-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, UJZcZJM5DrdddcLaZHk2gw8KBUHXw4wYVNXT36EoiIEaGNW0nQAIE/DF/2Qc0kkR hFqa1H/JG0DuD2WAPrUEEA== 0000912057-00-013453.txt : 20000327 0000912057-00-013453.hdr.sgml : 20000327 ACCESSION NUMBER: 0000912057-00-013453 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000324 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HYBRID NETWORKS INC CENTRAL INDEX KEY: 0000900091 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 770250931 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-23289 FILM NUMBER: 578416 BUSINESS ADDRESS: STREET 1: 6409 GUADALUPE MINES ROAD CITY: SAN JOSE STATE: CA ZIP: 95120 BUSINESS PHONE: 4083236500 MAIL ADDRESS: STREET 1: 6409 GUADALUPE MINES ROAD CITY: SAN JOSE STATE: CA ZIP: 95120 10-K 1 10-K - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES 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
FOR THE YEAR ENDED DECEMBER 31, 1999, OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________ TO ______________. COMMISSION FILE NUMBER: 0-23289 HYBRID NETWORKS, INC. (Exact name of registrant as specified in its charter) DELAWARE 77-0252931 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.) INCORPORATION OR ORGANIZATION) 6409 GUADALUPE MINES ROAD 95120 SAN JOSE, CALIFORNIA (ZIP CODE) (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (408) 323-6500 Securities registered pursuant to Section 12(b) of the Exchange Act: None Securities registered pursuant to Section 12(g) of the Exchange Act: Common Stock, par value $0.001 per share Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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-B 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 / / As of February 16, 2000, there were outstanding 13,948,159 shares of the Registrant's Common Stock, $0.001 par value per share. As of that date, the aggregate market value of the shares of voting common stock held by non-affiliates of the Registrant, based on the average bid and ask prices of such stock as of such date on the pink sheets (although the Registrant disclaims that such prices accurately reflect the fair market value of such stock), was approximately $216,196,465. This excludes shares of common stock held by directors, officers and stockholders whose ownership exceeded ten percent of the shares outstanding. Exclusion of shares held by any person should not be construed to indicate that such person possesses power, direct or indirect, to direct or cause the direction of the management or policies of the Registrant, or that such person is controlled by or is under common control with the Registrant. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- TABLE OF CONTENTS
PAGE -------- PART I ITEM 1 Business.................................................... 2 ITEM 2 Properties.................................................. 13 ITEM 3 Legal Proceedings........................................... 13 ITEM 4 Submission of Matters to a Vote of Security Holders......... 15 PART II ITEM 5 Market for the Registrant's Common Equity and Related Stockholder Matters......................................... 16 ITEM 6 Selected Financial Data..................................... 17 ITEM 7 Management's Discussion and Analysis of Financial Condition and Results of Operations................................... 17 ITEM 7A Quantitative and Qualitative Disclosures About Market Risk........................................................ 33 ITEM 8 Financial Statements........................................ 34 ITEM 9 Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.................................... 59 PART III ITEM 10 Directors and Executive Officers of the Company............. 60 ITEM 11 Executive Compensation...................................... 60 ITEM 12. Security Ownership of Certain Beneficial Owners and Management.................................................. 60 ITEM 13 Certain Relationships and Related Transactions.............. 60 PART IV ITEM 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K......................................................... 60 Signatures.......................................................................... 63 Exhibits
As used in this report on Form 10-K, unless the context otherwise requires, the terms "we," "us," or, "the Company" and "Hybrid" refer to Hybrid Networks, Inc., a Delaware corporation. PART I THIS REPORT ON FORM 10-K CONTAINS FORWARD-LOOKING STATEMENTS RELATING TO FUTURE EVENTS OR FINANCIAL RESULTS, SUCH STATEMENTS INDICATING THAT "WE BELIEVE," "WE EXPECT," "WE ANTICIPATE" OR "WE INTEND" THAT CERTAIN EVENTS MAY OCCUR OR CERTAIN TRENDS MAY CONTINUE. OTHER FORWARD-LOOKING STATEMENTS INCLUDE STATEMENTS ABOUT THE FUTURE DEVELOPMENT OF PRODUCTS OR TECHNOLOGIES, MATTERS RELATING TO OUR PROPRIETARY RIGHTS, YEAR 2000 COMPLIANCE, FACILITIES NEEDS, OUR LIQUIDITY AND CAPITAL NEEDS AND OTHER STATEMENTS ABOUT FUTURE MATTERS. ALL THESE FORWARD-LOOKING STATEMENTS INVOLVE RISKS AND UNCERTAINTIES. YOU SHOULD NOT RELY TOO HEAVILY ON THESE STATEMENTS; ALTHOUGH THEY REFLECT THE GOOD FAITH JUDGMENT OF OUR MANAGEMENT, THEY INVOLVE FUTURE EVENTS THAT MIGHT NOT OCCUR. WE CAN ONLY BASE SUCH STATEMENTS ON FACTS AND FACTORS THAT WE CURRENTLY KNOW. OUR ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE IN THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF VARIOUS FACTORS, INCLUDING THOSE SET FORTH UNDER "RISK FACTORS" AND ELSEWHERE IN THIS FORM 10-K. WE DISCLAIM ANY OBLIGATION TO UPDATE THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF SUBSEQUENT EVENTS. ITEM 1. BUSINESS OVERVIEW We design, develop, manufacture and market broadband access products, primarily for wireless systems, that provide high speed access to the Internet for business and consumers. Our customers are principally wireless system operators and CATV (cable) operators. Our high speed access systems remove the bottleneck in the connection to the end-user, thereby greatly accelerating the response time for accessing bandwidth-intensive information on the Internet. We provide a proven alternative to DSL and cable for high speed Internet access for small businesses and residential subscribers. Although we have provided our products to a number of cable operators, we believe the principal market for our products will be for broadband wireless applications. This is in part because the broadband wireless industry, which had historically been under-capitalized, has had a substantial capital infusion. During 1999, Sprint Corporation and MCI WorldCom acquired a majority of MMDS wireless frequency licenses in the United States. In addition, we believe Internet access through broadband wireless provides advantages over DSL and cable applications in many areas. These advantages include: - Rapid Deployment: Wireless systems may be deployed and installed more rapidly than DSL and cable systems, in part because wireless systems do not require laying wires for customer hookup. - Low Set-Up and Maintenance Cost: Since wireless does not depend upon the wire-based infrastructure required by DSL and cable, the cost to initiate and maintain wireless systems is relatively low. - Coverage: Wireless MMDS provides Internet access over a 35-mile radius around a transmitter. Although wireless transmission requires a clear line of sight to subscribers, it can fill gaps in DSL and cable coverage (providing service to areas that would otherwise be inaccessible), and it offers viable alternatives in markets accessible to all three technologies. - Costs to Acquire Spectrum: The cost on a per subscriber basis is often lower for line-of-sight wireless transmission compared to cable transmission. The wireless broadband market is expected to grow substantially. Strategic Group of Washington, D.C., a telecommunications research and consulting company, announced its prediction that broadband wireless revenues, driven by local telephone service and Internet usage, will reach $3.4 billion in 2003, compared to 1999 revenues of $1.2 million. Our proprietary technology includes technical innovations (including those that increase spectrum utilization and decrease interference) which enhance the performance of wireless systems. Our systems have been field tested and are deployed in wireless applications in over 45 markets; we have developed 2 experienced customer service and technical expertise; and we believe we have a sound plan for supporting future voice and video developments in wireless services. Moreover, the wireless industry has not adopted the Data Over Cable System Interface Specification (DOCSIS), a standard to which our products do not conform. While the DOCSIS standard has inhibited our sales to cable customers, it has not affected our ability to market to wireless system operators. We believe our products offer significant advantages to wireless customers, providing an opportunity for growth as the wireless industry expands in the future. RECENT DEVELOPMENTS In September 1999, Sprint invested $11.0 million and certain capital investors invested $7.1 million in Hybrid in exchange for convertible debentures, convertible at a conversion price of $2.85 per share (subject to adjustment). In addition, Sprint agreed to purchase $10 million of our products on terms that are to be negotiated. In connection with the equipment purchase agreement, we issued warrants to purchase $8.4 million additional convertible debentures. At December 31, 1999, the Sprint debentures were convertible, into 3,907,775 shares of our Common Stock (subject to adjustment) and the debentures issuable upon exercise of the warrants would be convertible, at the same conversion price, into 2,946,622 shares of our common stock. Assuming that as of December 31, 1999 Sprint converted all its convertible debentures and exercised all its warrants, it would own 6,854,397 shares of our Common Stock, representing approximately 37.4% of the 18,335,847 shares of our Common Stock that would then be outstanding (assuming no other security holders exercised their options, warrants or conversion privileges). On a fully diluted basis, assuming that as of December 31, 1999 all other security holders exercised their options, warrants and conversion privileges as well as Sprint, Sprint would own approximately 22.6% of the 30,323,156 fully diluted shares of our Common Stock that would then be outstanding. Under the terms of Sprint's investment, Sprint appointed two of our five directors and has substantial governance rights (including veto rights over most material actions we might take, see Note 9 to the Notes to Financial Statements below), has a right of first refusal if a third party seeks to acquire us (which right of first refusal Sprint can assign to a third party), and has substantial additional rights and privileges (as described in Item 2 of our Quarterly Report on Form 10-Q for the quarter ended September 30, 1999). Following Sprint's investment, we responded to the request for proposal (RFP) that Sprint sent us and other potential suppliers of broadband wireless Internet access equipment, soliciting bids to supply Internet access equipment for use in Sprint's proposed deployment of broadband wireless service in the United States. The technically complex RFP process has continued for the last six months and has included direct submission by us, by various competitors, and systems integrators. Negotiations with Sprint are continuing, but Sprint has not yet placed an order for any new market for our products or indicated that it will select our products for the first phase of its wireless broadband system roll out. PRODUCTS, TECHNOLOGY AND SERVICES Our Series 2000 products are an integral part of a full wireless or cable high speed Internet access system. The Series 2000 includes head end routers, network and subscriber management tools and a line of end-user routers and modems. Our head end products include downstream and upstream routers and management systems. These products are used by broadband wireless and cable operators at their base stations, or head ends, to connect Internet subscribers to the operator's networks in order to give the subscribers high speed Internet access. Our head end products provide management systems that allow the operators to configure and manage their networks, to set systems alarms and to engineer parameters for different priorities, and different levels of services and charges, among end users. These parameters enable the operators to give priority to premium-paying high-volume subscribers and allocate unused capacity to lower-volume groups. 3 The subscribers to the wireless operators' networks are typically single-computer customers or local area networks (LANs) used by small businesses and high-end residential customers. The operators use our end-user products to connect subscribers to the wireless systems networks at the subscribers' sites. We provide high speed two-way transmission systems for both wireless and cable operators. We also support one-way high speed downstream transmission on wireless and cable systems that use a telephone modem or router return. In addition to enabling operators to use either two-way or one-way broadband transmission systems, our products can be engineered to accommodate the operators' other requirements as well, including their particular frequency spectrum holdings and cable plants. PRODUCTS The following table outlines the primary components of the Company's Series 2000:
HEADEND EQUIPMENT (1) PRODUCT DESCRIPTION CyberManager 2000 (CMG-2000) Workstation with proprietary Hybrid software that provides subscriber and network management, allows the operator to set the service levels or groups for business or residential. CyberMaster Downstream Router (CMD-2000) High speed downstream RF router that supports up to 60 Mbps aggregate throughput in 12 MHz of spectrum. CyberMaster Upstream Router QPSK Return (CMU Upstream router and demodulator for two-way 2000-14C and QDC-030-2) operation with QPSK return. END-USER EQUIPMENT (1) Multi-User Modem/Router (CCM-201, CCM-202) Client modem and router that can be used in CCM-231) either wireless or cable systems. Supports up to 20 users. Single-User Modem (N-201, N202) N-231) Similar to CCM-201, CCM-202 and CCM-231 but restricted to a single user. Wireless Broadband Router (WBR-60, WBR-20 Similar to CCM except it emphasizes the (WBR-5) device is a router for privacy and not a "bridge" modem such as often used in lower priced systems. Serves 60, 20, or 5 users respectively.
