Securities and Exchange Commission
Washington, D.C. 20549
Form 10-Q
[x] Quarterly Report pursuant Under Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Quarterly Period Ended September 30, 1999
[ ] Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Transition Period to
Commission File Number 0-21766
BroadBand Technologies, Inc.
- --------------------------------------------------------------------------------
Delaware 56-1615990
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(State of Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
4024 Stirrup Creek Drive, Durham, N.C. 27703
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (919) 544-0015
----------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -------
Indicate the number of shares outstanding in each of the issuer's classes of
Common Stock, as of the latest feasible date.
Classes Outstanding as of November 11, 1999:
- -------
Common Stock ($.01 par Value) 13,483,708
<PAGE>
BROADBAND TECHNOLOGIES, INC.
Index
PAGE NO.
--------
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Balance Sheets
September 30, 1999 and December 31, 1998 3-4
Condensed Statements of Operations
Three Months Ended September 30, 1999 and 1998 5
Condensed Statements of Operations
Nine Months Ended September 30, 1999 and 1998 6
Condensed Statements of Cash Flows
Nine Months Ended September 30, 1999 and 1998 7
Notes to Condensed Financial Statements 8-11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11-18
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 5. Other Information 19-30
Item 6. Exhibits and Reports on Form 8-K 30
SIGNATURES 30
2
<PAGE>
BROADBAND TECHNOLOGIES, INC.
Condensed Balance Sheets
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- -----------
(UNAUDITED) (AUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 27,228,761 $ 45,403,692
Restricted cash (NOTE 2) 1,050,000 7,283,500
Short-term investments (NOTE 3) 38,282,093 48,787,993
Accounts receivable, trade, less allowances $100,000 in 1999
and $250,879 in 1998 6,267,843 7,638,024
Inventories (NOTE 4) 2,266,471 1,861,372
Prepaid expenses and other current assets 3,190,002 1,204,372
---------------- -----------------
Total current assets 78,285,170 112,178,953
Long-term investments (NOTE 3) 4,973,155 408,780
Restricted cash (NOTE 2) -- 4,146,563
Furniture, fixtures, and equipment:
Equipment 16,586,008 14,626,531
Software 5,290,872 4,804,929
Furniture and fixtures 725,687 723,411
Leasehold improvements 1,345,332 1,316,276
---------------- -----------------
23,947,899 21,471,147
Accumulated depreciation and amortization (17,542,083) (15,381,974)
---------------- -----------------
Net furniture, fixtures and equipment 6,405,816 6,089,173
Deferred debt issuance costs (net of accumulated amortization) (NOTE 5) 1,217,162 1,777,787
Other noncurrent assets (NOTE 2) 2,373,995 6,406
---------------- -----------------
3,591,157 1,784,193
Total assets $ 93,255,298 $ 124,607,662
================== ===============
</TABLE>
SEE NOTES TO CONDENSED FINANCIAL STATEMENTS.
3
<PAGE>
BROADBAND TECHNOLOGIES, INC.
Condensed Balance Sheets
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
(UNAUDITED) (AUDITED)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 5,457,992 $ 3,244,472
Accrued expenses 6,057,135 5,912,028
Deferred revenue 1,331,110 5,659,015
Deposits and other accrued liabilities 803,628 3,969,923
----------------------- ----------------------
Total current liabilities 13,649,865 18,785,438
Long-term liabilities:
Convertible debt (NOTE 5) 115,000,000 115,000,000
Deferred compensation (NOTE 2) -- 1,400,000
Other liabilities 130,000 2,300,000
----------------------- ----------------------
Total long-term liabilities 115,130,000 118,700,000
Stockholders' deficit:
Series A preferred stock, $.01 par value; 100,000
shares authorized; no shares issued and outstanding -- --
Convertible preferred stock, $.01 par value; 7,500,000
shares authorized; no shares issued and outstanding -- --
Common stock, $.01 par value; 30,000,000 shares
authorized; 13,479,700 and 13,436,686 shares
outstanding 134,797 134,367
Additional paid-in capital 156,174,730 163,428,408
Deferred compensation (NOTE 2) (500,000) (650,000)
Accumulated deficit (191,334,094) (175,790,551)
----------------------- ----------------------
Total stockholders' deficit (35,524,567) (12,877,776)
----------------------- ----------------------
Total liabilities and stockholders' deficit $ 93,255,298 $ 124,607,662
======================= ======================
</TABLE>
SEE NOTES TO CONDENSED FINANCIAL STATEMENTS.
4
<PAGE>
BROADBAND TECHNOLOGIES, INC.
Condensed Statements of Operations
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
1999 1998
--------- ---------
<S> <C> <C>
Revenues:
Product sales and contract revenue $ 10,593,332 $ 1,597,022
Services revenue 1,873,272 1,420,228
---------------------- ----------------------
Total revenues 12,466,604 3,017,250
Costs and expenses:
Cost of revenues 9,394,124 1,952,518
Research and development 5,430,663 3,778,800
Selling, general and administrative expenses 2,834,650 3,105,926
---------------------- ----------------------
Total costs and expenses 17,659,437 8,837,244
---------------------- ----------------------
Loss from operations (5,192,833) (5,819,994)
Interest income 938,555 1,735,567
Interest expense (1,624,136) (1,656,173)
Other income (expense) -- 18,631
---------------------- ----------------------
Total other income (expense) (685,581) 98,025
---------------------- ----------------------
Loss before income taxes (5,878,414) (5,721,969)
Income taxes -- --
---------------------- ----------------------
Net loss $ (5,878,414) $ (5,721,969)
====================== ======================
Net loss per share (NOTE 8) $ (.44) $ (.43)
====================== ======================
Average number of shares and equivalents 13,469,466 13,423,598
====================== ======================
</TABLE>
SEE NOTES TO CONDENSED FINANCIAL STATEMENTS.
5
<PAGE>
BROADBAND TECHNOLOGIES, INC.
Condensed Statements of Operations
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
1999 1998
---------- ---------
<S> <C> <C>
Revenues:
Product sales and contract revenue $ 16,681,645 $ 6,355,233
Services revenue 5,693,906 1,975,784
Nonrefundable prepayment revenue (NOTE 6) 2,185,000 --
Technology transfer & license agreement (NOTE 7) -- 17,000,000
------------------ --------------------
Total revenues 24,560,551 25,331,017
Costs and expenses:
Cost of revenues 15,042,380 6,242,152
Research and development 14,457,855 14,627,843
Restructuring costs -- 2,577,678
Selling, general and administrative expenses 8,835,914 13,065,656
------------------ --------------------
Total costs and expenses 38,336,149 36,513,329
------------------ --------------------
Loss from operations (13,775,598) (11,182,312)
Interest income 3,103,897 6,001,245
Interest expense (4,871,843) (4,879,048)
Other income (expense) -- 668,838
------------------ --------------------
Total other income (expense) (1,767,946) 1,791,035
------------------ --------------------
Loss before income taxes (15,543,544) (9,391,277)
Income taxes -- --
------------------ --------------------
Net loss $ (15,543,544) $ (9,391,277)
================== ====================
Net loss per share (NOTE 8) $ (1.16) $ (.70)
================== ===================
Average number of shares and equivalents 13,449,153 13,407,937
================== ===================
</TABLE>
SEE NOTES TO CONDENSED FINANCIAL STATEMENTS.
6
<PAGE>
BROADBAND TECHNOLOGIES, INC.
Condensed Statements of Cash Flows
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
1999 1998
----------- ---------
<S> <C> <C>
OPERATING ACTIVITIES
Net (loss) $ (15,543,544) $ (9,391,277)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation 2,300,566 2,642,255
Other noncash charges 711,942 2,716,750
Changes in operating assets (3,038,136) 511,064
Changes in operating liabilities (8,705,573) 3,627,704
----------------------- ---------------------
Net cash provided by (used in) operating activities (24,274,745) 106,496
INVESTING ACTIVITIES
Acquisitions of furniture, fixtures and equipment (2,617,209) (1,258,907)
Acquisitions of product software (350,000) --
Net decrease in investments 5,941,525 11,824,485
----------------------- ----------------------
Net cash provided by investing activities 2,974,316 10,565,578
FINANCING ACTIVITIES
Settlement of put option (NOTE 2) (7,346,370) --
Issuance of Common Stock 91,805 126,771
Decrease (increase) in restricted cash 10,380,063 (2,048,345)
----------------------- ----------------------
Net cash provided by (used in) financing activities 3,125,498 (1,921,574)
Increase (decrease) in cash and cash equivalents (18,174,931) 8,750,500
Cash and cash equivalents at beginning of period 45,403,692 47,464,129
----------------------- ----------------------
Cash and cash equivalents at end of period $ 27,228,761 $ 56,214,629
======================= ======================
</TABLE>
SEE NOTES TO CONDENSED FINANCIAL STATEMENTS.
