prepaid and other current assets 335,686 (592,176) (262,117)
Accounts payable and accrued expenses 612,688 (1,834,782) (57,254)
Deferred revenue 4,628,015 (3,844,000) (3,318,970)
Deposits (13,018,062) 10,004,818 839,540
Accrued warranty reserve (4,215,576) (993,600) 3,175,284
Other long-term liabilities 2,300,000 -- --
---------------------------------------------------------
Net cash used in operating activities (8,869,914) (28,014,774) (26,560,807)
Investing activities
Acquisition of furniture, fixtures & equipment (2,395,516) (3,921,420) (4,388,284)
Disposals of furniture, fixtures & equipment -- 21,600 2,325,000
Net decrease (increase) in investments 7,458,557 (15,570,400) (22,982,752)
---------------------------------------------------------
Net cash (used in) provided by investing activities 5,063,041 (19,470,220) (25,046,036)
Financing activities
Issuance of common stock 143,692 308,959 1,051,372
Issuance of long-term debt -- -- 111,262,500
Payments on capital lease obligations -- -- (282,823)
Net decrease (increase) in restricted cash 1,602,744 (12,581,765) 2,255,306
---------------------------------------------------------
Net cash provided by (used in) financing activities 1,746,436 (12,272,806) 114,286,355
---------------------------------------------------------
(Decrease) increase in cash & cash equivalents (2,060,437) (59,757,800) 62,679,512
Cash and cash equivalents at beginning of year 47,464,129 107,221,929 44,542,417
---------------------------------------------------------
Cash and cash equivalents at end of year $ 45,403,692 $ 47,464,129 $ 107,221,929
=========================================================
Supplemental disclosure of cash flow information
Cash paid for interest $ 5,753,063 $ 5,750,058 $ 2,770,058
=========================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
40
<PAGE>
BROADBAND TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
1. SIGNIFICANT ACCOUNTING POLICIES
This summary of significant accounting policies is presented to assist the
reader in understanding and evaluating the financial statements. These policies
are in conformity with generally accepted accounting principles and have been
applied consistently in all material respects.
BUSINESS DESCRIPTION
The Company is engaged principally in the design, engineering, manufacturing and
marketing of a sophisticated electronics and software platform for operators of
local exchange telephone networks in the United States. The Company's product
platform addresses the access portion of the telephone network and has enabled
operations of these local exchange telephone networks the capability to transmit
voice, video and data over fiber optics and copper wire to provide a wide array
of services, including voice and private line and data service.
In 1998 the Company developed and implemented a new strategy that again focused
on the network access markets while leveraging its advanced technologies. The
Company's new strategic plan resulted in executing several new agreements with
Lucent Technologies, Inc. (see Note 2) and a strategic alliance with Bosch
Telecom GmbH and Bosch Telecom, Inc. (see Note 3). These agreements resulted in
several one-time revenues and cash payments to the Company, product development
revenues and revenue recognition of certain nonrefundable deposits as revenue
in 1998. In addition the Company began development of a new generation access
product to address the new trends in the network access market. The Company
views this as an opportunity to utilize its technology, experience and capital
to address this market need.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
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, U. S. 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 December 31, 1998
and 1997, the Company had no investments that qualified as trading or available
for sale.
41
<PAGE>
BROADBAND TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ACCOUNTS RECEIVABLE
The Company's principal financial instrument subject to potential concentration
of credit risk is accounts receivable, which are unsecured. The Company's
exposure to credit loss in the event that payment from a customer is not
received for revenue recognized equals the net outstanding accounts receivable
balance from that customer.
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined using
the first-in, first-out (FIFO) cost flow assumption.
FURNITURE, FIXTURES AND EQUIPMENT
Furniture, fixtures and equipment are stated at cost. Depreciation is determined
for financial reporting purposes using the straight-line method over the
estimated useful lives of the individual assets, ranging from three to five
years, or for leasehold improvements, over the terms of the related leases if
shorter. Straight-line and accelerated methods of depreciation have been used
for income tax purposes.
DEFERRED DEBT ISSUANCE COSTS
The Company capitalized certain costs relating to the issuance of debt. The
costs are amortized on a straight-line basis over the term of the debt.
REVENUE RECOGNITION
Generally, revenue is recognized when products are shipped. Deferred revenue
results from product licensing fees and from specific contractual terms for
certain sales agreements. Prepaid product (software) license fees are recorded
as deferred revenue when collected from customers and are recognized as revenue
in accordance with the terms of the related contract.
Revenue related to the Lucent research and development services contract and
related project letters are recognized on the percentage of completion method of
accounting. Percentage of completion under the contract is measured principally
by the percentage of costs incurred to date, to the estimated total project
costs.
INCOME TAXES
Income taxes are accounted for using the liability method in accordance with
FASB Statement No. 109, Accounting for Income Taxes (see Note 14).
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are charged to operations when incurred.
42
<PAGE>
BROADBAND TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
STOCK OPTIONS
The Company accounts for its employee stock option grants in accordance with
Accounting Principle Board Opinion No. 25, Accounting for Stock Issued to
Employees ("APB 25"). Under APB 25, no compensation expense has been recognized
since the number of shares granted is fixed and the exercise price of the
Company's employee stock options equals the market price of the underlying stock
on the date of grant.
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, basic earnings per share excludes any
dilutive effects of options, warrants and convertible securities. Diluted
earnings per share is very similar to the previously expected fully dilutive
earnings per share. All loss per share amounts for all periods have been
presented to conform to SFAS 128. Due to the net losses for each of the three
periods presented, potential common shares are considered antidilutive and
therefore did not require restatement of prior periods.
NEW ACCOUNTING PRONOUNCEMENTS
In 1998, the Company adopted Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income," ("SFAS 130"), which establishes standards
for reporting and display of comprehensive income and its components in a full
set of general-purpose financial statements. SFAS 130 only impacts financial
statement presentation as opposed to actual amounts recorded. Other
comprehensive income includes all nonowner changes in equity that are excluded
from net income. This Statement has no financial statement impact for an
enterprise that has no items of other comprehensive income in any period
presented. During the three years in the period ended December 31, 1998, the
Company had no items of other comprehensive income.
In 1998, the Company adopted Statement of Financial Accounting Standards No.
131, "Disclosures about Segments of an Enterprise and Related Information,"
("SFAS 131"). SFAS 131 changes the way public companies report segment
information in annual financial statements and also requires those companies to
report selected segment information in interim financial statements to
shareholders. SFAS 131 also establishes standards for related disclosures about
products and services, geographic areas, and major customers. The application of
the new rules does not have a significant impact on the Company's financial
statements.
In June 1998, the Financial Accounting Standards Board issued Statement No. 133,
"Accounting for Derivative Instruments and Hedging Activities," ("SFAS 133")
which is required to be adopted in years beginning after June 15, 1999. Because
of the Company's minimal use of derivatives, management does not anticipate that
the adoption of the new Statement will have a significant effect on earnings or
the financial position of the Company.
43
<PAGE>
BROADBAND TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
2. LUCENT TECHNOLOGY, INC. RELATIONSHIP
On February 4, 1998 the Company entered into several agreements with Lucent
Technologies, Inc. ("Lucent") that establish a new nonexclusive relationship
which replaces the exclusive relationship between the Company and Lucent entered
into in 1995 with respect to the Switched Digital Broadband Access Systems
(SDBAS) joint product. The new relationship with Lucent includes a $21.0 million
research and development contract, an original equipment manufacturing
agreement, an intellectual property license, a contract manufacturing agreement
and other consideration related to the resolution of outstanding contracts. The
Company and Lucent have identified and agreed to specific development projects
of approximately $17.3 million under the $21.0 research and development contract
regarding Lucent's new AnyMedia digital loop carrier product.
The Company has recognized $6.3 million of revenue in 1998 from the various
agreements and has recorded a $4.75 million trade accounts receivable from
Lucent. Deferred revenue of $5.7 million primarily represents the contractual
billings under the research and development contract net of the revenue
recognized under the percentage of completion method of accounting.
As a result of the agreements with Lucent, combined with a decrease in demand
for the SDBAS joint product from certain customers, 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.
3. STRATEGIC ALLIANCE AND TECHNOLOGY TRANSFER AGREEMENT
In 1998 the Company entered into an alliance agreement with Bosch Telecom GmbH
and Bosch Telecom, Inc. (collectively "Bosch"). The agreement includes $12
million in cash payments and approximately $2 million in development and support
expense reimbursement over a two year period, cross transfer of intellectual
property, royalty payments to BroadBand, international manufacturing and
distribution agreements, as well as future cross supply agreements. The Company
recognized $12 million of one-time revenue related to the alliance and recorded
reimbursements for expenses as incurred. A $2.0 million contractual payment due
from Bosch has been recorded as an Account Receivable Other in the accompanying
financial statements and is due upon completion of product development or August
1999, whichever occurs first.
During the second quarter of 1998 the Company determined that a restructuring
charge of $2.6 million was required to cover the cost of implementing the Bosch
alliance and to provide for the change in the relationship with Lucent. The
restructuring charge includes a charge of $0.7 million for legacy product
inventory reserves, a write-off of $0.6 million for obsolete lab and computer
equipment, $1.2 million provision for the transfer of 40 employees to Bosch and
related severance expenses and $0.1 million of other costs. Other income
included a $0.7 million gain on the sale of equipment to Bosch.
4. EMPLOYMENT AGREEMENT AND RESTRICTED CASH
The Company has outstanding restricted cash in the amount of $200,000 at
December 31, 1998 for a corporate procurement card and had an outstanding letter
of credit in the amount of $3.0 million at December 31, 1997. The letter of
credit was collateralized by restricted cash of the same amount and expired in
November 1998.
44
<PAGE>
BROADBAND TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
4. EMPLOYMENT AGREEMENT AND RESTRICTED CASH (CONTINUED)
The Company has restricted cash of $4 million associated with executive
compensation for its 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 to receive the interest income earned by the $4
million, which is reported as compensation to him. 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. Additionally, restricted cash of
$146,000 is associated with the establishment of a supplemental deferred
compensation plan which is part of Mr. Orr's employment agreement. The Company
is required to fund the plan annually. In 1998, $146,000 was funded and charged
to compensation expense.
During the first quarter of 1997, the Board of Directors authorized the
initiation of a stock repurchase program and entered into an agreement with an
investment banker that utilizes equity options for the purchase of up to 1.0
million shares of common stock outstanding. The actual number of shares to be
purchased and the timing of the purchase is 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 $2.94 at December 31, 1998, the Company has restricted
cash in the amount of $7,083,500 in connection with this agreement. This amount
will fluctuate based upon the market value of the stock. In December 1998, the
Company sold the 500,000 call option surrender portion of the equity option for
$31,250. If at April 15, 1999, the market value of the stock is below $9.11
("put strike price"), the Company will be obligated to pay the put 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 assuming the Company purchased and took delivery of the
1.0 million shares; however, if the Company decided to sell a portion of the
shares and not take delivery of those shares, the obligation would be less than
the $9.1 million.
5. INVESTMENT IN DEBT SECURITIES
At December 31, 1998 and 1997, the Company's investments in debt securities were
classified as cash and cash equivalents and both short and long-term
investments. The Company maintains these balances principally in demand deposit
accounts, U. S. 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, as well as
credit and maturity risks. The Company performs periodic evaluations of the
relative standing of those financial institutions that participate in the
Company's investment strategy.
The following is a summary of cash and cash equivalents and short and long-term
investments by balance sheet classification at:
45
<PAGE>
BROADBAND TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
5. INVESTMENT IN DEBT SECURITIES (CONTINUED)
<TABLE>
<CAPTION>
December 31
1998 1997
-----------------------------------
<S> <C> <C>
Cash and cash equivalents:
Demand deposit accounts $13,019,247 $11,090,313
Commercial paper 13,228,613 17,225,114
U.S. Treasury Obligations 19,155,832 19,148,702
-----------------------------------
$45,403,692 $47,464,129
===================================
<CAPTION>
December 31
1998 1997
-----------------------------------
<S> <C> <C>
Short-term investments:
Certificate of deposit $ -- $ 2,505,293
Commercial paper 46,255,410 34,800,200
U.S. Treasury Obligations 2,532,583 4,021,749
-----------------------------------
$48,787,993 $41,327,242
===================================
Long-term investments:
Commercial paper $ 408,780 $13,296,211
U.S. Treasury Obligations -- 2,031,877
-----------------------------------
$ 408,780 $15,328,088
===================================
</TABLE>
The estimated fair value of each investment approximates the amortized cost and,
therefore, there are no unrealized gains or losses as of December 31, 1998 and
1997.
6. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
December 31
1998 1997
-----------------------------------
<S> <C> <C>
Electronic parts and other components $ 4,264,671 $ 3,882,876
Work-in-process 291,310 626,008
Finished goods 1,490,287 2,245,958
-----------------------------------
6,046,268 6,754,842
Inventory valuation reserve (4,184,896) (3,540,481)
-----------------------------------
$ 1,861,372 $ 3,214,361
===================================
</TABLE>
46
<PAGE>
BROADBAND TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
7. LEASES
In December 1998, the Company renewed its non-cancelable operating lease for the
rental of its primary facilities. The new lease agreement terminates in December
2003 with an option for renewal. The total monthly commitment for the renewed
lease is approximately $78,000. The Company also entered into various year to
year operating leases related to certain equipment. In June 1998, the Company
entered into a five year non-cancelable sublease for a portion of its office
facilities to a third party.
The lease terminates in December 2003 with an option for renewal. The total
monthly commitment for the renewed lease approximates $78,000. The Company has
also entered into various year to year operating leases related to certain
equipment.
Future minimum lease payments, net of sublease income under the non-cancelable
leases at December 31, 1998 are as follows:
<TABLE>
<S> <C>
1999 $ 726,800
2000 722,500
2001 700,900
2002 660,100
2003 267,500
==========
Total $3,077,800
==========
</TABLE>
Future rental income payments under non-cancelable subleases at December 31,
1998 are approximately $1,291,000. Rent expense was approximately $1,170,000,
$1,500,000, and $1,205,000, for the years ended December 31, 1998, 1997, and
1996, respectively.
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. At December 31, 1998 the estimated fair value
of the term notes, determined by the average of the bid and ask prices on that
date, was approximately $42 million.
9. COMMITMENTS AND CONTINGENCIES
The Company commenced legal action in civil court in March 1997 against a
competitor claiming infringement of a patent the Company owns. The Company was
seeking to enjoin the competitor from further acts infringing the patent and to
recover damages. The competitor immediately countered to have the Company's
patent declared invalid and unenforceable, and further claims infringement by
the Company of two of its patents. In April 1998, the Company and its competitor
announced that they had ended their patent litigation. As part of the
settlement, the Company and the competitor entered into a
47
<PAGE>
BROADBAND TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
9. COMMITMENTS AND CONTINGENCIES (CONTINUED)
perpetual cross license agreement of patents currently issued or applied for and
for future patents issued during the next five years. The Company received $5.0
million for the perpetual cross license agreement and has included this amount
in "Technology transfer and license agreement" revenue in the accompanying
financial statements. Additionally, the competitor and one of its affiliates
contractually agreed not to pursue further litigation regarding patents
currently issued or applied for over the next five years.
The Company has entered into contracts with various suppliers for the production
of certain components and subassemblies used in the Company's products. Under
the terms of the contract, the Company had firm purchase commitments to purchase
from the suppliers approximately $5,815,000 and $1,330,000 of these components
and subassemblies at December 31, 1998 and 1997, respectively. The majority of
the 1998 commitments are related to a contract with a major customer. If the
customer terminates the contract, the Company will be able to receive
reimbursement for its commitments.
10. STOCK OPTION PLANS
The Company had previously adopted an incentive stock option plan for employees,
and a non-qualified stock option plan for consultants and others, a
non-qualified stock option plan in connection with the CEO employment agreement,
and a directors stock option plan for Directors. On May 19, 1998 the
shareholders approved an equity compensation plan that replaced all of the
existing stock option plans. Under the plan, the Company may grant incentive
stock options, non-qualified stock options, restricted stock, stock appreciation
rights and other stock awards or stock rights. The aggregate number of shares of
common stock and equivalent stock rights available for award under the plan are
250,000.
Information concerning outstanding stock options to purchase common stock
pursuant to the plans as of December 31, 1998 is summarized as follows:
<TABLE>
<CAPTION>
Aggregate
Per Share Number of Exercise
Exercise Price Shares Price
---------------------------------------------
<S> <C> <C> <C>
Incentive and non-qualified stock options
outstanding:
Vested $1.63 - $ 17.25 764,536 $3,188,115
Unvested $1.63 - $ 17.25 1,628,740 $5,068,687
---------------------------------------------
Totals 2,393,276 $8,256,802
========================
</TABLE>
Options are granted at not less than fair market value at the date of grant as
determined by the Board of Directors and may be exercised upon terms approved by
the Board. During 1998, 1,316,685 options were granted under the incentive stock
option plan and 1,141,677 non-qualified options were granted. Certain
non-qualified grants include provisions, which prohibit exercise, until near the
option expiration date or until the end of the full vesting period or prior to
the Company attaining profitability. Vested options are exercisable at dates
ranging from six months to nine years and nine months from date of
48
<PAGE>
BROADBAND TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
10. STOCK OPTION PLANS (CONTINUED)
grant. Shares not yet vested are not exercisable. All options granted expire
between five and one half and ten years from the grant date.
The following table summarizes stock option activity from January 1, 1996
through December 31, 1998:
<TABLE>
<CAPTION>
Number of Range of Exercise Option Price
Description Shares Prices Per Shares Total
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Options outstanding at December 31, 1995 1,033,767 $0.10 to $35.75 $16,151,877
Options exercisable at December 31, 1995 535,153 $0.10 to $35.75 $6,407,088
Options granted during 1996 571,428 $16.50 to $32.50 $11,440,944
Options canceled during 1996 66,192 $2.70 to $35.75 $1,327,063
Options exercised during 1996 89,225 $0.80 to $27.25 $847,821
Options outstanding at December 31, 1996 1,449,778 $0.10 to $35.75 $25,417,958
Options exercisable at December 31, 1996 731,231 $0.10 to $35.75 $10,489,122
Options granted during 1997 2,306,971 $3.63 to $13.38 $19,503,623
Options canceled during 1997 1,161,512 $3.16 to $35.75 $22,351,674
Options exercised during 1997 25,097 $0.80 to $ 9.75 $74,092
Options outstanding at December 31, 1997 2,570,140 $0.10 to $31.75 $22,495,815
Options exercisable at December 31, 1997 693,474 $0.10 to $31.75 $6,647,310
Options granted during 1998 2,458,362 $1.63 to $7.94 $8,559,401
Options canceled during 1998 2,608,326 $0.10 to $31.75 $22,867,204
Options exercised during 1998 26,900 $0.10 to $2.70 $6,890
Options outstanding at December 31, 1998 2,393,276 $1.63 to $17.25 $8,256,802
Options exercisable at December 31, 1998 764,536 $1.63 to $17.25 $3,188,115
</TABLE>
On December 10, 1998, the Board of Directors approved the repricing of 1,941,761
outstanding stock options. The options, which have been repriced, are reflected
as canceled in 1998 in the above table. The replacement options, which were
repriced at the market value on December 10, 1998, are reflected as 1998 option
grants. Since the repriced option price equals the market price of the
underlying stock on the date the repricing occurred, no compensation expense has
been recognized.
On April 2, 1997, the Board of Directors approved the repricing of 807,253
outstanding incentive stock options. The options, which have been repriced, are
reflected as canceled in 1997 in the above table. The replacement options, which
were repriced at the market value on April 2, 1997, are reflected as 1997 option
grants. Since the repriced option price equals the market price of the
underlying stock on the date the repricing occurred, no compensation expense has
been recognized.
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25") due to the fact that the
alternative fair value accounting provided for under Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation", ("SFAS
123") requires the use of option valuation models that were not developed for
use in valuing employee stock options.
49
<PAGE>
BROADBAND TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
10. STOCK OPTION PLANS (CONTINUED)
Pro forma information regarding net loss and loss per share is required by SFAS
123, and has been determined as if the Company accounted for its employee stock
options granted subsequent to December 31, 1994, under the fair value method of
SFAS 123. The fair value for these options was estimated at the date of grant
using a Black-Scholes option pricing model with the following weighted average
assumptions for 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
------------------------------
<S> <C> <C>
Risk free interest rate 4.67% 5.50%
Dividends - -
Volatility factor 0.9127 0.6105
</TABLE>
The Black-Scholes option valuation model was developed for use in estimating in
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
changes in the subjective input assumption can materially affect the fair value
estimate, in management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of its employee stock
options.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information follows:
<TABLE>
<CAPTION>
December 31
1998 1997
-----------------------------
<S> <C> <C>
Pro forma net loss $6,164,227 $44,284,810
Pro forma loss per share $0.46 $3.34
</TABLE>
Exercise prices for options outstanding as of December 31, 1998 ranged from
$1.63 to $17.25. The weighted average remaining contractual life of those
options is 7.75 years. The weighted average exercisable price of outstanding
options at December 31, 1998 is $4.17.
11. COMMON STOCK RESERVED FOR FUTURE ISSUANCE
At December 31, 1998, the Company had reserved a total of 4,192,911 of its
authorized 30,000,000 shares of common stock for future issuance:
<TABLE>
<CAPTION>
<S> <C>
Granted and outstanding stock options 2,393,276
Future issuance of stock options 552,540
Outstanding warrants related to a lease line 7,813
Outstanding warrants (Note 12) 1,225,000
Future issuance under 401(k) plan 14,282
----------
Total shares reserved 4,192,911
==========
</TABLE>
50
<PAGE>
BROADBAND TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
12. WARRANTS
During 1995, the Company received $7 million for six-year warrants that entitle
the purchaser of the warrants to acquire 1,000,000 shares of the Company's
Common Stock for $41.75 per share.
13. CAPITAL STOCK
On November 19, 1996, the Board of Directors declared a dividend distribution of
one preferred share purchase right (Right) for each share of Common Stock
outstanding on December 23, 1996. The Right becomes exercisable only if a person
or group acquires, or obtains the right to acquire, 15% or more of the Company's
Common Stock or commences a tender offer or exchange offer which, if
consummated, would result in that person or group owning at least 15% of the
Company's outstanding Common Stock.
In connection with the November 19, 1996, preferred share dividend distribution,
the Company restated its articles of incorporation, thereby creating a series of
Series A Preferred Stock. 100,000 shares of this series have been authorized,
which have a dividend rate of the greater of $10.00 per share or 1,000 times the
aggregate per share amount of Common Stock dividends. Each share is entitled to
one vote and shall have a liquidation preference of $1,000 per share, plus
accrued and unpaid dividends.
14. INCOME TAXES
At December 31, 1998 and 1997, the Company has net operating loss carryforwards
and research and development credits of approximately $166.5 million and $5.2
million, and $155.6 million and $3.4 million, respectively, for income tax
purposes that expire in years 2003 through 2014. The Company has North Carolina
net economics loss carryforwards of $69.0 million that expire in years 1999
through 2003. For financial reporting purposes, a valuation allowance of $78.0
million ($73.1 million in 1997) has been recognized to offset the deferred tax
assets related to those carryforwards at December 31, 1998. When, and if,
realized, the tax benefit for those items will be reflected in current
operations as a reduction of income tax expense. Significant components of the
Company's deferred tax liabilities and assets at December 31, 1998 are as
follows:
51
<PAGE>
BROADBAND TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
14. INCOME TAXES (CONTINUED)
<TABLE>
<CAPTION>
December 31
1998 1997
---------------------------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 66,601,000 $ 62,233,000
Research and experimental credit carryforwards 5,162,000 3,402,000
Executive compensation 700,000 300,000
Deposits -- 2,800,000
Book over tax depreciation 366,000 475,000
Deferred revenue 2,264,000 412,000
Inventory reserve 1,674,000 1,416,000
Warranty reserve 290,000 1,976,000
Other long-term liabilities 920,000 --
Other 59,000 59,000
---------------------------------
Total deferred tax assets $ 78,036,000 $ 73,073,000
Valuation allowance for deferred tax assets (78,036,000) (73,073,000)
Net deferred tax assets -- --
---------------------------------
Net deferred taxes $ -- $ --
=================================
</TABLE>
Based on the number of shares of common and preferred stock issued in 1992 and
1993, the Company exceeded the limits allowable under the Tax Reform Act of 1986
related to changes in ownership percentage governing future utilization of net
operating loss carryforwards. The effect of this occurrence limits the annual
utilization of the net operating loss carryforwards to an amount determined by
multiplying the fair market value of the Company immediately prior to the change
in ownership percentage by the federal long-term tax exempt interest rate at the
time of the change. As of December 31, 1998, future use of a portion of the net
operating loss carryforwards are limited to approximately $27 million of taxable
income per year. This limitation applies to all losses incurred through
November 12, 1993 in the amount of $50.2 million; the remaining loss of
$116.3 million is not currently limited.
15. EMPLOYEE BENEFIT PLAN
The Company has a 401(k) Plan and Trust covering substantially all employees.
Employees at least 21 years of age are eligible for the Plan. The Company will
provide a matching contribution of up to 50% of employee contributions to a
maximum employee contribution of 6% of the employee's wages. In addition, the
Company may make annual discretionary profit sharing contributions to the Plan.
The Company's contributions are subject to a five year vesting period.
Contributions are invested in one or more of eleven investment choices,
including the Company's common stock, at the discretion of the employee. The
Company pays the Plan expenses which totaled approximately $44,000, $49,000, and
$24,000, in the years 1998, 1997 and 1996. Company contributions to the plan for
1998, 1997 and 1996 totaled approximately $458,000, $503,000, and $412,000,
respectively.
52
<PAGE>
BROADBAND TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
16. 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, Bosch, direct sales to RBOCs and others as a percentage of
the Company's total revenues (exclusive of the $10.7 million nonrefundable
prepayment revenue and the $17.0 million technology transfer and license
agreement) are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
--------------------------------
<S> <C> <C> <C>
Lucent 79.0% 43.0% 29.0%
RBOCs 6.0% 15.0% 51.0%
Others 15.0% 42.0% 20.0%
--------------------------------
100.0% 100.0% 100.0%
================================
</TABLE>
The following customers' accounts receivable balances as a percentage of the
Company's total accounts receivable are as follows:
<TABLE>
<CAPTION>
December 31
1998 1997
-------------------
<S> <C> <C>
Lucent 62.0% 27.0%
Bosch 32.0% -
RBOCs 6.0% 21.0%
Others - 52.0%
--------------------
100.0% 100.0%
====================
</TABLE>
17. SUBSEQUENT EVENTS
Commencing in August 1998, the Company was notified by Nasdaq that it no longer
met the market capitalization requirements for continued listing on the Nasdaq
National Market. Since this notification, the Company's market capitalization
has remained below the required amount of $50.0 million. Nasdaq granted the
Company an extension of time to demonstrate a plan which when implemented would
satisfy the requirements for continued listing on the Nasdaq National Market,
including maintaining the required minimum amount of net tangible assets of $4.0
million. The Company's primary initiative under its plan was to restructure its
$115.0 million 5% convertible subordinated notes. Although progress has been
made on defining the issues related to the restructuring of the subordinated
notes, the Company was not able to finalize this plan in a manner sufficient to
satisfy the listing requirements. Nasdaq denied the Company's request for a
further extension of time and delisted the Company's shares from the National
Market. The Company's shares are now traded on the OTC Bulletin Board, an
electronic quotation service. The Company is continuing its plan to restructure
its subordinated notes.
53
<PAGE>
BROADBAND TECHNOLOGIES, INC.