- ------------------------ (1) All products are available for use with wireless or cable systems. Headend Equipment CYBERMANAGER 2000. The CyberManager 2000 ("CMG-2000") is our proprietary subscriber and network management workstation. The CMG-2000 uses our software to provide the system administrator interface to the upstream and downstream routers and end customer equipment. The 4 CMG-2000 has a 10/100BaseT (Ethernet) interface to connect to a fast Ethernet switch in the headend. Currently, CMG-2000's are operating with 6,000 modems in the field with a limit of up to 20,000 modems. CYBERMASTER DOWNSTREAM ROUTER. The CyberMaster Downstream Router ("CMD-2000") is a rack-mounted industrial microcomputer. It supports our proprietary SIF and QAM cards, which are used for downstream routing and for 64-quadrature amplitude modulation ("64-QAM") downstream modulation. The CMD-2000 has a 10/100BaseT interface to connect to a fast Ethernet switch within the headend. The CMD-2000 supports up to six independent 10 Mbps downstream channels normally feeding two TV channels or transmitters. Each 10 Mbps channel occupies 2 MHz of either wireless or cable spectrum. CYBERMASTER UPSTREAM ROUTER QPSK RETURN. The Cybermaster upstream router is a rack mounted industrial microcomputer. The product houses dual Quadrature phase-shift keying ("QPSK") receiver cards which demodulate upstream QPSK signals. The CMU-2000-14C has a 10/100BaseT interface to connect to a fast Ethernet switch at the headend. The CMU supports up to 28 upstream ports each with a 256 Kbits per second (Kbps) to 5 Mbits per second (Mbps) data rate. It is usually configured to support up to 2,400 wireless or cable modem subscribers with 256 kbps channels. End User Equipment MULTI-USER MODEM/ROUTER. The Multi-User Modem/Router supports 10 Mbps, 64-QAM downstream data transmission on both wireless and cable systems and upstream transmission via wireless or cable return, telephone modem or router. The router family includes the CCM-201, a phone return with external modem, the CCM-202 phone return with internal modem, and the CCM-231, for wireless, cable or phone return. Each CCM includes routing capability to support up to 20 networked devices (PC, Macintosh or workstation), the WBR family extends this to 60. These units have a number of security features including system authentication and user ID. SINGLE-USER ROUTER. The Single-User Routers are similar to the Multi-User Modem/ Routers (CCM-201, CCM-202 and CCM231, respectively) but support only one client device which can be a PC, Macintosh or workstation. WIRELESS BROADBAND ROUTER. The Wireless Broadband Router family is similar to the CCM except it emphasizes the device is a router for privacy and not a "bridge" modem often used in lower priced systems. TECHNOLOGY The Series 2000 product line is a proprietary, integrated broadband access system. The Series 2000 is media independent, in that all the same system components may be deployed in either wireless or cable systems. The Series 2000 supports asymmetric two-way transmission on either a wireless or cable system as well as asymmetric telephone-return or router-return on either a wireless or cable system, and the same wireless transmitter or downstream TV channel can be used for any combination of two-way and telephone or router return configurations. The Series 2000 system is expandable from an entry-level system to large systems that serve up to 20,000 modems. It has been successfully deployed by wireless operators in systems that utilize multiple antennas at the head end to increase capacity. Each of the multiple return antennas is pointed in a slightly different direction, covering sectors of roughly 30 DEG., to increase the capacity of the available return frequency spectrum. We believe that our extensive field experience with fully operational wireless systems in over 45 markets, wireless and cable, gives us a key advantage in the design and delivery of wireless systems. 5 Wireless Downstream Optimization Our patented proprietary sub-channelization technology splits a standard 6 MHz channel into three 2 MHz slices for downstream transmission, providing greater service flexibility and minimizing the effects of multipath interference in wireless systems. Sub-channels mitigate the effects of interference between transmitters and allow flexible sectorization in large installations. They can also be loaded differently to provide different grades of service. Our patented 2 MHz sub-channelization allows our products to serve the newer wireless communication services ("WCS") wireless bands, which are 5 and 10MHz wide. The WCS bands are similar to MMDS except for bandwidth range of 2.305 GHz to 2.320 GHz and 2.345 GHz to @.360 GHz. Upstream Optimization Groups of subscribers share many 160 to 600 kHz bandwidth return channels. This provides redundancy and resistance to the interference common in large wireless installations, especially those with multiple return sectors. Narrow channels allow smaller antennas and lower power transceivers than are needed for conventional 2MHz TDMA channels. The Series 2000 head end or base station automatically offsets the transmit frequencies of the WBR or modems to correct for drift in the customer's transceiver and optimize performance of the head end demodulators. The head end levels the return transmit power so all signals arrive at the head end at the same level. This optimizes demodulator performance and minimizes interference between the multiple receive sectors used in large systems. Software not only allows subscribers to share many return channels, but also allows some to burst into a continuous transmission state to move large files upstream. The operator can control the parameters to optimize performance for business users yet still provide everyone access to capacity. It is usual to set up two or three groups of return channels, often with different bandwidths so as to provide different service levels or groups for business and residential customers. Alliances Hybrid has developed long term alliances with all manufacturers of transceivers, headend transmitters and headend downconverters necessary to implement a full wireless system. These alliances allow us to concentrate on our core technology while offering the appropriate complementary technology and providing customers with choices among complementary offerings. SERVICES Our product support services include consulting, systems engineering, systems integration, installation, training and technical support. Network operations engineers, who combine radio frequency and TCP/IP networking expertise, provide network consulting to support the sales force, assisting sales representatives and customers in defining the specifications for the system to be installed. Our network operations group also works with the customer during site preparation to aid in systems engineering, system integration, installation and acceptance testing for system start-up. Each customer is required to enroll, for a fee, at least one person in our one-week training course; enrollment for multiple employees from the customer organization is encouraged and supported with a discounted fee schedule. These training courses are tailored to specific implementations of our products and cover the installation, operation and maintenance of our headend and client modem products in a network operating environment. We typically provide a one-year warranty on our hardware products that includes factory repair service. Customer support also includes telephone support, maintenance releases and technical bulletins covering all of our software and firmware products that contain application code. We provide support after expiration of the warranty period as a purchase option, including on-site field support. 6 CUSTOMERS Our customers include wireless system operators and cable system operators. A small number of customers has traditionally accounted for a large portion of our net sales. In 1999, RCN Corporation (a cable system operator) and wireless operators now owned by Sprint accounted for 31% and 28% of our net sales, respectively. In 1998, RCN Corporation and Knology Holdings, Inc. (another cable system operator) accounted for 25% and 13% of our net sales, respectively. During 1999 and 1998, 52% and 58% respectively, of our net sales were attributable to cable system applications and the balance to wireless applications. The trend to consolidation with fewer but larger and much better capitalized companies is expected to continue. WIRELESS CUSTOMERS Sprint and MCI WorldCom have acquired over 60% of the prime MMDS wireless spectrum. As indicated in "Recent Developments" above, Sprint now holds $11 million of our convertible debentures and warrants to purchase an additional $8.4 million convertible debentures. These debentures, (including accrued interest) are convertible into 6,854,397 shares of our Common Stock which, at December 31, 1999 would have constituted (37.4% on a beneficial ownership percentage and) 22.6% of our fully diluted outstanding shares of Common Stock. Sprint has appointed two of our five directors and has substantial corporate governance rights, has veto rights over most material actions we might take, has a right of first refusal if a third party seeks to acquire us and has other substantial rights and privileges. Sprint has agreed to purchase at least $10 million of our products during 2000 on terms that are to be negotiated. We have been negotiating with Sprint for six months a possible agreement whereby Sprint would purchase, or cause a service provider to purchase our products for the first phase of Sprint's roll out of broadband wireless Internet access service. As yet no agreement has been reached with Sprint for the purchase of our products. Our ability to expand sales of our products may depend to a significant extent upon whether and to what extent Sprint elects to purchase our broadband wireless Internet access products and upon the terms of any such purchases. We believe that, in addition to our sales to Sprint (directly or through a service provider), Sprint's decision regarding the purchase of our products may affect our ability to sell our products to other wireless customers as well. We believe other wireless customers have deferred significant purchases of high speed Internet access equipment pending Sprint's decision. CABLE CUSTOMERS Although most of our sales have in the past been to cable customers, we anticipate that those customers will represent a decreasing portion of our future net sales. Because our products do not conform to the Data Over Cable System Interface Specification ("DOCSIS") standard for cable modems, we are not selling products to new cable customers and our sales to existing cable customers have been limited to additions to their previously installed systems. SALES, MARKETING AND DISTRIBUTION We sell our products primarily in the United States. Sales are made through our own field sales force and sales support organization. We also sell our products through VARs. We have field sales offices in Atlanta, Georgia, Tinton Falls, New Jersey and Littleton, Colorado. Our direct sales force also sold to wireless operators in Mexico and Canada in 1999. European interest in DOCSIS has made it unprofitable to pursue international cable sales. 7 The sale of our products typically involves a great deal of time and expense. Customers usually engage in significant technical evaluation before making a purchase commitment. There are delays associated with customers' internal procedures to complete the evaluation and to approve the large capital expenditures that are typically involved in purchasing our products. The sales cycle for our products has been lengthy and is subject to a number of significant risks. Any delay or loss of an order that is expected in a quarter can have a major effect on our sales and operating results for that quarter. We have substantially no backlog of orders. We believe this is not necessarily an indication of our future sales. Our marketing efforts are targeted at broadband wireless system operators, many of whom are now part of Sprint or MCI WorldCom, and regional or smaller wireless operators. Our cable efforts are concentrated on technically supporting existing customers. Because we have elected to focus our sales efforts on wireless operators, we have decided not to develop DOCSIS compatible cable modems. We are not selling products to new cable customers, and our sales to existing cable customers have been limited to additions to previously installed systems. The market for our products has historically experienced significant price erosion, and we have experienced and expect to continue to experience pressure on our selling prices. The cable industry's standardization on DOCSIS and the deployment of DSL by telephone companies has increased pricing pressure. While we have initiated cost reduction programs to offset pricing pressures on our products, there can be no assurance that we will keep pace with competitive price pressures or improve our gross margins. Further, we anticipate that in the future the sales mix of our products will be weighted toward lower-margin single-user products, thereby adversely affecting our gross margins. MANUFACTURING Our manufacturing strategy is to perform assembly, testing and quality inspection internally and to outsource the manufacturing of the product modules to third parties. We maintain a limited in-house manufacturing capability for performing assembling and testing on headend products and for reconfiguring small quantities of routers at our headquarters in San Jose. Our Series 2000 client routers are manufactured by Sharp Corporation through an agreement we have had since early 1997 with Sharp and its distributor, Itochu Corporation. We have not developed an alternative manufacturing source given the quality of the Sharp product and our limited