7
<PAGE>
BROADBAND TECHNOLOGIES, INC.
Notes to Condensed Financial Statements
September 30, 1999
1. BASIS OF PRESENTATION
The accompanying unaudited Condensed Financial Statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. Operating results for the three and nine months ended September 30,
1999 and 1998 are not necessarily indicative of the results that may be expected
for a full fiscal year. Certain items in the 1998 financial statements have been
reclassified to conform to the 1999 presentation. For further information, refer
to the financial statements and accompanying footnotes for the year ended
December 31, 1998 included in the Company's Form 10-K submission.
2. EMPLOYMENT AGREEMENT AND RESTRICTED CASH
The Company has an outstanding stand-by letter of credit in the amount of $1.0
million at September 30, 1999, which expires in March 2000. This letter of
credit is collateralized by restricted cash of the same amount. The Company also
has $50,000 restricted cash on deposit with its primary bank collateralizing a
corporate procurement card.
At December 31, 1998, the Company had restricted cash of $4.0 million associated
with executive compensation for the President and CEO, David E. Orr, who joined
the Company on April 1, 1997. Compensation expense of $4.0 million was being
recognized on a straight-line basis over the term of the employment agreement of
five years. Additionally, Mr. Orr was entitled to receive the interest income
earned by the $4.0 million. The compensation was 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. In the third
quarter of 1999, the employment agreement was amended to convert the $4.0
million executive compensation to a secular trust with all income earned after
the effective date to be paid annually to Mr. Orr on January 1 thereafter. All
other terms of the employment agreement were unchanged, including the term of
the employment agreement. The secular trust was established in early August
1999. Upon conversion from a rabbi trust, the remaining unrecognized
compensation expense was charged to prepaid expense and is being amortized over
the remaining term of the five year employment agreement. Mr. Orr was also
granted 80,000 shares of restricted Common Stock valued at $1.0 million. Upon
issuance of this stock, deferred compensation equivalent to the market value at
the date of grant, $1.0 million, has been charged to shareholders' equity and is
being amortized as compensation expense over the employment period of five
years.
During the first quarter of 1997, the Board of Directors authorized the
initiation of a stock repurchase program and entered into an agreement with an
investment banker that utilizes equity put and call options for the purchase of
up to 1.0 million shares of Common Stock outstanding. The options expired April
15, 1999. To settle its option obligations, the Company paid the holder of the
options $3.0 million from restricted cash during the first quarter and $4.3
million from restricted cash during the second quarter. All payments were
recorded as a reduction of additional paid-in capital. All option obligations
have been settled and the Company has no further obligations under the original
agreement.
3. CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents. Cash equivalents consist
principally of funds in demand deposit accounts, United States Treasury
Obligations, and commercial paper.
8
<PAGE>
BROADBAND TECHNOLOGIES, INC.
Notes to Condensed Financial Statements
3. CASH AND CASH EQUIVALENTS (CONTINUED)
INVESTMENTS IN DEBT SECURITIES
Management determines the appropriate classification of its investments in debt
securities at the time of purchase. Debt securities for which the Company has
both the intent and ability to hold to maturity are classified as held to
maturity. These securities are carried at amortized cost. At September 30, 1999,
the Company had no investments that qualified as trading or available for sale.
At September 30, 1999, the Company's investments in debt securities were
classified as cash and cash equivalents and both short- and long-term
investments. The Company maintains these balances principally in demand deposit
accounts, United States Treasury Obligations and commercial paper with various
financial institutions. These financial institutions are located in different
areas of the U.S. and Company policy is designed to limit exposure to any one
institution. The Company performs periodic evaluations of the relative standing
of those financial institutions that participate in the Company's investment
strategy.
The following is a summary of cash and cash equivalents and both short- and
long-term investments by balance sheet classification for September 30, 1999 and
December 31, 1998:
<TABLE>
<CAPTION>
<S> <C> <C>
SEPTEMBER 30, DECEMBER 31,
1999 1998
-------------- -------------
Cash and cash equivalents:
Demand deposit accounts $ 8,287,946 $ 13,019,247
Commercial paper 18,940,815 13,228,613
U.S. Treasury Obligations -- 19,155,832
--------------------- ------------------
$ 27,228,761 $ 45,403,692
====================== ===================
Short-term investments:
Commercial paper $ 30,921,937 $ 46,255,410
U.S. Treasury Obligations 7,360,156 2,532,583
---------------------- ---------------------
$ 38,282,093 $ 48,787,993
====================== =====================
Long-term investments:
Commercial paper $ 4,973,155 $ 408,780
---------------------- ---------------------
$ 4,973,155 $ 408,780
====================== =====================
</TABLE>
The estimated fair value of each investment approximates the amortized cost and,
therefore, there are no unrealized gains or losses as of September 30, 1999 and
December 31, 1998.
4. INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or market. The
components of inventory consist of the following:
9
<PAGE>
BROADBAND TECHNOLOGIES, INC.
Notes to Condensed Financial Statements
4. INVENTORIES (CONTINUED)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
---------------------- -------------------
<S> <C> <C>
Electronic parts and other components $ 3,922,090 $ 4,264,671
Work in process 968,613 291,310
Finished goods 1,204,466 1,490,287
---------------------- ---------------------
6,095,169 6,046,268
Inventory reserves (3,828,698) (4,184,896)
---------------------- ---------------------
$ 2,266,471 $ 1,861,372
====================== =====================
</TABLE>
5. LONG-TERM DEBT
The Company issued on May 17, 1996 $115.0 million of 5% convertible subordinated
notes due May 15, 2001 that entitle the holder to convert the notes into shares
of the Company's Common Stock. Interest is payable on May 15 and November 15 of
each year. Each $1,000 note is convertible into 24.1080 shares of Common Stock
of the Company at a conversion price of $41.48 per share. The notes were not
redeemable by the Company prior to May 15, 1999. Thereafter, the Company can
redeem the notes initially at 102%, and at decreasing prices thereafter to 100%
at maturity, in each case together with accrued interest. Costs associated with
this financing have been deferred and are being amortized on a straight-line
basis over the term of the notes. The Company was negotiating a debt
restructuring of the convertible subordinated notes and decided in November 1999
not to undertake a debt restructuring transaction at this time. (See Item 2,
Management's Discussion and Analysis of Financial Conditions and Results of
Operations: Recent Developments.)
6. LUCENT SETTLEMENT AGREEMENT
In late 1998, as a result of the agreements with Lucent and the decrease in the
demand for the Switched Digital Broadband Access Systems (SDBAS) joint product,
the Company recognized as revenue the $13.0 million of nonrefundable prepayments
received in prior years net of $2.3 million relating to certain potential
contractual obligations. On April 1, 1999 the Company and Lucent agreed that due
to the continued lack of demand for the SDBAS joint product from certain
customers and Lucent's new product development, AnyMedia, future contractual
obligations are unlikely to occur; therefore, the Company recognized $2.2
million of one-time revenue in the second quarter of 1999 from the remaining
$2.3 million liability. At September 30, 1999, a liability of $115,000 still
existed for certain potential canceled purchase orders.
7. STRATEGIC ALLIANCE AND TECHNOLOGY TRANSFER AGREEMENT
In the second quarter of 1998, the Company recognized one-time revenue of $12.0
million for cross transfer of intellectual property related to the alliance with
Bosch Telecom GbH and Bosch Telecom, Inc. and $5.0 million of revenue for the
license agreement associated with the settlement of patent litigation and
perpetual cross license agreement with Next Level Communications. (See Item 2,
Management's Discussion and Analysis of Financial Conditions and Results of
Operations: Recent Developments.)
10
<PAGE>
BROADBAND TECHNOLOGIES, INC.
Notes to Condensed Financial Statements
8. NET LOSS PER SHARE
All loss per share amounts for all periods have been presented to conform to
Financial Accounting Standards Board issued Statement No. 128, "Earnings per
Share" ("SFAS 128"). Due to the cumulative net losses for the periods presented,
potential common shares are considered antidilutive and therefore did not
require restatement of prior periods.