QUARTERLY RESULTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
SUPPLEMENTAL FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
1998
-----------------------------------------------------------
Fourth Third Second First
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenue $ 13,986 $ 3,017 $ 19,807 $ 2,507
Gross Margin 13,123 1,065 17,705 319
Net Income (Loss) $ 6,630 ($ 5,722) $ 7,405 ($11,074)
======== ======== ======== ========
Net Income (Loss) per share $ 0.49 ($ 0.43) $ 0.55 ($ 0.83)
======== ======== ======== ========
<CAPTION>
1997
-----------------------------------------------------------
Fourth Third Second First
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenue $ 2,344 $ 2,125 $ 5,233 $ 5,310
Gross Margin 264 248 1,190 1,013
Net Loss ($ 6,054) ($16,510) ($ 8,795) ($ 8,462)
======== ======== ======== ========
Net Loss per share ($ 0.45) ($ 1.25) ($ 0.66) ($ 0.64)
<CAPTION>
1996
-----------------------------------------------------------
Fourth Third Second First
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenue $ 7,926 $ 5,706 $ 5,515 $ 3,997
Gross Margin 977 393 290 (260)
Net Loss ($ 8,470) ($ 8,498) ($ 6,509) ($ 7,541)
======== ======== ======== ========
Net Loss per share ($ 0.64) ($ 0.64) ($ 0.49) ($ 0.57)
======== ======== ======== ========
</TABLE>
54
<PAGE>
BROADBAND TECHNOLOGIES, INC.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Current Directors
The following table sets forth information regarding the Directors of the
Company:
<TABLE>
<CAPTION>
Year
First
Elected As Term
Name Director Expires Age
---- -------- ------- ---
<S> <C> <C> <C>
David E. Orr 1997 2000 47
Dr. John R. Hutchins, III 1988 2000 64
Richard P. Clark 1992 2001 51
Dr. J. Richard Jones 1988 2001 51
Dr. Charles T. Lee 1989 1999 59
Alan E. Negrin 1998 1999 61
</TABLE>
Executive Officers of the Registrant
Executive Officers are elected annually and serve at the pleasure of the Board
of Directors. The current executive officers of the Company are as follows:
<TABLE>
<CAPTION>
Name Office Officer Since Age
---- ------ ------------- ---
<S> <C> <C> <C>
David E. Orr President, Chief Executive Officer and 1997 47
Director
Dr. John R. Hutchins, III Chairman of the Board, Secretary and Director 1988 64
Dr. J. Richard Jones Executive Vice President, Assistant Secretary 1988 51
and Director
John T. Autrey Vice President and Chief Financial Officer 1998 48
Julia LaColle Assistant Treasurer 1998 49
</TABLE>
As of the end of 1998, the following people held these positions:
55
<PAGE>
BROADBAND TECHNOLOGIES, INC.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (CONTINUED)
EXECUTIVE OFFICERS OF THE REGISTRANT (CONTINUED)
<TABLE>
<CAPTION>
Name Office Officer Since Age
---- ------ ------------- ---
<S> <C> <C> <C>
Leonard D. Hayes Vice President Operations 1997 48
David J. McLean Vice President Network Access Engineering 1998 38
Craig Swinn Vice President Sales and Marketing 1998 48
Loretta M. Woodall Vice President Human Resources 1998 48
</TABLE>
BIOGRAPHIES OF DIRECTORS AND EXECUTIVE OFFICERS
Mr. Autrey began with the Company as an interim Chief Financial Officer while a
partner with Tatum CFO Partners, LLP and became Vice President and Chief
Financial Officer in November, 1998. Mr. Autrey was previously employed from
1997 to 1998 as a partner with Tatum CFO, LLP, serving as an interim CFO with
several small to mid-size companies. From 1988 to 1996, he was employed as Vice
President Finance and Administration at a subsidiary of IKON Office Solutions.
Mr. Clark has been the President and Chief Executive Officer of M/A-COM, Inc. (a
wholly owned subsidiary of AMP, Incorporated, a supplier of connectors for
electronic products) from July 1995 to the present. He has also been Vice
President of Global Wireless Products Group of AMP, Incorporated during the same
period. From July 1989 to July 1995, Mr. Clark was the Associate Director of
Corporate Development of AMP Incorporated.
Mr. Hayes joined the Company in March 1992 as Director of Materials. From March
1997, Mr. Hayes has served as Vice President of Operations and is responsible
for all manufacturing and procurement functions including contract negotiations
and administration. In his 23 years in materials and manufacturing operations,
he has held executive positions responsible for materials, logistics, and
manufacturing at Commodore International Ltd., where he was responsible for
worldwide activities in support of a $1.1 billion revenue stream, and senior
management positions in materials and operations at Data General Corporation.
Dr. Hutchins is a founder of the Company and has served as Chairman of the Board
(except for a period during 1997 and 1998 during which he was Chairman Emeritus)
and a Director of the Company since its formation in July 1988. Except for a
period during 1990 and 1991, he also served as the Company's Treasurer and
Secretary until November 1992. Prior to July 1988, Dr. Hutchins was Executive
Vice President at Siecor Corporation, which he joined in September 1985. Prior
to joining Siecor, Dr. Hutchins served as Senior Vice President, Vice President
and Director of Research and Development at Corning Incorporated for 12 of his
25 years there. Since March 1, 1991, the Company has employed Dr. Hutchins on a
part-time basis. On February 1, 1998, Dr. Hutchins replaced Mr. Bhatia as
Chairman of the Board of Directors, and on April 7, 1998 Dr. Hutchins replaced
Mr. Oakley as Secretary.
Dr. Jones is a founder of the Company and has served as Executive Vice President
and a Director of the Company since its formation in July 1988. He is the chief
technical officer of the Company and is
56
<PAGE>
BROADBAND TECHNOLOGIES, INC.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (CONTINUED)
BIOGRAPHIES OF DIRECTORS AND EXECUTIVE OFFICERS (CONTINUED)
responsible for overseeing the development of advanced technology. From February
1987 until July 1988, he worked for Siecor Corporation, where he held the
position of Director of Broadband Development. Prior to February 1987, Dr. Jones
held management and development-oriented positions at FiberLAN, Inc. (a
Siecor-BellSouth joint venture), Siecor Corporation, Harris Corporation (a
manufacturer of communications systems for military and industrial markets), and
Bell Laboratories.
Dr. Lee is the Chairman and founder of Charles Lee Enterprise, an information
industry business development firm with a specialty in Asia/Pacific alliances
since 1989. He was General Partner of Abacus Ventures, a venture capital
investment company from 1985 to 1997.
Mr. Negrin is a telecommunications industry consultant. He previously founded
and was CEO of E/O Networks in 1993 and co-founded Optilink Corporation, where
he was Executive Vice President.
Mr. Orr has served as President, Chief Executive Officer and Director since he
joined the Company in April 1997. Prior to joining the Company, he was employed
at Alcatel Network Systems, Inc. as President and Chief Executive Officer since
August 1991. At Alcatel Network Systems, which designs, manufactures and markets
a full line of telecommunications systems products for the transport and
management of voice, data and image traffic, he was responsible for operations
in Raleigh and Clinton, North Carolina; Longview, Texas; Nogales, Mexico;
Georgetown, Canada; and San Jose, California. Prior to joining Alcatel, he was
Vice President and General Manager of Rockwell International's Network
Transmission Systems Division. He held various other management positions at
Rockwell since joining that company in 1985. Prior to joining Rockwell, he held
various positions with GTE including Network Director for General Telephone
Company of Wisconsin.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
The Company believes that all executive officers and Directors of the Company
and all other persons known by the Company to be subject to Section 16 of the
Securities Exchange Act of 1934, filed all reports required to be filed during
1998 under Section 16(a) of that Act on a timely basis, except John T. Autrey
and Alan E. Negrin, each of whom filed one late report. The Company's belief is
based solely on its review of Forms 3, 4 and 5 and amendments thereto, furnished
to the Company during, and with respect to, its most recent fiscal year by
persons known to be subject to Section 16.
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table and the narrative text disclose the compensation paid during
1998, 1997 and 1996 to David E. Orr, who served as the Company's President and
Chief Executive Officer during 1998, the four (4) other highest paid executive
officers whose annual salary and bonuses exceeded $100,000 during 1998, and
Salim Bhatia and James L. Chitkowski, who would have been among the two (2)
highest paid executive officers whose annual salary and bonuses exceeded
$100,000 during 1998, but for the fact that such individuals were not serving as
an executive officer of the Company at the end of 1998.
57
<PAGE>
BROADBAND TECHNOLOGIES, INC.
ITEM 11. EXECUTIVE COMPENSATION (CONTINUED)
SUMMARY COMPENSATION TABLE (CONTINUED)
<TABLE>
<CAPTION>
Annual Compensation Long Term Compensation
Awards Payouts
Other Annual Restricted Options/ LTIP All Other
Name and Salary Bonus Compensation Stock SARs Payouts Compensation
Principal Position Year ($) ($)(1) ($) Awards (#)(2) ($) ($)
------------------ ---- --- ------ --- ------ ------ --- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C>
David E. Orr 1998 350,004 306,250 (3) (4) 400,000(5) (4) 397,650(6)
President and 1997 262,503 131,250 (3) (4) 400,000 (4) 262,880(7)
Chief Executive 1996 (4) (4) (3) (4) (4) (4) (4)
Officer (8)
Salim A. L. Bhatia 1998 (4) (4) (3) (4) (4) (4) 627,015(9)
Chairman of the 1997 252,000 (4) (3) (4) 156,328(10) (4) (4)
Board of 1996 190,008 95,285 (3) (4) 107,110 (4) (4)
Directors (9)
J. Richard Jones 1998 150,000 67,500 (3) (4) 121,204(11) (4) (4)
Executive Vice 1997 145,008 (4) (3) (4) 68,596(12) (4) (4)
President and 1996 140,004 56,242 (3) (4) 32,608 (4) (4)
Chief Technology
Officer
James L. Chitkowski 1998 47,903 (4) (3) (4) (4) (4) 90,000(13)
Vice President, 1997 132,500 30,000 (3) (4) 33,369(14) (4) (4)
Sales and 1996 36,000 (4) (3) (4) (4) (4) (4)
Marketing
David J. McLean 1998 170,004 75,000 (3) (4) 128,365(15) (4) (4)
Vice President, 1997 120,006 10,000 (3) (4) 108,365 (4) (4)
Network Access 1996 26,897 (4) (3) (4) 20,000 (4) (4)
Systems
Leonard D. Hayes 1998 135,000 54,000 (3) (4) 71,671(16) (4) (4)
Vice President, 1997 118,334 28,128 (3) (4) 41,299 (4) (4)
Operations 1996 110,004 18,200 (3) (4) 15,372 (4) (4)
Craig M. Swinn 1998 36,290 110,000(17) (3) (4) 100,000 (4) 11,193(18)
Vice President, 1997 (4) (4) (3) (4) (4) (4) (4)
Sales and 1996 (4) (4) (3) (4) (4) (4) (4)
Marketing
</TABLE>
58
<PAGE>
BROADBAND TECHNOLOGIES, INC.
ITEM 11. EXECUTIVE COMPENSATION (CONTINUED)
SUMMARY COMPENSATION TABLE (CONTINUED)
(1) Amounts in column include amounts earned during the year but paid during the
following year.
(2) Number of shares of Common Stock issuable upon exercise of options granted
during 1998. The Company did not grant any Stock Appreciation Rights during
1998.
(3) Other Annual Compensation for executive officers is not reported as it is
less than the required reporting threshold of the Securities and Exchange
Commission.
(4) No compensation of this type received.
(5) Includes 400,000 options deemed to be granted pursuant to the repricing,
effective as of December 10, 1998, of an aggregate of 400,000 options previously
granted to Mr. Orr.
(6) Includes $4,042 paid during 1998 to Mr. Orr for moving expenses and
$247,045 of interest on $4,000,000 deposited in trust pursuant to Mr. Orr's
employment agreement. For a discussion of Mr. Orr's employment agreement and the
payment of interest on amounts deposited in trust, see "Employment Agreement."
Also includes $61,500 for 1997, $82,000 for 1998, and $3,063 included in 1997
contributions made to the BroadBand Technologies Supplemental Deferred
Compensation Plan by the Company in 1998.
(7) Includes $87,493 paid during 1997 to Mr. Orr for moving expenses and
$175,387 of interest on $4,000,000 deposited in trust pursuant to Mr. Orr's
employment agreement. For a discussion of Mr. Orr's employment agreement and the
payment of interest on amounts deposited in trust, see "Employment Agreement."
(8) Mr. Orr has served as the Company's President and Chief Executive Officer
since April 1, 1997.
(9) Mr. Bhatia served as the Company's President and Chief Executive Officer
until March 31, 1997. He continued to be employed as Chairman of the Board of
Directors for the remainder of 1997. Mr. Bhatia ceased to be employed by the
Company effective as of January 30, 1998. The Company paid Mr. Bhatia $627,015
in connection with the termination of Mr. Bhatia's employment.
(10) Includes 105,000 options deemed to be granted pursuant to the repricing,
effective as of April 2, 1997, of an aggregate of 105,000 options previously
granted to Mr. Bhatia.
(11) Includes 121,204 options deemed to be granted pursuant to the repricing,
effective as of December 10, 1998, of an aggregate of 121,204 options previously
granted to Dr. Jones.
(12) Includes 22,500 deemed to be granted pursuant to the repricing, effective
as of April 2, 1997, of an aggregate of 22,500 options previously granted to Dr.
Jones.
(13) Mr. Chitkowski ceased to be employed by the Company effective as of May 8,
1998. The Company paid Mr. Chitkowski $90,000 in connection with the termination
of his employment.
59
<PAGE>
BROADBAND TECHNOLOGIES, INC.
ITEM 11. EXECUTIVE COMPENSATION (CONTINUED)
SUMMARY COMPENSATION TABLE (CONTINUED)
(14) Includes 10,000 deemed to be granted pursuant to the repricing, effective
as of April 2, 1997, of an aggregate of 10,000 options previously granted to Mr.
Chitkowski.
(15) Includes 128,365 options deemed to be granted pursuant to the repricing,
effective as of December 10, 1998, of an aggregate of 128,365 options previously
granted to Mr. McLean.
(16) Includes 71,671 options deemed to be granted pursuant to the repricing,
effective as of December 10, 1998, of an aggregate of 71,671 options previously
granted to Mr. Hayes.
(17) Includes $60,000 paid to Mr. Swinn as a sign-on bonus and $50,000 paid as a
1998 Retention Bonus.
(18) $11,193 was paid to Mr. Swinn in 1998 for moving expenses.
EMPLOYMENT AGREEMENTS
The Company has entered into an employment agreement with David E. Orr (the "Orr
Employment Agreement"). Set forth below is a summary of certain terms of the Orr
Employment Agreement. This summary is not a complete description of the terms
and conditions of the Orr Employment Agreement and is qualified in its entirety
by reference to the Orr Employment Agreement, a copy of which is filed as an
exhibit to the Company's reports filed with the Securities and Exchange
Commission.
Mr. Orr was appointed the President and Chief Executive Officer of the Company
effective as of April 1, 1997. Mr. Orr's term of employment is five years, but
automatically extends for additional one year periods unless either the Company
or Mr. Orr terminates the Orr Employment Agreement by written notice to the
other at least one year prior to the termination date then in effect. Mr. Orr's
base annual compensation will be at least $350,000 and he has been granted an
incentive bonus of $175,000 for his first year of employment by the Company.
Thereafter, he will be eligible for an incentive bonus in accordance with the
Company's incentive compensation program, but the annual target bonus will be at
least 50% of his then-current base salary. The Company also agreed to pay Mr.
Orr a signing bonus in the amount of $4,000,000. To carry out this agreement,
the Company placed in trust $4,000,000, which will be distributed to Mr. Orr on
the earlier of the fifth anniversary of the Orr Employment Agreement or the
termination of Mr. Orr's employment by the Company without cause. If Mr. Orr
voluntarily terminates his employment before the fifth anniversary of the Orr
Employment Agreement or the Company terminates his employment for cause before
the fifth anniversary of the Orr Employment Agreement, the trust will not be
distributed to Mr. Orr. He will receive a pro-rata portion of this amount upon
an employment termination due to permanent disability. Interest on the amount
deposited in trust will accrue and be payable to Mr. Orr periodically. The
Company has also issued to Mr. Orr 80,000 shares of the Company's Common Stock.
Mr. Orr will forfeit such shares of Common Stock if his employment with the
Company terminates for any reason prior to the fifth anniversary of the grant of
the stock, unless the Company terminates him without cause. Mr. Orr was also
granted a non-qualified stock option to purchase 350,000 shares of the Company's
Common Stock (the "Option") at an exercise price of $12.50 per share. The Option
will become exercisable upon reaching certain performance goals, but is
60
<PAGE>
BROADBAND TECHNOLOGIES, INC.
ITEM 11. EXECUTIVE COMPENSATION (CONTINUED)
EMPLOYMENT AGREEMENTS (CONTINUED)
subject to accelerated vesting upon a Change in Control (as defined below) under
certain circumstances. If the Company terminates his employment without cause
during the term of the Orr Employment Agreement, Mr. Orr will receive, for two
years after termination, payments based on his then-current base salary and his
target bonus for the year in which the termination occurs. If a Change in
Control occurs and the Company terminates his employment without cause during
the three year period commencing on the effective date of the Change in Control,
the Company will: (i) either arrange for the full vesting of the Option or make
a lump sum payment to him equal to the value lost under the Option; and (ii) pay
him three lump sum payments, each in an amount equal to his base salary in
effect on the date of the termination of his employment and his target bonus for
the year in which such termination occurs. The Company will make such payments
on the date of termination and the first and second anniversaries of the date of
termination. The Orr Employment Agreement includes certain provisions
restricting Mr. Orr's ability to compete with the Company or solicit the
Company's employees, suppliers or customers for two (2) years after the
termination of his employment.
Effective January 31, 1998, Mr. Bhatia's employment by the Company ceased and,
in accordance with his separation agreement, he will receive two (2) years of
his current base salary of $252,000, in addition to certain other benefits. Mr.
Bhatia's separation agreement also includes certain provisions restricting his
ability to compete with the Company or solicit the Company's employees,
suppliers or customers for two (2) years after he ceased to be employed by the
Company.
61
<PAGE>
BROADBAND TECHNOLOGIES, INC.
ITEM 11. EXECUTIVE COMPENSATION (CONTINUED)
EMPLOYMENT AGREEMENTS (CONTINUED)
For the purposes of the Orr Employment Agreement, a "Change in Control" means:
(i) a tender offer or other acquisition pursuant to which at least 50% of the
Company's stock is purchased; (ii) the merger or consolidation of the Company
with or into another corporation; (iii) the sale of all, or substantially all,
of the Company's assets; (iv) the liquidation of the Company; or (v) the
directors of the Company as of the commencement of the agreement or directors
elected by the stockholders on the recommendation of at least two-thirds of such
directors (or directors previously so elected) cease to be a majority of the
Board of Directors.
STOCK OPTIONS GRANTED DURING FISCAL YEAR
The following table sets forth information about the stock options granted to
the named executive officers of the Company during 1998. No stock appreciation
rights were granted to the named executive officers during 1998.
62
<PAGE>
BROADBAND TECHNOLOGIES, INC.
ITEM 11. EXECUTIVE COMPENSATION (CONTINUED)
STOCK OPTIONS GRANTED DURING FISCAL YEAR (CONTINUED)
<TABLE>
<CAPTION>
Option Grants In Last Fiscal Year
Potential Realized
% of Total Value at Assumed
Options Annual Rates of Stock
Granted to Price Appreciation for
Employees in Exercise or Option Term
Options Fiscal Year Base Price Expiration (3)
Name Granted (2) ($/Sh) Date 5% 10%
<S> <C> <C> <C> <C> <C> <C>
David E. Orr (1) 350,000 15.3 3.25 03/10/07 $ 563,446 $1,358,815
David E. Orr (1) 50,000 2.2 3.25 12/17/07 $ 89,827 $ 221,368
Salim A. L. Bhatia 0 -- -- -- -- --
J. Richard Jones (1) 20,000 .9 3.25 01/26/03 $ 14,506 $ 31,342
J. Richard Jones (1) 16,304 .7 3.25 01/30/06 $ 22,081 $ 51,655
J. Richard Jones (1) 16,304 .7 3.25 01/30/06 $ 22,081 $ 51,655
J. Richard Jones (1) 25,000 1.1 3.25 12/17/07 $ 44,913 $ 110,684
J. Richard Jones (1) 21,096 .9 3.25 01/21/07 $ 33,306 $ 80,027
J. Richard Jones (1) 22,500 1.0 3.25 06/27/05 $ 27,511 $ 63,330
James L. Chitkowski 0 -- -- -- -- --
Leonard D. Hayes (1) 5,000 .2 3.25 03/27/07 $ 8,105 $ 19,570
Leonard D. Hayes (1) 15,000 .7 3.25 03/31/03 $ 11,392 $ 24,724
Leonard D. Hayes (1) 7,686 .3 3.25 01/30/06 $ 10,410 $ 24,351
Leonard D. Hayes (1) 7,686 .3 3.25 01/30/06 $ 10,410 $ 24,351
Leonard D. Hayes (1) 25,000 1.1 3.25 12/17/07 $ 44,913 $ 110,684
Leonard D. Hayes (1) 9,602 .4 3.25 01/21/07 $ 15,159 $ 36,425
Leonard D. Hayes (1) 1,697 .1 3.25 01/21/07 $ 2,679 $ 6,438
David J. McLean (1) 100,000 4.4 3.25 12/17/07 $ 179,654 $ 442,735
David J. McLean (1) 8,365 .4 3.25 01/21/07 $ 13,206 $ 31,733
David J. McLean (1) 20,000 .9 3.25 11/19/06 $ 30,765 $ 73,571
Craig M. Swinn 100,000 4.4 1.63 10/19/08 $ 102,510 $ 259,780
</TABLE>
(1) Deemed to be granted pursuant to the repricing, effective as of December 10,
1998, of previously issued options.
(2) Options to acquire an aggregate of 2,393,461 shares of Common Stock of the
Company were granted to all team members during 1998, including 1,829,861
options deemed to be granted pursuant to the repricing of previously issued
options, effective as of December 10, 1998, including 111,900 options deemed to
be granted pursuant to the repricing, effective as of December 10, 1998. Options
to acquire an additional 171,900 shares of Common Stock were granted to
nonemployee Directors of the Company during 1998.
63
<PAGE>
BROADBAND TECHNOLOGIES, INC.
ITEM 11. EXECUTIVE COMPENSATION (CONTINUED)
STOCK OPTIONS GRANTED DURING FISCAL YEAR (CONTINUED)
(3) The potential realizable value of the options reported above was calculated
by assuming 5% and 10% annual rates of appreciation of the Common Stock of the
Company from the date of grant of the options until the expiration of the
options. These assumed annual rates of appreciation were used in compliance with
the rules of the Securities and Exchange Commission and are not intended to
forecast future price appreciation of the Common Stock of the Company. The
Company chose not to report the present value of the options because the Company
does not believe any formula will determine with reasonable accuracy a present
value because of unknown or volatile factors. The actual value realized from the
options could be substantially higher or lower than the values reported above,
depending upon the future appreciation or depreciation of the Common Stock
during the option period and the timing of exercise of the options.
STOCK OPTIONS EXERCISED DURING FISCAL YEAR AND YEAR END VALUES OF UNEXERCISED
OPTIONS
The following table sets forth information about the stock options exercised by
the named executive officers of the Company during 1998. No stock appreciation
rights were exercised by the named executive officers during 1998.
<TABLE>
<CAPTION>
Aggregated Option Exercises in Last Fiscal Year and FY-End Option
Value of Unexercised
In-the-Money Options
Shares Acquired Number of Unexercised at FY-End
on Exercise Value Options at FY-End ($)
Name (#) Realized (#) Exercisable/Unexercisable
($)(1) Exercisable/Unexercisable (2)
<S> <C> <C> <C> <C>
David E. Orr 0 0 0/400,000 0/0
Salim A. L. Bhatia 0 0 84,853/0 0/0
J. Richard Jones 0 0 46,289/74,915 0/0
James L. Chitkowski 0 0 0/0 0/0
Leonard D. Hayes 0 0 37,514/49,157 0/0
David J. McLean 0 0 4,000/124,365 0/0
Craig M. Swinn 0 0 0/100,000 100,000/131,000
</TABLE>
(1) Upon exercise of the option, an option holder did not receive the amount
reported above under the column Value Realized. The amounts reported above under
the column Value Realized merely reflect the amount by which the value of the
Common Stock of the Company, on the date the option was exercised, exceeded the
exercise price of the option. The option holder does not realize any cash until
the shares of Common Stock issued upon exercise of the options are sold.
(2) The value of the Common Stock of the Company at December 31, 1998 was $2.94
per share. Value was determined by taking the last sale price of the Common
Stock of the Company on that date as
64
<PAGE>
BROADBAND TECHNOLOGIES, INC.
ITEM 11. EXECUTIVE COMPENSATION (CONTINUED)
STOCK OPTIONS EXERCISED DURING FISCAL YEAR AND YEAR END VALUES OF UNEXERCISED
OPTIONS (CONTINUED)
reported by Nasdaq. The value of options was determined by subtracting the
aggregate exercise prices of the options from the value of the Common Stock
issuable upon exercise of the options.
COMPENSATION OF DIRECTORS
Directors who are not full-time employees of the Company (i) are reimbursed for
reasonable travel expenses incurred in attending meetings of the Board or
committees of the Board; (ii) are paid a fee of $1,000 for each day on which the
Board and/or committee meets or is in conference, which such Directors attend,
except for committee meetings held on the same date as a Board meeting or
conference; (iii) are paid a $10,000 retainer each year while serving on the
Board; and (iv) are granted stock options pursuant to the terms of the Equity
Compensation Plan, which was approved by the Shareholders on May 19, 1998. Under
the Previous Directors Stock Option Plan, Eligible Directors were granted, on
May 23, 1994, options to purchase an aggregate of 62,000 shares of Common Stock
of the Company and annual grants are made to each eligible Director of options
to purchase 5,000 shares. On March 17, 1998, Mr. Clark, Dr. Lee and Dr. Hutchins
were granted options to purchase 10,000 shares at an exercise price of $7.94 per
share. Effective as of March 17, 1998, annual grants are made to each eligible
Director of options to purchase 5,000 shares, and options to purchase 10,000
shares will be granted to a new Director upon the election of the new Director.
On December 10, 1998, the Board of Directors of the Company approved a repricing
program for underwater options. Option exercised prices were reduced to $3.25
per share, the fair market value of the Corporation's Common Stock as of
December 10, 1998. The repricing program applied to 111,900 non-qualified stock
options held by non-employee Directors of the Company.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Until January 26, 1998, the members of the Compensation Committee of the Board
of Directors were Mr. Clark (Chairman) and Mr. McLernon (who resigned as a
member of the Company's Board of Directors, effective as of January 26, 1998).
Since January 26, 1998, Mr. Clark (Chairman) and Dr. Lee have been the members
of the Compensation Committee. Mr. Clark and Dr. Lee are nonemployee directors;
Mr. McLernon was a nonemployee director.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the only stockholders known by the Company to be
the beneficial owners, as of March 25, 1999, of more than five percent (5%) of
the outstanding shares of Common Stock of the Company.
65
<PAGE>
BROADBAND TECHNOLOGIES, INC.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(CONTINUED)
<TABLE>
<CAPTION>
Shares Percent of
Beneficially Shares
Name and Address Owned (1) Outstanding
---------------- --------- -----------
<S> <C> <C>
Goldman, Sachs & Co. 2,284,003(2) 17.0%
85 Broad Street
New York, NY 10004
Loomis, Sayles & Company, L.P. 2,229,364(3) 14.23%
One Financial Center
Boston, MA 02111
AMP Incorporated 1,073,063 7.98%
470 Friendship Road
Harrisburg, PA 17111
</TABLE>
(1) The persons and entities named in the table have sole voting and investment
power with respect to all shares shown as beneficially owned by them, except as
noted below.
(2) Based on information filed with the Securities and Exchange Commission on a
Schedule 13G, filed February 12, 1999. In the Schedule 13G, Goldman, Sachs & Co.
reported that it has shared power to vote or direct the vote and shared power to
dispose or to direct the disposition of the shares listed in the table.
(3) Based on information filed with the Securities and Exchange Commission on a
Schedule 13G, filed February 10, 1999. Represents shares that Loomis, Sayles &
Company, L.P., has a right to acquire as a result of its ownership of
convertible securities, which consist of 5% convertible subordinated notes due
May 15, 2001, which have a conversion price of $41.48 per share. In the Schedule
13G, Loomis, Sayles & Company, L.P., reported that it has (i) sole power to vote
or direct the vote of an aggregate of 1,880,522 shares; (ii) shared power to
vote or direct the vote of an aggregate of 212,753 shares; and (iii) shared
power to dispose or to direct the disposition of an aggregate of 2,229,364
shares.
The table below gives the number of shares of Common Stock of the Company
beneficially owned as of March 25, 1999 by persons who were members of the Board
of Directors and executive officers of the Company during 1998.