volumes. We plan to have our new Wireless Broadband Router (WBR) manufactured in new packaging by Sharp. In order for us to compete effectively in the sale of systems, we will need to reduce our prices, and the underlying costs of our routers. As long as Sharp is the only manufacturing source of our routers, our ability to reduce the manufacturing costs may be limited. We have subcontractors for the standard components and subassemblies for our headend products. Standard components include the Sun Microsystems Sparc 5 workstation and its Sun Operating System (OS); and Intel's Ethernet cards and Pentium-based PCI processor cards. Our CyberManager 2000 Router is built on the Sparc 5/Sun OS platform by installing our proprietary network subscriber and network management software, HybridWare. Our CyberMaster Downstream Router ("CMD") and CyberMaster Upstream Router ("CMU") are built on Intel's Pentium-based PCI/ISA-based computer cards installed in standard rack-mounted backplanes from Industrial Computer Source that are configured to our specifications. Our proprietary software, Hybrid OS, is overlaid on a standard Berkeley Systems operating system for the CMD and CMU. We are dependent upon these and other key suppliers for a number of the components for our 64-QAM products. For example, each new modem or WBR design can use only one vendor for the 64-QAM demodulator semiconductors, and in past periods these semiconductors have been in short supply. The CCM and N type routers use Broadcom chip sets. Hitachi is the sole supplier of the processors used in certain of our routers. The former Stanford Telecom, Telecom Component Products 8 Group (now acquired by Intel), is currently the sole supplier for certain components used in our products. There can be no assurance that these and other single-source components will continue to be available to us, or that deliveries of them to us will not be interrupted or delayed (due to shortages or other factors). Having single-source components also makes it more difficult for us to reduce our costs for these components and makes us vulnerable to price increases by the component manufacturer. Any significant interruption or delay in the supply of components for our products or any increase in our costs for components, or our inability to reduce component costs, could hurt our business. Our products generally carry a one-year warranty for replacement of parts. Although we have not experienced any significant product liability claims to date, there can be no assurance that we will not be subjected to such claims in the future. RESEARCH AND DEVELOPMENT As of December 31, 1999, our research and development staff consisted of 12 full-time employees, and 10 local consultants. To supplement our research and development efforts, we have hired a consulting firm in India to work on various projects. Our agreement with the firm is to provide up to 20 engineers as consultants depending upon the project needs. Our total research and development expenses for 1999, 1998 and 1997 were $4,191,000, $7,771,000 and $7,831,000, respectively. Our research and development during 1999 was directed primarily towards improving the performance of our 2-way wireless products and reducing the cost of our routers. We enhanced our QPSK return product software in cooperation with certain of our wireless customers to improve performance as the customers introduce antenna sectorization to increase return path capacity. The capacity of the manager was increased to 20,000 routers and the WBR-60-231 multi-user modem was extended to address 60 computers. In 2000, we are continuing our efforts to reduce the cost of manufacturing and improve the performance of client routers significantly through design and engineering changes. In addition, we are engaged in the development of new CMD's and CMU's with power supply redundancy. We are also working on Network Management integration into ever larger networks and technology to serve subscribers where the line of sight to the base station is marginal. There can be no assurance that we will be successful in these development efforts. The market for wireless high speed Internet access products is characterized by rapidly changing and competing technologies, evolving industry standards and frequent new product introductions leading to short product life cycles. There can be no assurance that we will be able to keep up with these changes. COMPETITION The market for wireless broadband high speed Internet access products is intensely competitive, and we expect even more competition in the future. The principal competitive factors in this market include: - product performance and features including both downstream and upstream transmission capabilities, - reliability and stability of operation (maintaining stable system operation is a key requirement), - integration with major operator's management and customer care systems which may involve an integrator partner, - price, - evolution to marginal line of sight situations for wireless with lower transmitter towers and transmit sectorization to conserve downstream spectrum, 9 - breadth of product line, - sales and distribution capability, - technical support and service, - relationships with broadband wireless and cable system operators, affiliates and ISPs, - general industry and economic conditions. While we believe our products and services are competitive with or superior to those of our competitors, our product development was affected by lack of resources, by disruptions resulting from management and personnel changes and uncertainties caused by our financial reporting difficulties in 1998 and 1999. Conditions in our market could change rapidly and significantly as a result of technological changes, and the development and market acceptance of alternative technologies could decrease the demand for our products or render them obsolete. Similarly, the continued emergence or evolution of industry standards or specifications may put us at a disadvantage in relation to our competitors. There can be no assurance that we will be able to compete successfully in the future. In general, our competitors are producers of asymmetric routers and other broadband access products. Most of our competitors are substantially larger and have greater financial, technical, marketing, distribution, customer support and other resources, as well as greater name recognition and access to customers, than we have. Many of our competitors are in a better position to withstand any significant reduction in capital spending by customers. Some of our present partners are major systems integrators who could choose to develop their own designs in-house for the wireless industry. WIRELESS COMPETITORS One of our principal competitors in the wireless market is Cisco Systems (which has proprietary products under development due to its acquisition of Clarity Wireless, Inc.). Cisco is promoting VOFDM, a competitive wireless technology that Cisco claims will provide superior cost/benefit performance and will operate successfully in adverse environments (around buildings, flat roofs and water, for example). We believe that Cisco has not yet installed a commercially operating VOFDM system. However, there is no assurance that in the future such systems will not be installed and provide benefits superior to our system. Other principal wireless competitors include ADC, which is currently offering the Vyyo (formerly Phasecom) product and has experience from its MMDS, WCS and UHF transmitter division (formerly known as ITS Corp.); Com21, which is attempting to adapt its proprietary cable systems for wireless; and Newbridge, which acquired much of Stanford Telecom (a manufacturer of QPSK products). Other vendors may be attracted by the 1999 investments by MCI Worldcom and Sprint in wireless operations. Nortel and Lucent have indicated an interest in entering the wireless market. While Hybrid has worked closely with Nortel and Lucent in making proposals to Sprint, other or both of these companies might choose to develop its own system to compete for Sprint deployments and to offer other competing products and services. We believe our products have been more widely accepted in the broadband wireless market than in the cable market for two reasons: 1) The understanding we gained with our customers' help in understanding the issues of deployment and in particular return path sectorization (used to increase spectrum utilization) and return path interference, 2) The adoption of the DOCSIS standard has not had a significant effect on wireless customers. 10 We believe that products meeting or based on the present DOCSIS standard does not perform well over wireless. This belief is based in part on the fact that Hybrid's 2 MHz downstream sub-channelization technique provides triple the resistance to multipath distortion by applying the full power of the WBR adaptive equalizer to a 2 MHz channel rather than a 6 MHz channel used in DOCSIS. In addition, we believe DOCSIS systems require higher power from the transceiver on the return path and will face probable disruption of the TDMA return path in the presence of multipath and noise. However, there can be no assurance that improvements in integrated circuit technology, transceiver output power levels or changes in the DOCSIS TDMA protocol will not allow systems developed for cable to perform effectively over wireless. One of the DOCSIS compliant vendors might modify the DOCSIS equipment to a proprietary non-standard form to work over wireless. Vendors adapting DOCSIS are attempting to achieve lower costs and prices but still preserving the customer benefit of allowing other vendors DOCSIS modems to operate on their systems. CABLE MODEM COMPETITORS The adoption of the DOCSIS cable standard by large cable operators has adversely affected our ability to sell to cable customers. Our decision not to pursue the cable market and not to develop the DOCSIS products, has not helped our existing and potential customers who wish to purchase broadband Internet access products from multiple suppliers, These customers were forced to buy from our competition because it provides them with multiple supplier option. OTHER COMPETITION The telephone companies are learning to deploy forms of DSL providing high speed Internet access over the existing phone wires. They are also working with computer vendors such as Dell Computer Corp. and Gateway Inc. to have DSL cards ordered with PCs manufactured by those companies, thereby reducing the telephone companies' distribution costs. The chief constraints on DSL are the type, condition and length of cables out of the phone exchanges and the fact that more distant subscribers are usually served by the carrier in street cabinets that have to be enlarged or adapted for DSL. Although DSL poses a significant competitive threat, in some instances the availability of DSL may be seen as complementary to the use of our products. Some operators may use DSL service for customers in those locations in which line-of-sight access may be difficult but choose to provide wireless service where line-of-sight transmission is uninterrupted. To be successful, we must respond promptly and effectively to the challenges of new competitive products and tactics, alternate technologies, technological changes and evolving industry 802.16 standards. We must continue to develop products with improved performance over two-way wireless transmission facilities. There can be no assurance that we will meet these challenges. INTELLECTUAL PROPERTY PATENTS We rely on a combination of patent, trade secret, copyright and trademark laws and contractual restrictions to establish and protect proprietary rights in our products. We have received 13 patents from the U.S. Patent and Trademark Office. These patents are directed to various aspects of wireless and cable modems and headend systems. In addition, the U.S. Patent and Trademark Office has issued formal notices of allowances for pending patent applications which are also directed to wireless and cable modems and headend systems, as well as various modulation and transmission schemes used in wireless cable modem systems. We have other patent applications pending before the U.S. Patent and Trademark Office. We have patent applications pending in a number of foreign jurisdictions as well. We do not know whether any pending or foreign patent applications will result in the issuance of patents. 