9. BUSINESS SEGMENT INFORMATION
The Company is engaged in a single business segment consisting of the
development, manufacture, marketing and service of electronic equipment for the
telecommunications industry. Regional Bell Operating Companies (RBOCs),
independent telephone companies and competitive local exchange carriers are the
primary users of the Company's products. In 1998, the Company entered into
several agreements with Lucent, which utilized the Company's research and
development and manufacturing resources. Revenues from Lucent, direct sales to
RBOCs and others as a percentage of the Company's total revenues are as follows:
SEPTEMBER 30
1999 1998
------------- ---------
Lucent 87.0% 26.0%
RBOCs 2.0% 2.0%
Others 11.0% 72.0%
------------- ---------
100.0% 100.0%
============= =========
The following customers' accounts receivable balances as a percentage of the
Company's total accounts receivable as of September 30, 1999 and December 31,
1998 are as follows:
1999 1998
-------------- ----------
Lucent 82.0% 62.0%
Bosch 12.0% 32.0%
RBOCs 6.0% 6.0%
-------------- ----------
100.0% 100.0%
============== ==========
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RECENT DEVELOPMENTS
DEBT RESTRUCTURING ACTIVITIES
In late 1998, the Company and its financial advisor, CIBC Oppenheimer Corp.,
began negotiating a restructuring of the Company's $115.0 million 5% convertible
subordinated notes, which do not become due, except for interest payments, until
May 2001. Through the debt restructuring negotiations and resulting transaction,
the Company was seeking to extend the due date for a significant portion of the
debt, which could have resulted in the noteholders receiving a combination of
cash and equity and/or debt securities with an extended maturity date. The
Company was negotiating to have the maturity date of a significant portion of
the principal extended until after the Company expects to begin generating
substantial revenues from its new generation access product (the "New
Platform"). In November 1999, the Company decided not to undertake a debt
restructuring transaction at this time. It may consider
11
<PAGE>
BROADBAND TECHNOLOGIES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
RECENT DEVELOPMENTS (CONTINUED)
DEBT RESTRUCTURING ACTIVITIES (CONTINUED)
such a transaction after market introduction of the New Platform. There can be
no assurance that the Company will be successful in implementing a debt
restructuring plan at that time or before the notes become due that would meet
the financial goals of the Company. Not implementing a debt restructuring at
this time or in the future requires that the Company will have to raise
substantial additional debt or equity financing prior to May 2001 to repay the
notes when they become due.
PROPOSALS FOR SHAREHOLDER APPROVAL
The Company's 1999 annual meeting, originally scheduled for May 18, 1999, which
was delayed due to the debt restructuring negotiations, has been scheduled for
December 7, 1999. At that meeting, the shareholders of record will be asked to
approve, among other proposals, an amendment to the Certificate of Incorporation
to change the Company's name to Pliant Systems, Inc. and to approve an amendment
to the Company's Certificate of Incorporation to increase the number of
authorized shares of the Company's Common Stock from 30 million to 65 million
shares. The details concerning these proposals and others are described in the
Proxy materials dated October 25, 1999 and filed with the Securities and
Exchange Commission.
LUCENT MANUFACTURING AGREEMENT
On March 22, 1999, the Company and Lucent agreed upon a Product Letter related
to the Company's 1998 Manufacturing Agreement (the "Agreement") with Lucent
which details the product specifications, pricing and other terms and conditions
of the product the Company will manufacture for a Lucent customer. The Product
Letter, among other provisions, provides that the Company shall be reimbursed by
Lucent for the cost of any reasonable excess inventories that result in a
forecast change or failure to order product. During the third quarter of 1999,
the Company shipped $7.6 million of product under the Product Letter and
recognized $2.0 million of revenue for payments in lieu of production volume,
offset by $0.6 million of manufacturing overhead absorption due to the
production shipments during the quarter. In August 1999, Lucent informed the
Company that it was canceling the Product Letter due to decreased demand for the
manufactured product. Final shipments of the product will occur during late
fourth quarter of 1999 and some residual revenue may occur in first quarter of
2000. The Manufacturing Agreement between the Company and Lucent provides that
Lucent will continue to make contractual payments to the Company; however, the
total payments to the Company will be somewhat less than if the Company had
manufactured any products for Lucent.
LUCENT R&D PROJECTS
During the third quarter of 1999, the Company recognized $1.8 million in service
revenue from development projects under the February 4, 1998 Research &
Development Agreement with Lucent. To date, Lucent and the Company have agreed
on projects valued at approximately $17.6 million of the $21.0 million called
for under the agreement, and the Company has recognized revenue of approximately
$7.0 million since inception of this contract. No additional specific
development projects have been agreed upon; however, the Company and Lucent are
currently negotiating additional development projects that could result in
completing the $21.0 million as
12
<PAGE>
BROADBAND TECHNOLOGIES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
RECENT DEVELOPMENTS (CONTINUED)
LUCENT R&D PROJECTS (CONTINUED)
specified in this Agreement. Subject to certain restrictions, the Company has
the right to use technology it develops for Lucent in the New Platform the
Company is currently developing. There can be no assurance as to what
percentage, if any, of the technology developed for Lucent will be usable in the
Company's New Platform.
TOTAL REVENUES
HISTORICAL
Total revenues for the third quarter of 1999 were $12.5 million compared to $3.0
million for the same period in 1998. These revenues included $10.6 million of
product sales and contractual manufacturing payments from Lucent. Included in
product sales was the production of a Lucent product, which the Company began to
manufacture in the second quarter. In August 1999, Lucent notified the Company
that the Product Letter will be canceled, with final shipments in late fourth
quarter of 1999 and some residual revenue in first quarter of 2000. The
Manufacturing Agreement between the Company and Lucent provides that Lucent will
continue to make contractual payments to the Company, and the total payments
received from Lucent will be somewhat less than if the Company had manufactured
any products for Lucent. Product revenues for the third quarter of 1999 included
less than $1.3 million in sales of the Company's Second Generation platform
(FLX-2500), while the prior year included $1.6 million. Services revenue of $1.9
million for the three-month period increased from $1.4 million for the same
period last year due to revenue recognition from the Company's 1998 $21.0
million R&D Agreement with Lucent. Service revenue has been accounted for under
the percentage of completion method of accounting.
Total revenues for the first nine months of 1999 were $24.6 million compared to
$25.3 million for the same period in 1998. Included in revenues for the second
quarter of 1999 were $2.2 million of nonrefundable prepayments received from
Lucent in prior years. Revenue recognition of the $2.2 million resulted from the
1998 Lucent Settlement Agreement and decreased demand for the SDBAS joint
product. One-time revenues of $17.0 million were recorded in the second quarter
of 1998: (a) $12.0 million related to the alliance with Bosch Telecom GbH and
Bosch Telecom, Inc.; and (b) $5.0 million of revenue for the license agreement
associated with the settlement of patent litigation and perpetual cross license
agreement with Next Level Communications.
Excluding the one-time revenues explained above, revenues of $22.4 million for
the nine-month period increased from $8.3 million for the same period of 1998.
Product sales and contract revenues of $16.7 million for the nine-month period
increased from $6.4 million for the same period last year and were primarily
comprised of revenue from the Lucent product and the 1998 Manufacturing
Agreement with Lucent. Services revenue of $5.7 million increased from $2.0
million for the nine-month period due to revenue recognition from the Lucent R&D
development projects. (See Recent Developments: Lucent Manufacturing Agreement
and Lucent R&D Projects.)
FUTURE EXPECTATIONS
The Company is developing a new generation access product (the "New Platform")
to address the new trends in the local network access market - the convergence
of traditional voice and higher speed Internet access. In 1998, the Company
ceased devoting resources to actively market its FLX Platform product and does
not expect significant
13
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BROADBAND TECHNOLOGIES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
TOTAL REVENUES (CONTINUED)
FUTURE EXPECTATIONS (CONTINUED)
future revenues from the FLX-2500 or the FLX-1100. The Company does not
anticipate initial revenues from its New Platform until second quarter 2000 and
does not expect substantial revenue from its New Platform until after the second
and third releases of the New Platform are completed and demonstrated to
customers. The Company has not received significant revenue from the 1998 Bosch
alliance and is uncertain whether future revenues from the FSAN products will
develop. (See Recent Developments: Lucent Manufacturing Agreement and Lucent R&D
Projects.)
COST OF REVENUES AND GROSS MARGIN
Cost of revenues for the three- and nine-month periods ended September 30, 1999
was $9.4 million and $15.0 million respectively, compared to $2.0 million and
$6.2 million respectively for the same periods in 1998. Cost of product revenue
for the three- and nine-month periods of 1999 was $8.7 million and $12.7 million
respectively. Cost of services revenue in 1999 was $0.7 million and $2.3 million
for the three- and nine-month periods, respectively. Cost of revenues for the
same periods of 1998 were all related to product revenues.
The gross margin of $3.1 million for the third quarter of 1999 was 25% compared
to 35% for the same period of 1998. Excluding one-time items explained above,
gross margin of $7.3 million for the nine-month period ended September 30, 1999
was 33% compared to 25% for the same period of 1998. The increased gross margin
for the third quarter and year to date reflects the shipments and contract
revenue associated with the Lucent Manufacturing Agreement.