66
<PAGE>
BROADBAND TECHNOLOGIES, INC.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(CONTINUED)
<TABLE>
<CAPTION>
Shares Percent of
Beneficially Shares
Name and Address Owned (1) Outstanding
---------------- --------- -----------
<S> <C> <C>
Richard P. Clark 1,097,896 8.2%
Director (2)
Dr. John R. Hutchins, III 118,949 *
Chairman of the Board of Directors(3)
Dr. Charles T. Lee 24,733 *
Director (4)
David E. Orr 95,625 *
Director, President and
Chief Executive Officer (5)
Salim A. L. Bhatia 84,853 *
Chairman of the Board
of Directors (6)
Dr. J. Richard Jones 157,078 1.2%
Director and Executive
Vice President (7)
James L. Chitkowski 0 *
Vice President of
Sales and Marketing (8)
David J. McLean 38,422 *
Vice President of
Network Access System (9)
Leonard D. Hayes 45,576 *
Vice President
of Manufacturing (10)
Craig M. Swinn 0 *
Vice President of
Sales and Marketing
Alan Negrin 8,333 *
Director (11)
All directors and executive 1,743,941 13.0%
officers as a group (15 persons) (12)
</TABLE>
* Represents beneficial ownership of less than one percent (1%) of Common
Stock.
67
<PAGE>
BROADBAND TECHNOLOGIES, INC.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(CONTINUED)
(1) The persons and entities named in the table have sole voting and investment
power with respect to all shares shown as beneficially owned by them, except as
noted below. Share ownership also includes shares of Common Stock issuable
within 60 days upon exercise of outstanding options.
(2) Includes 24,833 shares that Mr. Clark may acquire pursuant to stock options
exercisable within 60 days after March 25, 1999. Also includes 1,073,063 shares
beneficially owned by AMP Incorporated. Mr. Clark, a Director of the Company, is
the President and Chief Executive Officer of M/A-COM, Inc., a wholly owned
subsidiary of AMP Incorporated. Mr. Clark does not exercise sole or shared
voting or investment power with respect to such shares and disclaims beneficial
ownership of such shares. AMP Incorporated is a corporation whose shares are
publicly traded. Voting and investment power with respect to shares of the
Company owned by AMP Incorporated are exercised by the Board of Directors of AMP
Incorporated.
(3) Includes: (i) 91,264 shares owned by Dr. John R. Hutchins, III, Revocable
Trust, for which Dr. Hutchins is both the sole trustee and beneficiary; (ii)
27,333 shares that Dr. Hutchins may acquire pursuant to stock options
exercisable within 60 days after March 25, 1999; and (iii) 352 shares in Dr.
Hutchins' account under the Company's 401(k) plan. Does not include the
following shares as to which Dr. Hutchins disclaims beneficial ownership: (i)
41,352 shares owned by Jane Ide Hutchins Revocable Trust, for which Jane I.
Hutchins, the wife of Dr. Hutchins, is both the sole trustee and beneficiary;
and (ii) 61 shares in Jane I. Hutchins' account under the Company's 401(k) plan.
(4) Includes 24,733 shares that Dr. Lee may acquire pursuant to stock options
exercisable within 60 days after March 25, 1999.
(5) Mr. Orr has 15,625 stock options exercisable within 60 days after March 25,
1999. In connection with his joining the Company, effective as of April 1, 1997,
the Company issued to Mr. Orr 80,000 shares of the Company's Common Stock. Mr.
Orr will forfeit such shares of Common Stock, which are included, if Mr. Orr's
employment with the Company terminates for any reason prior to the fifth
anniversary of the grant of the stock to Mr. Orr, except under certain
circumstances. Mr. Orr also received a non-qualified stock option to purchase
350,000 shares of the Company's Common Stock. See "Executive Compensation -
Employment Agreements."
(6) Includes 84,853 shares that Mr. Bhatia may acquire pursuant to stock options
exercisable within 60 days after March 25, 1999. Mr. Bhatia served as the
Company's President and Chief Executive Officer until March 31, 1997. Effective
as of January 31, 1998, Mr. Bhatia resigned as a Director of the Company and
ceased to be employed by the Company.
(7) Includes 609 shares in Dr. Jones' account under the Company's 401(k) plan
and 55,507 shares that Dr. Jones may acquire pursuant to stock options
exercisable within 60 days after March 25, 1999.
(8) Mr.Chitkowski has no stock options exercisable. Mr. Chitkowski ceased to be
employed by the Company effective as of May 8, 1998.
68
<PAGE>
BROADBAND TECHNOLOGIES, INC.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(CONTINUED)
(9) Includes 37,250 that Mr. McLean may acquire pursuant to stock options
exercisable within 60 days after March 25, 1999. Includes 1,172 shares in Mr.
McLean's account under the Company's 401(k) Plan.
(10) Includes 45,576 that Mr. Hayes may acquire pursuant to stock options
exercisable within 60 days after March 25, 1999.
(11) Includes 8,333 shares that Mr. Negrin may acquire pursuant to stock options
exercisable within 60 days after March 25, 1999.
(12) Includes 396,937 shares that the Officers and Directors as a group may
acquire upon exercise of options within 60 days after March 25, 1999. Includes
30,000 shares that Carl Kammire may acquire pursuant to stock options
exercisable within 60 days after March 25, 1999 and 1,043 shares in his account
under the Company's 401(k) Plan. Mr. Kammire ceased to be employed by the
Company April 30, 1998. Includes 18,750 shares that John Autrey may acquire
pursuant to stock options exercisable within 60 days after March 25, 1999.
Includes 22,052 shares that Loretta Woodall may acquire pursuant to stock
options exercisable within 60 days after March 25, 1999. Includes 631 shares
owned by Timothy Oakley. Mr. Oakley ceased to be employed by the Company
April 17, 1998.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following financial statements are included in Part II, Item 8 of this
Form 10-K.
1. Financial Statements
Report of Independent Auditors.
Statements of Operations for the years ended December 31, 1998, 1997
and 1996.
Balance Sheets as of December 31, 1998 and 1997.
Statements of Stockholders' (Deficit) Equity for the years ended
December 31, 1998, 1997 and 1996.
Statements of Cash Flows for the years ended December 31, 1998, 1997
and 1996.
Notes to Financial Statements.
2. Financial Statement Schedules
The following financial statement schedule is filed as part of this
report:
69
<PAGE>
BROADBAND TECHNOLOGIES, INC.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(CONTINUED)
2. Financial Statement Schedules (Continued)
II. Valuation and Qualifying Accounts
All other schedules are omitted because they are not required or the
required information is shown in the financial statements or notes
thereto.
3. Exhibits
See Exhibit Index and Exhibits attached to this report.
(b) Reports on Form 8-K
The Company filed a current report on Form 8-K, Commission File No.
0-21766, dated October 13, 1998, to report that it had issued a press
release that disclosed: (1) the Registrant has retained CIBC Oppenheimer as
its financial advisor; and (2) the Company submitted to Nasdaq on
October 9, 1998 a plan for achieving and maintaining continued listing
on the Nasdaq National Market.
The Company filed a current report on Form 8-K, Commission File No.
0-21766, dated November 18, 1998, that it had issued a press release that
disclosed that on November 12, 1998 Nasdaq granted the Company an extension
to achieve listing requirements.
The Company filed a current report on Form 8-K, Commission File No.
0-21766, dated February 12, 1999, that it had issued a press release
disclosing that (1) on February 11, 1999 Nasdaq removed the Company from
the Nasdaq National Market due to the Company's inability to meet the
continued listing requirements of the Nasdaq National Market; and (2) the
Company's stock will trade on the OTC Bulletin Board, an electronic
quotation service.
(c) See Exhibit Index and Exhibits attached to this report.
(d) Financial Statement Schedules.
Exhibit Index and Exhibits
<TABLE>
<CAPTION>
Exhibit Page
Number Description Number
------ ----------- ------
<S> <C> <C>
3.1 Amended and Restated Certificate of Incorporation. (1)
3.2 Amended and Restated Bylaws (2)
4.1 Amended and Restated Certificate of Incorporation (Included as
Exhibit 3.1 to this Annual Report on Form 10-K)
4.2 Amended and Restated Bylaws (Included as Exhibit 3.2 to this
Annual Report on Form 10-K)
4.3 Form of Common Stock Certificate (1)
</TABLE>
70
<PAGE>
BROADBAND TECHNOLOGIES, INC.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(CONTINUED)
EXHIBIT INDEX AND EXHIBITS (CONTINUED)
<TABLE>
<CAPTION>
Exhibit Page
Number Description Number
------ ----------- ------
<S> <C> <C>
4.4 Warrant Agreement, dated as of March 30, 1995, by and between the
Registrant and Bell Atlantic Corporation (4)
4.5 Form of Warrant Certificate (Included as exhibit to Exhibit 4.4 to
this Annual Report on Form 10-K)
4.6 Rights Agreement, dated as of November 19, 1996, by and between
the Registrant and First Union National Bank, as Rights Agent,
including the form of Certificate of Designations, Preferences and
Rights of Series A Preferred Stock as Exhibit A, the form of
Rights Certificate as Exhibit B, and the Summary of Rights as
Exhibit C (6)
4.7 Form of 5% Subordinated Convertible Notes, due May 15, 2001 (8)
4.8 Form of 5% Subordinated Convertible Notes, due May 15, 2001 (8)
10.1 Technology Purchase Agreement dated as July 16, 1988, between and
among the Registrant, Siecor Corporation and FiberLAN, Inc. (1)
10.2 Equipment Lease Schedule VL-2 dated as of October 2, 1990, between
the Registrant and Comdisco, Inc. (1)
10.3 Master Equipment Lease Agreement between the Registrant and
MMC/GATX Partnership No. 1 dated September 30, 1992. (1)
10.4 Equipment Lease Schedule No. 1 dated as of September 30, 1992,
between the Registrant and MMC/GATX Partnership No. 1. (1)
10.5 Warrant Agreement dated as of September 30, 1992, between the
Registrant and MMC/GATX Partnership No. 1. (1)
10.6 Form of Investors' Rights Agreement dated as of November 13, 1992,
between the Registrant and certain investors. (1)
10.7 Standstill Agreement dated December 4, 1991, between the
Registrant and AMP Incorporated. (1)
10.8 Volume Purchase Agreement executed February 25, 1993, between the
Registrant and Bell Atlantic Network Services, Inc., as amended by
a Further Agreement and Amendment No. 1 dated as of May 3, 1993.
(3)
10.9 Further Agreement and Amendment No. 2, dated November 15, 1993 to
Volume Purchase Agreement executed February 25, 1993 between the
Registrant and Bell Atlantic Network Services, Inc. (4)
10.10 Office Lease dated February 25, 1993, between the Registrant and
The Wachovia Real Estate Fund. (1)
10.11 Amended and Restated 1988 Incentive Stock Option Plan (2)
10.12 Amended and Restated 1992 Nonqualified Stock Option Plan (2)
10.13 Directors' Stock Option Plan (2)
10.14 1993 Flexible Benefits Plan (1)
10.15 Amended 401 (k) Plan dated November 17, 1998 (14)
10.16 Warrant Agreement, dated as of March 30, 1995, by and between the
Registrant and Bell Atlantic Corporation (4)
10.17 Agreement Between BroadBand Technologies, Inc. and Lucent
Technologies Executed November 15, 1995. (4) (9)
10.18 Indenture, dated as of May 22, 1996, by and between the Registrant
and Marine Midland Bank, as Trustee (5)
10.18A Cross Reference Sheet (8)
10.19 Purchase Agreement, dated as of May 17, 1996, by and between the
Registrant and Goldman, Sachs & Co., and Bear, Stearns & Co., Inc.
(5)
10.20 Registration Rights Agreement, dated as of May 17, 1996, by and
between the Registrant and Goldman, Sachs & Co., and Bear, Stearns
& Co., Inc. (5)
</TABLE>
71
<PAGE>
BROADBAND TECHNOLOGIES, INC.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(CONTINUED)
EXHIBIT INDEX AND EXHIBITS (CONTINUED)
<TABLE>
<CAPTION>
Exhibit Page
Number Description Number
------ ----------- ------
<S> <C> <C>
10.21 Bell Atlantic Network Services, Inc. and BroadBand Technologies,
Inc. Procurement Agreement, Contract No. BA 14494, dated July 1,
1996 (7) (10)
10.22 First Amendment to Agreement LGC-A65-D executed July 12, 1996,
between the Registrant and Lucent Technologies, Inc. (7) (10)
10.23 Rights Agreement, dated as of November 19, 1996, by and between
the Registrant and First Union National Bank, as Rights Agent,
including the form of Certificate of Designations, Preferences and
Rights of Series A Preferred Stock as Exhibit A, the form of
Rights Certificate as Exhibit B, and the Summary of Rights as
Exhibit C (6)
10.24 Employment Agreement between the Registrant and Salim A.L. Bhatia,
dated as of March 5, 1997 (11)
10.25 Employment Agreement between the Registrant and David E. Orr,
dated as of March 10, 1997 (11)
10.26 Umbrella Settlement Agreement dated as of February 4, 1998,
between BroadBand Technologies, Inc. and Lucent Technologies, Inc.
(13)
10.27 Form of Release dated as of February 4, 1998, between BroadBand
Technologies, Inc. and Lucent Technologies, Inc. (12)
10.28 Form of Release dated as of February 4, 1998, between BroadBand
Technologies, Inc. and Lucent Technologies, Inc. (12)
10.29 Supply Agreement, dated as of February 4, 1998, between BroadBand
Technologies, Inc. and Lucent Technologies, Inc. (13)
10.30 Technology Transfer Agreement, dated as of February 4, 1998,
between BroadBand Technologies, Inc. and Lucent Technologies, Inc.
(13)
10.31 Manufacturing Agreement, dated as of February 4, 1998, between
BroadBand Technologies, Inc. and Lucent Technologies, Inc. (13)
10.32 BBT OEM Agreement, dated as of February 4, 1998, between BroadBand
Technologies, Inc. and Lucent Technologies, Inc. (13)
10.33 Lucent OEM Agreement, dated as of February 4, 1998, between
BroadBand Technologies, Inc. and Lucent Technologies, Inc. (13)
10.34 Research and Development Agreement, dated as of February 4, 1998,
between BroadBand Technologies, Inc. and Lucent Technologies, Inc.
(13)
10.35 Element Manager Software Letter Agreement, dated as of February 4,
1998, between BroadBand Technologies, Inc. and Lucent
Technologies, Inc. (12)
10.36 Goldman Sachs & Co. and BroadBand Technologies, Inc. agreements,
dated April 8, 1997.(14)
10.37 Alliance Agreement between BroadBand Technologies, Inc. and Bosch
Telecom GmbH and Bosch Telecom, Inc. dated June 8, 1998. (15)
10.38 Amendment to the BroadBand Technologies, Inc. 401(k) Plan dated as
of June 7, 1998. (16)
10.39 Amendment to the BroadBand Technologies, Inc. 401(k) Plan dated as
of November 17, 1998. (16)
10.40 Supplemental Deferred Compensation Plan of BroadBand Technologies,
Inc. dated as of December 1, 1998. (16)
10.41 Office Lease between BroadBand Technologies, Inc. and Highwoods
Realty Limited Partnership dated December 28, 1998. (16)
23.1 Consent of Ernst & Young LLP for 1998. (16)
27.0 Financial Data Schedule (This exhibit is required to be submitted
electronically pursuant to the rules and regulations of the
Security and Exchange Commission and shall not be deemed filed for
purposes of Section 11 of the Securities Act of 1933 or Section 18
of the Securities Exchange Act of 1934).
</TABLE>
(1) (Incorporated by reference to exhibits filed with the Company's
Registration Statement on Form S-1, No. 33-62754 declared effective on June
30, 1993.)
72
<PAGE>
BROADBAND TECHNOLOGIES, INC.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(CONTINUED)
EXHIBIT INDEX AND EXHIBITS (CONTINUED)
(2) (Incorporated by reference to exhibit filed with the Company's Form 10-Q
for the period ended June 30, 1994.)
(3) (Confidential treatment was granted by the Securities and Exchange
Commission on June 30, 1993.)
(4) (Incorporated by reference to exhibit filed with Registrant's Current
Report on Form 8-K, Commission File No. 0-21766, dated March 30, 1995.)
(5) (Incorporated by reference to exhibit filed with Registrant's Current
Report on Form 8-K, Commission File No. 0-21766, dated May 22, 1996.)
(6) (Incorporated by reference to exhibit filed with Registrant's Current
Report on Form 8-K, Commission File No. 0-21766, dated November 19, 1996.)
(7) (Incorporated by reference to exhibit filed with Registrant's Quarterly
Report, dated August 14, 1996, as amended by Amendment No. 1, dated
November 26, 1996.)
(8) (Incorporated by reference to exhibit filed with Amendment No. 1 to the
Registrant's Registration Statement on Form S-3, No. 333-09661, dated
September 17, 1996.)
(9) (Confidential treatment was granted by the Securities and Exchange
Commission on May 10, 1996.)
(10) (Confidential treatment was granted by the Securities and Exchange
Commission on December 12, 1996.)
(11) (Incorporated by reference to exhibit filed with Registrant's Annual
Report, dated March 31, 1997.)
(12) (Incorporated by reference to exhibit filed with Registrant's Current
Report on Form 8-K, Commission File No. 0-21766, dated March 5, 1998.)
(13) (Incorporated by reference to exhibit filed with Registrant's current
report on Form 8-K, Commission File No. 0-21766, dated March 5, 1998.
Confidential treatment for certain portions of this agreement is being
requested pursuant to Rule 24b-2 of the Securities and Exchange Commission
under the Securities Exchange Act of 1934, as amended.)
(14) (Incorporated by reference to exhibit filed with Registrant's Annual
Report, dated March 31, 1998.)
(15) (Incorporated by reference to exhibit filed with Registrant's Current
Report on Form 8-K, Commission File No. 0-21766, dated June 8, 1998.)
(16) Attached exhibits.
73
<PAGE>
BROADBAND TECHNOLOGIES, INC.
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Additions Deductions
Balance at charged to credited to
beginning of costs and costs and Balance at end
Description year expenses expenses of year
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1998
Allowances deducted from related balance sheet accounts:
Accounts Receivable ....................................... -- 250,879 -- 250,879
Inventories ............................................... 3,540,481 3,727,672 3,083,257 4,184,896
Warranty Reserves ......................................... 4,940,427 65,016 4,280,592 724,851
1997
Allowances deducted from related balance sheet accounts:
Accounts Receivable ....................................... -- -- -- --
Inventories ............................................... 3,335,739 204,742 -- 3,540,481
Warranty Reserves ......................................... 5,934,027 -- 993,600 4,940,427
1996
Allowances deducted from related balance sheet accounts:
Accounts Receivable ....................................... -- -- -- --
Inventories ............................................... 1,918,891 1,416,848 -- 3,335,739
Warranty Reserves ......................................... 2,758,743 3,175,284 -- 5,934,027
</TABLE>
74
<PAGE>
BROADBAND TECHNOLOGIES, INC.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
BroadBand Technologies, Inc.
Dated March 30, 1999 By: /S/ John T. Autrey
------------------------------------------
John T. Autrey
Title: Vice President, Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/S/ David E. Orr President (Principal Executive March 30, 1999
- ----------------------------- Officer) and Director
David E. Orr
/S/ John T. Autrey Vice President (Principal Financial March 30, 1999
- ----------------------------- Officer and Principal Accounting
John T. Autrey Officer)
/S/ Dr. John R. Hutchins, III
- -----------------------------
Dr. John R. Hutchins, III Chairman of the Board March 30, 1999
/S/ Dr. J. Richard Jones
- -----------------------------
Dr. J. Richard Jones Director March 30, 1999
/S/ Richard P. Clark
- -----------------------------
Richard P. Clark Director March 30, 1999
/S/ Dr. Charles T. Lee
- -----------------------------
Dr. Charles T. Lee Director March 30, 1999
/S/ Alan E. Negrin
- -----------------------------
Alan E. Negrin Director March 30, 1999
</TABLE>
75
FIRST AMENDMENT TO THE
BROADBAND TECHNOLOGIES, INC. 401(K) PLAN
WHEREAS, BroadBand Technologies, Inc. (the "Sponsor") adopted the
BroadBand Technologies, Inc. 401(k) Plan (the "Plan"), as most recently amended
and restated effective July 1, 1997; and
WHEREAS, the Sponsor desires to amend the Plan;
NOW, THEREFORE, the Sponsor amends the Plan as follows effective as of
the date hereof:
1. Section 6.11 of the Plan is amended and restated by adding the following
paragraph to the end of the Section:
Notwithstanding the foregoing, for each Participant who transfers
employment to Bosch Telecom, Inc. ("Bosch") under the agreement between the
Employer and Bosch dated May 18, 1998 (an "Affected Participant"), the
Affected Participant's vested interest in his or her Profit-Sharing and
Matching Contributions Sub-Accounts shall become 100 percent (if not
already 100%) effective June 7, 1998.
2. The first paragraph of Section 12.1 of the Plan is amended and restated
to read as follows:
A Participant who is a party in interest may make written application to
the Administrator for a loan from his Separate Account, other than that
portion of his Separate Account attributable to Employer Contributions;
provided, however, that a Participant who is an Affected Participant (as
defined in Section 6.11) may apply for a loan hereunder regardless of
whether he is a party in interest so long as he or she is an employee of
Bosch Telecom, Inc.
3. Section 12.6(f) of the Plan is amended and restated to read as follows:
(f) Effect of Termination of Employment: Upon a Participant's termination
of employment, the balance of any outstanding loan hereunder shall
immediately become due and owing; provided, however, that, the
provisions of this subsection (f) shall not apply to any loan to an
Affected Participant (as defined in Section 6.11) until such time as
the Affected Participant terminates employment with Bosch Telecom,
Inc.
<PAGE>
IN WITNESS WHEREOF, the Sponsor has executed this instrument this ____
day of June, 1998.
BROADBAND TECHNOLOGIES, INC.
By:
--------------------------
Title:
--------------------------
EX-10.39
AMENDMENT TO THE
BROADBAND TECHNOLOGIES, INC.
401(k) PLAN
THIS AMENDMENT, made and entered into and effective this 17th day of
November, 1998, by BROADBAND TECHNOLOGIES, INC., a North Carolina corporation
(the "Employer"):
WITNESSETH:
WHEREAS, the Employer has previously established and adopted the
BroadBand Technologies, Inc. 401(k) Plan (the "Plan"), as last amended and
restated effective July 1, 1997, for the benefit of its eligible employees;
WHEREAS, the Employer has reserved the right to amend or modify the Plan
at any time;
WHEREAS, pursuant to action taken by its Board of Directors (the
"Board"), the Employer has amended the Plan, effective as of November 17, 1998,
to modify the definition of compensation for purposes of making and receiving
contributions under the Plan such that compensation shall mean a participant's
compensation which is required to be reported in Box 1 of Internal Revenue
Service Form W-2, modified by including elective contributions paid on behalf of
the participant by the Employer to any plan maintained by the Employer pursuant
to Sections 125, 402(a)(8), 403(b) or 402(h)(1)(B) of the Internal Revenue Code
of 1986, as amended (the "Code"), and by excluding certain forms of incentive
compensation provided by the Employer, known as "Executive Team Bonuses," "Team
Restart Awards," and "Quick to Market Bonuses;" and
WHEREAS, the Board has authorized and directed the officers of the
Employer to document such amendment to the Plan.
NOW, THEREFORE, in consideration of the premises herein contained,
section 1.1 of the Plan is hereby amended, effective November 17, 1998, by
deleting the first paragraph of the definition of Compensation included in
Section 1.1 of the Plan in its entirety and inserting in lieu thereof the
following:
"The 'Compensation' of a Participant for any period means the wages as
defined in Section 3401(a) of the Code, determined without regard to any
rules that limit compensation included in wages based on the nature or
location of the employment or services performed, and all other payments
made to him for such period for services as an Employee for which his
Employer is required to furnish the Participant a written statement
under Sections 6041(d), 6051(a)(3), and 6052 of the Code, but determined
prior to any exclusions for amounts deferred under Section 125,
402(e)(3), 302(h)(1)(B), 403(b) or 457(b) of the Code or for certain
contributions described in Section 414(h)(2)
<PAGE>
of the Code that are picked up by the employing unit and treated as
employer contributions, and excluding any 'Executive Team Bonus(es),'
'Team Restart Award(s),' and 'Quick to Market Bonus(es)' paid by the
Employer to the Participant."
IN WITNESS WHEREOF, the Employer has caused this Amendment to be
executed by its duly authorized officers and its corporate seal to be hereunto
affixed, all as of the day and year first above written.
BROADBAND TECHNOLOGIES, INC.
ATTEST:
(Corporate Seal)
______________________________ By:_______________________________________
Secretary Authorized Officer
BROADBAND TECHNOLOGIES, INC.
SUPPLEMENTAL DEFERRED COMPENSATION PLAN
(Effective as of December 1, 1998)
<PAGE>
BROADBAND TECHNOLOGIES, INC.
SUPPLEMENTAL DEFERRED COMPENSATION PLAN
BROADBAND TECHNOLOGIES, INC.
SUPPLEMENTAL DEFERRED COMPENSATION PLAN
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ARTICLE I - INTRODUCTION AND ESTABLISHMENT...................................................1
ARTICLE II - DEFINITIONS.....................................................................2
2.1 Account.........................................................................2
2.2 Anniversary Date................................................................2
2.3 Base Salary.....................................................................2
2.4 Beneficiary.....................................................................2
2.5 Board...........................................................................2
2.6 Bonus...........................................................................2
2.7 Code............................................................................2
2.8 Company.........................................................................2
2.9 Compensation....................................................................2
2.10 Deferral Subaccount............................................................2
2.11 Election Form..................................................................3
2.12 Employee.......................................................................3
2.13 Employer.......................................................................3
2.14 Employer Credit................................................................3
2.15 Employer Credit Subaccount.....................................................3
2.16 ERISA..........................................................................3
2.17 Participant....................................................................3
2.18 Plan...........................................................................3
2.19 Plan Administrator.............................................................3
2.20 Plan Year......................................................................3
2.21 Valuation Date.................................................................3
ARTICLE III - PARTICIPATION..................................................................4
3.1 Eligibility to Participate......................................................4
3.2 Deferral Election...............................................................4
3.3 Time and Manner of Election.....................................................4
3.4 Change of Election..............................................................4
3.5 Employer Credit.................................................................5
ARTICLE IV - INTEREST OF PARTICIPANTS........................................................6
4.1 Accounting for Participants'Interests...........................................6
4.2 Vesting of a Participant's Account..............................................6
4.3 Distribution of a Participant's Account.........................................6
4.4 Withdrawals During Employment...................................................7
ARTICLE V - PLAN ADMINISTRATOR...............................................................8
5.1 Members.........................................................................8
5.2 Action..........................................................................8
<PAGE>
5.3 Right and Duties................................................................8
5.4 Compensation, Indemnity and Liability...........................................9
5.5 Taxes...........................................................................9
ARTICLE VI - CLAIMS PROCEDURE...............................................................10
6.1 Claims for Benefits............................................................10
6.2 Appeals........................................................................10
ARTICLE VII - AMENDMENT AND TERMINATION.....................................................11
7.1 Amendments.....................................................................11
7.2 Termination of Plan............................................................11
ARTICLE VIII - MISCELLANEOUS................................................................12
8.1 Limitation on Participant's Rights.............................................12
8.2 Benefits Unfunded..............................................................12
8.3 Other Plans....................................................................12
8.4 Receipt or Release.............................................................12
8.5 Governing Law..................................................................12
8.6 Adoption of Plan by Related Employers..........................................13
8.7 Gender, Tense, and Headings....................................................13
8.8 Successors and Assigns; Nonalienation of Benefits..............................13
</TABLE>
ii
<PAGE>
ARTICLE I
INTRODUCTION AND ESTABLISHMENT
BroadBand Technologies, Inc. hereby establishes the Plan for the
benefit of certain management and highly compensated employees of the Company
and affiliated adopting employers, as such employees are selected by the Board
of Directors of the Company. The Plan shall be effective as of December 1, 1998.
<PAGE>
ARTICLE II
DEFINITIONS
When used in this Plan, the following terms shall have the meanings
set forth below unless a different meaning is plainly required by the context:
2.1 "Account" means the records maintained by the Plan Administrator
to determine each Participant's interest under this Plan. Such Account may be
reflected as an entry in the Employer's records, or as a separate account under
any trust established to provide benefits under the Plan, or as a combination of
both. The Plan Administrator may establish such additional subaccounts as it
deems necessary for the proper administration of the Plan.