11 We cannot be assured that our patents will not be challenged or invalidated, or that the claims allowed in our patents will be of sufficient scope or strength to provide meaningful protection or commercial advantage to us. We have initiated one patent infringement litigation to enforce our patent rights, and it resulted in a settlement in which we granted licenses to the defendants containing certain terms that are in some respects favorable for them, including a right of first refusal to purchase our patents that we granted to one defendant (Com21, Inc.) in the event that in the future we propose to sell our patents (separately or together with our other assets) to any third party (See Item 3 "Legal Proceedings"). We do not know whether we will bring litigation in the future in an effort to assert our patent rights, or whether other companies will bring litigation challenging our patents. Any such litigation could be time consuming and costly for us and could result in our patents being held invalid or unenforceable. Furthermore, even if the patents are upheld or are not challenged, third parties might be able to develop other technologies or products without infringing any such patents. SOFTWARE PROTECTION We have entered into confidentiality and invention assignment agreements with our employees, and we enter into non-disclosure agreements with certain of our suppliers, distributors and customers, in order to limit access to and disclosure of our proprietary information. There can be no assurance that these contractual arrangements or the other steps we take to protect our intellectual property will prove sufficient to prevent misappropriation of our technology or deter independent third-party development of similar technologies. The laws of certain foreign countries may not protect our products or intellectual property rights to the same extent as do the laws of the United States. INFRINGEMENT We have in the past, received, and may in the future receive, notices from third parties claiming that our products, software or asserted proprietary rights infringe the proprietary rights of third parties. We expect that developers of wireless and cable modems will be increasingly subject to infringement claims as the number of products and competitors in our market grows. While we are not currently subject to any such claim, any future claim, with or without merit, could be time consuming, result in costly litigation, cause product shipment delays or require us to enter into royalty or licensing agreements. Such royalty or licensing agreements might not be available on terms acceptable to us or at all. In the future, we may also file lawsuits to enforce our intellectual property rights, to protect our trade secrets or to determine the validity and scope of the proprietary rights of others. Such litigation, whether successful or not, could result in substantial costs and diversion of resources. As indicated above, we were engaged during 1998 in an infringement lawsuit that we brought against two third parties. In 1999, in order to stop the diversion of resources caused by the litigation, we entered into a settlement pursuant to which the defendants obtained licenses to our patents on terms that in certain respects were favorable to the defendants (See "--Patents" above and Item 3 "Legal Proceedings" below). Nonetheless, we may find it necessary to institute further infringement litigation in the future. EMPLOYEES As of December 31, 1999, we had 38 full-time employees. None of our employees is represented by a collective bargaining unit with respect to his or her employment, and we have never experienced an organized work stoppage. We used consultants heavily to supplement our workforce and as of December 31, 1999 we had 16 local consultants in various areas. 12 ITEM 2. PROPERTIES We currently sublease approximately 55,000 square feet of office, research and development and manufacturing space in San Jose, California. The sublease expires in April 2004, and we have an option to extend the term of the lease through October 2009. We also lease approximately 900 square feet of office space in Tinton Falls, New Jersey and approximately 1,000 square feet of office space in Atlanta, Georgia on a month-to-month basis. We believe that our San Jose facilities will be sufficient to meet our anticipated growth in the near term. ITEM 3. LEGAL PROCEEDINGS CLASS ACTION LITIGATION In June 1998, five class action lawsuits were filed in San Mateo County Superior Court, California against us, two of our directors, four former directors and two former officers. The lawsuits were brought on behalf of purchasers of our Common Stock during the class period commencing November 12, 1997 (the date of our initial public offering) and ending June 1, 1998. In July 1998, a sixth class action lawsuit was filed in the same court against the same defendants, although the class period was extended to June 18, 1998. All six lawsuits (the "State Actions") also named as defendants the underwriters in our initial public offering, but the underwriters have since been dismissed from the cases. The complaints in the State Actions claimed that we and the other defendants violated the anti-fraud provisions of the California securities laws, alleging that the financial statements used in connection with our initial public offering and the financial statements issued subsequently during the class period, as well as related statements made on our behalf during the initial public offering and subsequently regarding our past and prospective financial condition and results of operations, were false and misleading. The complaints also alleged that we and the other defendants made these misrepresentations in order to inflate the price of the Company's Common Stock for the initial public offering and during the class period. We and the other defendants denied the charges of wrongdoing. In July and August 1998, two class action lawsuits were filed in the U.S. District Court for the Northern District of California (the "Federal Actions"). Both of the Federal Actions were brought against the same defendants as the State Actions, except that the second Federal Action also named as a defendant Price Waterhouse Coopers, LLP ("PWC"), our former independent accountants. (The underwriters in our initial public offering were named as defendants in the first Federal Action but were subsequently dismissed.) The class period for the first Federal Action is from November 12, 1997 to June 1, 1998, and the class period in the second Federal Action extends to June 17, 1998. The complaints in both Federal Actions claimed that we and the other defendants violated the anti-fraud provisions of the federal securities laws, on the basis of allegations that are similar to those made by the plaintiffs in the state class action lawsuits. We and the other defendants denied these charges of wrongdoing. We believe that the State and Federal Actions hurt our business during the latter part of 1998 and in 1999, made it more difficult for us to attract and retain employees, disrupted our management, sales and marketing, engineering and research and development staffs, contributed to our inability during the year to complete the restatement of our financial statements and adversely affected the sales of our products and services. We and the other parties (other than PwC) to the State Actions and the Federal Actions reached an agreement to settle the lawsuits in March 1999. The agreement was approved by the U.S. District Court for the Northern District of California in June 1999. In November 1999, the settlement of the State Actions and the Federal Actions became final. The time to appeal from the Court's approval of the settlement has expired. Under the settlement, (i) our insurers paid $8.8 million on our behalf and 13 on behalf of the other officer and director defendants, and (ii) we issued 3,057,459 shares of Common Stock to the plaintiffs and their counsel (750,000 shares were issued in November 1999 and the balance in February 2000), representing 21.9% of all shares of our Common Stock that were outstanding at the end of February 2000. As a result of the settlement and a related agreement between us and our insurers, we have paid, and will not be reimbursed by our insurers for, $1.2 million in attorneys fees and other litigation expenses that would otherwise be covered by our insurance, and we will not have insurance coverage for the attorneys fees and expenses relating to the settlement that we incurs in the future. As of December 31, 1999, we had accrued $1,346,000 for the value of the 2,307,459 shares then remaining to be issued in the settlement. SEC INVESTIGATION In October 1998, the Securities and Exchange Commission began a formal investigation of us and certain individuals with respect to our 1997 financial statements and public disclosures. During 1999, we produced documents in response to the Securities and Exchange Commission's subpoena and cooperated with the investigation. A number of current and former officers and employees and outside directors have testified before the Securities and Exchange Commission's staff. In November 1999, the SEC staff attorneys informed us in writing that the staff intended to file a civil injunctive action and seek civil monetary penalties against us for alleged violations of the federal securities laws. Without admitting or denying any wrongdoing, we recently reached agreement with the staff pursuant to which the staff will recommend entry of an order enjoining us from violating the books and records and related provisions of the federal securities laws. The recommended action would not include any monetary penalties or an injunction against the violation of the antifraud provisions of the securities laws. Resolution of this matter is subject to negotiation and documentation of a final agreement with the SEC staff attorneys, the Commission's acceptance of the staff's recommendation and approval by the federal district court. We do not believe, based on current information, that the proposed order will have a material adverse effect on our business, financial condition or future results of operations. PATENT LITIGATION In January 1998, we brought a lawsuit in the U.S. District Court for the Eastern District of Virginia against Com21, Inc. and Celestica, Inc. in which we alleged that the defendants infringed our patents. In response to our lawsuit, Com21 initiated a declaratory judgment action six days later in the U.S. District Court for the Northern District of California to obtain a declaration that our patents were invalid and unenforceable and that in any event Com21 did not infringe them. In February 1998, the action in the Eastern District of Virginia was transferred to the Northern District of California, and the two actions were consolidated. Pre-trial discovery continued in the consolidated action until September 1998 when the parties agreed to stay the proceedings while they attempted to reach a settlement. In January 1999, the Company entered into a settlement agreement and the actions were dismissed. Pursuant to the settlement, we granted Com21 and Celestica a nonexclusive license to our patents under which they may be required to pay royalties in the event that they sell certain products in the future, subject to certain contingencies, and we granted Com21 a right of first refusal to purchase our patents in the event that we propose in the future to sell our patents (whether separately or together with our other assets) to any third party. The Company has agreed to pay its legal counsel in this action, as a partial contingency fee (in return for such counsel's acceptance of reduced current legal fees), an amount equal to 50% of any royalties that the Company receives from its license with 14 the defendants in the litigation (but not in excess of $3,000,000). The Company has received minimum royalties from the license. PACIFIC MONOLITHICS LAWSUIT In March 1999, Pacific Monolithics, Inc. (which had filed a voluntary petition under Chapter 11 of the U.S. Bankruptcy Code and is suing as debtor-in-possession) filed a lawsuit in Santa Clara County Superior Court, California against us, two of our directors, four former directors (one of whom was subsequently dismissed), a former officer and PwC. The lawsuit concerns an agreement which we entered into in March 1998 to acquire Pacific Monolithics through a merger, which acquisition was never consummated. The complaint alleged that we induced Pacific Monolithics to enter into the agreement by providing it with our financial statements, and by making other representations concerning our financial condition and results of operations, which were false and misleading, and further alleged that we wrongfully failed to consummate the acquisition. The complaint claimed the defendants committed breach of contract and breach of implied covenant of good faith and fair dealing, as well as fraud and negligent misrepresentation. The complaint sought compensatory and punitive damages according to proof, plus attorneys' fees and costs. In July 1999, the court granted our motion to compel arbitration and to stay the lawsuit pending the outcome of the arbitration. In October 1999, the plaintiff filed a demand for arbitration against us and the individual defendants with the San Francisco office of the American Arbitration Association. In the demand, the plaintiff alleges claims for breach of contract, breach of implied covenant of good faith and fair dealing, fraud and negligent misrepresentation arising out of the proposed merger between the two companies. The demand seeks unspecified compensatory and punitive damages, pre-judgement interest and attorneys' fees and costs. In November 1999, we and the individual defendants answered the demand by denying the claims and seeking an award of attorneys' fees and costs pursuant to the agreement for the proposed merger. The arbitration hearing is scheduled to be held in September 2000. We do not believe, based on current information (which is only preliminary, since discovery has not commenced in the litigation), that the outcome of this litigation will have a material adverse effect on our business, financial condition or future results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no matters submitted to a vote of our security holders during 1999. 15 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS MARKET INFORMATION FOR COMMON STOCK Our Common Stock was traded on the Nasdaq National Market under the symbol "HYBR" during the period from our initial public offering on November 12, 1997 through June 16, 1998. On June 17, 1998, trading in our Common Stock was suspended by the Nasdaq National Market, in response to our independent auditors, PwC, withdrawing their reports to our 1997 financial statements. The suspension continued until December 1, 1998, when our Common Stock was delisted by the Nasdaq National Market due to continuing noncompliance with listing requirements. Since December 1, 1998, our stock has been traded in the over-the-counter market on the pink sheets. The table below shows the range of high and low closing sale prices reported on the pink sheets for the periods indicated. The table reflects inter-dealer prices without retail mark-up, mark down or commission. On February 29, 2000, the closing price of our Common Stock on the pink sheets was $16.56.