The Company expects that price competition, as well as rapidly changing
technology developments in the telecommunications industry, could have an
adverse impact on the Company's costs and margins. There can be no assurance
that the Company can meet product modification requests, customers' feature
requests, or customers' business cases. The Company's ability to continue to
meet its cost reduction goals could have a material effect on the Company's
profitability. The Company's margins are expected to fluctuate due to the
uncertainty of shipments of the existing products and New Platform under
development, as well as a higher mix of services revenue from the Lucent
Agreements in the fourth quarter of 1999 and the reduction in Lucent contract
manufacturing after 1999. (See Recent Developments: Lucent Manufacturing
Agreement and Lucent R&D Projects.)
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses for the three- and nine-month periods ended
September 30, 1999 were $5.4 million and $14.5 million respectively, compared to
$3.8 million and $14.6 million for the same period in 1998. The $1.6 million
increase for the quarter was due to the acceleration of activities associated
with the New Platform product being developed by the Company. Expenses for the
nine-month period were essentially unchanged, despite the increased activities
associated with the New Platform product, due to a more focused engineering
development effort and several improved cost controls.
The Company's ability to reduce development expenses associated with the
Company's New Platform access product by incorporating some costs into the New
Platform technology being developed with Lucent has affected favorably research
and development expenses. However, as the development team continues hardware
and software integration and testing as well as final system testing during the
fourth quarter of the year, the Company does anticipate research
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BROADBAND TECHNOLOGIES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
RESEARCH AND DEVELOPMENT EXPENSES (CONTINUED)
and development expenses to increase from the current levels. A continued tight
labor market in the Research Triangle Park area and severe competitive
engineering salary pressure in the market place continue to make development
more expensive. (See Item 5, Other Information: New Platform Development.)
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses for the three- and nine-month
periods ended September 30, 1999 were $2.8 million and $8.8 million
respectively, compared to $3.1 million and $13.1 million respectively for the
same period in 1998. These expenses include support of field service, marketing
resources, legal expense, as well as administrative requirements. This 10%
reduction for the third quarter was due primarily to a lower payroll costs and
tighter expense controls. The 32% reduction for the nine-month period was due
primarily to a $1.7 million decrease in legal fees and lower payroll costs,
partially offset by purchased services related to non-development activities of
the New Platform access product. Selling expenses are expected to increase in
the fourth quarter as the company reestablishes a sales force for the planned
release of its New Platform access product in the first quarter of the year
2000. Additionally, the Company has incurred a significant increase in legal and
financial advisory fees in connection with its current efforts to restructure
the $115.0 million 5% convertible subordinated notes due in May 2001. These
expenses are classified as prepaid expenses at September 30, 1999, and in
November 1999 the Company decided not to undertake a debt restructuring
transaction. These costs, approximately $2.5 million, will be expensed in the
fourth quarter of 1999. (See Recent Developments: Debt Restructuring
Activities.)
In the second quarter of 1998, the Company recorded a restructuring charge of
$2.6 million to cover the cost of implementing its new business strategy. This
charge includes $0.7 million for FLX-2500 inventory reserves, write-off of $0.6
million for obsolete test and lab equipment and computer equipment, as well as
$1.2 million for employee transfer and severance expenses and $0.1 million of
other costs.
OTHER INCOME (EXPENSES)
Other income (expenses) during the third quarter of 1999 consists primarily of
interest income and interest expense. Net interest income (expense) for the
three- and nine-month periods ended September 30, 1999 was approximately $0.7
million and $1.8 million, respectively, in expense compared to $0.1 million and
$1.1 million, respectively, in income for the same period in 1998. Other income
in the nine-month period of 1998 included $0.7 million from the gain on the sale
of equipment resulting from the closing of the Bosch strategic alliance. The
decrease in interest income for the three- and nine-month periods ended
September 30, 1999 compared to the same periods of 1998 was the result of lower
cash and investment balances and a slightly lower yield. Interest income is the
result of investment of the cash balances available during the period. The
Company expects interest expense to continue to exceed interest income in future
periods as the Company's cash is reduced by operating losses and capital
expenditures during the development period of its New Platform.
NET INCOME (LOSS)
The net loss for the third quarter of 1999 was $5.9 million or $.44 per share as
compared to $5.7 million in net loss or $.43 per share for the same period in
1998. The net loss for the first nine months of 1999 was $15.5 million or $1.16
per share as compared to $9.4 million or $.70 per share for the same period in
1998. After adjusting for the one-time revenues in 1999 and 1998, the 1998
restructuring charge and one-time gain on sale of equipment, the net loss for
the nine-month period was $17.7 million or $1.32 per share, compared with $24.5
million or $1.82 per share in 1998.
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BROADBAND TECHNOLOGIES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
NET INCOME (LOSS) (CONTINUED)
The Company's results continue to reflect both the development stage of the
Company's New Platform access product and an unfavorable regulatory environment
for its FLX-2500 product. The Company has completed the fifth full quarter of
implementation of its new business strategy announced in early 1998 and it
expects to continue to incur substantial losses in future periods.
LIQUIDITY AND CAPITAL RESOURCES
The ending cash and cash equivalents, restricted cash, and short- and long-term
investment balances on September 30, 1999 were $71.5 million compared to a
balance of $106.0 million at December 31, 1998. The decrease of $34.5 million
was due primarily to $24.3 million used in operations and $7.3 million paid as
settlement of the put equity option more fully described in Note 2 (Employment
Agreement and Restricted Cash) of the Condensed Financial Statements. Included
in the $24.3 million operating use of cash was $4.0 million transferred from the
rabbi trust to the secular trust and payments to Bell Atlantic of $3.2 million
to settle certain hardware and software supply agreements. Activities related to
the development of the Company's New Platform accounted for a substantial
portion of the $2.6 million increase in capital expenditures during the first
three quarters of 1999. (See Recent Developments: Lucent Manufacturing
Agreement.)
The Company had total restricted cash, included in the above amounts, of $1.1
million as of September 30, 1999. The restricted cash balance consists of an
outstanding stand-by letter of credit in the amount of $1.0 million, which is
collateralized by restricted cash of the same amount and expires March 31, 2000,
and $50,000 restricted cash on deposit with its primary bank for the
implementation of a corporate procurement card. The details of these restricted
cash balances are more fully described in Note 2 (Employment Agreement and
Restricted Cash) of the Condensed Financial Statements.
Of the total restricted cash of $11.4 million at December 31, 1998, $7.1 million
is included in the Company's cash balance as of that date based upon a market
value of the stock of $2.94 per share, in connection with the equity put option
agreement. As more fully described in Note 2 (Employment Agreement and
Restricted Cash) of the Condensed Financial Statements, settlement payments of
$3.0 million were made in the first quarter of 1999 and $4.3 million in the
second quarter of 1999 to settle the Company's obligations. All option
obligations have been settled and the Company has no further obligation under
the 1997 agreement. There was no restricted cash related to this transaction at
September 30, 1999.
The Company has issued $115.0 million of 5% convertible subordinated notes which
do not become due, except for interest payments, until May 15, 2001. Interest is
payable on May 15 and November 15 of each year. Additional details on the
convertible subordinated notes are more fully described in Note 5 (Long-Term
Debt) of the Condensed Financial Statements. The Company is current on all
interest payments and is capable of making such payments in the future.
In November 1999, the Company decided not to undertake a debt restructuring
transaction at this time. It may consider such a transaction after market
introduction of the New Platform. There can be no assurance that the Company
will be successful in implementing a debt restructuring plan at that time or
before the notes become due that would meet the financial goals of the Company.
Not implementing a debt restructuring at this time or in the future will require
that the Company raise substantial additional debt or equity financing prior to
May 2001 to repay the notes when they become due. The Company expects to seek to
raise additional capital before the end of 2000.
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BROADBAND TECHNOLOGIES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
Failure to pay principal and interest of the notes when due would have a
material adverse effect on the Company. If the Company's new business strategy
fails to generate investor confidence in the Company's ability to generate
future revenue and profits, the Company would not be able to obtain the
additional financing it would require to repay the notes when the notes become
due, or will not obtain such financing on terms favorable to the Company. There
can be no assurance that the Company will be successful in raising additional
capital, or if it is successful, that the terms will be favorable to the
Company.
Management expects that cash and cash equivalents at September 30, 1999 and cash
generated from fees and product sales and contract and service revenues will be
adequate to fund operating requirements and property and equipment expenditures
at least through the date the notes become due - May 15, 2001 - based on current
forecasted operations. Management will be actively considering financing
alternatives when and if market conditions and the Company's progress in
implementing its business plan are deemed to cause financing to be available on
favorable terms, as to which there can be no assurance.