2.2 "Anniversary Date" means the last day of each Plan Year.
2.3 "Base Salary" means a Participant's base salary for a Plan Year.
2.4 "Beneficiary" means the person or persons last designated in
writing by the Participant to receive the amount in his Account in the event of
such Participant's death; or if no designation shall be in effect at the time of
a Participant's death or if all designated Beneficiaries shall have predeceased
the Participant, then the Beneficiary shall be the following, in the order
listed:
(a) Such Participant's surviving spouse, if any;
(b) Otherwise, the Participant's estate.
2.5 "Board" means the Board of Directors of the Company.
2.6 "Bonus" means the total amount of cash bonuses payable to a
Participant for a Plan Year.
2.7 "Code" means the Internal Revenue Code of 1986, as amended.
2.8 "Company" means BroadBand Technologies, Inc., or its successor or
successors.
2.9 "Compensation" means a Participant's Base Salary and Bonus for a
Plan Year.
2.10 "Deferral Subaccount" means the subaccount of a Participant's
Account maintained to reflect his interest in the Plan attributable to his
deferrals of Compensation and earnings or losses credited to such account.
2
<PAGE>
2.11 "Election Form" means the form prescribed by the Plan
Administrator on which a Participant may specify the amount of his Compensation
that is to be deferred pursuant to the provisions of Article III.
2.12 "Employee" means any member of a select group of management or
highly compensated employee of an Employer.
2.13 "Employer" means the Company and each affiliated employer which
has adopted the Plan with the consent of the Company.
2.14 "Employer Credit" means the Employer credit described in Section
3.5.
2.15 "Employer Credit Subaccount" means the subaccount of a
Participant's Account maintained to reflect his interest in the Plan
attributable to the Employer Credit, and any earnings or losses credited to such
account.
2.16 "ERISA" means the Employee Retirement Income Security Act of
1974, as amended.
2.17 "Participant" means any eligible Employee who has satisfied the
requirements for participation in this Plan and who has an Account.
2.18 "Plan" means the BroadBand Technologies, Inc. Supplemental
Deferred Compensation Plan, as it may be amended from time to time.
2.19 "Plan Administrator" means the committee or individual appointed
pursuant to the provisions of this Plan to administer the Plan. In the absence
of such appointment, the Company shall be the Plan Administrator.
2.20 "Plan Year" means the 12-month period January 1 to December 31,
provided that the first Plan Year shall begin December 1, 1998 and end December
31, 1998.
2.21 "Valuation Date" means the Annual Valuation Date, December 31,
and any other date(s) selected by the Plan Administrator in its sole discretion
as of which the Accounts of Participants are valued.
3
<PAGE>
ARTICLE III
PARTICIPATION
3.1 Eligibility to Participate. The Board or its designee shall
specify the Employees of the Employer who are eligible to participate in the
Plan and the effective date and period of each such Employee's eligibility to
participate. Such eligibility designation may be made by establishing a minimum
compensation level for participation or by the use of such other criteria as the
Board deems appropriate from time to time. An Employee designated as eligible to
participate shall become a Participant on the eligibility date specified by the
Board or its designee in its discretion. A Participant shall continue to be
eligible to participate in the Plan until the Board determines he is no longer
eligible.
3.2 Deferral Election. Each Participant may elect to defer under the
Plan any whole percentage of his Compensation in the manner described in Section
3.3. A separate election may apply to the Participant's Base Salary and Bonus
for the Plan Year. The amount of Base Salary deferred by the Participant shall
be deducted each pay period in which the Participant has Compensation during his
period of participation in the Plan.
3.3 Time and Manner of Election. An eligible Employee desiring to make
a deferral election shall, no later than December 1 prior to the beginning of
each Plan Year (or within thirty (30) days of his initial eligibility to
participate) complete an Election Form indicating the percentage of Compensation
to be deferred under the Plan for such Plan Year. Such election must be made
prior to the period of service for which the Compensation subject to the
deferral election would otherwise be payable. If a Participant fails to file a
properly completed and duly executed Election Form with the Plan Administrator
by the prescribed time, he will be deemed to have elected not to defer any
Compensation under this Plan for the Plan Year, except to the extent the Plan
Administrator in its sole discretion permits an extension of the election
period. Except as provided in Section 3.4, a Participant may not, after the
applicable election date, discontinue his election to participate or change the
percentage of Compensation he has elected to defer for a Plan Year.
The Participant shall designate on the Election Form (or on a separate
form provided by the Plan Administrator) a Beneficiary to receive payment of
amounts in his Account in the event of his death.
3.4 Change of Election. Upon written notice to the Plan Administrator
by December 1 of a Plan Year, a Participant may increase, decrease, or
discontinue his deferral election for the following Plan Year; provided,
however, that (a) the form and amount deferred, and (b) the amount to be
deferred after such election, satisfy the provisions of Sections 3.2 and 3.3.
In addition, a Participant may at any time during the Plan Year
terminate an election and discontinue future deferrals of Compensation under
this Plan by providing written notice to the Plan Administrator prior to the
start of the next payroll period for which
4
<PAGE>
Compensation will be payable. In such event, Compensation earned for services
subsequent to such termination notice will be paid directly to the Participant
and will not be subject to his prior deferral election. A Participant who elects
to discontinue deferrals under the Plan for a Plan Year may not recommence
deferrals under the Plan until the next following Plan Year (or such later Plan
Year in which he is again eligible to participate), provided the Participant
completes and executes the required Election Form. Increases or decreases in the
amount a Participant elects to defer (other than a suspension of deferrals)
shall not be permitted during the Plan Year.
3.5 Employer Credit. For each Plan Year, a Participant shall be
entitled to an additional benefit in an amount determined by the Employer, as
set forth on Schedule A attached hereto and made a part hereof, or as set forth
on further such Schedules as may be established by the Employer from time to
time. This amount shall be prorated for a Plan Year based on weeks of employment
during the Plan Year for any Employee who is not a Participant for an entire
Plan Year.
5
<PAGE>
ARTICLE IV
INTEREST OF PARTICIPANTS
4.1 Accounting for Participants' Interests.
Each Participant's interest shall be accounted for by means of a
Deferral Subaccount and an Employer Credit Subaccount.
(a) Deferral Subaccount. Each Participant's Deferral Subaccount shall
be credited with the amounts of Compensation deferred by the Participant under
this Plan. The timing and manner in which amounts are credited to Participants'
Accounts under this Plan shall be determined by the Company and the Plan
Administrator in their discretion, but a Participant's deferral election shall
be applied to each pay period in which he has Compensation during his period of
participation in the Plan.
(b) Employer Credit Subaccount. Each Participant's Employer Credit
Subaccount shall be credited with the amounts of Employer Credit provided for
each Participant as described in Section 3.5 and this section 4.1(b). A
Participant's Employer Benefit for a Plan Year shall be credited to his or her
Employer Credit Subaccount as of the last day of such Plan Year.
(c) Account Earnings or Losses. The Participant's Account shall be
credited with earnings (or losses) each Valuation Date as provided in this
subsection (c). The earnings rate credited to the Participant's Account will be
determined assuming the amounts credited to his Account were invested in
accordance with guidelines determined by the Plan Administrator after obtaining
recommendations of the Participant for this purpose. The Participant shall be
entitled to revise these recommendations from time to time, and the Plan
Administrator shall be entitled to revise its guidelines from time to time. The
Plan Administrator shall not be required to follow the Participant's
recommendations.
4.2 Vesting of a Participant's Account.
A Participant's interest in the value of his Account shall at all
times be 100% vested and nonforfeitable.
4.3 Distribution of a Participant's Account.
A Participant's Account shall be distributed as provided in this
Section 4.3. A Participant's Account shall continue to be credited with earnings
or losses under Section 4.1 until the Account is fully distributed.
(a) Termination of Service or Retirement. In the event the
Participant's employment with his Employer terminates for any reason, the
amounts credited to his Account shall be paid to such Participant in either a
lump sum or in substantially equal annual installments over a
6
<PAGE>
period of years (not to exceed 10), as elected by the Participant, which
election must made be at least twenty-four (24) months prior to his termination
of employment. Payments shall commence as soon as practical after such
termination of employment; provided, however, the Participant may elect to delay
the commencement of payment until the date specified by the Participant on a
form provided for such purpose by the Plan Administrator, provided such election
to defer payment is made at least twenty-four (24) months prior to the date of
his termination of service or retirement. A Participant may not defer the
commencement of payment beyond the date he reaches age seventy (70).
If his election as to the form of payment or time of payment is not
made at least twenty-four (24) months prior to the date of his termination of
service or retirement, the balance credited to his Account shall be paid to him
as he most recently elected to commence such payments (but at least twenty-four
months prior to the date of his termination of service or retirement, as
applicable). In the absence of a valid election, the balance credited to his
Account shall be paid to him in a lump sum as soon as practical after his
effective date of termination of employment.
If the payout is due to the Participant's suffering a disability (as
determined by the Plan Administrator), the twenty-four (24) month restriction
will not apply and the Participant's most recent election as to the time and/or
method of payment will apply.
(b) Death of Participant. In the event of the death of a Participant,
distribution of the balance credited to a Participant's Account as of the date
of his death shall be made to his Beneficiary as soon as practical following his
death in a lump sum. If the Participant dies after payment of his interest in
the Plan has commenced, but prior to payment of his entire Account, the
remaining balance shall be paid to his Beneficiary (or Beneficiaries) in a lump
sum as soon as possible following his death.
4.4 Withdrawals During Employment. Except as expressly provided in
this Section 4.4, no payment of benefits shall be made under this Plan prior to
a Participant's termination of employment. A Participant who is suffering an
unforeseen and severe financial hardship as a result of an illness or accident
of the Participant or his immediate family, or loss of Participant's property
due to casualty, or for such other reasons as the Plan Administrator may
establish, may file a written request with the Plan Administrator for
distribution of all or a portion of the amount credited to his Account. The Plan
Administrator shall have sole discretion to determine whether to grant a
Participant's hardship request and the amount to distribute to the Participant.
The Plan Administrator shall not authorize distribution of an amount in excess
of that reasonably necessary to alleviate the Participant's hardship. Any
Participant who receives a hardship withdrawal under this section shall not be
eligible to make additional deferrals of Compensation to the Plan for a period
of twelve (12) months immediately following the date of the withdrawal. If such
Participant becomes eligible to reparticipate in the Plan prior to the last day
of a Plan Year, he must elect to reparticipate within thirty (30) days of the
date he is eligible to reparticipate. If he does not elect within such
thirty-day period, he shall not be eligible to reparticipate until the first day
of the immediately following Plan Year.
7
<PAGE>
ARTICLE V
PLAN ADMINISTRATOR
5.1 Members. The Plan Administrator shall be the Compensation
Committee of the Board or such other Committee or an individual appointed by the
Board to serve at its pleasure. Members of any such committee shall not be
required to be employees of the Company or Participants. Any committee member
may resign by giving notice, in writing, filed with the Company.
5.2 Action. Action of the Plan Administrator may be taken with or
without a meeting of committee members; provided, however, that any action shall
be taken only upon the vote or other affirmative expression of a majority of the
committee members qualified to vote with respect to such action. If a member of
the committee or the appointed individual is a Participant in the Plan, he shall
not participate in any decision which solely affects his own Account. The Plan
Administrator shall for purposes of administering the Plan choose a secretary
who shall keep minutes of the Plan Administrator's proceedings and all records
and documents pertaining to the administration of this Plan. The secretary may
execute any certificate or any other written direction on behalf of the Plan
Administrator.
5.3 Right and Duties. The Plan Administrator shall administer and
manage the Plan and shall have all powers necessary to accomplish that purpose,
including (but not limited to) the following:
(a) To construe, interpret, and administer this Plan;
(b) To make allocations and determinations required by this Plan, and
to maintain records regarding Participants' Accounts;
(c) To compute and certify to the Employer the amount and kinds of
benefits payable to Participants or their Beneficiaries, and to determine the
time and manner in which such benefits are to be paid;
(d) To authorize all disbursements by the Employer pursuant to this
Plan;
(e) To maintain (or cause to be maintained) all the necessary records
of the administration of this Plan;
(f) To make and publish such rules for the regulation of this Plan as
are not inconsistent with the terms hereof;
(g) To delegate to other individuals or entities from time to time the
performance of any of its duties or responsibilities hereunder;
8
<PAGE>
(h) To establish or to change the investment funds or arrangements
under Section 4.1(d) of the Plan; and
(i) To hire agents, accountants, actuaries, consultants and legal
counsel to assist in operating and administering the Plan.
The Plan Administrator shall have the exclusive discretionary
authority to construe and to interpret the Plan, to decide all questions of
eligibility for benefits and to determine the amount and manner of payment of
such benefits, and its decisions on such matters shall be final and conclusive
on all parties.
5.4 Compensation, Indemnity and Liability. The Plan Administrator
shall serve as such without bond and without compensation for services
hereunder. All expenses of the Plan and the Plan Administrator shall be paid by
the Employer. If the Plan Administrator is a committee, no member of the
committee shall be liable for any act or omission of any other member of the
committee, nor for any act or omission on his own part, excepting his own
willful misconduct. The Employer shall indemnify and hold harmless the Plan
Administrator and each member of the committee, if any, against any and all
expenses and liabilities, including reasonable legal fees and expenses, arising
out of his membership on the committee, excepting only expenses and liabilities
arising out of his own willful misconduct.
5.5 Taxes. If the whole or any part of any Participant's Account shall
become liable for the payment of any estate, inheritance, income, or other tax
which the Employer shall be required to pay or withhold, the Employer shall have
the full power and authority to withhold and pay such tax out of any monies or
other property in its hand for the account of the Participant whose interests
hereunder are so liable. The Employer shall provide the Participant notice of
such withholding. Prior to making any payment, the Employer may require such
releases or other documents from any lawful taxing authority as it shall deem
necessary.
9
<PAGE>
ARTICLE VI
CLAIMS PROCEDURE
6.1 Claims for Benefits. A Participant or his duly authorized
representative (the "claimant") may make a claim for benefits under the Plan to
the Plan Administrator. The claim shall be reviewed, and the claimant shall be
notified in writing of the Plan Administrator's decision within ninety (90) days
following the date the Plan Administrator receives the claim. If special
circumstances are involved, this ninety (90) day period may be extended for up
to an additional ninety (90) days. If such an extension is necessary, the
claimant shall receive written notice of the extension before the end of the
initial ninety (90) day period.
If the claim is denied, the notice shall explain the reason for the
denial, quoting the sections of the Program or other pertinent documents, if
any, used to arrive at this decision; provide a description of any additional
material or information that would be helpful to the Plan Administrator in
further review of the claim and reasons why such material or information is
necessary; and provide an explanation of the claims review procedure.
6.2 Appeals. If a claimant is not satisfied with the decision of the
Plan Administrator regarding the claim, the claimant may appeal the decision of
the Plan Administrator by filing a written request with the Plan Administrator.
This written request must be filed with the Plan Administrator within sixty (60)
days following the date the claimant receives the written decision of the Plan
Administrator. The claimant may review any applicable documents and may also
submit points of disagreement or other comments in writing.
The Plan Administrator, in its discretion, may schedule a meeting with
the Participant and/or his representative within sixty (60) days after the
claimant has filed the request for review. Within sixty (60) days of the date of
the receipt of the request for review by the Plan Administrator, the claimant
shall receive written notice of the Plan Administrator's final decision.
However, if a hearing is held or there are other special circumstances involved,
the decision shall be given no later than one hundred and twenty (120) days
following the date the Plan Administrator receives the appeal. If such an
extension of time is necessary, the claimant shall receive written notice of the
extension before it begins.
The Plan Administrator shall interpret this Section 6 such that the
claims procedures applicable under the Program conform to the claims review
requirements of Part 5, Title I of ERISA.
10
<PAGE>
ARTICLE VII
AMENDMENT AND TERMINATION
7.1 Amendments. The Board shall have the right in its sole discretion
to amend this Plan in whole or in part at any time; provided, however, that no
such amendment shall reduce the amounts credited at that time to any
Participant's Account. Any amendment shall be in writing and executed by a duly
authorized officer of the Company. All Participants shall be bound by such
amendment.
7.2 Termination of Plan. The Company expects to continue this Plan,
but does not obligate itself to do so. The Company reserves the right to
discontinue and terminate the Plan at any time, in whole or in part, for any
reason (including a change, or an impending change, in the tax laws of the
United States or any State). If the Plan is terminated, the Plan Administrator
shall be notified of such action in a writing executed by a duly authorized
officer of the Company, and the Plan shall be terminated at the time therein set
forth. Termination of the Plan shall be binding on all Participants, but in no
event may such termination reduce the amounts credited at that time to any
Participant's Account. If this Plan is terminated, amounts theretofore credited
to Participants' Accounts shall either be paid in a lump sum immediately, or
distributed in some other manner consistent with this Plan, as determined by the
Plan Administrator in its sole discretion.
11
<PAGE>
ARTICLE VIII
MISCELLANEOUS
8.1 Limitation on Participant's Rights. Participation in this Plan
shall not give any Participant the right to be retained in the Company's employ
or any right or interest in this Plan or any assets of the Company other than as
herein provided. The Company reserves the right to terminate the employment of
any Participant without any liability for any claim against the Company under
this Plan, except to the extent provided herein.
8.2 Benefits Unfunded. The benefits provided by this Plan shall be
unfunded. All amounts payable under this Plan to Participants shall be paid from
the general assets of the Company or Employer, and nothing contained in this
Plan shall require the Company or Employer to set aside or hold in trust any
amounts or assets for the purpose of paying benefits to Participants. This Plan
shall create only a contractual obligation on the part of the Company or
Employer, and Participants shall have the status of general unsecured creditors
of the Company or Employer under the Plan with respect to amounts of
Compensation they defer hereunder or any other obligation of the Employer to pay
benefits pursuant hereto. Any funds of the Employer available to pay benefits
pursuant to the Plan shall be subject to the claims of general creditors of the
Company or Employer, and may be used for any purpose by the Company or Employer.
Notwithstanding the preceding paragraph, the Company or Employer may
at any time transfer assets to a trust for purposes of paying all or any part of
its obligations under this Plan. However, to the extent provided in the trust
only, such transferred amounts shall remain subject to the claims of general
creditors of the Company and Employer only in accordance with the terms of such
trust. To the extent that assets are held in the trust when a Participant's
benefits under the Plan become payable, the Plan Administrator shall direct the
trustee to make trust assets available to pay such benefits to the Participant.
Any payments made to a Participant or Beneficiary from such trust shall relieve
the Company and Employer from any further obligations under the Plan only to the
extent of such payment.
8.3 Other Plans. This Plan shall not affect the right of any eligible
Employee or Participant to participate in and receive benefits under and in
accordance with the provisions of any other employee benefit plans which are now
or hereafter maintained by the Employer, unless the terms of such other employee
benefit plan or plans specifically provide otherwise.
8.4 Receipt or Release. Any payment to a Participant in accordance
with the provisions of this Plan shall, to the extent thereof, be in full
satisfaction of all claims against the Plan Administrator and the Company, and
the Plan Administrator may require such Participant, as a condition precedent to
such payment, to execute a receipt and release to such effect.
8.5 Governing Law. This Plan shall be construed, administered, and
governed in all respects in accordance with applicable federal law and, to the
extent not preempted by federal law, in accordance with the laws of the State of
North Carolina. If any provisions of this
12
<PAGE>
instrument shall be held by a court of competent jurisdiction to be invalid or
unenforceable, the remaining provisions hereof shall continue to be fully
effective.
8.6 Adoption of Plan by Related Employers. With the consent of the
Company, any corporation related to the Company by stock ownership is authorized
to adopt the Plan by action of its board of directors. The action taken by the
board shall include the effective date of the adoption of the Plan by such
related employer.
8.7 Gender, Tense, and Headings. In this Plan, whenever the context so
indicates, the singular or plural number and the masculine, feminine, or neuter
gender shall be deemed to include the other. Headings and subheadings in this
Plan are inserted for convenience of reference only and are not considered in
the construction of the provisions hereof.
8.8 Successors and Assigns; Nonalienation of Benefits. This Plan shall
inure to the benefit of and be binding upon the parties hereto and their
successors and assigns; provided, however, that the amounts credited to the
Account of a Participant shall not (except as provided in Section 5.5) be
subject in any manner to anticipation, alienation, sale, transfer, assignment,
pledge, encumbrance, charge, garnishment, execution or levy of any kind, either
voluntary or involuntary, and any attempt to anticipate, alienate, sell,
transfer, assign, pledge, encumber, charge or otherwise dispose of any right to
any benefits payable hereunder, including, without limitation, any assignment or
alienation in connection with a separation, divorce, child support or similar
arrangement, shall be null and void and not binding on the Plan or the Company.
IN WITNESS WHEREOF, the Company has caused this Plan to be executed by
its duly authorized officers to be effective as of the date first set forth
above.
COMPANY:
BROADBAND TECHNOLOGIES, INC.
ATTEST:
[Corporate Seal] By:_____________________________________
Title:___________________________________
____________________________
Secretary
13
<PAGE>
BROADBAND TECHNOLOGIES, INC.
SUPPLEMENTAL DEFERRED COMPENSATION PLAN
SCHEDULE A
<TABLE>
<CAPTION>
Participant Annual Amount of Employer Benefit
- ----------- ---------------------------------
<S> <C>
David E. Orr, effective 1998: $143,500
December 1, 1998
1999 and Subsequent Years: $82,000
</TABLE>
14
NET LEASE
This LEASE, made this ______ day of _______________, 19____, by and between
HIGHWOODS REALTY LIMITED PARTNERSHIP, a North Carolina Limited Partnership,
whose address is 3100 Smoketree Court, Suite 600, Raleigh, North Carolina 27604,
hereinafter "Landlord" and BROADBAND TECHNOLOGIES, INC., a North Carolina
Corporation, whose address is 4024 Stirrup Creek Drive, Suite 700, Durham, North
Carolina 27703, hereinafter (whether one or more) "Tenant":
I. GENERAL.
1.1 CONSIDERATION. Landlord enters into this Lease in consideration of
the payment by Tenant of the rents herein reserved and the keeping, observance
and performance by Tenant of the covenants and agreements herein contained.
1.2 EXHIBITS AND ADDENDA TO LEASE. The Exhibits and Addenda listed below
shall be attached to this Lease and be deemed incorporated in this Lease by this
reference. In the event of any inconsistency between such Exhibits and Addenda
and the terms and provisions of this Lease, the terms and provisions of the
Exhibits and Addenda shall control. The Exhibits and Addenda to this Lease are:
Exhibit A - Premises
Exhibit A-1 - Land
Exhibit B - Environmental Compliance
Exhibit B-1 - Chemical Inventory List
Exhibit C - Estoppel Certificate
Exhibit D - HVAC Inspection and Service Contract
Exhibit E - Operating Expense Exclusions
Addendum Number One - Option to Extend Lease Term
Addendum Number Two - First Right of Offer
Addendum Number Three - Option to Cancel
II. DEMISE OF PREMISES.
2.1 DEMISE. Subject to the provisions, covenants and agreements herein
contained, Landlord hereby leases and demises to Tenant, and Tenant hereby
leases from Landlord, the Premises as hereinafter defined, together with a
non-exclusive right to use the Parking Area, as hereinafter defined, for the
Lease Term as hereinafter defined, subject to existing covenants, restrictions,
easements and encumbrances affecting the same.
2.2 PREMISES. The "Premises" shall mean the space to be occupied by
Tenant as depicted on Exhibit A attached hereto. The Premises are within the
Building which is located on the Land, as the terms Building and Land are
hereinafter defined.
2.3 SQUARE FOOTAGE AND ADDRESS. The Premises contains approximately
97,195 RENTABLE SQUARE FEET, TO BE VERIFIED BY HAGERSMITH DESIGN, P.A. ON OR
BEFORE FEBRUARY 1, 1999. The address of the Premises is 4024 STIRRUP CREEK
DRIVE, SUITE 700, DURHAM, NORTH CAROLINA 27703.
1
<PAGE>
2.4 LAND. "Land" shall mean the parcel of real property more
particularly described in EXHIBIT A-1 attached hereto, containing approximately
ELEVEN AND THREE TENTHS (11.3) ACRES OF LAND.
2.5 BUILDING. "Building" shall mean the Building constructed or to be
constructed on the Land, containing approximately 124,432 RENTABLE SQUARE FEET,
TO BE VERIFIED BY HAGERSMITH DESIGN, P.A.
2.6 IMPROVEMENTS. "Improvements" shall mean the Building, the Parking
Area (as hereinafter defined), and all other improvements on the Land, including
landscaping thereon.
2.7 PROPERTY. "Property" shall mean the Land, the Building and the
Improvements and any fixtures and personal property used in operation and
maintenance of the Land, Building and Improvements, other than fixtures and
personal property of Tenant and other users of space in the Building.
2.8 COMMON FACILITIES. "Common Facilities" shall mean all of the
Property except the Premises and other space in the Building leased or held for
lease to other Tenants. Common Facilities shall include the Parking Area and any
walks, driveways, lobby areas, halls, stairs and restrooms designated for common
use by Tenant and other users of space in the Building.
2.9 PARKING AREA. "Parking Area" shall mean that portion that of the
Property which is for the parking of motor vehicles. The Parking Area is to be
shared by Tenant in common with other users of space in the Building.
2.10 PARK. The Property is located in and is part of THE development
commonly known as TRIANGLE BUSINESS CENTER.
2.11 USE OF COMMON FACILITIES. Tenant is hereby granted the
non-exclusive right to use, in common with other users of space in the Building,
so much of the Common Facilities as are needed for the use of the Premises.
2.12 COVENANT OF QUIET ENJOYMENT. If Tenant promptly and punctually
complies with each of its obligations hereunder, it shall peacefully have and
enjoy the possession of the Premises during the Term hereof, provided that no
action of Landlord or other tenants working in other space in the Building, or
in repairing or restoring the Premises, shall be deemed a breach of this
covenant, or give to Tenant any right to modify this Lease either as to term,
rent payable, or other obligations to be performed, SO LONG AS SUCH WORK,
REPAIRS OR RESTORATION DO NOT UNREASONABLY INTERFERE WITH OR PREVENT TENANT'S
USE OF THE PREMISES, AND SO LONG AS ALL SUCH ACTIVITIES ARE DONE IN A
COMMERCIALLY REASONABLE MANNER BY LANDLORD.
2.13 CONDITION OF PREMISES. Tenant covenants and agrees that, upon
taking possession of the Premises, it will have accepted the Premises "as-is"
and Tenant waives any warranty of condition or habitability, suitability for
occupancy, use of habitation, fitness for a particular purpose, or of
merchantability, express or implied, relating to the Premises.
III. TERM OF LEASE.
3.1 LEASE TERM. "Lease Term" shall mean the period COMMENCING ON THE
FIRST (1ST) DAY OF JANUARY, 1999 AND EXPIRING ON THE THIRTY-FIRST (31ST) DAY OF
DECEMBER, 2003.
IV. RENT AND OTHER AMOUNTS PAYABLE.
4.1 BASE RENT. Tenant covenants and agrees to pay to Landlord, without
prior demand and without offset, deduction or abatement, base rent for the full
Lease Term in the amount (before Cost of Living Increases) of $3,844,062.00
("Base Rent"), for a Minimum annual Base Rent of $768,812.40 before adjustments.
2
<PAGE>
4.2 MONTHLY RENT. Base Rent shall be payable monthly in advance, in
equal installments in the amount of $64,067.70 ("Monthly Rent"), commencing on
the first day of the first month of the Lease Term and continuing on the same
day of each month thereafter for the balance of the Lease Term, unless the
commencement date of the Lease Term is other than the first day of a calendar
month, in which event rent shall be payable on the commencement date for the
remaining number of days in that month prorated for such partial month, and
thereafter as provided above.