HIGH LOW -------- -------- First Quarter 1998.......................................... $13.00 $4.00 Second Quarter 1998......................................... $ 8.75 $2.13 Third Quarter 1998.......................................... Not Traded Fourth Quarter 1998......................................... $ 0.75 $0.13 First Quarter 1999.......................................... $ 1.25 $0.13 Second Quarter 1999......................................... $ 2.88 $0.38 Third Quarter 1999.......................................... $ 9.03 $2.00 Fourth Quarter 1999......................................... $20.00 $4.75
STOCKHOLDERS As of December 31, 1999, there were approximately 184 holders of record of our Common Stock DIVIDENDS We have not paid any cash dividends on our capital stock to date. We currently anticipate that we will retain any future earnings for use in our business and do not anticipate paying any dividends in the foreseeable future. The terms our outstanding debentures and our agreement with Sprint prohibit us from paying any cash dividends without the consent of the debenture holders and Sprint. RECENT SALES OF UNREGISTERED SECURITIES During 1999, we sold without registration under the Securities Act 251,000 shares of Common Stock to current or former officers or employees, upon their exercise of stock options previously granted to them, at exercise prices of from $0.27 to $11.05 per share (the average exercise price was $1.42). These sales were made in reliance on exemptions under Rule 701 or under Section 4(2) of the Securities Act. We made no other sales of securities during 1999 that were not registered under the Securities Act, except for sales previously reported in our quarterly reports on Form 10-Q filed during the year. 16 ITEM 6. SELECTED FINANCIAL DATA The following selected financial data should be read in conjunction with the Company's financial statements and related notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this Form 10-K.
YEARS ENDED DECEMBER 31, ---------------------------------------------------- 1999 1998 1997(1) 1996 1995 -------- -------- -------- -------- -------- STATEMENT OF OPERATION DATA: Net sales.................................... $ 13,016 $ 12,418 $ 4,120 $ 2,962 $ 630 Cost of sales................................ 13,341 14,046 8,899 3,130 761 -------- -------- -------- ------- ------- Gross profit................................. (325) (1,628) (4,779) (168) (131) Operating expenses: Research and development................... 4,191 7,771 7,831 5,076 3,862 Sales and marketing........................ 1,740 3,642 4,678 1,786 390 General and administrative................. 7,660 8,933 2,964 1,714 748 Asset impairment charge.................... -- 1,250 -- -- -- Write off of technology license............ -- 1,283 -- -- -- -------- -------- -------- ------- ------- Total operating expenses................. 13,591 22,879 15,473 8,576 5,000 -------- -------- -------- ------- ------- Loss from operations................... (13,916) (24,507) (20,252) (8,744) (5,131) Interest income and other expense, net....... 171 779 316 257 166 Interest expense............................. (8,447) (897) (1,666) (28) (304) -------- -------- -------- ------- ------- Net loss..................................... $(22,192) $(24,625) $(21,602) $(8,515) $(5,269) ======== ======== ======== ======= ======= Basic and diluted net loss per share......... $ (2.08) $ (2.37) $ (6.10) $ (3.36) $ (2.37) ======== ======== ======== ======= ======= Shares used in basic and diluted per share calculation(2)............................. 10,678 10,410 3,541 2,535 2,223 ======== ======== ======== ======= =======
DECEMBER 31, ---------------------------------------------------- 1999 1998 1997(1) 1996 1995 -------- -------- -------- -------- -------- BALANCE SHEET DATA: Cash and cash equivalents......................... $13,394 $3,966 $27,143 $3,886 $3,353 Working capital................................... 6,027 (812) 23,795 6,944 3,149 Total assets...................................... 21,152 15,420 39,065 10,539 4,586 Long-term debt.................................... 18,478 419 654 472 228 Total stockholders' equity (deficit).............. (9,820) 2,702 27,303 7,709 3,661
- ------------------------ (1) All financial data in the table above as of and for the year ended December 31, 1997 presented reflect the restated financial statement. (2) See Note 2 of Notes to Financial Statements for an explanation of the number of shares used to compute basic and diluted net loss per share. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THE DISCUSSION BELOW SHOULD BE READ IN CONJUNCTION WITH THE FINANCIAL STATEMENTS AND THE NOTES THERETO INCLUDED IN ITEM 8 OF THIS REPORT. THE DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS RELATING TO FUTURE EVENTS OR FINANCIAL RESULTS, SUCH AS STATEMENTS INDICATING THAT "WE BELIEVE," "WE EXPECT," "WE ANTICIPATE" OR "WE INTEND" THAT CERTAIN 17 EVENTS MAY OCCUR OR CERTAIN TRENDS MAY CONTINUE. OTHER FORWARD-LOOKING STATEMENTS INCLUDE STATEMENTS ABOUT THE FUTURE DEVELOPMENT OF PRODUCTS OR TECHNOLOGIES, MATTERS RELATING TO OUR PROPRIETARY RIGHTS, YEAR 2000 COMPLIANCE, FACILITIES NEEDS, OUR LIQUIDITY AND CAPITAL NEEDS AND OTHER STATEMENTS ABOUT FUTURE MATTERS. ALL THESE FORWARD-LOOKING STATEMENTS INVOLVE RISKS AND UNCERTAINTIES. YOU SHOULD NOT RELY TOO HEAVILY ON THESE STATEMENTS; ALTHOUGH THEY REFLECT THE GOOD FAITH JUDGMENT OF OUR MANAGEMENT, THEY INVOLVE FUTURE EVENTS THAT MIGHT NOT OCCUR. WE CAN ONLY BASE SUCH STATEMENTS ON FACTS AND FACTORS THAT WE CURRENTLY KNOW. OUR ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE IN THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF VARIOUS FACTORS, INCLUDING THOSE SET FORTH UNDER "RISK FACTORS" AND ELSEWHERE IN THIS REPORT ON FORM 10-K. OVERVIEW GENERAL We are a broadband access equipment company that designs, develops, manufactures and markets wireless and cable systems that provide high speed access to the Internet and corporate intranets for businesses and consumers. Our products remove the bottleneck over the local connection to the end-user, thereby greatly accelerating the response time for accessing bandwidth-intensive information. Since 1996, our principal product line has been the Hybrid Series 2000 which consists of secure headend routers, wireless and cable routers and management software for use with either wireless transmission or cable TV facilities. To date, net sales include principally product sales and support and networking services. We sell our products primarily in the United States. Our customers include primarily broadband wireless system operators and cable system operators. A small number of customers has accounted for a substantial portion of our net sales, and we expect the trend to continue. As a result, we have experienced, and expect to continue to experience, significant fluctuations in our results of operations on a quarterly and an annual basis. The sales cycle for our products has been lengthy, and is subject to a number of significant risks, including customers' budgetary constraints and internal acceptance reviews. Any delay or loss of an order that is expected in a quarter can have a major effect on our sales and operating results for that quarter. The same is true of any failure of a customer to pay for products on a timely basis. The market for high speed network connectivity products and services is intensely competitive and is characterized by rapid technological change, new product development and product obsolescence, and evolving industry standards. Because our products do not conform to the DOCSIS standard for cable modems, we are not selling products to new cable customers and our sales to existing cable customers have been limited to additions to previously installed systems. Our ability to develop and offer competitive products on a timely basis could have a material effect on our business. The market for our products has historically experienced significant price erosion over the life of a product, and we have experienced and expect to continue to experience pressure on our unit average selling prices. While we have initiated cost reduction programs to offset pricing pressures on our products, there can be no assurance that we will keep pace with competitive price pressures or improve our gross margins. Further, we anticipate that in the future the sales mix of our products will be increasingly weighted toward lower-margin products, thereby adversely affecting our gross margins. We believe our products are particularly well suited for use in broadband wireless applications. Until this year, however, the wireless industry has suffered from under capitalization and poor financial performance. During 1999, the wireless industry has received a substantial infusion of capital, 18 principally from investment by telephone companies. Sprint Corporation has acquired PCTV-Speedchoice and other wireless operators (our principal wireless customers). In September 1999, Sprint invested $11.0 million in our securities (and we received an additional $7.1 million in investment from venture capital sources), and Sprint committed to purchase at least $10 million of our products for wireless applications. As part of the investment, Sprint acquired veto rights with respect to most material corporate actions we might take as well as other substantial rights and privileges. We anticipate that the success of our future operations will depend to a substantial extent upon our relationship with Sprint and whether Sprint selects our products for use in connection with Sprint's wireless high speed Internet access services in the future. Due to our diminished capital resources during the first three quarters of 1999 (see "--Liquidity and Capital Resources"), we reduced our expenditures for research and development and sales and marketing during this period. In February 1999, we implemented a reduction in force. As of December 31, 1999, we had 38 full-time employees and 16 consultants compared to 87 full-time employees and 18 consultants at December 31, 1998. Following the infusion of funds we received in September 1999, as indicated above, we are seeking to hire new employees and plan to increase our expenditures for research and development, sales and marketing. RESTATEMENT OF FINANCIAL STATEMENTS In May and June 1998, we and PricewaterhouseCoopers LLP ("PwC"), our independent auditors, engaged in a review of our financial statements for 1997 and the first quarter of 1998. In June 1998, we announced that PwC had notified us that its audit reports on our 1997 financial statements should no longer be relied upon and that we and they were continuing to review those financial statements. In July 1998, PwC resigned as our independent auditors, stating that it believed our 1997 financial statements should be restated but that, although there had been no disagreements between PwC and us on any matter of our accounting principles, or practices, financial statement disclosure or auditing procedure, PwC would not continue as our independent auditors to address the restatement. In August 1998, we retained Arthur Andersen ("AA") as our independent auditors. After extensive work in examining our 1997 financial statements, AA resigned as our independent auditors in November 1998. AA informed us that, in its view, material weaknesses existed in our internal controls of a nature that prevented AA from being able to form an opinion on our conclusions as to the appropriate timing and amount of revenue recognition for the purposes of our 1997 financial statements. AA also stated that, during the course of its work, it had reached the conclusion that it needed to expand significantly the scope of its audit, which it did with our approval and cooperation, and that, while AA did not complete its audit, it concluded that our 1997 financial statements were materially misstated. AA confirmed that there had been no disagreements between AA and us on any matter of our accounting principles and practices, financial statement disclosure or auditing procedure. In December 1998, we engaged Hein + Associates LLP ("Hein") as our independent auditors. During the review of our financial statements in conjunction with Hein (and earlier with PwC and AA), we became aware of errors and irregularities that caused our financial statements for 1997 and the first quarter of 1998 to be misstated, particularly with respect to the timing and amount of our sales in 1997 and the first quarter of 1998. We also concluded that the financial effects of warrants issued by us in 1997 had not been properly reflected in our financial statements. In June 1999, Hein completed its audit of our 1997 and 1998 financial statements. Our financial statements for 1997 and the first quarter of 1998 have been restated to correct these errors. As a result of the restatement net sales for 1997 were reduced from $14,270,000 to $4,120,000 (resulting in gross loss of $4,779,000 rather than gross profit of $2,012,000), net loss increased from $13,590,000 to $21,602,000 and accumulated deficit increased from $30,932,000 to $38,944,000. Our basic and diluted loss per share increased from $3.84 to $6.10. 