OTHER FINANCIAL INFORMATION
BACKLOG
The Company's backlog includes sales orders received by the Company that have a
scheduled delivery date prior to September 30, 2000. The aggregate sales price
of orders received and included in backlog was approximately $4.4 million at
September 30, 1999. The Company believes that the orders included in the backlog
are firm orders that will be shipped prior to September 30, 2000. However, some
orders may be canceled by the customer without penalty where management believes
it is in the Company's best interest to do so. A portion of this backlog relates
to commitments by Lucent for contract manufacturing, which will be shipped by
late fourth quarter 1999. The Company also has backlog of approximately $10.6
million in specific development projects with Lucent.
YEAR 2000 ISSUES
To address Year 2000 issues, the Company had established a compliance plan
consisting of four elements: inventory, assessment, remediation and testing. The
Company completed substantially all of the efforts around these phases in late
April 1999, with extensive testing and obtaining assurances from key suppliers
with regard to Year 2000 compliance of their products and services to the
Company to continue through 1999. The Company implemented a new enterprise
resource planning system (ERP) during the second and third quarter that includes
all the major accounting, manufacturing and material requirement planning
systems of the Company. This ERP system has been successfully tested for Year
2000 compliance. Costs associated with the correction of Year 2000 problems for
the prior year and 1999, including correction of the Company's products that
have been deployed as well as internal systems, will not exceed $175,000.
Although the Company believes that its Year 2000 compliance plan is adequate to
address Year 2000 concerns, there can be no assurance that the Company will not
experience negative consequences as a result of undetected defects or the
noncompliance of third parties with whom the Company interacts. Furthermore,
there can be no assurance that there will not be a delay in, or increased costs
associated with, the implementation of corrections, such as unexpected costs of
correcting equipment that has not yet been fully evaluated. If realized, as the
Year 2000 compliance plan is performed these risks could result in adverse
effects on the business, results of operations and financial condition.
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BROADBAND TECHNOLOGIES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
OTHER FINANCIAL INFORMATION (CONTINUED)
YEAR 2000 ISSUES (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 by
potential customers resulting from their Year 2000 problems.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Quantitative Disclosures
The following table provides information about the Company's financial
instruments that are sensitive to changes in interest rates. For investment
securities and debt obligations, the table presents principal cash flows and
related interest rates by expected maturity dates. The Company's investments are
classified as both short- and long-term investments. All short-term investments
are scheduled to mature within twelve (12) months subsequent to September 30,
1999. The Company's long-term investment is scheduled to mature in the years
2000 and 2001.
EXPECTED MATURITY DATES
Fair Value
(dollars in 000's) 1999 2000 2001 2002 2003 Total @ 9/30/99
ASSETS:
Short-term investments $38,282 - - - - $38,282 $38,282
Long-term investments - $1,949 $3,024 - - $4,973 $4,973
Average interest rate
5.1% 5.3%
LIABILITIES:
Long-term debt - - $115,000 - - $115,000 $42,000
Average interest rate 5.0%
Qualitative Disclosures
There have been no changes in the nature of the Company's investments since
September 30, 1999 and December 31, 1998 or the various financial institutions
which hold those investments.
On March 11, 1999, the Company entered into an agreement with an investment
banker to undertake an early exercise (unwinding) of the equity put option,
which the Company had initiated in 1997. The unwinding of this equity put option
resulted in cash payments made from restricted cash of $3.0 million in the
quarter ended March 31, 1999 and $4.3 million in the quarter ended June 30,
1999. (See Note 2 "Employment Agreement and Restricted Cash" in the Notes to the
Condensed Financial Statements.)
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BROADBAND TECHNOLOGIES, INC.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company currently has no material litigation pending.
A Committee of Creditors, representing certain holders of the Company's 5%
convertible subordinated notes due 2001, during the negotiations for the
restructuring of the Company's debt which the Company recently elected not to
continue, has alleged that the Company is in default under the indenture for
the notes because the Company allegedly admitted its inability to pay its debts
generally as they become due by delivering to the Committee a business plan that
does not show the Company generating sufficient cash flow from operations
between now and May 2001 to repay the notes in full. The Company, however, is
paying all its obligations as they become due, including interest on the notes,
has a new product under development which is expected to be released prior to
the due date of the notes, has a business plan which the Company believes will
enable it to raise additional capital before the due date of the notes to repay
the notes in full, and at September 30, 1999 had over $70 million to fund
implementation of its business plan. Consequently, the Company does not believe
any default exists under the indenture for the notes, and the Company would
vigorously defend against any action by its noteholders to have a default
declared under the indenture.
ITEM 5. OTHER INFORMATION
BUSINESS PLAN DISCLOSURES
As discussed above, in November 1999 the Company elected not to continue
negotiations for restructuring the debt of the Company with a Committee of
Creditors representing certain holders of its $115 million of 5% Convertible
Subordinated Notes due May 2001. At commencement of the negotiations in December
1998, to provide the Committee with information to evaluate the Company's debt
restructuring proposals, the Company provided the Committee of Creditors with
its business plan (the "1998 Business Plan"). The 1998 Business Plan contained
information about the expectations of the Company's management with respect to
the future financial performance of the Company. This information, which was
primarily forward looking, focused on the Company's new access product being
developed and the Company's strategic relationships with Lucent and Bosch, as
well as management's financial forecasts for future periods. Some of this
information has not been disclosed to the public.
The Company's 1998 Business Plan was based on certain detailed assumptions which
were and are subject to uncertainties, including forecasts for contract
manufacturing for Lucent, manufacturing parts of Lucent's AnyMedia product,
Bosch's FSAN development and revenue forecasts, and the Company's new product
development schedule and product introduction plans. The forward looking
assumptions and statements contained in the business plan were and are subject
to certain risks and uncertainties that could cause actual results to differ
materially from management's expectations. In fact, a number of assumptions
contained in the 1998 Business Plan provided to the Committee are occurring
differently than the Company expected in December 1998, which has caused the
Company to revise its business plan. See "Risk Factors" below for a discussion
of important factors that could cause actual results to differ materially from
the forward looking statements contained herein.
The Company has an agreement with certain noteholders or their representatives,
which requires the Company to disclose to the public nonpublic material
information the Company disclosed to the Committee. The following disclosures
are made pursuant to such agreement.
THE DISCLOSURES MADE HEREIN ARE AS OF NOVEMBER 15, 1999. THE COMPANY IS MAKING
THESE DISCLOSURES ON A ONE-TIME BASIS. THE COMPANY DOES NOT INTEND TO UPDATE
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BROADBAND TECHNOLOGIES, INC.
PART II - OTHER INFORMATION (CONTINUED)
ITEM 5. OTHER INFORMATION (CONTINUED)
BUSINESS PLAN DISCLOSURES (CONTINUED)
DISCLOSURES OF FORWARD LOOKING STATEMENTS SHOULD THE COMPANY BECOME AWARE THAT
THE FINANCIAL PERFORMANCE INFORMATION FORECASTED BY THE COMPANY WILL NOT BE
ACHIEVED OR THAT THE ASSUMPTIONS ON WHICH SUCH FORECASTS ARE BASED HAVE CHANGED.
CONSEQUENTLY, NO ONE SHOULD ASSUME THAT IF IN THE FUTURE THE COMPANY DOES NOT
MAKE DISCLOSURES CONTRADICTING THE FORWARD LOOKING STATEMENTS CONTAINED HEREIN
THAT THE COMPANY STILL BELIEVES IT WILL ACHIEVE ITS FORECASTS OR THAT THE
ASSUMPTIONS ON WHICH SUCH FORECASTS ARE BASED HAVE NOT CHANGED.
AS INDICATED BELOW, CERTAIN BASIC ASSUMPTIONS OF THE 1998 BUSINESS PLAN, WHICH
THE COMPANY BELIEVED WOULD OCCUR WHEN THE COMPANY DISCLOSED THE 1998 BUSINESS
PLAN TO THE COMMITTEE, HAVE CHANGED AND THE COMPANY IS CHANGING ITS FINANCIAL
FORECASTS. CONSEQUENTLY, NO ONE WHO COMES INTO POSSESSION OF INFORMATION
CONTAINED IN THE 1998 BUSINESS PLAN BY ANY MEANS SHOULD RELY ON SUCH INFORMATION
WHEN CONSIDERING WHETHER TO BUY OR SELL ANY SECURITIES OF THE COMPANY.