4.3 PLACE OF PAYMENTS. Base Rent and all other sums payable by Tenant to
Landlord under this Lease shall be paid to Landlord at the place for payments
specified for notices in Section 13.8, or such other place as Landlord may, from
time to time, designate in writing. In addition to such remedies as may be
provided under the Default provisions of this Lease, Landlord shall be entitled
to collect a late charge of four percent (4%) of the amount of each monthly
payment not received within five (5) days of the date when due, and a charge of
the lower of the maximum lawful bad check fee or five percent (5%) of the amount
of any check given by Tenant and not paid when first presented by Landlord. IF
TENANT FAILS TO PAY RENT WHEN DUE (A "LATE PAYMENT"), THEN TWICE DURING ANY
CALENDAR YEAR SUCH LATE PAYMENT SHALL NOT BE CONSIDERED AN EVENT OF DEFAULT
PURSUANT TO ARTICLE XI BELOW, IF, WITHIN FIVE (5) DAYS AFTER WRITTEN NOTICE FROM
LANDLORD (THE "GRACE PERIOD"), TENANT SUBMITS THE RENT DUE, INCLUDING THE LATE
CHARGE OF FOUR PERCENT (4%), FOR SUCH MONTH. LANDLORD SHALL FORGIVE TENANT ONLY
TWO (2) LATE PAYMENTS PER CALENDAR YEAR, ANY ADDITIONAL LATE PAYMENT SHALL
CONSTITUTE AN EVENT OF DEFAULT.
4.4 LEASE A NET LEASE AND RENT ABSOLUTE. It is the intent of the parties
that the Base Rent provided in this Lease shall be a net payment to Landlord;
that the Lease shall continue for the full Lease Term notwithstanding any
occurrence preventing or restricting use and occupancy of the Premises,
including any damage or destruction affecting the Premises, and any action by
governmental authority relating to or affecting the Premises, except as
otherwise specifically provided in this Lease; that the Base Rent shall be
absolutely payable without offset, reduction or abatement for any cause except
as otherwise specifically provided in this Lease; that Landlord shall not bear
any costs or expenses relating to the Premises or provide any services or do any
act in connection with the Premises except as otherwise specifically provided in
this Lease; and that Tenant shall pay, in addition to Base Rent, Additional Rent
to cover costs and expenses relating to the Premises, the Common Facilities, and
the Property.
3
<PAGE>
4.5 ADDITIONAL RENT. EXCEPT FOR ITEMS EXCLUDED HEREIN, Tenant covenants
and agrees to pay, as Additional Rent, its Proportionate Share of: (i) all costs
and expenses incurred by Landlord relating to the Premises; (ii) all costs and
expenses relating to the Common Facilities; and (iii) certain costs and expenses
relating to the Property and the Park, all as hereinafter provided and to pay
all other amounts payable by Tenant under the terms of this Lease ("Additional
Rent"). Costs and expenses, the Proportionate Share of which is payable by
Tenant as Additional Rent (as aforesaid) shall include (a) Taxes and Assessments
(as defined in Article V below); (b) insurance costs (as provided in Article VI
below); (c) utility charges (as provided in Section 7.1 below); (d) operating
expenses (as provided in Section 7.2 below); (e) maintenance and repair expenses
(as provided in Section 7.3 below); (f) the HVAC Expense (as defined in Section
4.7 below); and (g) other costs and expenses relating to the Premises, the
Common Facilities, the Property, and the Park during or attributable to the
Lease Term, all as hereinafter provided in this Lease. SUCH AGGREGATE COSTS
SHALL NOT INCREASE, AFTER CALENDAR YEAR 1998, MORE THAN TEN PERCENT (10%)
ANNUALLY. ADDITIONAL RENT SHALL NOT INCLUDE ANY ITEMS FOR WHICH TENANT HAS THE
OBLIGATION TO MAKE DIRECT PAYMENT, BUT SHALL ONLY INCLUDE ITEMS IN THIS
PARAGRAPH 4.5 (AND NOT OTHERWISE EXCLUDED UNDER THE TERMS OF THE LEASE) PAID BY
LANDLORD.
4.6 TENANT'S PROPORTIONATE SHARE. "Tenant's Proportionate Share" shall
mean the percentage derived by dividing the rentable square footage of the
Premises, as set forth in Section 2.3, by the rentable square footage within the
Building as set forth in Section 2.5. Tenant's Proportionate Share on the date
of this Lease is 78.1109%. Such percentage shall be appropriately adjusted in
the event of construction of additional building(s) on the Land if such
building(s) share the Common Facilities AND/OR IF THE SQUARE FOOTAGE OF THE
PREMISES OR BUILDING ARE ADJUSTED IN ACCORDANCE WITH SECTIONS 2.3, "SQUARE
FOOTAGE AND ADDRESS" AND 2.5 "BUILDING".
4.7 MONTHLY DEPOSITS FOR COSTS AND EXPENSES PAYABLE AS ADDITIONAL RENT.
Tenant covenants and agrees to pay to Landlord, monthly in advance, without
notice, on each day that payment of Monthly Rent is due, amounts as hereinafter
specified (the "Monthly Deposits") for: (i) payment of Taxes and Assessments (as
hereinafter defined); (ii) insurance premiums payable with respect to the
Property ("Insurance Premiums"); (iii) and (iv) utility charges, operating
expenses and maintenance and repair expenses, as specified in Article VII below,
and other costs and expenses relating to the Common Facilities and the Park
(other than the Premises) (collectively, the "Expenses"), and, if the Monthly
Deposits are insufficient to pay the Expenses, to pay to Landlord, within ten
(10) days after demand by Landlord, amounts necessary to provide Landlord with
funds to pay the same. The Monthly Deposits shall each be equal to the aggregate
of 1/12 of the amount, as reasonably estimated by Landlord, of the annual HVAC
Expense and Tenant's Proportionate Share of 1/12 of the amounts, as reasonably
estimated by Landlord, of the annual Expenses. Beginning on the first day of the
first month of the Lease Term, Tenant agrees to pay an MONTHLY DEPOSIT OF
FOURTEEN CENTS ($0.14) PER SQUARE FOOT, namely the sum of THIRTEEN THOUSAND SIX
HUNDRED SEVEN DOLLARS AND THIRTY CENTS ($13,607.30) PER MONTH. To the extent the
Monthly Deposits exceed the Expenses, the excess amount shall, at Landlord's
option, except as may be otherwise provided by law, either be paid to Tenant or
credited against future Monthly Deposits or against Base Rent, or other amounts
payable by Tenant under this Lease. The amount of Expenses payable by Tenant for
the years in which the Lease Term commences and expires shall be subject to the
provisions hereinafter contained in this Lease for proration of such amounts in
such years. Prior to the dates on which payment becomes delinquent for Expenses,
Landlord shall make payment of such amounts to the extent of funds from Monthly
Deposits available therefor and, upon request by Tenant, shall furnish Tenant
with a copy of any receipt for such payments. Except for Landlord's obligation
to make payments out of funds available from Monthly Deposits, the making of
Monthly Deposits by Tenant shall not limit or alter Tenant's obligation to pay
any part of the Expenses, as elsewhere provided in this Lease.
4.8 PARK EXPENSES. In addition to all other amounts payable by Tenant
pursuant to the terms of this Lease, Tenant shall pay, as Additional Rent
payable pursuant to the provisions hereinabove for Monthly Deposits, Tenant's
Proportionate Share of the Park Expenses which are deemed allocated to the
Property. "Park Expenses" shall mean all items listed in paragraph 4.5 hereof as
Additional Rent which relate to the Park and which are not separately
attributable to the Property or any other portion of the Park.
4
<PAGE>
4.9 PRORATION AT COMMENCEMENT AND EXPIRATION OF TERM. Expenses shall be
prorated between Landlord and Tenant for the year in which the Lease Term
commences and for the year in which the Lease Term expires as of, respectively,
the date of commencement of the Lease Term and the date of expiration of the
Lease Term, except as hereinafter provided. Tenant shall be liable without
proration for the full amount of any Taxes and Assessments relating to
improvements, fixtures, equipment or personal property installed by or on behalf
of Tenant which are levied, assessed, or attributable to the Lease Term.
Proration of Expenses shall be made on the basis of the actual Expenses, billed
during the calendar years of the Lease Term. The Tenant's Proportionate Share of
Expenses for the years in which the Lease Term commences and expires shall be
paid and deposited with the Landlord through Monthly Deposits as hereinabove
provided, but, in the event actual Expenses for either year are greater or less
than as estimated for purposes of Monthly Deposits, appropriate adjustment and
payment shall be made between the parties, at the time the actual amounts are
known, as may be necessary to accomplish payment or proration, as herein
provided.
4.10 SECURITY DEPOSIT.
4.11 GENERAL PROVISIONS AS TO MONTHLY DEPOSITS. Landlord shall be free
to commingle the Monthly Deposits with Landlord's own funds and Landlord shall
not be obligated to pay interest to Tenant on account of the Monthly Deposits.
In the event of a transfer by Landlord of Landlord's interest in the Premises,
Landlord may deliver the Monthly Deposits to the transferee of Landlord's
interest and Landlord shall thereupon be discharged from any further liability
to Tenant with respect to such Monthly Deposits. In the event of a transfer by
Tenant of Tenant's interest in the Premises (Tenant's right to do being limited
by Section 8.17), Landlord shall be entitled to deliver the Monthly Deposits to
Tenant's successor in interest and Landlord shall thereafter have no liability
with respect to the Monthly Deposits.
4.12 AUDIT OF ADDITIONAL RENT. IF TENANT DISPUTES THE AMOUNT OF
ADDITIONAL RENT PAID WITHIN 120 DAYS OF THE END OF THE CALENDAR YEAR FOR WHICH
SUCH RENT WAS PAID (OR 120 DAYS FROM THE DATE OF PAYMENT, WHICHEVER IS LATER),
AND PROVIDING TENANT IS NOT THEN IN DEFAULT UNDER THIS LEASE, TENANT SHALL HAVE
THE RIGHT ON WRITTEN NOTICE TO HAVE LANDLORD'S BOOKS AND RECORDS RELATING TO
OPERATING EXPENSES AUDITED BY A QUALIFIED PROFESSIONAL SELECTED BY TENANT OR BY
TENANT ITSELF. IF AFTER SUCH AUDIT TENANT STILL DISPUTES THE AMOUNT OF OPERATING
EXPENSES, A CERTIFICATION AS TO THE PROPER AMOUNT SHALL BE MADE BY LANDLORD'S
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT IN CONSULTATION WITH TENANT'S
PROFESSIONAL, WHICH CERTIFICATION SHALL BE FINAL AND CONCLUSIVE. IF SUCH AUDIT
REVEALS THAT OPERATING EXPENSES WERE OVERSTATED BY EIGHT PERCENT (8%) OR MORE IN
THE CALENDAR YEAR AUDITED, LANDLORD SHALL REIMBURSE TENANT FOR ITS REASONABLE
COSTS IN DOING THE AUDIT, AND LANDLORD SHALL WITHIN THIRTY (30) DAYS AFTER THE
CERTIFICATION PAY TO TENANT THE AMOUNT OF ANY OVERSTATEMENT WHICH IT HAD
COLLECTED FROM TENANT. HOWEVER, IF SUCH CERTIFICATION DOES NOT SHOW THAT
LANDLORD HAD MADE SUCH AN OVERSTATEMENT THEN TENANT SHALL PAY BOTH THE COSTS OF
ITS PROFESSIONAL AS WELL AS THE REASONABLE CHARGES OF LANDLORD'S INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANT ENGAGED TO DETERMINE THE CORRECT AMOUNT OF OPERATING
EXPENSES. IF THE CERTIFICATION SHOWS THAT LANDLORD HAS UNDERCHARGED TENANT THEN
TENANT SHALL WITHIN THIRTY (30) DAYS PAY TO LANDLORD THE AMOUNT OF ANY
UNDERCHARGE.
5
<PAGE>
BOOKS AND RECORDS NECESSARY TO ACCOMPLISH ANY AUDIT PERMITTED UNDER THIS
SECTION SHALL BE RETAINED FOR TWELVE MONTHS AFTER TENANT RECEIVES NOTICE OF
ADDITIONAL RENT DUE, AND ON RECEIPT OF NOTICE OF TENANT'S DISPUTE OF THE
OPERATING EXPENSES SHALL BE MADE AVAILABLE TO TENANT TO CONDUCT THE AUDIT, WHICH
MAY BE EITHER AT THE PROPERTY OR AT LANDLORD'S OFFICES IN THE RESEARCH TRIANGLE
AREA OF NORTH CAROLINA.
IN THE EVENT THAT TENANT ELECTS TO HAVE A PROFESSIONAL AUDIT LANDLORD'S
OPERATING EXPENSES AS PROVIDED IN THIS LEASE, SUCH AUDIT MUST BE CONDUCTED BY AN
INDEPENDENT NATIONALLY OR REGIONALLY RECOGNIZED ACCOUNTING FIRM THAT IS NOT
BEING COMPENSATED BY TENANT ON A CONTINGENCY FEE BASIS. ALL INFORMATION OBTAINED
THROUGH SUCH AUDIT AS WELL AS ANY COMPROMISE, SETTLEMENT OR ADJUSTMENT REACHED
AS A RESULT OF SUCH AUDIT SHALL BE HELD IN STRICT CONFIDENCE BY TENANT AND ITS
OFFICERS, AGENTS, AND EMPLOYEES AND AS A CONDITION TO SUCH AUDIT, TENANT'S
AUDITOR SHALL EXECUTE A WRITTEN AGREEMENT AGREEING THAT THE AUDITOR IS NOT BEING
COMPENSATED ON A CONTINGENCY FEE BASIS AND THAT ALL INFORMATION OBTAINED THROUGH
SUCH AUDIT AS WELL AS ANY COMPROMISE, SETTLEMENT OR ADJUSTMENT REACHED AS A
RESULT OF SUCH AUDIT, SHALL BE HELD IN STRICT CONFIDENCE AND SHALL NOT BE
REVEALED IN ANY MANNER TO ANY PERSON EXCEPT UPON THE PRIOR WRITTEN CONSENT OF
LANDLORD, WHICH CONSENT MAY BE WITHHELD IN LANDLORD'S SOLE DISCRETION, OR IF
REQUIRED PURSUANT TO ANY LITIGATION BETWEEN LANDLORD AND TENANT MATERIALLY
RELATED TO THE FACTS DISCLOSED BY SUCH AUDIT, OR IF REQUIRED BY LAW.
V. TAXES AND ASSESSMENTS.
5.1 COVENANT TO PAY TAXES AND ASSESSMENTS. Tenant covenants and agrees
to pay, as Additional Rent, Tenant's Pro Rata Share of Taxes and Assessments,
which are billed during any calendar year falling partly or wholly within the
Lease Term, payable pursuant to the provisions hereinabove for Monthly Deposits.
"Taxes and Assessments" shall mean all taxes, assessments or other impositions,
general or special, ordinary or extraordinary, of every kind or nature, which
may be levied, assessed or imposed upon or with respect to the Property or any
part thereof.
5.2 SPECIAL ASSESSMENTS. In the event any Taxes or Assessments are
payable in installments over a period of years, Tenant shall be responsible only
for installments billed during the calendar years within the Lease Term, with
proration, as above provided, of any installment payable prior to or after
expiration of the Lease Term.
5.3 NEW OR ADDITIONAL TAXES. Tenant's obligation to pay Tenant's Pro
Rata Share of Taxes and Assessments shall include any Taxes and Assessments of a
nature not presently in effect but which may hereafter be levied, assessed or
imposed upon Landlord or upon the Property if such tax shall be based upon or
arise out of the ownership, use or operation of, or the rents received from the
Property, other than income taxes of Landlord. For the purposes of computing
Tenant's liability for such new type of tax or assessment, the Property shall be
deemed the only property of Landlord.
5.4 LANDLORD'S SOLE RIGHT TO CONTEST TAXES. Landlord shall have the sole
right to contest any Taxes or Assessments. Landlord shall pay to or credit
Tenant with Tenant's Pro Rata Share of any abatement, reduction or recovery of
any Taxes and Assessments attributable to the Lease Term, less Tenant's
Proportionate Share of all costs and expenses incurred by Landlord, including
attorneys' fees, in connection with such abatement, reduction or recovery.
VI. INSURANCE.
6.1 CASUALTY INSURANCE. Landlord covenants and agrees to obtain and keep
in full force and effect during the Lease Term, Casualty Insurance as
hereinafter defined. "Casualty Insurance" shall mean fire and extended coverage
insurance with respect to the Property, in an amount equal to the full
replacement cost thereof, with coinsurance clauses of no less than 80%, and with
coverage, by endorsement or otherwise, for all risks, vandalism and malicious
mischief, sprinkler leakage, boilers, and rental loss and with a deductible in
an amount for each occurrence as Landlord, in its sole discretion, may determine
from time to time. Casualty Insurance obtained by Landlord need not name Tenant
as an insured party but may, at Landlord's option, name any mortgagee or holder
of a deed of trust as an insured party as its interest may appear. Tenant
covenants and agrees to pay its Proportionate Share of the cost of Casualty
6
<PAGE>
Insurance obtained by Landlord as Additional Rent, payable pursuant to the
provisions hereinabove for Monthly Deposits. Tenant shall be responsible for
obtaining, at Tenant's cost and expense, insurance coverage for property of
Tenant and for business interruption of Tenant, and Tenant shall have no claim
against Landlord for damage to its property or interruption of its business
whether or not it insures the same.
6.2 LIABILITY INSURANCE. Tenant covenants and agrees at its expense to
obtain and keep in full force and effect during the Lease Term Liability
Insurance as hereinafter defined. "Liability Insurance" shall mean comprehensive
general liability insurance covering public liability with respect to the
ownership, use and operation of the Premises, with combined single limit
coverage of not less than $2,000,000.00, with endorsements for assumed
contractual liability with respect to the liabilities assumed by Tenant under
Section 8.24 of this Lease, and with no deductible, retention or self-insurance
provision contained therein, unless otherwise approved in writing by Landlord,
WHICH APPROVAL SHALL NOT BE UNREASONABLY WITHHELD, CONDITIONED OR DELAYED.
Landlord covenants and agrees to obtain and keep in full force and effect during
the Lease Term public liability insurance with respect to the ownership, use and
operation of the Property, and the Common Facilities, but excluding the Premises
and space leased to other tenants, with combined single limit coverage of not
less than $2,000,000.00. Tenant also covenants and agrees to pay Tenant's
Proportionate Share of the premiums and costs of such liability insurance as
Additional Rent, payable pursuant to the provisions hereinabove for Monthly
Deposits.
6.3 GENERAL PROVISIONS RESPECTING INSURANCE. Except as otherwise
approved in writing by Landlord, all insurance obtained by Tenant shall be on
forms and with insurers selected or approved by Landlord, which approval shall
not be unreasonably withheld; shall name Landlord and the holder of any first
mortgage or deed of trust encumbering the Property as insured parties, as their
interests may appear; shall contain a waiver of rights of subrogation as among
Tenant, Landlord and the holder of any such first mortgage or deed of trust; and
shall provide, by certificate of insurance or otherwise, that the insurance
coverage shall not be cancelled or altered except upon thirty (30) days prior
written notice to Landlord and the holder of any such first mortgage or deed of
trust. Certificates of insurance obtained by Tenant shall be delivered to
Landlord, who may deposit the same with the holder of any such first mortgage or
deed of trust.
6.4 COOPERATION IN THE EVENT OF LOSS. Landlord and Tenant shall
cooperate with each other in the collection of any insurance proceeds which may
be payable in the event of any loss, including the execution and delivery of any
proof of loss or other actions required to effect recovery.
6.5 WAIVER OF SUBROGATION RIGHTS. WITH RESPECT TO ALL POLICIES OF
INSURANCE CARRIED OR MAINTAINED PURSUANT TO THIS LEASE, AND TO THE EXTENT
PERMITTED UNDER SUCH POLICIES, TENANT AND LANDLORD EACH WAIVE THE INSURANCE
CARRIERS' RIGHTS OF SUBROGATION.
VII. UTILITY, OPERATING, MAINTENANCE AND REPAIR EXPENSES.
7.1 UTILITY CHARGES. Tenant covenants and agrees to pay all charges for
water, sewage disposal, gas, electricity, light, heat, power, telephone or other
utility services used, rendered or supplied to or for the Premises and to
contract for the same in Tenant's own name. Tenant also covenants and agrees to
pay to Landlord Tenant's Proportionate Share of any such charges relating to
Common Facilities or which are not separately metered, or billable to premises
in the Building leased or held for lease to tenants, such charges to be payable
pursuant to the provisions hereinabove for Monthly Deposits.
7.2 OPERATING EXPENSES. Tenant covenants and agrees to pay all costs and
expenses of operations on or relating to the Premises, including BUT NOT LIMITED
TO, costs and expenses for utilities, trash and garbage disposal, janitorial and
cleaning services FOR THE PREMISES, MAINTENANCE OF THE HVAC SYSTEM IN A MANNER
CONSISTENT WITH EXHIBIT D ATTACHED HERETO AND MADE A PART HEREOF, MAINTENANCE
AND REPAIRS WITHIN THE PREMISES INCLUDING BUT NOT LIMITED TO PAINTING, BREAKABLE
MATERIALS (EXCEPT FOR EXTERIOR GLASS) in or serving the Premises and replacement
of lights and light fixtures in or serving the Premises, and to contract for the
same in Tenant's own name. AS FURTHER DESCRIBED IN SECTION 4.7 "MONTHLY DEPOSITS
FOR COSTS AND EXPENSES PAYABLE AS ADDITIONAL RENT" Tenant also covenants and
agrees to pay to Landlord Tenant's Proportionate Share of any such costs and
expenses incurred by Landlord relating to Common Facilities, INCLUDING BUT NOT
7
<PAGE>
LIMITED TO, gardening and landscaping services, security services, removal of
snow and ice from parking areas, sidewalks and driveways serving the Premises
and painting, or which are not separately allocated to premises in the Building
leased or held for lease to tenants, such costs and expenses to be payable
pursuant to the provisions hereinabove for Monthly Deposits. THE TERM "OPERATING
EXPENSES" SHALL NOT INCLUDE THE ITEMS LISTED IN EXHIBIT E TO THIS LEASE.
7.3 MAINTENANCE AND REPAIR EXPENSES. Tenant covenants and agrees to
maintain, repair, replace and keep the Premises and all improvements, fixtures
and personal property thereon in good, safe and sanitary condition, order and
repair and in accordance with all applicable laws, ordinances, orders, rules and
regulations (including, without limitation, the Americans with Disabilities Act
"ADA") of governmental authorities having jurisdiction, now existing or
hereafter enacted; to pay all costs and expenses in connection therewith; and to
contract for the same in Tenant's own name; and to pay to Landlord, pursuant to
the provisions hereinabove for Monthly Deposits, Tenant's Proportionate Share of
any such costs and expenses incurred by Landlord relating to Common Facilities
or which are not separately allocated to premises in the Building leased or held
for lease to tenants. Such costs and expenses as to Common Facilities may
include the costs and expenses of maintenance and upkeep of grass, trees, shrubs
and landscaping, including replanting where necessary; keeping parking areas,
landscaped areas, sidewalks and driveways safe and secure (with guards or
watchmen where Landlord deems necessary) and free from litter, dirt, debris,
snow, and obstructions; and ordinary maintenance and repair of the Property and
Improvements INCLUDING REPLACEMENT OF EXTERIOR GLASS (WHICH SHALL BE THE
RESPONSIBILITY OF LANDLORD). All maintenance and repairs by Tenant shall be done
promptly, in a good and workmanlike fashion, and without diminishing the
original quality of the Premises or the Property. Landlord shall be responsible
for and shall bear the costs and expenses of replacement of, or extraordinary
maintenance and repairs to, roofs, exterior walls, and structural elements of
the Building and Improvements, unless the need for such replacement or repair is
caused by the act or neglect of Tenant. LANDLORD SHALL ALSO BE RESPONSIBLE FOR
ADA COMPLIANCE OF THE BUILDING AND COMMON AREAS, UNLESS THE NEED FOR SUCH
COMPLIANCE IS CAUSED BY ANY RENOVATIONS OR CHANGES DONE BY TENANT.
VIII. OTHER COVENANTS OF TENANT.
8.1 LIMITATION ON USE BY TENANT. Tenant covenants and agrees to use the
Premises only for the following use or uses OFFICE, RESEARCH, DEVELOPMENT AND
ENGINEERING; ASSEMBLY AND TESTING OF ELECTRONIC UNITS AND COMPONENTS;
WAREHOUSING AND SHIPPING and for no other purposes, except with the prior
written consent of Landlord.
8.2 COMPLIANCE WITH LAWS. Tenant covenants and agrees that nothing shall
be done or kept on the Premises in violation of any law, ordinance, order, rule
or regulation of any governmental authority having jurisdiction, and that the
Premises shall be used, kept and maintained in compliance with any such law,
ordinance, order, rule or regulation (now existing or hereafter enacted) and
with the certificate of occupancy issued for the Building and the Premises.
8.3 COMPLIANCE WITH INSURANCE REQUIREMENTS. Tenant covenants and agrees
that nothing shall be done or kept on the Premises which might make unavailable
or increase the cost of insurance maintained with respect to the Premises or the
Property, which might increase the insured risks or which might result in
cancellation of any such insurance.
8.4 NO WASTE OR IMPAIRMENT OF VALUE. Tenant covenants and agrees that
nothing shall be done or kept on the Premises or the Property which might impair
the value of the Premises or the Property, or which would constitute waste.
8.5 NO HAZARDOUS USE. Tenant covenants and agrees that nothing shall be
done or kept on the Premises or the Property and that no improvements, changes,
alterations, additions, maintenance or repairs shall be made to the Premises
which might be unsafe or hazardous to any person or property. Tenant shall at
all times comply with its representations, warranties and covenants as set forth
in Exhibit C.
8.6 NO STRUCTURAL OR OVERLOADING. Tenant covenants and agrees that
nothing shall be done or kept on the Premises or the Building and that no
improvements, changes, alterations, additions, maintenance or repairs shall be
made to the Premises which might impair the structural soundness of the
Building, which might result in an overload of the weight capacity of floors or
of
8
<PAGE>
electricity lines serving the Building, or which might interfere with electric
or electronic equipment in the Building or on any adjacent or nearby property.
In the event of violations hereof, Tenant covenants and agrees to remedy
immediately the violation at Tenant's expense and in compliance with all
requirements of governmental authorities and insurance underwriters.
8.7 NO NUISANCE, NOXIOUS OR OFFENSIVE ACTIVITY. Tenant covenants and
agrees that no noxious or offensive activity shall be carried on upon the
Premises or the Property; nor shall anything be done or kept on the Premises or
the Property which may be or become a public or private nuisance or which may
cause embarrassment, disturbance, or annoyance to others in the Building or on
adjacent or nearby property.
8.8 NO ANNOYING LIGHTS, SOUNDS OR ODORS. Tenant covenants and agrees
that no light shall be emitted from the Premises which is unreasonably bright or
causes unreasonable glare; no sound shall be emitted from the Premises which is
unreasonably loud or annoying; and no odor shall be emitted from the Premises
which is or might be noxious or offensive to others in the Building or on
adjacent or nearby property.
8.9 NO UNSIGHTLINESS. Tenant covenants and agrees that no unsightliness
shall be permitted on the Premises or the Property. Without limiting the
generality of the foregoing, all unsightly conditions, equipment, objects and
conditions shall be kept enclosed within the Premises; hallways adjoining the
Premises may not be used for discarding or storing any materials; no refuse,
scrap, debris, garbage, trash, bulk materials or waste shall be kept, stored or
allowed to accumulate on the Premises or the Property except as may be enclosed
within the Premises; all pipes, wires, poles, antenna and other facilities for
utilities or the transmission or reception of audio or visual signals or
electricity shall be kept and maintained underground or enclosed within the
Premises or appropriately screened from view; and no temporary structure shall
be placed or permitted on the Premises or the Property without the prior written
consent of Landlord.
8.10 NO ANIMALS. Tenant covenants and agrees that no animals (OTHER THAN
SEEING-EYE DOGS) shall be permitted or kept on the Premises or the Property.
8.11 RESTRICTION ON SIGNS AND EXTERIOR LIGHTING. Tenant's EXTERIOR
GROUND SIGN AND BUILDING SIGNAGE AS OF NOVEMBER 5, 1998 IS APPROVED BY LANDLORD.
Tenant covenants and agrees that no other signs or advertising devices of any
nature shall be erected or maintained by Tenant on the Premises or the Property
and no exterior lighting shall be permitted on the Premises or the Property
except as approved in writing by Landlord.
8.12 NO VIOLATION OF COVENANTS. Tenant covenants and agrees not to
commit, suffer or permit any violation of any covenants, conditions or
restrictions affecting the Premises or the Property, SO LONG AS TENANT HAS BEEN
NOTIFIED IN WRITING OF SUCH COVENANTS AND HAS BEEN PROVIDED A COPY OF SAME.