19 Our inability to reissue audited financial statements during the course of events described above had serious consequences for our business. As a result, the Nasdaq National Market suspended trading in our Common Stock from June 1998 and delisted our stock in December 1998. During 1998, primarily due to our announcements regarding the need to restate our financial statements, a number of class action litigations were filed and the Securities and Exchange Commission initiated a formal investigation. We believe these actions hurt our business, made it more difficult for us to attract and retain employees, disrupted our management, sales and marketing, engineering and research and development staffs and adversely affected the sales of our products. REVENUE RECOGNITION We normally ship our products based upon a bona fide purchase order and volume purchase agreement. We generally recognize revenue at the time a transaction is shipped and collection of the resulting account receivable is probable. Shipments on customer orders with either acceptance criteria, installation criteria or rights of return are recognized as revenue only when the criteria are satisfied according to the contract. Revenue related to shipments to distributors is normally recognized upon receipt of payment for such transactions. During 1999, we generally sold our software together with a three-year commitment, for which we did not charge separately, to provide upgrades, maintenance, system support and service. We recognized revenue attributed to the software over the three-year period. (Recently, we changed our policy to charge separately for maintenance and other software support after 90 days.) In those instances in which we sold software and entered into a maintenance contract for which we charged separately, we recognized revenue on the software sale without reference to the maintenance contract, and we recognized revenue on the maintenance contract over its term, generally on a straight line basis. Other service revenue, primarily training and consulting, is generally recognized at the time the service is performed. WARRANTY COSTS We accrue for estimated warranty costs when the related sales revenue is recognized. Our modem manufacturer, Sharp Corporation, provides a 15 month warranty on all cable routers manufactured by them. The warranty period begins on the date the routers are completely assembled. We provide a 12 month warranty on all headend equipment sold, and we typically provide a 90-day warranty on software. Actual warranty costs incurred have not differed materially from those estimated and accrued by the Company. NET LOSSES We incurred net losses for the years ended December 31, 1999, 1998 and 1997 of $22,192,000, $24,625,000 and $21,602,000, respectively. Our accumulated deficit was $85,761,000 as of December 31, 1999. We expect to incur losses for the foreseeable future. DEFERRED TAXES As of December 31, 1999, we had approximately $31.3 million in gross deferred tax assets comprised primarily of net operating loss carry forwards and capitalized research expenditures. We believe that we might not be able to realize our deferred tax assets, due to uncertainties regarding our future, our history of net losses and our lack of capital resources. In addition, the utilization of net operating loss carry-forwards may be subject to a substantial annual limitation due to the "change in ownership" provisions of the Internal Revenue Code of 1986 and similar provisions of state tax laws. We will continue to assess the realizability of the deferred tax assets based on actual and forecasted operating results. See Note 10 of Notes to Financial Statements. 20 RESULTS OF OPERATIONS The following table sets forth the percentage of net sales represented by the items in our statements of operations for the periods indicated:
YEARS ENDED DECEMBER 31, ------------------------------------ 1999 1998 1997 -------- -------- -------- Net sales................................................... 100.0% 100.0% 100.0% Cost of sales............................................... 102.5% 113.1% 216.0% ------ ------ ------ Gross loss.................................................. (2.5)% (13.1)% (116.0)% ------ ------ ------ Operating expenses: Research and development.................................. 32.2% 62.6% 190.1% Sales and marketing....................................... 13.4% 29.3% 113.5% General and administrative................................ 58.8% 71.9% 72.0% Asset impairment charge................................... -- 10.1% -- Write-off of technology license........................... -- 10.3% -- ------ ------ ------ Total operating expenses................................ 104.4% 184.2% 375.6% ------ ------ ------ Loss from operations.................................... (106.9)% (197.3)% (491.6)% Interest income and other................................... 1.3% 6.2% 7.7% Interest expense............................................ (64.9)% (7.2)% (40.4)% ------ ------ ------ Net loss................................................ (170.5)% (198.3)% (524.3)% ====== ====== ======
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998 NET SALES. Net sales for 1999 were $13,016,000, compared to net sales of $12,418,000 for 1998, an increase of approximately 4.8%. In 1999, cable systems operators accounted for approximately 52% of net sales, compared to approximately 57% in 1998; and broadband wireless systems operators accounted for 48% in 1999, compared to 43% in 1998. International sales accounted for approximately 5% in 1999 compared to none in 1998. We had two customers that individually accounted for 31% and 28% of net sales during 1999, compared to two customers that accounted for 25% and 13% during 1998. In September 1999, we issued Sprint warrants to purchase $8.4 million in convertible debentures which are convertible to common stock at a conversion price of $2.85 per share (subject to adjustment). The warrants will be exercisable in 10% increments for each $1 million in orders Sprint submits to us under an equipment purchase agreement to be negotiated between Sprint and us. The fair value of these warrants, which will likely be substantial, will be recognized as a discount on these sales to Sprint. GROSS LOSS. Gross margin was negative 2.5% and negative 13.1% in 1999 and 1998, respectively. The $1,303,000 decrease (80%) in gross loss amount from 1998 to 1999 was primarily due to a favorable change in the product mix (increased sales of multi-user modem/router compared to a single-user modem/router), improved margin for headend routers and reduced costs attributable to manufacturing overhead. RESEARCH AND DEVELOPMENT. Research and development expenses consist primarily of ongoing headend software and cable modem development expenses, as well as design expenditures associated with programs to reduce the cost and improve the manufacturability of our products. Research and development expenses were $4,191,000 and $7,771,000 for 1999 and 1998, respectively, representing 32.2% and 62.6% of net sales, respectively. In 1999, research and development expenses included noncash charges of $668,000 for compensation recognized on stock options granted at exercise prices below fair market value to employees and consultants engaged in research and development. No 21 such charges were incurred in 1998. The decrease in research and development expenses in 1999 as compared to 1998 (46%) was due to reduced staffing and associated engineering costs. Since we were able to obtain additional financing in September 1999, we are expecting to increase our investment in research and development programs in future periods for the purpose of enhancing current products and developing new ones. SALES AND MARKETING. Sales and marketing expenses include primarily salaries and related payroll costs for sales and marketing personnel, commissions, advertising, promotions and travel. Sales and marketing expenses were $1,740,000 and $3,642,000 during 1999 and 1998, respectively, or 13.4% and 29.3% of net sales, respectively. In 1999, sales and marketing expenses included noncash charges of $88,000 for compensation recognized on stock options granted at exercise prices below fair market value for employees and consultants engaged in sales and marketing. No such charges were incurred in 1998. The decrease in sales and marketing expenses in 1999 as compared to 1998 (52%) was due principally to decreased headcount and related payroll costs and reduced expenses for advertising, promotion and travel. We expect to increase our sales and marketing expenses as we expand our sales and marketing efforts in future periods. GENERAL AND ADMINISTRATIVE. General and administrative expenses consist mainly of salaries and benefits for administrative officers and support personnel, travel expenses, legal, accounting and consulting fees. General and administrative expenses were $7,660,000 and $8,933,000 during 1999 and 1998, respectively, representing 58.8% and 71.9% of net sales, respectively. In 1999, general and administrative expenses included noncash charges of $219,000 for compensation recognized on stock options granted at exercise prices below fair market value to employees and consultants engaged in providing general and administrative services. No such charges were incurred in 1998. The decrease in general and administrative expenses in 1999 as compared to 1998 (14%) was primarily due to the decrease in general legal, audit and consulting fees offset by slight increase in reserves in connection with the settlement of certain class action litigation and with an SEC investigation, and costs incurred in the restatement of our financial statements for 1997 (see Item 3 "Legal Proceedings"). INTEREST INCOME (EXPENSE) AND OTHER. The Company incurred net interest expense during 1999 of $8,276,000 compared to $118,000 in 1998. The increase in net interest expense in 1999 was due to amortization of deemed discount of approximately $7.4 million which results from the difference between the conversion price ($2.85) of the $18.1 million of convertible debentures which we agreed to issue on August 30, 1999 and the then market price of our Common Stock ($4.00). This deemed discount was amortized through December 31, 1999 (the date on which the debentures became convertible). YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997. NET SALES. Net sales for 1998 were $12,418,000, compared to net sales of $4,120,000 for 1997. The growth in net sales was primarily due to increased unit shipments of products offset in part by price declines on certain products in connection with volume purchases. In 1998, cable systems operators accounted for approximately 57% of net sales, compared to approximately 59% in 1997; broadband wireless systems operators accounted for approximately 43% of net sales in 1998, compared to 41% in 1997. There were no international sales in 1998. International sales accounted for 13.5% of net sales in 1997. We had two customers that individually accounted for 25% and 13% of net sales during 1998, compared to two customers that accounted for 13% and 12% during 1997. GROSS PROFIT. Gross margin was negative 13.1% and negative 116.0%, in 1998 and 1997, respectively. Gross margin in 1997 reflected an increase in the inventory provision included in cost of sales by $2.6 million as compared to 1996, largely related to excess inventory levels and to shipments made during 1997 in transactions that were not recognized as sales (due to restatement of our financial statements). Such a large inventory provision relative to sales was not made in 1998. Excluding this 22 nonrecurring inventory charge, gross margin for 1997 would have been a negative 40%. The remaining increase in gross margin from 1997 was primarily due to efficiencies resulting from increased unit shipments and to decreased cost per unit. RESEARCH AND DEVELOPMENT. Research and development expenses include ongoing headend, software and cable modem development expenses, as well as