NEW PLATFORM ACCESS PRODUCT
The Company has been developing, and expects to continue developing, a new
generation access product for telecommunications network operators. The New
Platform leverages the Company's technological experience gained in the
development of prior generations of access products. The New Platform is
expected to provide traditional voice/special services via Time Division
Multiplexing (TDM) architecture, as does the current generation of Digital Loop
Carrier (DLC) products. In addition, the New Platform will provide for a variety
of new emerging Digital Subscriber Line (DSL) services such as High Density
Digital Subscriber Line (HDSL), Symetrical Digital Subscriber Line (SDSL),
Asymmetric Digital Subscriber Line (ADSL), ADSL-lite and others via an
Asynchronous Transfer Mode (ATM) architecture. The product concept is to provide
a single platform that can support traditional and emerging telecommunication
services simultaneously and efficiently. The intention is to provide an access
platform that can support the expected transition from circuit-based networks
traditionally deployed by telecommunications network operators to emerging
cell-based networks. The Company believes that a transitional product will be
attractive to network operators so that maximum benefit can be derived from the
operators' embedded network investment. The architecture being developed will
consist of a host control shelf that is capable of supporting many remote
service nodes. The control shelf will aggregate telephony traffic and interface
to the circuit switch network via an industry standard protocol. Likewise, the
control shelf will aggregate cell-based traffic and be capable of interfacing to
data network via industry standard protocols. The remote service nodes are
designed to support highly distributed network designs over both copper and
fiber optic spans. Node shelves are planned in various capacities and sizes to
meet expected industry needs.
PRODUCT AVAILABILITY
The plan is to make the product commercially available in a phased approach. The
first release will provide for traditional telephony (DLC) line services and is
expected to be completed in the first quarter of 2000. The second release, which
will add cell-based services and optical interfaces, is planned for the end of
the third quarter of 2000.
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BROADBAND TECHNOLOGIES, INC.
PART II - OTHER INFORMATION (CONTINUED)
ITEM 5. OTHER INFORMATION (CONTINUED)
PRODUCT AVAILABILITY (CONTINUED)
A third release, which will implement a variety of networking and data service
enhancements, is planned for the third quarter of 2001. Subsequent feature
enhancements and derivative products have been defined; however, no specific
schedules have been set beyond the fourth release and will depend upon customer
demand.
The Company's current product development plan differs from the plan on which
the 1998 Business Plan was based in that certain features which were planned to
be included in the second release have been shifted to the third release or
dropped from the development plan based on further analysis by the Company of
anticipated market demand for such features. Other features and capabilities of
the New Platform were not in the 1998 Product Plan and many others have been
accelerated from the third release to the second release to better position the
product in the market.
ADDRESSABLE MARKET
Today's domestic loop electronics market is estimated to be $3.0 billion and
growing at a rate exceeding ten percent (10%). A majority of this market is
comprised of DLC sales to incumbent local exchange carriers (regional Bell
operating companies and independents) as well as Competitive Local Exchange
Carriers (CLECs). The Company believes that as demand for faster access to the
Internet grows, there will be an opportunity for a new generation of access
products, as most existing DLCs were not designed to support the bandwidth
required for emerging DSL-based Internet services. The Company's new product has
been designed for low and medium density applications, which the Company
believes could be the fastest growing segment of the loop electronics market.
While difficult to estimate considering the embryonic nature of the DSL-based,
high-speed Internet access market, the Company believes it can address a
significant portion of the new generation access market. The Company estimates
its addressable market to be $500.0 million to $700.0 million per year, and that
it is growing at an anticipated rate greater than the overall market rate.
COMPETITION
The Company's new product will compete in the DLC and Digital Subscriber Line
Access Multiplexer (DSLAM) markets. Competition in the North American DLC market
includes Alcatel, Lucent, Nortel, Reltec, AFC, and Cisco, as well as smaller
competitors such as Fibex Systems and Mainsail. The North American DSLAM market
competition consists of Alcatel, Nokia, Copper Mountain and other smaller
companies.
SELECTED FORECASTED FINANCIAL DATA
Selected forecasted financial data was provided to the Committee of Creditors in
the 1998 Business Plan. Both information from the 1998 Business Plan and
information which is based on changes in the Company's business plan since
December 1998 are set forth below:
FORECASTED REVENUE
The forecasted revenue contained in the 1998 Business Plan was $36.3 million for
1999 compared with the Company's current forecast of $33.8 million for 1999. The
1998 Business Plan forecasted $51.0 million of revenue
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BROADBAND TECHNOLOGIES, INC.
PART II - OTHER INFORMATION (CONTINUED)
ITEM 5. OTHER INFORMATION (CONTINUED)
FORECASTED REVENUE (CONTINUED)
for 2000 compared to the Company's current forecast of $21.8 million for 2000.
The forecasted revenue for 2001 in the 1998 Business Plan was $57.6 million. The
Company currently forecasts $21.6 million of revenue for 2001.
Operating Expenses
The 1998 Business Plan forecasted operating expenses of $34.6 million for 1999
compared to the Company's current forecast of $34.0 million for 1999. The
Company forecasted $39.0 million of operating expenses in 2000 in the 1998
Business Plan, but the Company's current forecast is for $40.3 million of 2000
operating expenses. Year 2001 operating expenses forecasted by the 1998 Business
Plan was $35.1 million compared to $35.5 million of operating expense in 2001,
which the Company is currently forecasting. Operating expenses do not include
cost of revenues in either the 1998 Business Plan forecasts or the Company's
current forecasts.
Operating Loss
The 1998 Business Plan forecasted operating loss of $22.1 million for 1999. The
Company's current forecast is also $22.1 million for 1999. The Company
forecasted $22.3 million of operating loss in 2000 in the 1998 Business Plan,
but the Company's current forecast is for $29.1 million of operating loss in
2000. Year 2001 operating loss forecasted by the 1998 Business Plan was $23.0
million compared to $30.8 million of operating loss in 2001, which the Company
is currently forecasting.
Decrease In Cash
The 1998 Business Plan forecasted a $35.3 million decrease in cash during 1999
compared to the Company's current forecast of $27.3 million for 1999. The
Company forecasted a $30.8 million decrease in cash in 2000 in the 1998 Business
Plan, but the Company's current forecast is for a $37.5 million decrease in cash
in 2000. The Year 2001 decrease in cash forecasted by the 1998 Business Plan was
$19.8 million compared to a $37.6 million decrease in cash in 2001, which the
Company is currently forecasting. The Company's current forecasts and the 1998
Business Plan forecasts do not include the impact of payment of the $115 million
of outstanding notes due in May 2001, because the Company's business plan
focuses on the financial results of its business operations and the Company will
seek to pay such notes from additional capital to be raised by the Company from
the sale of equity and/or debt securities.
Cash Position (Unrestricted)
The 1998 Business Plan forecasted unrestricted cash of $61.6 million at December
31, 1999 compared to the Company's current forecast of $67.3 million at December
31, 1999. The Company forecasted $30.9 million of unrestricted cash at December
31, 2000 in its 1998 Business Plan, but the Company's current forecast is for
$29.8 million of unrestricted cash at December 31, 2000. Unrestricted cash
forecasted by the 1998 Business Plan was a deficit of $103.9 million at December
31, 2001 compared to a deficit of $122.8 million of unrestricted cash, which the
Company is currently forecasting at December 31, 2001. The Company's current
forecasts and the 1998 Business
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BROADBAND TECHNOLOGIES, INC.
PART II - OTHER INFORMATION (CONTINUED)
ITEM 5. OTHER INFORMATION (CONTINUED)
FORECASTED REVENUE (CONTINUED)
Cash Position (Unrestricted) (continued)
Plan forecasts for unrestricted cash assume payment of the $115 million for
notes due May 2001, but do not include the impact of additional capital the
Company intends to raise from the sale of equity and/or debt securities, which
may exceed the amount used to repay the notes.
Years 2002 and 2003
The 1998 Business Plan also contained forecasts for each of the items described
above for the years 2002 and 2003. The Company believes that the financial
performance of the Company beyond the Year 2001 is subject to many variables
beyond the control of the Company to predict. Therefore, the Company believes it
would not be prudent for the Company to disclose such information at this time.
CHANGES IN ASSUMPTIONS
The principal reasons for changes in the assumptions for the Company's forecasts
are as follows:
Lucent Contract Manufacturing
The Company's financial forecast in the 1998 Business Plan included contract
manufacturing opportunities from the 1998 Manufacturing Agreement with Lucent,
including a signed Product Letter with Lucent, and the Company's assumption of
manufacturing Lucent's AnyMedia Optical Network Unit starting in 2000 based on a
Project Letter provided to the Company by Lucent. Although the revenues from
both contract manufacturing opportunities were material, the gross margin
contribution was not as significant. In August 1999, Lucent informed the Company
that it was canceling the Product Letter due to decreased demand for the
manufactured product. Final shipments of the product are expected to occur
during late fourth quarter of 1999 and some residual revenue in first quarter of
2000. The Manufacturing Agreement between the Company and Lucent calls for
Lucent to continue making payments during 2000 and 2001. The Company also now
believes at this time that it will probably not receive the AnyMedia ONU
manufacturing opportunity in 2000 and is uncertain about subsequent years. (See
Item 2: Management's Discussion and Analysis of Financial Condition and Results
of Operations: Recent Developments: Lucent Manufacturing Agreement; and Item 5:
Other Information: Risk Factors: Lucent Relationship.)