8.13 RESTRICTION ON CHANGES AND ALTERATIONS. Tenant may not make any
structural or interior alterations, which change the Premises from the condition
that existed AS OF THE EXECUTION OF THIS LEASE. If Tenant desires to have
alterations made, Tenant shall provide Landlord's managing agent with two (2)
complete sets of construction drawings, and such agent shall then determine the
cost of the work to be done pursuant to such drawings (such cost to include a
construction supervision fee of 5% of such cost to be paid to Landlord's
managing agent IF LANDLORD COORDINATES SUCH WORK WITH CONTRACTORS), and submit
the cost to Tenant. Tenant may then either agree to pay Landlord the cost, in
which event Landlord shall cause the work to be done, or Tenant may withdraw its
request for alterations. BROADBAND MAY MAKE NON-STRUCTURAL ALTERATIONS WHICH (I)
DO NOT REQUIRE A BUILDING PERMIT, (II) DO NOT CREATE AN UNREASONABLE BURDEN ON
THE LOAD BEARING CAPACITY OF THE FLOOR OR ANY OTHER STRUCTURAL COMPONENT OF THE
BUILDING, AND (III) DO NOT MODIFY, CONNECT TO, OR INTERFERE WITH ANY OF THE
BUILDING SYSTEMS (SUCH AS HVAC, ELECTRICAL OR PLUMBING SYSTEMS); PROVIDED THAT,
HIGHWOODS IS GIVEN AT LEAST TEN BUSINESS DAYS TO REVIEW AND APPROVE THE FINAL
CONSTRUCTION PLANS AND DRAWINGS BEFORE THE WORK IS STARTED, WHICH APPROVAL SHALL
NOT BE UNREASONABLY WITHHELD OR CONDITIONED. LANDLORD SHALL ADVISE TENANT AT THE
TIME OF THE REQUESTED STRUCTURAL OR NON-STRUCTURAL CHANGE OR ALTERATION WHETHER
TENANT SHALL BE REQUIRED at the termination of this Lease or vacation of the
Premises by Tenant to restore (at Tenant's sole cost and
9
<PAGE>
expense) the Premises to the same condition as existed at the commencement of
the term, ordinary wear and tear and damage by insured casualty only excepted.
LANDLORD AND TENANT ACKNOWLEDGE THAT TENANT ALREADY OCCUPIES THE PREMISES
PURSUANT TO A LEASE OF SPACE DATED FEBRUARY 25, 1993, BETWEEN WACHOVIA BANK OF
NORTH CAROLINA, N.A., NOT PERSONALLY BUT AS TRUSTEE FOR THE WACHOVIA REAL ESTATE
FUND, (LANDLORD'S PREDECESSOR IN INTEREST), AND TENANT ("WACHOVIA LEASE), WHICH
WACHOVIA LEASE PROVIDES IN SECTION 13.1:
"TENANT COVENANTS AND AGREES TO SURRENDER POSSESSION OF THE DEMISED
PREMISES TO LANDLORD, IN THE SAME CONDITION AS WHEN TENANT FIRST
OCCUPIED THE DEMISED PREMISES, ORDINARY WEAR AND TEAR, CHANGES (AS
CONTEMPLATED PURSUANT TO SECTION 8.13 OF THIS LEASE), AND DAMAGES BY
FIRE OR OTHER CASUALTY (AS PERMITTED BY ARTICLE IX, OF THIS LEASE)
EXCEPTED."
PRIOR TO FEBRUARY 1, 1999, LANDLORD AND TENANT AGREE TO CONDUCT AN AUDIT, AT
TENANT'S EXPENSE, OF THE PREMISES TO DETERMINE WHAT RESTORATION WILL BE REQUIRED
OF TENANT TO COMPLY WITH THE TENANT'S RESTORATION OBLIGATIONS UNDER THE WACHOVIA
LEASE. THE RESULTS OF THIS AUDIT WILL BE REDUCED TO WRITING AND SIGNED BY
LANDLORD AND TENANT, AND SHALL GOVERN TENANT'S RESTORATION OBLIGATIONS FOR THE
PREMISES AS OF THE COMMENCEMENT DATE OF THIS LEASE. IN ADDITION TO ANY OTHER
RESTORATION OBLIGATIONS TENANT HAS UNDER THE TERMS OF THIS LEASE, TENANT SHALL
RESTORE THE PREMISES IN ACCORDANCE WITH THE TERMS OF THE AUDIT AT THE EXPIRATION
OR EARLIER TERMINATION OF THIS LEASE. However, Landlord may elect to require
Tenant to leave alterations performed for it unless at the time of such
alterations Landlord agreed in writing that Tenant could remove them on
expiration or termination of this Lease, and if Tenant does so remove Tenant
shall repair any damage occasioned by such removal.
8.14 NO MECHANICS LIENS. Tenant covenants and agrees not to permit or
suffer, and to cause to be removed and released, any mechanics, materialmen or
other lien on account of supplies, machinery, tools, equipment, labor or
material furnished or used in connection with the construction, alteration,
improvement, addition to or repair of the Premises by, through or under Tenant.
Tenant shall have the right to contest, in good faith and with reasonable
diligence, the validity of any such lien or claimed lien, provided that Tenant
shall give to Landlord such security as may be reasonably requested by Landlord
to insure the payment of any amounts claimed, including interests and costs, and
to prevent any sale, foreclosure or forfeiture of any interest in the Property
on account of any such lien and provided that, on final determination of the
lien or claim for lien, Tenant shall immediately pay any judgment rendered, with
interests and costs, and will cause the lien to be released and any judgment
satisfied.
8.15 NO OTHER ENCUMBRANCES. Tenant covenants and agrees not to obtain
any financing secured by Tenant's interest in the Premises and not to encumber
the Premises, or Landlord or Tenant's interest therein, without the prior
written consent of Landlord, and to keep the Premises free from all liens and
encumbrances except those created by Landlord.
8.16 SUBORDINATION TO LANDLORD MORTGAGES. Tenant covenants and agrees
that, at Landlord's option, this Lease and Tenant's interest in the Premises
shall be junior and subordinate to any mortgage or deed of trust now or
hereafter encumbering the Property if in any mortgage or deed of trust given
hereunder, the mortgagee or beneficiary under such mortgage or deed of trust
agrees in writing, or adequate provision is made in the mortgage or deed of
trust, that, in the event of foreclosure of any such mortgage or deed of trust,
Tenant shall not be disturbed in its possession of the Premises conditioned only
on Tenant attorning to the party acquiring title to the Property as the result
of such foreclosure. Tenant covenants and agrees, within fifteen (15) days of
request of Landlord, to execute SUCH COMMERCIALLY REASONABLE documents as may be
necessary or appropriate to confirm and establish this Lease as subordinate to
any such mortgage or deed of trust in accordance with the foregoing provisions.
Alternatively, Tenant covenants and agrees that, at Landlord's request, Tenant
shall execute COMMERCIALLY REASONABLE documents as may be necessary to establish
this Lease and Tenant's interest in the Premises as superior to any such
mortgage or deed of trust. If Tenant fails to execute any documents required to
be executed by Tenant under the provisions hereof, Tenant hereby makes,
constitutes and irrevocably appoints Landlord as Tenant's attorney in fact and
in Tenant's name, place and stead to execute any such documents.
10
<PAGE>
8.17 NO ASSIGNMENT OR SUBLETTING. TENANT MAY ASSIGN THE LEASE IN ITS
ENTIRETY OR MAY SUBLEASE ALL OR ANY PORTION OF THE PREMISES WITHOUT LANDLORD'S
CONSENT TO (A) ANY ENTITY RESULTING FROM A MERGER OR CONSOLIDATION WITH TENANT;
(B) ANY ENTITY SUCCEEDING TO THE BUSINESS AND ASSETS OF TENANT; OR (C) ANY
SUBSIDIARY OR AFFILIATE OF TENANT SO LONG AS THE FINANCIAL STRENGTH OF THE
RESULTING TENANT OR SUBTENANT IS EQUAL TO OR GREATER THAN THAT OF TENANT AND THE
RESULTING TENANT'S OR SUBTENANT'S USE DOES NOT CONFLICT WITH LOCAL ORDINANCES OR
PRIVATE COVENANTS APPLICABLE TO THE BUILDING. WITH THE EXCEPTION OF THE
FOREGOING,Tenant may not assign or encumber this Lease or its interest in the
Premises arising under this Lease, and may not sublet any part or all of the
Premises without the written consent of Landlord first had and obtained. Any
assignment or sublease to which Landlord may consent (one consent not being any
basis that Landlord should grant any further consent) shall not relieve Tenant
of any or all of its obligations hereunder. For the purpose of the Section 8.17,
the word "assignment" shall be defined and deemed to include the following: (i)
if Tenant is a partnership, the withdrawal or change, whether voluntary,
involuntary or by operation of law of partners owning thirty percent (30%) or
more of the partnership, or the dissolution of the partnership; (ii) if Tenant
consists of more than one person, an assignment, whether voluntary, involuntary,
or by operation of law, by one person to one of the other persons that is a
Tenant; (iii) if Tenant is a corporation, any dissolution or reorganization of
Tenant, or the sale or other transfer of a controlling percentage (hereafter
defined) of capital stock of Tenant other than to an affiliate or subsidiary or
the sale of fifty-one percent (51%) in value of the assets of Tenant; (iv) if
Tenant is a Limited Liability Company, the change of members whose interest in
the Company is 50% or more. The phrase "controlling percentage" means the
ownership of, and the right to vote, stock possessing at least fifty-one percent
(51%) of the total combined voting power of all classes of Tenant's capital
stock issued, outstanding and entitled to vote for the election of directors, or
such lesser percentage as is required to provide actual control over the affairs
of the corporation. Acceptance of Rent by Landlord after any non-permitted
assignment shall not constitute approval thereof by Landlord. Notwithstanding
the foregoing provisions of this Section 8.17, Tenant may assign or sublease
part or all of the Premises without Landlord's consent to: (i) any corporation
or partnership that controls, is controlled by, or is under common control with,
Tenant; or (ii) any corporation resulting from the merger or consolidation with
Tenant or to any entity that acquires all of Tenant's assets as a going concern
of the business that is being conducted on the Premises, as long as the assignee
or sublessee is a bona fide entity and assumes the obligations of Tenant, and
continues the same use as permitted under Section 8.1. However, Landlord must be
given prior written notice of any such assignment or subletting, and failure to
do so shall be a default hereunder. Landlord will never consent to an assignment
or sublease that might result in a use that conflicts with the rights of an
existing tenant.
In no event shall this Lease be assignable by operation of any law, and
Tenant's rights hereunder may not become, and shall not be listed by Tenant as
an asset under any bankruptcy, insolvency or reorganization proceedings. Tenant
is not, may not become, and shall never represent itself to be an agent of
Landlord, and Tenant acknowledges that Landlord's title is paramount, and that
it can do nothing to affect or impair Landlord's title.
If this Lease shall be assigned or the Premises or any portion thereof
sublet by Tenant at a rental that exceeds the rentals to be paid to Landlord
hereunder, attributable to the Premises or portion thereof so assigned or
sublet, then any such excess shall be paid over to Landlord by Tenant.
LANDLORD ACKNOWLEDGES THAT THE CURRENT SUBTENANCY OF BOSCH TELECOM, INC.
IN APPROXIMATELY 20,000 SQUARE FEET OF THE PREMISES IS APPROVED.
8.18 ANNUAL FINANCIAL STATEMENTS. Tenant covenants and agrees to furnish
to Landlord annually, within ninety (90) days after the end of each fiscal year
of Tenant, copies of financial statements of Tenant, audited if requested by
Landlord, by a certified public accountant, and agrees that Landlord may deliver
any such financial statements to any existing or prospective mortgagee or
purchaser of the Property. The financial statements shall include a balance
sheet as of the end of, and a statement of profit and loss for, the preceding
fiscal year of Tenant. TENANT'S FAILURE TO PROVIDE THE FINANCIAL STATEMENTS TO
LANDLORD SHALL NOT CONSTITUTE AN EVENT OF DEFAULT UNLESS TENANT FAILS TO PROVIDE
THE FINANCIAL STATEMENTS TO LANDLORD WITHIN THIRTY (30) DAYS AFTER WRITTEN
NOTICE FROM LANDLORD.
11
<PAGE>
8.19 PAYMENT OF INCOME AND OTHER TAXES. Tenant covenants and agrees to
pay promptly when due all property taxes on personal property of Tenant on the
Premises and all federal, state and local income taxes, sales taxes, use taxes,
Social Security taxes, unemployment taxes and taxes withheld from wages or
salaries paid to Tenant's employees, the nonpayment of which might give rise to
a lien on the Premises or Tenant's interest therein, and to furnish, if
requested by Landlord, written evidence of such payments.
8.20 ESTOPPEL CERTIFICATES. Tenant covenants and agrees to execute,
acknowledge and deliver to Landlord, within ten (10) business days of Landlord's
written request, a written statement certifying that this Lease is unmodified
(or, if modified, stating the modifications) and in full force and effect;
stating the dates to which Base Rent has been paid; stating the amount of the
Security Deposit held by Landlord; stating the amount of Monthly Deposits held
by Landlord for the then tax and insurance year; and stating whether or not
Landlord is in default under this Lease (and, if so, specifying the nature of
the default). Tenant agrees that such statement may be delivered to and relied
upon by any existing or prospective mortgagee or purchaser of the Property.
Tenant agrees that a failure to deliver such a statement within ten (10) days
after written request from Landlord shall be conclusive upon Tenant that this
Lease is in full force and effect without modification except as may be
represented by Landlord; that there are no uncured defaults by Landlord under
this Lease; and that any representation by Landlord with respect to Base Rent,
the Security Deposit and Monthly Deposits are true.
8.21 LANDLORD RIGHT TO INSPECT AND SHOW PREMISES AND TO INSTALL FOR SALE
SIGNS. Tenant covenants and agrees that Landlord and authorized representatives
of Landlord shall have the right to enter the Premises at any reasonable time
during ordinary business hours for the purposes of inspecting or maintaining the
same, and making such repairs, alterations or changes as Landlord deems
necessary, or performing any obligations of Tenant which Tenant has failed to
perform hereunder or for the purposes of showing the Premises to any existing or
prospective mortgagee, purchaser or lessee of the Property or the Premises.
Tenant covenants and agrees that Landlord may at any time and from time to time
place on the Property or the Premises a sign advertising the Property or the
Premises for sale or for lease.
8.22 LANDLORD TITLE TO FIXTURES, IMPROVEMENTS AND EQUIPMENT. Tenant
covenants and agrees that all fixtures and improvements on the Premises and all
equipment and personal property relating to the use and operation of the
Premises (as distinguished from operations incident to the business of Tenant),
including all plumbing, heating, lighting, electrical and air conditioning
fixtures and equipment, whether or not attached to or affixed to the Premises,
and whether now or hereafter located upon the Premises, shall be and remain the
property of the Landlord upon expiration of the Lease Term.
8.23 REMOVAL OF TENANT'S EQUIPMENT. Tenant covenants and agrees to
remove, not later than the expiration date of the Lease Term, all of Tenant's
Equipment, as hereinafter defined. "Tenant's Equipment" shall mean all
equipment, apparatus, machinery, signs, furniture, furnishings and personal
property used in the operation of the business of Tenant (as distinguished from
the use and operation of the Premises). If such removal shall injure or damage
the Premises, Tenant covenants and agrees, at its sole cost and expense, at or
prior to the expiration of the Lease Term, to repair such injury and damage in
good and workmanlike fashion and to place the Premises in the same condition as
the Premises would have been in if such Tenant's Equipment had not been
installed. If Tenant fails to remove any Tenant's Equipment by the expiration of
the Lease Term, Landlord may, at its option, keep and retain any such Tenant's
Equipment or dispose of the same and retain any proceeds thereof and Landlord
shall be entitled to recover from Tenant any costs or expenses of Landlord in
removing the same and in restoring the Premises in excess of the actual
proceeds, if any, received by Landlord from disposition thereof.
8.24 TENANT INDEMNIFICATION OF LANDLORD. Tenant covenants and agrees to
protect, indemnify and save Landlord harmless from and against all liability,
obligations, claims, damages, penalties, causes of action, costs and expenses,
including REASONABLE attorneys' fees ACTUALLY INCURRED at all tribunal levels,
imposed upon, incurred by or asserted against Landlord by reason of (a) any
accident, injury to or death of any person or loss of or damage to any property
occurring on or about the Premises UNLESS RESULTING FROM LANDLORD'S GROSS
NEGLIGENCE OR WILLFUL MISCONDUCT; (b) any act or omission of Tenant or Tenant's
officers, employees, agents, guests or invitees or of anyone claiming by,
through or under Tenant; (c) any use which may be made of, or condition existing
upon, the Premises; (d) any improvements, fixtures or equipment upon the
12
<PAGE>
Premises; (e) any failure on the part of Tenant to perform or comply with any of
the provisions, covenants or agreements of Tenant contained in this Lease; (f)
any violation of any law, ordinance, order, rule or regulation of governmental
authorities having jurisdiction by Tenant or Tenant's officers, employees,
agents, guests or invitees or by anyone claiming by, through or under Tenant;
and (g) any repairs, maintenance or changes to the Premises by, through or under
Tenant. Tenant further covenants and agrees that, in case any action, suit or
proceeding, is brought against Landlord by reason of any of the foregoing,
Tenant will, at Tenant's sole cost and expense, defend Landlord in any such
action, suit or proceeding, with counsel acceptable to Landlord.
8.25 WAIVER BY TENANT. Tenant waives and releases any claims Tenant may
have against Landlord or Landlord's officers, agents or employees for loss,
damage or injury to person or property sustained by Tenant or Tenant's officers,
agents, employees, guests, invitees or anyone claiming by, through or under
Tenant resulting from any cause whatsoever other than Landlord's gross
negligence or willful misconduct; EXCEPT THAT, SUCH WAIVER SHALL NOT APPLY TO
THIRD PARTY CLAIMS FOR PERSONAL INJURY OR DEATH WHEN SUCH CLAIMS ARISE FROM THE
NEGLIGENT ERROR OR OMISSION OF LANDLORD OR ITS EMPLOYEES OR AGENTS.
8.26 RELEASE UPON TRANSFER BY LANDLORD. In the event of a transfer by
Landlord of the Property or of Landlord's interest as Landlord under this Lease,
Landlord's successor or assign shall take subject to and be bound by this Lease
and, in such event, Tenant covenants and agrees that: Landlord shall be released
from all obligations of Landlord under this Lease, except obligations which
arose and matured prior to such transfer by Landlord; that Tenant shall
thereafter look solely to Landlord's successor or assign for satisfaction of the
obligations of Landlord under this Lease; and that Tenant shall attorn to such
successor or assign.
8.27 COMPLIANCE WITH ADA. Tenant covenants and agrees that nothing shall
be done or kept by Tenant on the Premises or in the Common Facilities in
violation of ADA, and that Tenant shall maintain, repair, replace, keep and use
the Premises and all improvements, fixtures and personal property therein and
thereon, and conduct its business within the Premises, in accordance with the
requirements of ADA. If any improvements, alterations or repairs to the Premises
are required by governmental authority under ADA or its implementing regulations
or guidelines, Tenant shall be solely responsible for all non-structural items
and any structural items due to Tenant's specific use of the Premises. Tenant
covenants and agrees to pay all costs and expenses in connection with the
performance of its obligations under this Section 8.27. Nothing contained in
this Section 8.27 shall be construed to limit the generality of the provisions
of Section 8.2 respecting Tenant's obligation to comply with applicable laws and
of the provisions of Section 8.13 respecting Tenant's obligation to comply with
ADA and other applicable laws in connection with any Change.
8.28 LANDLORD INDEMNIFICATION OF TENANT. LANDLORD SHALL INDEMNIFY AND
HOLD TENANT HARMLESS FROM AND AGAINST ANY AND ALL THIRD PARTY CLAIMS FOR
PERSONAL INJURY OR DEATH ASSERTED AGAINST TENANT ARISING SOLELY OUT OF ANY
NEGLIGENT ERROR OR OMISSION OF LANDLORD, OR ITS EMPLOYEES OR AGENTS, OCCURRING
IN OR ABOUT THE PREMISES OR BUILDING.
IX. DAMAGE OR DESTRUCTION.
9.1 TENANT'S NOTICE OF DAMAGE. If any portion of the Premises shall be
damaged or destroyed by fire or other casualty, Tenant shall give prompt written
notice thereof to Landlord ('Tenant's Notice of Damage").
9.2 OPTIONS TO TERMINATE IF DAMAGE SUBSTANTIAL. Upon receipt of Tenant's
Notice of Damage, Landlord shall promptly proceed to determine the nature and
extent of the damage or destruction and to estimate the time necessary to repair
or restore the Premises. As soon as reasonably possible, Landlord shall give
written notice to Tenant stating Landlord's estimate of the time necessary to
repair or restore the Premises ("Landlord's Notice of Repair Time"). If Landlord
reasonably estimates that repair or restoration of the Premises cannot be
completed within 180 days from the time of Tenant's Notice of Damage, Landlord
and Tenant shall each have the option to terminate this Lease. In the event,
however, that the damage or destruction was caused by the GROSS NEGLIGENCE OR
WILLFUL MISCONDUCT of Tenant or Tenant's officers, employees, agents, guests or
invitees or of anyone claiming by, through or under Tenant, Landlord shall have
the option to terminate this Lease if Landlord reasonably estimates that the
13
<PAGE>
repair or restoration cannot reasonably be completed within 180 days from the
time of Tenant's Notice of Damage, but Tenant shall not have the option to
terminate this Lease. Any option granted hereunder shall be exercised by written
notice to the other party given within 10 days after Landlord's Notice of Repair
Time. In the event either Landlord or Tenant exercises its option to terminate
this Lease, the Lease Term shall expire 10 days after the notice by either
Landlord or Tenant exercising such party's option to terminate this Lease. In
the event of termination of this Lease under the provisions hereof, Landlord
shall refund to Tenant such amounts of Base Rent and Additional Rent theretofore
paid by Tenant as may be applicable to the period subsequent to the time of
Tenant's Notice of Damage less the reasonable value of any use or occupation of
the Premises by Tenant subsequent to the time of Tenant's Notice of Damage.
9.3 OBLIGATIONS TO REPAIR AND RESTORE. In the event there are sufficient
funds, and such funds are available to Landlord to repair and restore and repair
of the Premises, and restoration can be completed within the period specified in
Section 9.2, in Landlord's reasonable estimation, this Lease shall continue in
full force and effect and Landlord shall proceed forthwith to cause the Premises
to be repaired and restored with reasonable diligence and there shall be
abatement of Base Rent and Additional Rent proportionate to the extent of the
space and period of time that Tenant is unable to use and enjoy the Premises.
9.4 APPLICATION OF INSURANCE PROCEEDS. The proceeds of any Casualty
Insurance maintained on the Premises, other than casualty insurance maintained
by Tenant on fixtures and personal property of Tenant, shall be paid to and
become the property of Landlord, subject to any obligation of Landlord to cause
the Premises to be repaired and restored, which obligation is contingent on
casualty insurance proceeds adequate to complete the repair or restoration being
available to Landlord.
X. CONDEMNATION.
10.1 TAKING - SUBSTANTIAL TAKING - INSUBSTANTIAL TAKING. A "Taking"
shall mean the taking of all or any portion of the Premises as a result of the
exercise of the power of eminent domain or condemnation for public or
quasi-public use or the sale of all or part of the Premises under the threat of
condemnation. A "Substantial Taking" shall mean a Taking of so much of the
Premises that the Premises cannot thereafter be reasonably used by Tenant for
carrying on, at substantially the same level or scope, the business theretofore
conducted by Tenant on the Premises. An "Insubstantial Taking" shall mean a
Taking such that the Premises can thereafter continue to be used by Tenant for
carrying on, at substantially the same level or scope, the business theretofore
conducted by Tenant on the Premises.
10.2 TERMINATION ON SUBSTANTIAL TAKING. If there is a Substantial Taking
with respect to the Premises, the Lease Term shall expire on the date of vesting
of title pursuant to such Taking. In the event of termination of this Lease
under the provisions hereof, Landlord shall refund to Tenant such amounts of
Base Rent and Additional Rent theretofore paid by Tenant as may be applicable to
the period subsequent to the time of termination of this Lease.
10.3 RESTORATION ON INSUBSTANTIAL TAKING. In the event of an
Insubstantial Taking, this Lease shall continue in full force and effect,
Landlord shall proceed forthwith to cause the Premises to be restored as near as
may be to the original condition thereof and there shall be abatement of Base
Rent and Additional Rent proportionate to the extent of the space so taken.
10.4 RIGHT TO AWARD. The total award, compensation, damages or
consideration received or receivable as a result of a Taking ("Award") shall be
paid to and be the property of Landlord, whether the Award shall be made as
compensation for diminution of the value of the leasehold or the fee of the
Premises or otherwise and Tenant hereby assigns to Landlord, all of Tenant's
right, title and interest in and to any such Award. Tenant covenants and agrees
to execute, immediately
14
<PAGE>
upon demand by Landlord, such documents as may be necessary to facilitate
collection by Landlord of any such Award. Tenant, however, shall be entitled to
apply for compensation, if available, for its relocation and for any of its
personal property taken.
XI. DEFAULTS BY TENANT.
If Tenant: (i) FAILS TO PAY RENT or any other sum of money which Tenant
is obligated to pay, as provided in this Lease, WHEN DUE (A "LATE PAYMENT"),
THEN TWICE DURING ANY CALENDAR YEAR SUCH LATE PAYMENT SHALL NOT BE CONSIDERED AN
EVENT OF DEFAULT, IF, WITHIN FIVE (5) DAYS AFTER WRITTEN NOTICE FROM LANDLORD
(THE "GRACE PERIOD"), TENANT SUBMITS THE RENT DUE, INCLUDING THE LATE CHARGE OF
FOUR PERCENT (4%), FOR SUCH MONTH. LANDLORD SHALL FORGIVE TENANT ONLY TWO (2)
LATE PAYMENTS PER CALENDAR YEAR, ANY ADDITIONAL LATE PAYMENT SHALL CONSTITUTE AN
EVENT OF DEFAULT; or (ii) breaches any other agreement, covenant or obligation
herein set forth and such breach shall continue and not be remedied within
fifteen (15) days after Landlord shall have given Tenant written notice
specifying the breach, or if such breach cannot, with due diligence, be cured
within said period of fifteen (15) days and Tenant does not within said fifteen
(15) day period commence and thereafter with reasonable diligence completely
cure the breach within thirty (30) days after notice; or (iii) files (or has
filed against it and not stayed or vacated within sixty (60) days after filing)
any petition or action for relief under any creditor's law (including
bankruptcy, reorganization, or similar action), either in state or federal
court; or (iv) makes any transfer in fraud of creditors as defined in Section
548 of the United States Bankruptcy Code (11U.S.C. 548, as amended or replaced),
has a receiver appointed for its assets (and appointment shall not have been
stayed or vacated within thirty (30) days), or makes an assignment for benefit
of creditors; then Tenant shall be in default hereunder, and, in addition to any
other lawful right or remedy which it may have, Landlord may do the following:
(i) terminate this Lease; (ii) repossess the Premises, and with or without
terminating, relet the same at such amount as Landlord deems reasonable; and if
the amount for which the Premises is relet is less than Tenant's Rent and all
other obligations of Tenant to Landlord hereunder, Tenant shall immediately pay
the difference or demand to Landlord, but if in excess of Tenant's Rent, and all
other obligations of Tenant hereunder, the entire amount obtained from such
reletting shall belong to Landlord, free of any claim of Tenant thereto; (iii)
seize and hold any personal property of Tenant located in the Premises and
assert against the same a lien for monies due Landlord; or (iv) without
obtaining any court authorization, lock the Premises and deny Tenant access
thereto. All reasonable expenses of Landlord in repairing, restoring, or
altering the Premises for reletting as general office space, together with
leasing fees and all other expenses in seeking and obtaining a new tenant, shall
be charged to and be a liability of Tenant. Landlord's reasonable attorneys'
fees in pursuing any of the foregoing remedies, or in collecting any Rent due by
Tenant hereunder, shall be paid by Tenant.
Tenant further agrees that Landlord may obtain an order for summary
ejectment from any court of competent jurisdiction without prejudice to
Landlord's rights to otherwise collect rents from Tenant.
All rights and remedies of Landlord are cumulative, and the exercise of
any one shall not be an election excluding Landlord at any other time from
exercise of a different or inconsistent remedy. No exercise by Landlord of any
right or remedy granted herein shall constitute or effect a termination of this
Lease unless Landlord shall so elect by written notice delivered to Tenant.