design expenditures associated with programs to reduce the cost and improve the manufacturability of our products. Research and development expenses were $7,771,000 and $7,831,000 during 1998 and 1997, respectively, representing 62.6% and 190.1% of net sales, respectively. SALES AND MARKETING. Sales and marketing expenses consist primarily of salaries and related payroll costs of sales and marketing personnel, commissions, advertising, promotions and travel. Sales and marketing expenses were $3,642,000 and $4,678,000 during 1998 and 1997, respectively, representing 29.3% and 113.5% of net sales, respectively. The decrease in sales and marketing expenses in absolute dollars was principally due to (i) decreased headcount and related payroll costs, (ii) unusually high sales commission costs during 1997 as a result of commissions being paid on shipments that were not recognized as sales (due to the restatement of our financial statements) until 1998 and (iii) marketing and promotion costs incurred in 1997 in connection with our Series 2000 product line. GENERAL AND ADMINISTRATIVE. General and administrative expenses consist primarily of executive personnel salaries, provision for doubtful accounts, travel expenses, legal fees and costs of outside services. General and administrative expenses were $8,933,000 and $2,964,000 during 1998 and 1997, respectively, representing 71.9% and 72.0% of net sales, respectively. The increase in absolute dollars in 1998 was due to increased legal costs and reserves in connection with the various legal proceedings in which we were engaged during 1998, including the SEC investigation and the accrual of $1,547,000 related to the class action settlement (see Item 3 "Legal Proceedings"), and in connection with our patent program, increased headcount and related payroll costs and increased expenses for professional and other fees required of a publicly traded company and to support the aforementioned restatement of our financial statements. OTHER CHARGES. Due to the under utilization of our San Jose headquarters, operating expenses include a fourth quarter charge of $1,250,000 reflecting the impairment of leasehold improvements and office furniture and fixtures. Operating expenses also include a nonrecurring charge of $1,283,000 relating to the write off of the rights to certain technology acquired in November 1997. INTEREST INCOME (EXPENSE) AND OTHER. The Company incurred net interest expense during 1998 and 1997 of $118,000 and $1,350,000, respectively. Net interest expense incurred in 1998 decreased in comparison to 1997 due (i) to interest income on increased average cash and cash equivalents resulting primarily from our initial public offering of Common Stock in November 1997, and (ii) to non-cash interest expense of $870,000 incurred in the fourth quarter of 1997 related to issuance of warrants with respect to certain loans obtained in September 1997. LIQUIDITY AND CAPITAL RESOURCES We have historically financed our operations primarily through a combination of debt, equity and equipment lease financing. In 1997, we raised $42.5 million in net proceeds through our initial public offering (in November 1997) and other debt and equity financing. By September 1999, our cash and cash equivalents had been virtually exhausted. In September 1999, we raised $18.1 million through the issuance and sale of convertible debentures to Sprint (in the amount of $11.0 million) and certain venture capital sources (in the amount of $7.1 million). The debentures are due in September 2009 and bear interest at 4% per annum, compounded monthly (accrued interest is automatically added to principal quarterly). The debentures will be convertible into Common Stock at the option of the respective holders at any time after December 31, 1999 and will be convertible into Common Stock at 23 our option at any time after 2000. The conversion price is $2.85 per share, subjected to anti-dilution adjustment (ratchet anti-dilution adjustment for the first six months, and weighted average anti-dilution thereafter). At December 31, 1999, the debentures, including accrued interest added to the principal, would be convertible into 3,907,775 shares of Common Stock at the current conversion price of $2.85. Additionally, Sprint acquired warrants to purchase up to $8.4 million of additional convertible debentures, which debentures were convertible at December 31, 1999 into 2,946,622 shares of Common Stock, on the same terms as the convertible debentures referred to above. The warrants were issued in consideration for Sprint's obligation to purchase at least $10 million of our products on terms that are to be negotiated, and the exercisability of the warrants is tied to Sprint's submission of purchase orders for our products (10% of the warrants become exercisable for each $1 million of purchase orders submitted). Assuming that as of December 31, 1999 Sprint converted all its convertible debentures and exercised all its warrants, it would own 6,854,397 shares of our Common Stock, representing approximately 37.4% of the 18,335,847 shares of our Common Stock that would then be outstanding (assuming no other security holders exercised their options, warrants or conversion privileges). On a fullydiluted basis, assuming that as of December 31, 1999 all other security holders exercised their options, warrants and conversion privileges as well as Sprint, Sprint would own approximately 22.6% of the 30,323,156 fully diluted shares of our Common Stock that would then be outstanding. Under the terms of Sprint's investment, Sprint appointed two of our five directors and has substantial corporate governance rights (including veto rights over most material actions we might take, see Note 9 of the notes to our financial statements below), has a right of first refusal if a third party seeks to acquire us (which right of first refusal Sprint can assign to a third party) and has substantial additional rights and privileges (as described in Item 2 of our Quarterly Report on Form 10-Q for the quarter ended September 30, 1999). In addition to the $18.1 million of convertible debentures referred to above, we have outstanding a senior secured convertible debenture in the face amount of $5.5 million due in April 2002 and bearing interest at 12% per annum, payable quarterly. The conversion price is subject to weighted average antidilution provisions whereby, if we issue shares in the future for consideration below the existing conversion price, then (with certain exceptions) the conversion price will automatically be decreased, allowing the holder of the debenture to receive additional shares of Common Stock upon conversion. During 1999, we issued certain securities which triggered antidilution adjustments to the conversion price of the $5.5 million debenture. These issuances included: (i) Warrants issued to customers to purchase 210,000 shares of common stock at $0.50 per share, (ii) Grants of options under our stock option plans to purchase up to 1,321,907 shares of common stock at $0.50 per share (which was less than the fair market value of the stock on the date of grant), (iii) Issuance of $18.1 million in convertible debentures convertible into common stock at a conversion price of $2.85 per share (subject to adjustment), and (iv) Commitment to issue 3,057,459 shares of common stock in settlement of the Class Action litigation. As a result of these issuances, the conversion price of the $5.5 million debenture decreased to $6.64 (and the total number of shares issuable upon conversion increased to 828,454). Net cash used in operating activities were $8,017,000, $19,302,000, and $21,677 during 1999, 1998 and 1997 respectively. The net cash used in operating activities in 1999 was primarily the result of our net loss of $22,192,000, partially offset by noncash charges attributable to the amortization of the deemed discount on the debentures referred to above amounting to $7,394,000, depreciation and 24 amortization charges of $1,323,000, noncash compensation charges of $1,031,000 recognized on the grant of stock and stock options to employees and consultants at exercise prices which were lower than fair market on the date of grant, and a reduction in current operating assets of $3,158,000. Net cash used in operating activities in 1998 was primarily due to our net loss of $24,625,000, partially offset by noncash charges of $6,336,000 and a decrease in net current assets related to operating activities of $1,013,000. Net cash used in operation in 1997 was primarily the result of our net loss of $21,602,000. Net cash used in investing activities was $21,000, $3,014,000, and $1,559,000 in 1999, 1998, and 1997, respectively. Aggregate capital expenditures for property and equipment (primarily computers, leasehold improvements, furniture, fixtures and engineering test equipment) were $21,000, $3,907,000 and $629,000 in 1999, 1998 and 1997, respectively. The significant increase in capital expenditures in 1998 as compared to 1997 was primarily due to expenditures for leasehold improvements offset by proceeds from short term investments of cash reserves. In the past, we have funded a substantial portion of our property and equipment expenditures from direct vendor leasing programs and third party commercial lease arrangements. At December 31, 1999, we did not have any material commitments for capital expenditures. Net cash provided by financing activities of $17,981,000 in 1999 was primarily due from proceeds from issuance of convertible debentures and related common stock warrants and from issuance of common stock for $18,446,000, offset by repayment of capital lease obligations amounting to $465,000. Net cash used in financing activities was $391,000 in 1998 primarily as a result of payment of $478,000 on capital lease obligations, partially offset by net proceeds of $87,000 from the exercise of stock options. Net cash provided by financing activities in 1997 was $42,508,000 primarily due to our initial public offering in November 1997 and the proceeds of our issuance of a convertible debenture and certain preferred stock earlier in the year, partially offset by repayment of $320,000 in capital lease obligations. At December 31, 1999, our liquidity consisted of cash and cash equivalents of $13,394,000 and working capital of $6,027,000. We had no available line of credit or other source of borrowings or financing. Our principal indebtedness consisted of the $23.8 million of convertible debentures referred to above, of which only $5.5 million is subject to call within the next 12 months. We believe that, with respect to our current operations, our cash balance, plus revenues from operations and non-operating cash receipts, will be sufficient to meet our working capital and expenditure needs for the next 12 months. We may seek additional financing during 2000 through debt, equity or equipment lease financing, or through a combination of financing vehicles. There is no assurance that additional financing will be available to us on acceptable terms, or at all, when we require it. SEASONALITY AND INFLATION We do not believe that our business is seasonal or is impacted by inflation. RISK FACTORS AN INVESTMENT IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD CAREFULLY CONSIDER THE RISKS described BELOW AND THE OTHER INFORMATION IN THIS REPORT ON FORM 10-K BEFORE INVESTING IN OUR COMMON STOCK. THE RISKS DESCRIBED BELOW ARE NOT THE ONLY ONES WE FACE. ADDITIONAL RISKS THAT WE ARE AWARE OF OR THAT WE CURRENTLY BELIEVE ARE IMMATERIAL MAY BECOME IMPORTANT FACTORS THAT AFFECT OUR BUSINESS. IF ANY OF THE FOLLOWING RISKS OCCUR, OR IF OTHERS OCCUR, OUR BUSINESS, OPERATING RESULTS AND FINANCIAL CONDITION COULD BE SERIOUSLY HARMED AND THE PRICE OF OUR COMMON STOCK COULD DECLINE. WE WILL NEED ADDITIONAL CAPITAL. Although we raised over $35 million in net proceeds from our initial public offering in November 1997, our capital resources were virtually exhausted by September 1999. In September, we 25 raised $18.1 million from the issuance and sale of convertible debentures, but we are losing money at a rate that will require us to raise additional capital to stay in business. While we believe we have sufficient capital to continue operations over the next 12 months, we may be required to cut back substantially on our expenditures if we do not raise additional capital this year. Our ability to raise additional capital may be limited by a number of factors, including (i) Sprint's veto rights, right of first refusal and other substantial rights and privileges, (ii) our dependence upon Sprint's business (which is not