Bosch Relationship
The Company's 1998 Alliance Agreement with Bosch provided for several revenue
opportunities with the current iFLX products and FSAN products under
development. Although revenue estimates in December 1998 were difficult due to
the undeveloped market for FSAN products, the Company has met its revenue
forecasts for Bosch in 1999. However, the Company is less certain about the
market demand for any FSAN products of either the Company or Bosch in 2000 and
subsequent years. Also, the Company believes its future will primarily depend
upon sales of its New Platform. Consequently, the current financial forecasts of
the Company do not include material future revenues from the FSAN and iFLX
products or other products or services, unless the Company has a contractual
commitment
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BROADBAND TECHNOLOGIES, INC.
PART II - OTHER INFORMATION (CONTINUED)
ITEM 5. OTHER INFORMATION (CONTINUED)
CHANGES IN ASSUMPTIONS (CONTINUED)
Bosch Relationship (continued)
for such business as it has with Lucent through the first quarter of 2001 as
described above. Any revenue from FSAN or iFLX products would represent upside
potential compared to our current forecasts. (See Item 5: Other Information:
Bosch Relationship.)
New Platform Development
During 1999, the Company made strategic marketing decisions relative to
accelerating the features and capabilities of its new generation access product.
Some of the features and capabilities of the New Platform access product being
developed by the Company were not in the 1998 Product Plan, and many others have
been accelerated from the third release to the second release to better position
the product in the market. The Company's current product development plan also
differs from the plan on which the 1998 Business Plan was based in that certain
features which were planned to be included in the second release have been
shifted to the third release, subsequent releases, or dropped from the
development plan based on further analysis by the Company of anticipated market
demand for such features. Such changes in the features have caused the Company
to reschedule the third release from the second quarter of 2001 to the end of
the third quarter 2001. Although research and development costs will be slightly
higher than originally forecast for 1999, the research and development forecast
for years 2000 and 2001 will be significantly greater due to the increased
headcount and prototype costs. The increased research and development costs in
years after 1999 will be offset by lower customer support costs than originally
forecast. (See Item 5: Other Information: New Platform Development.) Financial
forecasts of revenue for the Company after the first quarter of 2001 consist
almost exclusively of forecasted sales of the Company's New Platform. The
Company does not expect substantial revenue from sales of its New Platform until
after the second and third releases are completed and demonstrated to customers.
Summary
The Company's current forecasted financial plan reflects the changes discussed
in its relationship with Lucent regarding contract manufacturing, its
relationship with Bosch, and the Company's decision to base its planning on the
assumption that revenues after the first quarter of 2001 will consist almost
entirely of revenue from its New Platform product.
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 the
Forecasted Selected Financial Data disclosed above, 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
24
<PAGE>
BROADBAND TECHNOLOGIES, INC.
PART II - OTHER INFORMATION (CONTINUED)
ITEM 5. OTHER INFORMATION (CONTINUED)
RISK FACTORS (CONTINUED)
requirements, and the Company's plans to raise capital in the future. 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 important factors that could cause actual results to differ materially
from the forward looking statements contained herein:
LUCENT RELATIONSHIP
Although management believes the current relationship with Lucent has provided
certain revenue opportunities for the Company and will continue to do so through
the first quarter of 2001, the relationship includes certain risks as well. As
disclosed in prior filings, the relationship between the Company and Lucent
relating to SDBAS, arising out of the November 1995 exclusive agreement, did not
meet the Company's expectations and resulted in substantially lower than
expected sales volume. On April 8, 1999, the Company notified Lucent of its
decision to discontinue manufacturing of the SDBAS joint product in twelve
months. There can be no assurances that the current relationship with Lucent
also will not fail to meet the Company's expectations. The Company's
relationship with Lucent also may adversely affect the prospect for partnership
with others in the telecommunications industry, especially in light of certain
restrictions contained in the new Lucent agreements, including change of control
provisions. Decisions by Lucent or rumors of a decision by Lucent that changes
Lucent's relationship with the Company may have an adverse effect on the market
price of the stock of the Company. In addition, Lucent is a vendor of digital
loop carrier products and the Company's product may compete with Lucent in some
circumstances. Such competition could adversely affect the ability of the
Company and Lucent to cooperate to the extent required under their agreements.
The Company expects that Lucent will re-evaluate continually its relationship
with the Company as business conditions change for both Lucent and the Company.
A recent example of changes in the Lucent relationship is cancellation of the
contract manufacturing Product Letter in August 1999 as described above. Further
changes could occur in the future.
NEW PLATFORM DEVELOPMENT
To survive, the Company must develop on schedule the New Platform, a new
generation access product, that can compete in the market on price,
architecture, features and other factors. Development of the New Platform
product by the Company will be subject to significant technical and other
challenges and will require a substantial investment of money and time. Although
the Company believes that the development of the first release of the New
Platform product is on schedule for beta-testing in first quarter of 2000 and
initial product revenues in the second quarter, there can be no assurance that
the Company will be able to develop a new generation access product, or that any
product it develops will be attractive to customers and priced competitively
with the products of competitors, including Lucent. The second release of its
New Platform is currently forecasted for the end of the third quarter of 2000
and the third release is planned for the third quarter of 2001. The Company does
not expect to receive substantial revenue from sales of the New Platform until
the second and third releases are completed and demonstrated to customers. There
can be no assurance that the anticipated development schedules will be met.
Competition for Internet/data services is growing between the traditional
telephone communication carriers and the cable television operators. The cable
television operators, including AT&T, will be deploying a technology referred
25
<PAGE>
BROADBAND TECHNOLOGIES, INC.
PART II - OTHER INFORMATION (CONTINUED)
ITEM 5. OTHER INFORMATION (CONTINUED)
NEW PLATFORM DEVELOPMENT (CONTINUED)
to as cable modem, as a solution to voice, data and video services. The
Company's New Platform product utilizes Digital Subscriber Lines technology to
enhance the traditional telephone wiring plant to provide enhanced services such
as high-speed Internet access. Should the cable television operators deploy
cable modem technology successfully, the market for DSL technology would be
diminished as well as the demand for the Company's New Platform product.
CONVERTIBLE SUBORDINATED DEBENTURES
In May 1996, the Company sold $115.0 million of 5% convertible five-year notes
due May 15, 2001, with interest payable on May 15 and November 15 of each year.
The Company expects that additional equity and/or debt financing will be
required to repay the notes when they become due. Failure to pay principal and
interest when due would have a material adverse effect on the Company. If the
Company's new business strategy fails to generate investor confidence in the
Company's ability to generate future revenue and profits, the Company would not
be able to obtain the additional financing it will require to repay the notes
when the notes become due, or will not obtain such financing on terms favorable
to the Company and its shareholders.
In November 1999, the Company decided not to undertake a debt restructuring
transaction at this time. It may consider such a transaction after market
introduction of the New Platform. There can be no assurance that the Company
will be successful in implementing a debt restructuring plan at that time or
before the notes become due that would meet the financial goals of the Company.
Not implementing a debt restructuring at this time or in the future requires the
Company to raise substantial additional debt or equity financing prior to May
2001 to repay the notes when they become due. In any event, the Company expects
it will seek to raise additional capital before the end of 2000. There can be no
assurance the Company will be successful in raising additional capital, or if it
is successful, that other terms will be favorable to the Company.
EFFECTS OF INDEBTEDNESS AND NOTEHOLDER ACTIONS ON VENDORS, EMPLOYEES AND
CUSTOMERS
As described in Item 1, Legal Proceedings, certain holders of the Company's 5%
convertible subordinated notes due in 2001 have alleged that because the
Company's business plan does not demonstrate the ability to repay the notes at
May 15, 2001 from cash from operations, the Company is in default under the
indenture for the notes because it allegedly admitted its inability to pay its
debts generally as they become due. Any possible action by the noteholders to
have a default declared under the indenture, even if not successful, could have
a material adverse effect on the Company's relationship with employees, vendors
and potential customers. With the Company's decision not to restructure its debt
at this time, the Company will seek to assure vendors, employees and potential
customers that by seeking to raise additional capital to repay its debt when it
becomes due, the Company will have the financial resources necessary to
successfully implement its business plan. There can be no assurance, however,
that vendors, employees and potential customers will continue existing
relationships with the Company or enter into new relationships with the Company.