No waiver by Landlord of any covenant or condition shall be deemed to
imply or constitute a further waiver of the same at a later time, and acceptance
of Rent by Landlord, even with knowledge of a default by Tenant, shall not
constitute a waiver of such default.
XII. SURRENDER AND HOLDING OVER.
12.1 SURRENDER UPON LEASE EXPIRATION. Upon the expiration or earlier
termination of this Lease, or on the date specified in any demand for possession
by Landlord after any Default by Tenant, Tenant covenants and agrees to
surrender possession of the Premises to Landlord in the same condition as when
Tenant first occupied the Premises, ordinary wear and tear and damage by fully
insured casualty (FOR ITEMS LANDLORD IS REQUIRED TO INSURE UNDER THE TERMS OF
THIS LEASE) excepted.
15
<PAGE>
12.2 HOLDING OVER. If Tenant shall hold over after the expiration of the
Lease Term or other termination of this Lease, such holding over shall not be
deemed to be a renewal of this Lease but shall be deemed to create a
tenancy-at-sufferance and by such holding over Tenant shall continue to be bound
by all of the terms and conditions of this Lease except that during such
tenancy-at-sufferance, Tenant shall pay to Landlord (a) Rent at the rate equal
to two hundred percent (200%) of that provided for in the foregoing Article 4,
and (b) any and all operating expenses and other forms of Additional Rent
payable under the terms of this Lease. The increased Rent during such holding
over is intended to partially compensate Landlord for losses, damages and
expenses, including frustrating and delaying Landlord's ability to secure a
replacement tenant. IN THE EVENT TENANT GIVES LANDLORD AT LEAST NINE (9) MONTHS
PRIOR NOTICE OF ITS INTENT TO HOLDOVER FOR THREE (3) MONTHS AT THE END OF THE
TERM OF THE LEASE, THEN THE TENANT MAY HOLDOVER FOR THREE (3) MONTHS (BUT NOT
MORE THAN THREE (3) MONTHS) ("PERMISSIBLE HOLDOVER PERIOD") AND THE MONTHLY
HOLDOVER RATE DURING THE PERMISSIBLE HOLDOVER PERIOD SHALL BE ONE HUNDRED AND
FIFTY PERCENT (150%), AFTER WHICH THE TENANT SHALL BE A TENANT-AT-SUFFERANCE AND
THE HOLDOVER RATE SHALL BE TWO HUNDRED PERCENT (200%) AS PROVIDED ABOVE. If
Landlord loses a prospective tenant because Tenant fails to vacate the Premises
on expiration of this Lease after notice to do so, Tenant will be liable for
such damages as Landlord can prove because of Tenant's wrongful failure to
vacate.
XIII. MISCELLANEOUS.
13.1 NO IMPLIED WAIVER. No failure by Landlord to insist upon the strict
performance of any term, covenant or agreement contained in this Lease, no
failure by Landlord to exercise any right or remedy under this Lease, and no
acceptance of full or partial payment during the continuance of any Default by
Tenant, shall constitute a waiver of any such term, covenant or agreement or a
waiver of any such right or remedy or a waiver of any such Default by Tenant.
13.2 SURVIVAL OF PROVISIONS. Notwithstanding any termination of this
Lease, the same shall continue in force and effect as to any provisions hereof
which require observance or performance by Landlord or Tenant subsequent to
termination.
13.3 RIGHT TO RELOCATE.
13.4 COVENANTS INDEPENDENT. This Lease shall be construed as if the
covenants herein between Landlord and Tenant are independent, and not dependent.
13.5 COVENANTS AS CONDITIONS. Each provision of this Lease performable
by Tenant shall be deemed both a covenant and a condition.
13.6 TENANT'S REMEDIES. Tenant may bring a separate action against
Landlord for any claim Tenant may have against Landlord under this Lease,
provided Tenant shall first give written notice thereof to Landlord and shall
afford Landlord a reasonable opportunity to cure any such default. In addition
Tenant shall send notice of such default by certified or registered mail,
postage prepaid, to the holder of any mortgage or deed of trust covering the
Premises TO WHICH TENANT HAS BEEN NOTIFIED IN WRITING, the Property or any
portion thereof of whose address
16
<PAGE>
Tenant has been notified in writing, and shall afford such holder a reasonable
opportunity to cure any default on Landlord's behalf. In no event will Landlord
be responsible to Tenant for any damages for loss of profits or interruption of
business as a result of any default by Landlord hereunder.
13.7 BINDING EFFECT. This Lease shall extend to and be binding upon the
heirs, executors, legal representative, successors and assigns of the respective
parties hereto. The terms, covenants, agreements and conditions in this Lease
shall be construed as covenants running with the Land.
13.8 NOTICES AND DEMANDS. All notices, demands or billings under this
Lease shall be in writing, signed by the party giving the same and shall be
deemed properly given and received when actually given and received or three (3)
business days after mailing, if sent by registered or certified United States
mail, postage prepaid, addressed the party to receive the notice at the address
set forth for such party in the first paragraph of this Lease or at such other
address as either party may notify the other in writing, with copies, in the
case of notices given by Tenant to Landlord, to HIGHWOODS REALTY LIMITED
PARTNERSHIP, 3100 Smoketree Court, Suite 600, Raleigh, North Carolina 27604.
Notices on behalf of either party may be given by such party's respective
counsel. Addresses for notices may be changed in the same manner provided for
giving notices but shall not be effective until ten (10) days elapse after their
receipt.
13.9 TIME OF THE ESSENCE. Time is of the essence under this Lease, and
all provisions herein relating thereto shall be strictly construed.
13.10 CAPTIONS FOR CONVENIENCE. The headings and captions hereof are for
convenience only and shall not be considered in interpreting the provisions
hereof.
13.11 SEVERABILITY. If any provision of this Lease shall be held invalid
or unenforceable, the remainder of this Lease shall not be affected thereby, and
there shall be deemed substituted for the affected provisions a valid and
enforceable provision as similar as possible to the affected provision.
13.12 GOVERNING LAW. This Lease shall be interpreted and enforced
according to the laws of the State of North Carolina.
13.13 ENTIRE AGREEMENT. This Lease and any exhibits and addenda referred
to herein, constitute the final and complete expression of the parties'
agreements with respect to the Premises and Tenant's occupancy thereof. Each
party agrees that it has not relied upon or regarded as binding any prior
agreements, negotiations, representations, or understandings, whether oral or
written, except as expressly set forth herein. Both parties have participated in
the preparation of this Lease and in resolving any ambiguities there shall be no
presumption that they are construed against the drafting party.
13.14 NO ORAL AMENDMENT OR MODIFICATIONS. No amendment or modification
of this Lease, and no approvals, consents or waivers by Landlord under this
Lease, shall be valid or binding unless in writing and executed by the party to
be bound.
13.15 REAL ESTATE BROKERS. Tenant covenants to pay, hold harmless and
indemnify the Landlord from and against any and all cost, expense or liability
for any compensation, commissions, charges or claims by any broker or other
agent with respect to this Lease or the negotiation thereof other than Highwoods
Properties, Inc. or any of its affiliates, and any other broker here listed as a
Participating Broker: CAPITAL ASSOCIATES, WHOSE ADDRESS IS 1100 CRESCENT GREEN,
CARY, NORTH CAROLINA 27511.
13.16 RELATIONSHIP OF LANDLORD AND TENANT. Nothing contained herein
shall be deemed or construed as creating the relationship of principal and agent
or of partnership, or of joint venture by the parties hereof, it being
understood and agreed that no provision contained in this Lease nor any acts of
the parties hereto shall be deemed to create any relationship other than the
relationship of Landlord and Tenant.
13.17 AUTHORITY OF PARTIES. Each individual executing this Lease on
behalf of THE PARTIES represents and warrants that such individual is duly
authorized to deliver this Lease on behalf of THE PARTY and that this Lease is
binding upon THE PARTIES in
17
<PAGE>
accordance with its terms, and agrees to document such authorization to THE
OTHER PARTY'S satisfaction if requested to do so.
13.18 EXCULPATION. Any provision of this Lease to the contrary
notwithstanding Landlord shall have no personal liability for payment of any
damages or performance of any term, provision or condition under this Lease or
under any other instrument in connection with this Lease, and Tenant shall look
for such payment or performance to the property, the rents, issues and profits
thereof, in satisfaction of any claim, order or judgment Tenant may at any time
obtain against Landlord in connection with this Lease.
13.19 HVAC MAINTENANCE. LANDLORD SHALL BE RESPONSIBLE FOR ANY HVAC
EXPENSES OF A CAPITAL NATURE IN ACCORDANCE WITH GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES ("GAAP") UNLESS SUCH EXPENSES ARE DUE TO TENANT'S SPECIFIC USAGE OF
THE HVAC UNITS/SYSTEMS EXCEEDING THE UNITS/SYSTEMS DESIGNED CAPACITY. AN
INDEPENDENT SURVEY OF THE HVAC UNITS/SYSTEMS HAS BEEN PERFORMED TO PROVIDE A
LEVEL OF THE CURRENT CONDITION OF THE UNITS/SYSTEMS. ON OR BEFORE FEBRUARY 1,
1999, TENANT SHALL PROVIDE AN INDEPENDENT SURVEY OF TENANT'S CURRENT USAGE TO
DETERMINE IF TENANT'S USAGE IS EXCEEDING THE UNITS/SYSTEMS DESIGNED CAPACITY,
SUCH SURVEY SHALL BE MUTUALLY APPROVED BY LANDLORD AND TENANT. NOTWITHSTANDING
THE FOREGOING, TENANT SHALL BE RESPONSIBLE FOR SECURING AND MAINTAINING A
MAINTENANCE CONTRACT ON THE HVAC UNITS/SYSTEMS SERVING THE PREMISES, AN EXAMPLE
OF SUCH MAINTENANCE CONTRACT IS ATTACHED AS EXHIBIT F. TENANT SHALL PAY ALL
COSTS ASSOCIATED WITH SUCH MAINTENANCE DIRECTLY TO THE PROVIDER OF SUCH
MAINTENANCE. TENANT SHALL PROVIDE LANDLORD WITH COPIES OF SUCH MAINTENANCE
CONTRACTS IN ORDER FOR LANDLORD TO APPROVE THE EXTENT OF THE MAINTENANCE
AGREEMENT.
13.20 LANDSCAPING/BUILDING EXTERIOR. LANDLORD AND TENANT ACKNOWLEDGE
THAT LANDLORD HAS BUDGETED TO RENOVATE THE COMMON AREA CORRIDOR, REPAIR
SIDEWALKS, UPGRADE LANDSCAPING AND RESEAL, SPOT REPAIR AND RESTRIPE PARKING LOT,
SUCH WORK IS TO BE COMPLETED BY LANDLORD AT LANDLORD'S SOLE COST AND EXPENSE.
LANDLORD WILL MAINTAIN THE BUILDING SITE COMPARABLE TO OTHER CLASS A FLEX SPACE
IN THE RESEARCH TRIANGLE PARK AREA. LANDLORD SHALL PROVIDE TENANT THE LANDSCAPE
RENOVATION PLANS AND SCHEDULE ON OR BEFORE FEBRUARY 1, 1999.
13.21 MEMORANDUM OF LEASE. AT THE REQUEST OF EITHER PARTY, A MEMORANDUM
OF LEASE SHALL BE EXECUTED BY THE PARTIES IN RECORDABLE FORM. THAT MEMORANDUM OF
LEASE MAY BE RECORDED IN THE PUBLIC REGISTRY, AT THE COST OF THE REQUESTING
PARTY.
13.22 CAPITAL IMPROVEMENTS. LANDLORD AGREES TO GIVE TENANT NOTICE OF
PROPOSED CAPITAL IMPROVEMENTS TO THE LAND AND BUILDING EACH CALENDAR YEAR DURING
THE TERM OF THE LEASE, SUCH NOTICE TO BE GIVEN TO TENANT BY THE END OF THE FIRST
QUARTER OF THAT CALENDAR YEAR. NOTHING IN THIS PROVISION OR SUCH NOTICE SHALL
OBLIGATE LANDLORD TO MAKE ANY SUCH IMPROVEMENTS NOR SHALL IT PRECLUDE THE
LANDLORD FROM MAKING OTHER CAPITAL IMPROVEMENTS, WHICH IN THE JUDGEMENT AND
DISCRETION OF LANDLORD SHOULD BE MADE TO THE LAND OR BUILDING. IF LANDLORD, FOR
ANY REASON, FAILS TO GIVE TENANT NOTICE OF THE PROPOSED CAPITAL IMPROVEMENTS,
THEN TENANT'S SOLE REMEDY SHALL BE TO REQUEST THE INFORMATION FROM LANDLORD, AND
LANDLORD SHALL HAVE TEN (10) BUSINESS DAYS TO PROVIDE THE INFORMATION THAT WOULD
BE REQUIRED IN SUCH NOTICE. FOR PURPOSES OF THIS PROVISION, THE TERM "CAPITAL
IMPROVEMENTS" SHALL BE SUCH IMPROVEMENTS AS WOULD HAVE TO BE CAPITALIZED UNDER
THE EXISTING GENERALLY ACCEPTED ACCOUNTING PRINCIPLES.
IN WITNESS WHEREOF, Landlord and Tenant have executed this Lease in duplicate
originals, all as of the day and year first above written.
TENANT:
BROADBAND TECHNOLOGIES, INC.
a North Carolina Corporation
By:
-----------------------------------
18
<PAGE>
Name:
---------------------------------
Title:
--------------------------------
Date:
Attest:
--------------------------------
-----------------------Secretary
Affix Corporate Seal:
LANDLORD:
HIGHWOODS REALTY LIMITED PARTNERSHIP
By: Highwoods Properties, Inc., its
general partner a Maryland corporation
By:
-----------------------------------
James A. Ciao, Vice President
Date:
----------------------------------
Attest:
-------------------------------
Cathleen C. Morgan, Assistant Secretary
Affix Corporate Seal:
19
<PAGE>
ACKNOWLEDGMENTS
STATE OF _______________________
COUNTY OF _____________________
I, the undersigned Notary Public, certify that
____________________________________ personally came before me this day and
acknowledged that ____he is _____________________ Secretary of
____________________________________________________, a
_________________________ corporation, and that by authority duly given and as
the act of the corporation, the foregoing instrument was signed in its name by
__________________________, as its ________________ President, attested by
______________________________________ as its ____________________ Secretary,
and sealed with its common corporate seal.
WITNESS my hand and notarial seal, this ______ day of ________________,
19 ______.
------------------------------------------
Notary Public
My Commission Expires: _____________________
20
<PAGE>
EXHIBIT A
PREMISES
[FACILITY ARCHITECTURAL LAYOUT]
<PAGE>
EXHIBIT A-1
LOT 7, TRIANGLE BUSINESS CENTER
BEGINNING at an iron pipe located at the northwestern corner of Lot 7 as shown
on that plat entitled "Triangle Business Center (Plat No. Two)" recorded in Plat
Book 107, Page 167, Durham County Registry; said iron pipe being in the eastern
right of way line of Stirrup Creek Drive; running thence South 83 degrees 52
minutes 59 seconds East 71.42 feet to an iron pipe set; thence continuing South
83 degrees 05 minutes 26 seconds East 682.28 feet to an iron pipe, said iron
pipe being located in the northeastern corner of the tract herein described;
running thence South 11 degrees 47 minutes 47 seconds West 279.27 feet to an
iron pipe in the line of now or formerly Wachovia Bank & Trust property as shown
on plat recorded in Plat Book 103, Page 42, Durham County Registry; runs thence
South 14 degrees 57 minutes 52 seconds West 405.96 feet to an iron pipe located
in the northern cul de sac line of Twin Creeks Court (60' right of way); runs
thence with the northern right of way line of Twin Creeks Court along a curve to
the left in a southwesterly direction, said curve having a radius of 60.00 feet,
an arc distance of 50.45 feet to a point; thence along a curve to the right in a
westerly direction, said curve having a radius of 25.00 feet, an arc distance of
21.68 feet to a point; thence continuing along the northern right of way line of
Twin Creeks Court North 73 degrees 30 minutes 50 seconds West 615.19 feet to a
point; thence along a curve to the right in a northwesterly direction, said
curve having a radius of 145.00 feet, an arc distance of 73.79 feet to a point;
thence North 44 degrees 21 minutes 23 seconds West 3.02 feet to a point where
the northerly line of the right of way of Twin Creeks Court begins to curve into
the easterly right of way line of Stirrup Creek Drive; thence along a curve to
the right in a northerly direction, said curve having a radius of 25.00 feet, an
arc distance of 36.06 feet to a point in the eastern right of way line of
Stirrup Creek Drive; thence along the eastern right of way line of Stirrup Creek
Drive as it curves to the left in a northerly direction, said curve having a
radius of 405.00 feet, an arc distance of 201.86 feet to a point; thence
continuing with the eastern right of way line of Stirrup Creek Drive North 09
degrees 44 minutes 18 seconds East 341.13 feet to the point and place of
BEGINNING, containing 11.095 acres (483,339.3 sq. ft.) as shown on that survey
entitled "ALTA/ACSM LAND TITLE SURVEY FOR LOT 7 TRIANGLE BUSINESS CENTER
HIGHWOODS REALTY LIMITED PARTNERSHIP, CHICAGO TITLE INSURANCE COMPANY AND FIRST
UNION NATIONAL BANK OF NORTH CAROLINA" dated 4/20/94, and prepared by Dewberry &
Davis, Registered Land Surveyors. For reference, see plat of Lot 7, Triangle
Business Center, recorded in Plat Book 107, Page 167, Durham County Registry.
1
<PAGE>
EXHIBIT B
ENVIRONMENTAL COMPLIANCE
I. TENANT'S REPRESENTATIONS, WARRANTIES AND COVENANTS CONCERNING THE USE
OF HAZARDOUS SUBSTANCES/PERIODIC NOTICE.
(a) ACCEPTANCE OF PROPERTY AND COVENANT TO SURRENDER. Tenant accepts the
Property as being in good and sanitary order, condition and repair and
accepts all buildings and other improvements in their present condition.
Tenant agrees on the last day of the term of this Lease, to surrender
the Premises to Landlord in good and sanitary order, condition and
repair, except for such wear and tear as would be normal for the period
of the Tenant's occupancy.
No spill, deposit, emission, leakage or other release of
Hazardous Substances on the Property or the soil, surface water or
groundwater thereof shall be deemed to be "wear and tear that would be
normal for the period of the Tenant's occupancy." Tenant shall be
responsible to promptly and completely clean up any such release caused
by Tenant, its officers and employees, agents, contractors, and invitees
as shall occur on the Property during the term of this Lease and shall
surrender the Property free of any contamination or other damage caused
by such occurrences during the term of the Lease.
(b) MAINTENANCE OF PREMISES. Tenant shall, at its sole cost and expense,
keep and maintain the Premises in good and sanitary order, condition,
and repair. As part of this maintenance obligation, Tenant shall
promptly respond to and clean up any release or threatened release of
any Hazardous Substance into the drainage systems, soil, surface water,
groundwater, or atmosphere, in a safe manner, in strict accordance with
Applicable Law, and as authorized or approved by all federal, state,
and/or local agencies having authority to regulate the permitting,
handling, and cleanup of Hazardous Substances.
(c) USE OF HAZARDOUS SUBSTANCES. TENANT HAS PROVIDED TO LANDLORD A LIST
OF HAZARDOUS MATERIALS WHICH TENANT USES ON SITE IN CONNECTION WITH ITS
OPERATIONS -- A COPY OF WHICH IS ATTACHED TO THE LEASE AS EXHIBIT B-1.
Tenant shall not use, store, generate, treat, transport, or dispose of
any OTHER Hazardous Substance on the Property without first obtaining
Landlord's written approval. Tenant shall notify Landlord and seek such
approval in writing at least 30 days prior to bringing any Hazardous
Substance onto the Property. Landlord may withdraw approval of any such
Hazardous Substance at any time, for reasonable cause related to the
threat of site contamination, or damage or injury to persons, property
or resources on or near the Property. Upon withdrawal of such approval,
Tenant shall immediately remove the Hazardous Substance from the site.
Landlord's APPROVAL OF OR failure to approve the use of a Hazardous
Substance under this paragraph shall not limit or affect Tenant's
obligations under this Lease, including Tenant's duty to remedy or
remove releases or threatened releases; to comply with Applicable Law
relating to the use, storage, generation, treatment, transportation,
and/or disposal of any such Hazardous Substances; or to indemnify
Landlord against any harm or damage caused thereby.
(d) REPORTS TO LANDLORD. For any month in which any Hazardous Substances
have been used, generated, treated, stored, transported or otherwise
been present on or in the Property pursuant to the provisions of the
preceding paragraph, Tenant shall provide Landlord with a written report
listing the Hazardous Substances which were present on the Property; all
releases of Hazardous Substances that occurred or were discovered on the
Property; all compliance activities related to such Hazardous
Substances, including all contacts with government agencies or private
parties of any kind concerning Hazardous Substances; and all manifests,
business plans, consent agreements or other documents relating to
Hazardous Substances executed or requested during that time period. The
report shall include copies of all documents and correspondence related
to such activities and written reports of all oral contacts relating
thereto.
(e) ENTRY BY LANDLORD. Tenant shall permit Landlord and his agents to
enter into and upon the Premises, FOLLOWING NOTICE (EXCEPT NO NOTICE
SHALL BE REQUIRED IN CASES OF EMERGENCY), at all reasonable times for
the purpose of inspecting the Premises and all activities thereon,
including activities involving Hazardous Substances, or for purposes of
maintaining any buildings on the Property. Such right of
entry and inspection shall not constitute managerial or
operational control by Landlord over any activities or operations
conducted on the Property by Tenant.
II. TENANT'S INDEMNITY AND RELEASE.
(a) INDEMNITY.
(i) Tenant hereby indemnifies, defends and holds harmless
Landlord from and against any suits, actions, legal or
administrative proceedings, demands, claims, liabilities, fines,
penalties, losses, injuries, damages, expenses or costs,
including interest and attorneys' fees, incurred by, claimed or
assessed against Landlord under any laws, rules, regulations
including, without limitation, Applicable Laws (as hereinafter
defined), in any way connected with any injury to any person or
damage to any property or any loss to Landlord caused by Tenant,
its officers, employees, agents, contractors, and invitees
occasioned in any way by Hazardous Substances (as hereinafter
defined) on the Property or the Premises.
(ii) This indemnity specifically includes the direct obligation
of Tenant to perform any remedial or other activities required,
ordered, recommended or requested by any agency, government
official or third party, or otherwise necessary to avoid or
minimize injury or liability to any person, or to prevent the
spread of pollution, however it came to be located thereon
(hereinafter, the "Remedial Work"). Tenant shall perform all such
work in its own name in accordance with Applicable Laws (as
hereinafter defined).
(iii) Without waiving, its rights hereunder, Landlord may, at its
option, perform such remedial or removal work as described in
clause (ii) above, and thereafter seek reimbursement for the
costs thereof. Tenant shall permit Landlord access to the
Property to perform such remedial activities.
(iv) Whenever Landlord has incurred costs described in this
section, Tenant shall, within 10 days of receipt of notice
thereof, reimburse Landlord for all such expenses together with
interest from the date of expenditure at the "applicable federal
rate" established by the Internal Revenue Service.
(b) AGENCY OR THIRD PARTY ACTION. Without limiting its obligations under
any other paragraph of this Agreement, Tenant shall be solely and
completely responsible for responding to and complying with any
administrative notice, order, request or demand, or any third party
claim or demand relating to potential or actual contamination on the
Premises. The responsibility conferred under this paragraph includes but
is not limited to responding to such orders on behalf of Landlord and
defending against any assertion of Landlord's financial responsibility
or individual duty to perform under such orders. Tenant shall assume,
pursuant to paragraph (a) above, any liabilities or responsibilities,
which are assessed against Landlord in any action described under this
paragraph (b).
(c) RELEASE.
III. DEFINITIONS.
(a) HAZARDOUS SUBSTANCE. "Hazardous Substance(s)" shall mean any
substance which at any time shall be listed as "hazardous" or "toxic"
under the Comprehensive Environmental Response, Compensation and
Liability Act ("CERCLA"), 42 U.S.C. 9601 et seq., as amended and the
Resource Conservation and Recovery Act ("RCRA"), 42 U.S.C. 6901 et seq.,
as amended, or in the regulations implementing such statutes, or which
has been or shall be determined at any time by any agency or court to be
a hazardous or toxic substance regulated under any other Applicable Laws
(as hereinafter defined). The term "Hazardous Substance(s)" shall also
include, without limitation, raw materials, building components, the
products of any manufacturing or other activities on the Property,
wastes,
2
<PAGE>
petroleum products, or special nuclear or by-product material as defined
by the Atomic Energy Act of 1954, 42 U.S.C. 3011, et seq., as amended.
(b) APPLICABLE LAW(S). "Applicable Law(s)" shall include, but shall not
be limited to, CERCLA, RCRA, the Federal Water Pollution Control Act, 33
U.S.C. 1251 et seq., the Clean Air Act, 42 U.S.C. 7401 et seq., as
amended, and the regulations promulgated thereunder, and any other
federal, state and/or local laws or regulations, whether currently in
existence or hereafter enacted or promulgated, that govern or relate to:
(i) The existence, cleanup and/or remedy of contamination of
property;
(ii) The protection of the environment from spilled, deposited or
otherwise emplaced contamination;
(iii) The control of hazardous or toxic substances or wastes; or
(iv) The use, generation, discharge, transportation, treatment, removal
or recovery of hazardous or toxic substances or wastes, including
building materials.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
3
<PAGE>
EXHIBIT B-1
CHEMICAL INVENTORY LIST
(TO BE MUTUALLY AGREED UPON BY TENANT AND LANDLORD BY FEBRUARY 1, 1999 AND
THEREAFTER ADDED HERETO)
1
<PAGE>
<TABLE>
EXHIBIT C
TENANT ESTOPPEL CERTIFICATE
[Date]
[Prospective Purchaser] [Prospective Lender]
============================= =============================
<S> <C> <C> <C> <C> <C> <C>
RE: Lease: Lease dated ________________ between _____________________________
("Landlord") and _________________________________________________ ("Tenant") (Copy
attached) consisting of _______ pages, plus Exhibit A (_______ pages), Exhibit B
(______ pages), Exhibit C (______ pages), and Amendment dated __________________
(______ pages).
Premises: _______________________________________________________________, consisting
of approximately ________________ rentable square feet.
Commencement Date: ___________________________________
Expiration Date: ________________________________________
Current Monthly Base Rent: _______________________________
Security Deposit: ________________________________________
Monthly Base Rent Paid Through: __________________________
</TABLE>
Gentlemen:
We are the Tenant under the Lease described above. We give you this
certificate to permit you to rely on it as conclusive evidence of the matters
stated below, in evaluating and completing the purchase by ([Prospective
Purchaser] __________________________________________) and the secured loan by
([Prospective Lender] _______________________________________) of the real
estate that includes the Premises. We warrant and represent to you as follows:
1. We are the Tenant at the Premises, and are in sole possession of and are
occupying the Premises. Tenant has not subleased all or any part of the Premises
or assigned the Lease, or otherwise transferred its interest in the Lease or the
Premises, EXCEPT AS MAY BE HEREINAFTER STATED.
2. The attached Lease is currently in effect and constitutes the entire
agreement between Landlord and Tenant. The Lease has not been amended, modified,
or changed whether in writing or orally, except as may be stated in the copy of
the Lease attached.
3. The Commencement Date and Expiration Date of the term of the Lease are
correctly stated above. Tenant has no options or rights and has not exercised
any options or rights to renew, extend, amend, modify, or change the term of the
Lease, except as may be stated in the copy of the Lease attached.
4. The Current Monthly Base Rent is correctly stated above. Monthly Base Rent
has been paid through the date stated above. No rent has been prepaid for more
than one (1) month. Tenant has not been given any free rent, partial rent,
rebates, rent abatements, or rent concessions of any kind, except as may be
stated in the copy of the Lease attached.
5. Tenant has deposited the Security Deposit stated above with Landlord, and
none of the Security Deposit has been applied by Landlord to the payment of rent
or any other amounts due under the Lease.
6. Any construction, build-out, improvements, alterations, or additions to the
Premises required under the Lease have been fully completed in accordance with
the plans and specifications described in the Lease.