The failure of vendors, employees and potential customers to continue their
relationships with the Company and to enter into new relationships would have a
material adverse effect on the Company, which could include the loss of key
employees that would delay development of the New Platform, the inability to
purchase materials and services from vendors on reasonable terms, and the
inability to sell the New Platform to potential customers who may be worried
about ensuring a reliable supply of equipment.
26
<PAGE>
BROADBAND TECHNOLOGIES, INC.
PART II - OTHER INFORMATION (CONTINUED)
ITEM 5. OTHER INFORMATION (CONTINUED)
NASDAQ DELISTING/OVER THE COUNTER BULLETIN BOARD
On February 12, 1999, the Company's shares of Common Stock were delisted from
the Nasdaq National Market for failure to achieve compliance with continued
listing criteria.
The Company's shares are now traded on the Over The Counter Bulletin Board. The
OTCBB is a regulated quotation service that displays real-time quotes and volume
information in over-the-counter (OTC) equity securities. The OTCBB does not
impose listing standards or requirements (other than filing Form 10-K and 10-Q
with the Securities and Exchange Commission), 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 resale of stock by employees more difficult. The foregoing could have a
material adverse effect on the ability of the Company to recruit and retain key
personnel unless the Company provides other recruiting and retention incentives,
which will be expensive. Failure to recruit and retain key employees, however,
would have a material adverse effect on the Company's ability to implement its
business plan, including its ability to develop its New Platform.
The market price of the Company's securities has been very volatile as a result
of many factors, some of which are outside the control of the Company,
including, but not limited to, quarterly variations in financial results,
announcements by the Company, its competitors, partners, customers, potential
customers or government agencies and predictions by industry analysts, as well
as general economic conditions. Sales by the Company's existing stockholders,
trading by short-sellers and other market factors may adversely affect the
market price of the Company's securities. Any or all of these risks have had and
are likely to have a material adverse effect on the market price of the
securities of the Company. With the substantially lower trading volumes that
have occurred since delisting and are likely to occur in the future, the
foregoing factors are likely to have a greater adverse impact on the market
price of the Company's securities.
BOSCH RELATIONSHIP
Although management believes the Alliance Agreement with Bosch offers certain
opportunities for the Company, the relationship includes certain risks as well.
There can be no assurances that the relationship with Bosch will meet the
Company's expectations. The Company's relationship with Bosch, which was
designed to leverage the Company's intellectual property and other resources,
may also adversely affect the prospect for partnership with others in the
telecommunications industry, especially in light of restrictions contained in
the Alliance Agreement relating to a change of control of the Company and
restrictions on the Company's sublicensing. Decisions by Bosch, change in
control of Bosch, or rumors of a decision by Bosch that changes Bosch's
relationship with the Company may have an adverse effect on the market price of
the Company's stock. In addition, although initially there will be geographic
restrictions on where the Company and Bosch can sell FSAN products, the Alliance
Agreement provides that these
27
<PAGE>
BROADBAND TECHNOLOGIES, INC.
PART II - OTHER INFORMATION (CONTINUED)
ITEM 5. OTHER INFORMATION (CONTINUED)
BOSCH RELATIONSHIP (CONTINUED)
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 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. As discussed above, the Company is
focusing its business plan on sales of its New Platform and is not depending on
future FSAN or iFLX revenues.
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. Substantial sales volume is not expected until the
second and third releases of the New Platform product are completed and
demonstrated to customers. (See Item 2, Management's Discussion and Analysis of
Financial Condition and Results of Operations: Recent Developments; and Item 2,
Management's Discussion and Analysis of Financial Condition and Results of
Operations: Total Revenues.)
To remain competitive, the Company must continue to invest substantial resources
in research and development and to achieve development results in its current
products and future products, including the New Platform 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 efforts. The Company has recently changed some of the features and
capabilities in the second and third releases of its New Platform product. Such
changes in features were made to make the New Platform product more competitive
in the access market as well as to align the development schedule with a
successful product introduction of the second release. There can be no assurance
that the anticipated development schedules will be met.
Failure of the Company to meet its development goals will have a material
adverse effect on the Company. Notwithstanding successful development by the
Company, competitors already are selling products to customers in the market
targeted by the Company; competitors may develop new competing technology and
products that are more attractive to customers than are the technologies and
products of the Company, and may offer such products at
28
<PAGE>
BROADBAND TECHNOLOGIES, INC.
PART II - OTHER INFORMATION (CONTINUED)
ITEM 5. OTHER INFORMATION (CONTINUED)
OTHER FACTORS (CONTINUED)
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. This move was attributed to federal
regulatory actions, which forced SBC to sell its video services and network to
new competitors at prices below actual cost. Also, the Company's current and
future products must meet the industry standards established by Telcordia
Technologies, Inc. (formerly BELLCORE) and must be compatible with the products
of other telephone company suppliers, including competitors of the Company.
Additionally, regulatory delays may continue to impede competition in the local
loop, which may delay the rollout of the Company's new generation access
product.
The failure of telephone companies to widely deploy broadband networks is also
increasing the risk that cable television networks, due to the broader bandwidth
capabilities of their coaxial cable networks, will become more competitive with
telephone companies for transmission of voice and data information. During the
past year, substantially greater interest and investment in broadband cable
television networks has occurred and the trend appears to be accelerating.
Failure by the telephone companies to successfully meet competition from coaxial
cable-based telecommunications networks would have a material adverse effect on
the Company.
As the Company or its partners announce new products to better meet the changing
requirements of customers, customers may delay orders of existing products until
the new products are available for shipment or until small volumes of new
products are adequately field tested. Announcements by Lucent of its new digital
loop carrier product, AnyMedia, had this adverse effect on sales of the
Company's FLX-2500 product, and the same could occur in the future with respect
to the New Platform the Company is developing.
The Company competes against many larger companies that have significantly
greater resources than the Company. The Company, which has an accumulated
deficit of approximately $191.3 million as of September 30, 1999, has never been
profitable on an annual basis and may never achieve profitability. The Company
will require additional capital and may not be able to raise such capital or may
be able to raise such capital only on unfavorable terms.
The Company was dependent upon Lucent for greater than 87.0% of its revenues for
the nine months ended September 30, 1999 and greater than 85.0% of its projected
1999 revenue, and will remain substantially dependent upon Lucent until the
Company develops and successfully markets its New Platform. Failure by the
Company or Lucent to comply with existing agreements would have a material
adverse effect on the Company.
As fewer large potential customers dominate the Company's market, the Company
may not have sufficient bargaining power to sell its products on favorable
terms. If the Company is successful in expanding, its sales growth will place
significant strain on its operational resources and systems. In some cases, the
Company depends on single source suppliers or parts, which are available only
from a limited number of sources. Delays in filling orders of the Company's
customers resulting from supplier delays may cause customer dissatisfaction.
29
<PAGE>
BROADBAND TECHNOLOGIES, INC.
PART II - OTHER INFORMATION (CONTINUED)
ITEM 5. OTHER INFORMATION (CONTINUED)
OTHER FACTORS (CONTINUED)
The patent and other proprietary rights of the Company may not prevent the
competitors of the Company from developing non-infringing technology and
products that are more attractive to customers than the technology and products
of the Company. The technology and products of the Company could be determined
to infringe the patents or other proprietary rights of others. Pursuit of
international markets exposes the Company to increased risks of currency
fluctuations and controls, political and social risks, trade barriers, new
competitors and other risks associated with international markets.
YEAR 2000
Although the Company believes that its Year 2000 compliance plan is adequate to
address Year 2000 concerns, there can be no assurance that the Company will not
experience negative consequences as a result of undetected defects or the
noncompliance of third parties with whom the Company interacts. Furthermore,
there can be no assurance that there will not be a delay in, or increased costs
associated with, the implementation of corrections, such as unexpected costs of
correcting equipment that has not yet been fully evaluated. If potential
customers for the New Platform product that the Company anticipates introducing
in first quarter 2000 are experiencing problems related to Year 2000 issues, the
Company's marketing efforts may be adversely affected by customers expending
resources to address Year 2000 problems or by revenue losses by potential
customers resulting from their Year 2000 platforms. If realized, as the Year
2000 compliance plan is performed these risks could result in adverse effects on
the business, results of operations and financial condition.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits - None.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant duly caused this Report of Form 10-Q to be signed on its behalf by
the undersigned, thereunto duly authorized.
November 15, 1999 /s/ John T. Autrey
-----------------------------------------
John T. Autrey
Vice President and Chief Financial Officer
30
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