7. Landlord has fully performed all of its obligations under the Lease and is
not in default under any term of the Lease. In addition, no circumstances exist
under which Landlord may be deemed in default merely upon service of notice or
passage of time.
1
<PAGE>
8. Tenant has no defenses, set-offs, or counterclaims to the payment of rent and
all other amounts due from Tenant to Landlord under the Lease.
9. Tenant has not been granted and has not exercised any options or rights of
expansion, purchase, or first refusal concerning the Lease or the Premises,
except as may be stated in the copy of the Lease attached.
10. Landlord has not given any consent to Tenant (for example, consent to
sublease or alter the Premises) that is required under the Lease before the
taking of any action by Tenant, except as may be hereinafter stated.
11. Tenant has not filed and is not the subject of any filing for bankruptcy or
reorganization under federal bankruptcy laws.
12. The address for notices to Tenant under the Lease is correctly set forth
above.
13. The person signing this letter on behalf of Tenant is a duly authorized
agent of Tenant.
Sincerely,
[Tenant]
By:________________________________________
Its_________________________________________
2
<PAGE>
EXHIBIT D
HVAC INSPECTION AND SERVICE CONTRACT
Service Agreement
for
Capital Associates
As Agent for BroadBand Technologies, Inc.
May 11, 1998
<PAGE>
Service 1017 Morrisville Pkwy, PO Drawer 185 Morrisville,
Agreement NC 27560-0185
(919)467-0106 FAX 467-7466
This Agreement is made by and between Applied Control Technology, Inc. and
Capital Associates
As Agents for
BroadBand Technologies
4024 Stirrup Creek Drive
Durham, NC 27703
Broadbandd Technologies
for services provided for the covered equipment at the following location(s):
Triangle Business Center
Applied Control Technology, Inc. will provide services in accordance with the
following schedules and the Standard Terms and Conditions of Sale, which are
part of this agreement and noted below.
PM Services
Included Excluded Inspection
Frequency
X Preventive Maintenance - Mechanical Quarterly
Equipment
X Preventive Maintenance - Control System N/A
X Preventive Maintenance - Fire Alarm System N/A
X Preventive Maintenance - Security System N/A
X Filter Change Labor See schedule
Support Services
Included Excluded
X Parts Coverage - Mechanical Equipment (Schedule A)
X Parts Coverage - Controls (Other than (Schedule B)
HVAC)
X Parts Coverage - Fire Alarm System (Schedule B)
X Parts Coverage - Security System (Schedule B)
X Parts Coverage - Filters (Schedule C)
X Water Treatment (Schedule D)
X Full Labor Coverage
X Refrigerant Recovery/Reclaim
X Replacement Refrigerant
X Emergency Service
X Special Services
<PAGE>
Planned Preventive Maintenance
Each preventive maintenance call will be custom prepared to meet special
customer requirements and manufacturers' guidelines. In general, maintenance
intervals will be scheduled at the frequency noted above, but exact schedules
will be determined by season, manufacturing guidelines, and equipment operating
hours. During each inspection, operational and efficiency tests will be
performed to detect early signs of equipment failure. After each service call,
the preventive maintenance checklist, complete with component analysis, will be
evaluated to provide the necessary input to update future service requirements.
Parts Coverage
Under this agreement, we will repair or replace worn parts or complete
components with new parts or reconditioned components. It is understood that
this undertaking by us applies only to the systems and equipment covered in this
agreement and specifically included on the attached schedules.
Repair and Emergency Labor
With the inclusion of this coverage, all labor charges, including overtime and
mileage fees, for repairs to covered equipment and emergency service for
failures of covered equipment, will be provided at no extra charge with
reasonable promptness during or after normal business hours. Applied Control
Technology's phone lines are answered 24 hours per day, and a minimum of six
technicians are on call at any given moment. Absent this coverage, standard
rates, including overtime when applicable, will apply.
Special Services
As a function of this agreement, Applied Control Technology shall provide: o Top
Priority emergency/trouble call response o Accurate, specific and thorough
equipment history reports and logs,
maintained for and available to, BroadBand Technologies.
o Recommendations for control strategy and/or operational criteria to minimize
system owning and operating costs, provided at no charge to BroadBand
Technologies.
o Notification of appropriate BroadBand Technologies personnel upon
technician's arrival and departure from facility.
o Annual performance evaluations scheduled with appropriate Capital Associates
personnel to insure optimum execution of this agreement.
o Applied Control Technology will familiarize a minimum of three technicians
with the site(s).
o Applied Control Technology will recapture and reclaim all refrigerants
whenever possible and in a manner consistent with the environmental policies
of Capital Associates.
o Guaranteed four hour response time. Two hour response time for units
considered critical.
General Notes and Exceptions
None
<PAGE>
Standard Terms and Conditions of Sale
Customer agrees to the following items under the scope of this agreement:
o The customer will provide reasonable means of access to all equipment
covered under this agreement. This includes freedom to start and stop all
primary equipment to perform scheduled services. Arrangements will be made
with the owner's representative prior to starting or stopping any equipment.
o In the event that the system(s) is altered, modified, changed, or moved,
this agreement is immediately terminable at the option of Applied Control
Technology, Inc.
o Warranties for equipment purchased from, but not installed by, Applied
Control Technology are limited to those offered by the manufacturer.
o Applied Control Technology's responsibility for injury to persons or
property that may be caused by, or arise through, the maintenance, service,
or use of the system(s) shall be limited to injury or damage caused directly
by our negligence in performing our obligations under this agreement, and in
no event shall we be liable for speculative, indirect, or consequential
damages.
o In the event it shall become necessary to retain legal council to enforce
any of its rights hereunder, BroadBand Technologies agrees that it shall be
responsible for payment of all reasonable attorneys' fees, expenses and
costs incurred therewith.
o Service Agreement period payments are due on the first day of the covered
service period. Any invoice that is not a Service Agreement period payment,
with a due date shown, shall be due 30 days from invoice date. Interest
charges due on overdue invoices shall accrue from the due date at the rate
of 1% per month.
General Exclusions
o All CFC refrigerants (R-11, R-12, R-500, R-502, etc.)
o Repair or replacement of non-maintainable parts of the system such as
ductwork, boiler shell and tubes, unit cabinets, boiler refractor material,
electrical wiring, hydronic and pneumatic piping, structural supports, etc.
is not included under this agreement.
o Repair of pre-existing conditions that are required to place equipment into
proper operating condition upon acceptance of this agreement.
o Emergency calls, labor, travel and repair necessitated by improper operation
or tampering of equipment or related equipment controls, other than by
Applied Control Technology's personnel.
o Deficiencies in system design or alterations to system design which effect
system performance or result in improper operation or damage to equipment.
o Handling, removal or disposal of any materials classified as hazardous
materials by any government or industry regulations.
o Repairs or damages resulting from occurrences beyond Applied Control
Technology control, including, but not limited to, Acts of God, freeze
damage, vandalism, facility electrical power problems, strikes or inability
of manufacturers/suppliers to furnish necessary equipment, parts, or
materials when required.
<PAGE>
This agreement shall commence on the date listed below, and shall continue for a
period of one year(s), and continue from year-to-year thereafter until
terminated. Either party may terminate this agreement by giving a written thirty
(30)day notice, provided all obligations (incurred) are fullfilled.
The agreement price may be adjusted annually based upon prevailing costs of
labor and materials.
Capital Associates and BroadBand Technologies agrees that they shall not
directly, nor through any of BroadBand Technologies' affiliates, employ any
executive, administrative, sales, technical, or other employee of Applied
Control Technology, Inc. or any affiliate thereof, including but not limited to
Applied Systems Technology, Inc., during the term of this agreement and for a
period of one year after the termination of this agreement.
This Service Agreement constitutes the entire and integrated agreement between
the parties and supersedes all other documents or agreements, either written or
oral, and takes precedence and control over any inconsistent or conflicting
provisions in any purchase order issued by Capital Associates and/or BroadBand
Technologies Acceptance of service shall constitute agreement to the terms of
this Service Agreement. This Agreement may be amended only by written instrument
which is executed by both parties.
This agreement shall commence on June 1, 1998.
The annual price for the services detailed herein is $17,520.00.
and is payable on the 10th of the month after the monthly period billed for, in
equal sums of $1,460.00.
This proposal is hereby accepted by:
Capital Associates as Agents for Applied Control Technology, Inc.
BroadBand Technologies
- ------------------------------- ---------------------------------------
Authorized Signature Authorized Signature
- ------------------------------- ---------------------------------------
Title Title
Management Approval _____________
Salesman:Mordecai
Prepared by:mak
- -------------------------------
Date P.O. Number
<PAGE>
<TABLE>
Schedule A
Maintained Mechanical Equipment
Inspection Frequency: Quarterly
<S> <C> <C> <C> <C> <C>
Unit Number Equipment Name Location Rating Manufacturer/Model # Serial #
SS1 Split 1- Manufacturing 10 Ton Carrier/AE012600 R695591
SS2 Split 1- Office 10 Ton Carrier/40BH009-300
SS4 Split 1- Rel. Audit 10 Ton Carrier/40BH009-300
1 RTU 1- Manufacturing 8 Ton Carrier/50RQ010600KB U599181
2 RTU 1- Manufacturing 8 Ton Carrier/50RQ010600KB U599182
3 RTU 1- Break Room 8 Ton Carrier/50RQ010600KB U599184
4 RTU 1- Manufacturing 10 Ton Carrier/50EG012610FA U599141
5 RTU 1- Manufacturing and 10 Ton Carrier/50EG012610FA U599143
Office
6 RTU 1- Manufacturing and Office 10 Ton Carrier/50EG012610FA U599142
7 RTU 2- Office 10 Ton Carrier/50EG012610FA U599139
8 RTU 2- Lab and Training Room 10 ton Carrier/40DP012610DA S595494
9 RTU 2- Perimeter 12 Ton Carrier/48DP014610AA R595742
10 RTU 2- Perimeter 12 Ton Carrier/48DP014610AA R595741
10 RTU Computer Room 10 Ton Carrier/50EG012610 S689272
11 RTU 2- Laboratory 12 Ton Carrier/48DP014610AA T594821
12 RTU 2- Office 12 Ton Carrier/48DP014610DA T594807
13 RTU 2- Office 12 Ton Carrier/48DP014610AA T594823
14 RTU 2- Office 12 Ton Carrier/48DP014610AA T594828
15 RTU 2- Laboratory 8 Ton Carrier/50RQ010600KB U599183
17 RTU 2- Laboratory 8 Ton Carrier/50RQ010600KB U599180
20 RTU 1- Mach. Shop 10 Ton Carrier/50EG012610FA U599144
22 RTU 2- Laboratory and CR. G 12 Ton Carrier/48DP014610AA T594827
23 RTU 2- Perimeter 12 Ton Carrier/48DP014610DA T594799
24 RTU 2- Perimeter 12 Ton Carrier/48DP014610AA T594825
25 RTU 2- Laboratory 12 Ton Carrier/48DP014610DA S596444
26 RTU 2- Offices 12 Ton Carrier/48DP014610DA S596446
27 RTU 2- Offices 12 Ton Carrier/48DP014610DA S596448
28 RTU 2- Offices 12 Ton Carrier/48DP014610AA T594819
29 RTU Atrium 7.5 Ton Carrier/48LD00800 2285G39122
30 RTU Atrium 7.5 Ton Carrier/48LD00800 2285G39124
</TABLE>
<PAGE>
Schedule C
Filters
Unit Unit ID # Filters per unit Size Type Annual changes
Quantity
3 24x24x1 F/G 4
84 16x20x2 F/G 4
18 16x20x1 F/G 4
26 20x20x1 F/G 4
<PAGE>
EXHIBIT E
OPERATING EXPENSE EXCLUSIONS
The following items shall be excluded from Operating Expenses pursuant to
Section 4.5 of the Lease:
1. Cost of items considered capital repairs, replacements, improvements and
equipment under generally accepted accounting principles consistently
applied or otherwise ("Capital Items"), except for (i) the annual
amortization (amortized over the useful life) of costs, including financing
costs, if any, incurred by Landlord after the Commencement Date for any
capital improvements installed or paid for by Landlord and required by and
new (or change in) laws, rules or regulations of any governmental or
quasi-governmental authority which are enacted after the Commencement Date;
(ii) the annual amortization (amortized over the useful life) of costs,
including financing costs, if any, of any equipment, device or capital
improvement purchased or incurred as a labor-saving measure or to affect
other economics in the operation or maintenance of the Building (provided
the annual amortized costs do not exceed the actual cost savings realized
and such savings do not primarily benefit any particular tenant); or (iii)
minor capital improvements, tools or expenditures to the extent each such
improvement or acquisition costs less than one thousand and no/100 dollars
($1,000.00) and the total cost of same are not in excess of five thousand
and no/100 dollars ($5,000.00) in any twelve (12) month period.
2. Rentals for items (except when needed in connection with normal repairs and
maintenance of permanent systems) which if purchased, rather than rented,
would constitute a Capital Item which is specifically excluded above
(excluding, however, equipment not affixed to the Building which is used in
providing janitorial or similar services).
3. Costs incurred by Landlord for the repair of damage to the Building, to the
extent that Landlord is reimbursed by insurance proceeds, and costs of all
capital repairs, regardless of whether such repairs are covered by
insurance.
4. Costs, including permit, license and inspection costs, incurred with
respect to the installation of tenant's or other occupants' improvements in
the Building or incurred in renovating or otherwise improving, decorating,
painting or redecorating vacant space for tenants or other occupants of the
Building.
5. Depreciation, amortization and interest payments, except as provided herein
and except on materials, tools, supplies and vendor-type equipment
purchased by Landlord to enable Landlord to supply services Landlord might
otherwise contract for with a third party where such depreciation,
amortization and interest payments would otherwise have been included in
the charge for such third party's services, all as determined in accordance
with generally accepted accounting principles, consistently applied, and
when depreciation or amortization is permitted or required, the item shall
be amortized over its reasonably anticipated useful life.
6. Marketing costs including, without limitation, leasing commissions,
attorneys' fees in connection with the negotiation and preparation of
letters, deal memos, letters of intent, leases, subleases and/or
assignments, space planning costs, and other costs and expenses incurred in
connection with lease, sublease and/or assignment negotiations and
transactions with present or prospective tenants or other occupants of the
Building.
7. Expenses in connection with services or other benefits which are not
offered to Tenant or for which Tenant is charged for directly but which are
not provided to another tenant or occupant of the Building free of charge.
8. Costs incurred by Landlord due to the violation by Landlord or any tenant
other than Tenant of the terms and conditions of any lease of space in the
Building.
1
<PAGE>
9. Overhead and profit increment paid to Landlord or to subsidiaries or
affiliates of Landlord for goods and/or services in or to the Building to
the extent the same exceeds the costs of such goods and/or services
rendered by unaffiliated third parties on a competitive basis.
10. Interest, principal, points and fees on debts or amortization on any
mortgage or mortgages or any other debt instrument encumbering the Building
or the Site (except as permitted herein).
11. Landlord's general corporate overhead and general and administrative
expenses; however, a market rate management fee not to exceed four percent
(4%) shall be included in Operating Expenses.
12. Any compensation paid to clerks, attendants or other persons in commercial
concessions operated by Landlord.
13. Rental and other related expenses incurred in leasing HVAC systems,
elevators or other equipment ordinarily considered to be Capital Items,
except for (i) expenses in connection with making minor repairs on or
keeping Building systems in operation while minor repairs are being made,
and (ii) costs of equipment not affixed to the Building which is used in
providing janitorial or similar services.
14. Advertising and promotional expenditures, and costs of signs in or on the
Building identifying the owner of the Building or other tenants' signs.
15. The cost of any electric power used by any other tenant in the Building or
electric power costs for which any tenant directly contracts with the local
public service company or of which any tenant is separately metered or
sub-metered and pays Landlord directly; provided, however, that if any
tenant in the Building contracts directly for electric power service or is
separately metered or sub-metered during any portion of the relevant
period, the total electric power costs for the Building shall be "grossed
up" to reflect what those costs would have been had each tenant in the
Building used the Building standard amount of electric power.
16. Costs incurred in connection with upgrading the Building to comply with
disability, life, fire and safety codes, ordinances, statutes, or other
laws in effect prior to the Commencement Date, based on the standards,
requirements, and interpretations thereof in effect on the Commencement
Date, including, without limitation, the ADA, including penalties or
damages incurred due to such non-compliance.
17. Tax penalties incurred as a result of Landlord's negligence, inability or
unwillingness and customarily charged by comparable landlords of comparable
buildings.
18. Costs arising from the negligence or fault of other tenants or Landlord or
its agents, or any vendors, contractors, or providers of materials or
services selected, hired or engaged by Landlord or its agents including,
without limitation, the selection of Building materials.
19. Notwithstanding any contrary provision of the Lease, including, without
limitation, any provision relating to capital expenditures, any and all
costs arising from the presence of hazardous materials or substances (as
defined by Applicable Laws in effect on the date the Lease is executed) in
or about the Premises, the Building or the Site including, without
limitation, hazardous substances in the ground water or soil, for which
Landlord is liable and responsible under this Lease.
20. Costs arising from Landlord's charitable or Political contributions.
21. Costs arising from latent defects in the base, shell, or core of the
Building or improvements installed by Landlord or repair thereof.
2
<PAGE>
22. Costs arising from any mandatory or voluntary special assessment on the
Building or the Site by any transit district authority or any other
governmental entity having the authority to impose such assessment.
23. Costs for sculptures, paintings or other objects of art.
24. Costs (including in connection therewith all attorneys' fees and costs of
settlement judgements and payments in lieu thereof) arising from claims,
disputes or potential disputes in connection with potential or actual
claims, litigation or arbitrations pertaining to Landlord and/or the
Building which are not associated with Landlord's reasonable, good faith
attempts to reduce a component of Operating Expenses.
25. Costs associated with the operation of the business of the partnership or
entity which constitutes Landlord as the same are distinguished from the
costs of operation of the Building, including partnership accounting and
legal matters, costs of defending any lawsuits with any mortgages (except
as the actions of Tenant may be in issue), costs of selling, syndicating,
assigning, mortgaging, or hypothecating any of Landlord's interest in the
Building, costs of any disputes between Landlord and its employees (if any)
not engaged in Building operation, disputes of Landlord with Building
management, or outside fees paid in connection with disputes with other
tenants.
26. Costs of any "tap fees" or any sewer or water connection fees for the
benefit of any particular tenant in the Building.
27. Costs incurred in connection with any environmental clean-up, response
action, or remediation not caused by Tenant on, in or about the Premises or
the Building, including but not limited to, costs and expenses associated
with the defense, administration, settlement, monitoring or management
thereof.
28. Any expenses incurred by Landlord for use of any portions of the Building
to accommodate events including, but not limited to show, promotions,
kiosks, displays, filming, photography, private events or parties,
ceremonies, and advertising beyond the normal expenses otherwise
attributable to providing Building services, such as lighting and HVAC to
such public portions of the Building in normal Building operations during
standard Building hours of operation.
3
<PAGE>
29. Any entertainment, dining or travel expenses for any purpose.
30. Any flowers, gifts, balloons, etc. provided to any entity whatsoever, to
include, but not limited to, Tenant, other tenants, employees, vendors,
contractors, prospective tenants and agents.
31. Any "finders fees", brokerage commissions, job placement costs or job
advertising costs.
32. Any "above standard" cleaning, including, but not limited to construction
cleanup or special cleanings associated with parties/ events and specific
tenant requirements, including related trash collection, removal, hauling
and dumping.
33. The cost of any magazine, newspaper, trade or other subscriptions.
34. The cost of any training or incentive programs, other than for tenant life
safety information services.
35. The cost of any "tenant relations" parties, events or promotion not
consented to by an authorized representative of Tenant in writing.
36. "In-house" legal and/or accounting fees.
37. Any other expenses which, in accordance with generally accepted accounting
principles, consistently applied, would not normally be treated as
Additional Rent or Park Expenses by comparable landlords of comparable flex
buildings or owners of comparable business parks.
The annual statement of Operating Expenses shall be accounted for and
reported in accordance with generally accepted accounting principles (the
"Annual Statement").
Notwithstanding anything herein to the contrary, the Tenant shall have the
right to audit, with reasonable notice to Landlord, the Annual Statement at the
end of each calendar year. Such audit shall be performed at Landlord's primary
place of business during Landlord's normal business hours by Tenant's in-house
accounting personnel, CPA or similar accounting professional, however, use of a
contingency fee based entity is prohibited. In the event that the Additional
Rent or Park Expenses are determined to be overstated by more than ten percent
(10%) of the correct amount, then the Landlord shall reimburse Tenant for the
overstated amount and for the reasonable compensation actually paid by Tenant to
the outside certified public accountant retained by Tenant to perform such
audit, the amount of which compensation must not be based, in whole or in part,
upon the results of such audit.
4
<PAGE>
ADDENDUM NUMBER ONE
OPTION TO EXTEND LEASE TERM
1. LEASE. "Lease" shall mean the Lease dated ____________________, ________, to
which this Addendum is attached between HIGHWOODS REALTY LIMITED PARTNERSHIP
("Landlord") and BROADBAND TECHNOLOGIES, INC. ("Tenant").
2. INITIAL LEASE TERM. For the purposes of this Addendum, "Initial Lease Term"
shall mean the Lease Term as defined in the Lease.
3. OPTION TO EXTEND. Tenant shall have the right and option to extend the Lease
(the "Renewal Option") for TWO (2) additional periods of THREE (3) YEARS each
(the "Renewal Lease Terms") (a separate notice is required for each Renewal
Lease Term); provided, however, such Renewal Option is contingent upon the
following (i) Tenant is not in default at the time Tenant gives Landlord written
notice of Tenant's intention to exercise the Renewal Option; (ii) upon the
Expiration Date or the expiration of any Renewal Lease Term, Tenant has no
outstanding default; (iii) no event has occurred that upon notice or the passage
of time would constitute a default; and (iv) Tenant is occupying the Premises.
Tenant shall exercise each Renewal Option by giving Landlord written notice at
least THREE HUNDRED SIXTY-FIVE (365) days prior to the Expiration Date or the
last day of any Renewal Lease Term. If Tenant fails to give such notice to
Landlord prior to said THREE HUNDRED SIXTY-FIVE (365) day period, then Tenant
shall forfeit the Renewal Option. If Tenant exercises the Renewal Option, then
during any such Renewal Lease Term, Landlord and Tenant's respective rights,
duties and obligations shall be governed by the terms and conditions of the
Lease.
4. TERM. If Tenant exercises the Renewal Option, then during any such Renewal
Lease Term, all references to the term "Term", as used in the Lease, shall mean
the "Renewal Lease Term".
5. LEASE TERM. The "Lease Term", as used in the Lease, shall mean the Initial
Lease Term and, if the Renewal Option is exercised, the Renewal Lease Term.
6. BASE RENT FOR RENEWAL LEASE TERM. If Tenant exercises the Renewal Option, the
Base Rent shall be $8.90 per rentable square foot for the first Renewal Option
and $9.73 per rentable square foot for the second Renewal Option; provided
Tenant accepts the Premises "as-is". Should Tenant elect to exercise the Renewal
Option with a Tenant Improvement Allowance ($200,000.00 per Renewal Option),
then the Base Rent shall be $9.72 per rentable square foot for the first Renewal
Option and $10.55 per rentable square foot for the second Renewal Option.
7. TERMINATION OF RENEWAL OPTION ON SUBLEASE OR ASSIGNMENT BY TENANT. In the
event Landlord consents to a SUBLEASE OR ASSIGNMENT, as defined in the Lease,
the Renewal Option shall automatically terminate unless otherwise agreed in
writing by Landlord, EXCEPT THAT, THIS RENEWAL OPTION SHALL NOT TERMINATE SO
LONG AS TENANT CONTINUES TO OCCUPY MORE THAN FIFTY PERCENT (50%) OF THE
PREMISES.
1
<PAGE>
ADDENDUM NUMBER TWO
FIRST RIGHT OF OFFER
Provided Tenant is not in default hereunder, during the Term, Tenant shall have
the first right of offer (the "First Right of Offer") on available space in the
Building (the "Expansion Space"). Landlord shall provide to Tenant written
notice of such Expansion Space as it becomes available outlining the square
footage and market terms and conditions in similar quality flex buildings in the
Research Triangle Park area. Tenant may exercise the First Right of Offer only
by delivering to Landlord, within ten (10) business days after receipt of
Landlord's notice, a written notice of Tenant's election to exercise the First
Right of Offer. In the event Tenant does not respond to Landlord's notice within
the said ten (10) day period, then Landlord may pursue other interested tenants.
However, if Tenant exercises its First Right of Offer, then Tenant and Landlord
shall commence good faith negotiations to lease the Expansion Space under the
following conditions: (i) the terms of said lease shall be at the then current
market terms and rates negotiated by Landlord and Tenant, however, if Landlord
and Tenant can not agree upon a rental rate, the rental rate shall be determined
by arbitration, (ii) this Lease shall be amended to incorporate the terms of
leasing the Expansion Space and the term of any lease for the Expansion Space
shall expire on the Termination Date; provided, however, if this Lease is not
amended to incorporate the terms of leasing the Expansion Space, then the lease
term for such Expansion Space shall expire on the Expiration Date; and (iii) if
Tenant exercises its First Right of Offer during the last year of the Term, then
this Lease FOR THE EXPANSION SPACE ONLY shall be amended to extend the Term for
a minimum of three (3) years.
1
<PAGE>
ADDENDUM NUMBER THREE
OPTION TO CANCEL
Tenant shall have the right to cancel this Lease at any time between the
thirty-sixth (36th) month and the forty-eighth (48th) month of the initial lease
term by providing Landlord twelve (12) months prior written notice between the
twenty-fourth (24th) months and the thirty-sixth (36th) month of the initial
lease term if: (i) Tenant is not in default under this Lease; (ii) Tenant ceases
to operate in Wake or Durham counties; or (iii) if Tenant requires additional
space of a minimum of fifty percent (50%) of the Demised Premises and Landlord
is unable to deliver the additional space (either contiguous, within a close
proximity or new space for the original and expanded space requirement) in a
location mutually acceptable to Landlord and Tenant within twelve (12) months of
written notice from Tenant of the additional space requirement. If Tenant
exercises its right to cancel this Lease, then prior to the effective date of
any such cancellation, Tenant shall pay to Landlord, at the time the notice of
the intent to cancel the Lease is delivered, a cancellation fee in an amount
equal to the sum of three (3) months rent WHICH IS $192,203.10.
1
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the following Registration
Statements: Form S-8 No. 33-67076 and Form S-8 No. 33-87630 pertaining to
the BroadBand Technologies, Inc. 1988 Incentive Stock Option Plan; Form S-8
No. 33-67724 pertaining to the BroadBand Technologies, Inc. 1992
Nonqualified Stock Option Plan; Form S-8 No. 33-73802 pertaining to the
BroadBand Technologies, Inc. 401 (k) Plan; Form S-8 No. 333-09661
pertaining to the BroadBand Technologies, Inc. 5% Convertible Subordinated
Notes due May 15, 2001 and Form S-8 No. 333-10443 pertaining to the
BroadBand Technologies, Inc. 1,000,000 shares of common stock issuable upon
exercise of outstanding warrants of our report dated January 25, 1999 with
respect to the financial statements of BroadBand Technologies, Inc.
included in the Annual Report (Form 10-K) for the year ended December 31,
1998.
/S/ ERNST & YOUNG LLP
---------------------
Ernst & Young LLP
Raleigh, North Carolina
March 26, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 101,475,185
<SECURITIES> 4,555,343
<RECEIVABLES> 7,888,903
<ALLOWANCES> (250,879)
<INVENTORY> 1,861,372
<CURRENT-ASSETS> 1,210,778
<PP&E> 21,471,147
<DEPRECIATION> (15,381,974)
<TOTAL-ASSETS> 124,607,662
<CURRENT-LIABILITIES> 18,785,438
<BONDS> 115,000,000
0
0
<COMMON> 134,367
<OTHER-SE> 162,778,408
<TOTAL-LIABILITY-AND-EQUITY> 124,607,662
<SALES> 8,276,105
<TOTAL-REVENUES> 39,317,090
<CGS> 7,105,515
<TOTAL-COSTS> 7,105,515
<OTHER-EXPENSES> 35,947,703
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (126,904)
<INCOME-PRETAX> (2,760,711)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,760,711)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,760,711)
<EPS-PRIMARY> (.21)
<EPS-DILUTED> (.21)
</TABLE>