assured) and, to a lesser extent, the business of a few other customers, (iii) possible continuing uncertainties and concerns as a result of our past financial reporting difficulties, class action litigation and related issues, (iv) our need to increase our work force quickly and effectively and to reduce the cost of our existing products and develop new products, (v) our Common Stock being delisted from the Nasdaq National Market, (vi) uncertainty regarding our financial condition and results of operations, (vii) our history of heavy losses and (viii) the other risk factors referred to below. We can give no assurance that we will be able to raise the additional capital we will need in the future or that any financing we may be able to obtain will not be on terms that are detrimental to our business and our ability to raise additional capital. WE ARE LARGELY DEPENDENT ON SPRINT. In September 1999, Sprint invested $11 million in purchasing convertible debentures from us and acquired warrants to purchase additional convertible debentures. The warrants are in consideration for a commitment by Sprint to purchase $10 million of our products by the end of 2000, but the terms of those purchases are subject to negotiation. We have not yet agreed upon terms after six months of negotiations. Sprint has acquired our principal wireless customers, and we expect that our future business will come primarily from wireless customers. Accordingly, our future business will probably be substantially dependent upon orders from Sprint or from companies selling to Sprint. Sprint is considering using our products in connection with the first phase of its roll-out of wireless Internet access services, but it has made no commitment to do so and there can be no assurance that it will do so. We have only a small number of other customers. In 1999, RCN Corporation (a cable system operator) accounted for 31% of our net sales, and wireless operators now owned by Sprint accounted for 28%. In 1998, RCN and Knology Holdings, Inc. (another cable customer) accounted for 25% and 13% of our net sales, respectively. RCN has announced that it will no longer purchase our product for installations in new markets, and we expect our future sales to other cable customers to be sharply reduced as well. Since our customer base is highly concentrated, the loss of any customer could significantly hurt our business. In connection with Sprint's investment in us, Sprint obtained substantial corporate governance rights. Two of our five directors are Sprint designees, and if Sprint exercised all its warrants and conversion privileges (and if no one else did so), Sprint would own as of December 31, 1999 approximately 37.4% of our common stock on a beneficial ownership basis and 22.6% of our Common Stockon a fully diluted basis (as discussed in Item 1 above). Under the terms of our agreements with Sprint, we cannot issue any securities or, in most cases, take material corporate action without Sprint's approval. Sprint has other rights and privileges, including pre-emptive rights and a right of first refusal in the case of any proposed change of control transaction. As a result, Sprint will have a great deal of influence on us in the future. We have no assurance that Sprint will exercise this influence in our best interests, as Sprint's interests are in many respects different than ours (e.g., in deciding whether to purchase our products, in negotiating the price and other terms of any of those purchases and in deciding whether or not to support any future investment in us or any future strategic partnering or sale opportunity). WE HAVE NOT BEEN PROFITABLE TO DATE, AND WE MAY NEVER BE PROFITABLE. WE EXPECT CONTINUING LOSSES FOR THE FORESEEABLE FUTURE. 26 We have not been profitable to date, and we cannot assure you that we will ever achieve or sustain profitability. We were organized in 1990 and have had operating losses each year since then. Our accumulated deficit was $85,761,000 as of December 31, 1999 and $63,569,000 as of December 31, 1998. The revenue and profit potential of our business is unproven. The market for our products has only recently begun to develop, is rapidly changing, has an increasing number of competing technologies and competitors, and many of the competitors are significantly larger than we are. We have had negative gross margins in prior periods and the price pressures on sales of our products continues. We expect to incur losses for the foreseeable future. WE ARE LARGELY DEPENDENT ON THE WIRELESS MARKET, AN EMERGING MARKET SUBJECT TO UNCERTAINTIES. While in the past over half our sales have been to cable customers, we have been essentially shut out of the market for new installations by cable customers (primarily because our products do not meet the cable DOCSIS standard), and we are now largely dependent on sales to broadband wireless system operators. The adoption of the DOCSIS standard has not had a significant effect on wireless customers. We believe that products meeting the present DOCSIS standard will not perform well over wireless, but this could change in the future as a result of modifications in the DOCSIS TDMA protocol, improvements in technology or other developments. The emergence of industry standards or specifications in the wireless industry in the future could hurt our ability to sell our products in the wireless market. The market for broadband Internet access products has only recently begun to develop. In the past, the broadband wireless industry has been adversely affected by chronic undercapitalization. The weak financial condition of many existing and potential customers has made them reluctant to undertake the substantial capital commitments necessary to introduce and market Internet access products and services. A number of wireless customers have been unable to pay for the products we shipped to them. Recent investments by Sprint and MCI in wireless operators is expected to have a significant effect upon the industry. One effect has been to attract major competitors. Cisco has announced that it is developing high speed Internet access products for wireless applications using a new technology that Cisco claims will replace existing technologies, including ours. We face other major competition in the wireless market as well. Our principal reliance is on Sprint's future business, but Sprint has not yet purchased our products for new installations or chosen them for the first phase of its wireless service roll out. The wireless industry itself competes with other technologies for providing high speed Internet access, including cable and DSL. Cable companies providing Internet access and telephone companies providing Internet access through DSL are expanding into areas that were primarily considered commercially reachable only by wireless service. The principal disadvantage of wireless cable is that it requires a direct line of sight between the wireless cable system operator's antenna and the customer's location. Physical interruptions such as buildings, trees or uneven terrain can interfere with reception, thus limiting broadband wireless system operators' customer bases. In addition, wireless customers face a number of licensing and regulatory restrictions. Conditions in the wireless market could change rapidly and significantly as a result of technological changes, and the development and market acceptance of alternative technologies could decrease the demand for our products or render them obsolete. There can be no assurance that the wireless industry market will grow or that our products will be accepted in the emerging market. 27 WE FACE SIGNIFICANT COMPETITION, INCLUDING COMPETITION FROM LARGE COMPANIES. Our market is intensely competitive, and we expect even more competition in the future. Most of our competitors are substantially larger and have greater financial, technical, marketing, distribution, customer support and other resources, as well as greater name recognition and access to customers, than we have. One of our principal competitors in the wireless market in Cisco, which has recently announced that it has a competitive wireless technology that will provide superior cost/benefit performance and will operate successfully in environments in which it is difficult to obtain a clear line of sight as well as environments with multipath interference (around buildings, flat roofs and water, for example). Although we believe Cisco has not yet installed a commercially operating system using this technology, we cannot assure you that it will not do so or that Cisco's system will not provide benefits superior to ours. Other principal competitors include ADC, which is currently offering the Phasecom (Vyyo) product and has creditability from its MMDS, WCS and UHF transmitter division (formerly known as ITS Corp.); COM21, which is attempting to adapt its proprietary cable system for wireless; and Newbridge, which acquired much of Stanford Telecom, a manufacturer of QPSK products. Other competitors may be attracted by the recent capital infusion in the industry by Sprint and MCI. Some of our partners are major system integrators who could choose to develop their own designs in-house. Nortel and Lucent have shown an interest in entering the industry. Telephone companies are learning to deploy forms of DSL to provide high speed Internet access over existing telephone wires. They are also working with computer vendors to have DSL cards installed when the computers are manufactured, thereby reducing the telephone companies' distribution costs. DSL and cable Internet access companies are continuing to expand the reach of their services, thereby providing direct competition for wireless even in areas that were previously considered too remote for economical access via DSL or cable. To be successful, we must respond promptly and effectively to the challenges of new competitive products and tactics, alternate technologies, technological changes and evolving industry standards. We must continue to develop products with improved performance over two-way wireless transmission facilities. There can be no assurance that we will meet these challenges. EVOLVING INDUSTRY STANDARDS, COMPETING TECHNOLOGIES AND TECHNOLOGICAL CHANGES MAY HURT OUR BUSINESS. Our products are not in compliance with the DOCSIS standard that has been adopted by cable operators or with the DAVIC specifications that are supported in Europe. The emergence of these standards has hurt our business, and the adoption of other industry standards in the future could have a further adverse effect. The market for high speed Internet access products is characterized by rapidly changing technologies and short product life cycles. The rapid development of new competing technologies increases the risk that the competitiveness of our products could be adversely affected. Future advances in technology may not be beneficial to, or compatible with, our business and products, and we might not be able to respond to the advances, or our response might not be timely or cost-effective. Market acceptance of new technologies and our failure to develop and introduce new products and enhancements to keep pace with technological developments could hurt our business. WE FACE LITIGATION RISKS. Although the class action lawsuits against us have been settled and we have tentatively settled potential litigation with the SEC, we continue to face litigation with Pacific Monolithics (see Item 3 28 "Legal Proceedings"). It is difficult for us to evaluate what the outcome of the Pacific Monolithics litigation will be. It is possible that we may be exposed to further litigation in the future. Litigation may be necessary in the future to enforce our intellectual property rights or to determine the validity and scope of our patents or of the proprietary rights of others. Such litigation might result in substantial costs and diversion of resources and management attention. Furthermore, our business activities may infringe upon the proprietary rights of others, and in the past third parties have claimed, and may in the future claim, infringement by our software or products. Any such claims, with or without merit, could result in significant litigation costs and diversion of management attention, and could require us to enter into royalty and license agreements that may be disadvantageous to us or suffer other harm to our business. If litigation is successful against us, it could result in invalidation of our proprietary rights and liability for damages, which could have a harmful effect on our business. We initiated one patent infringement litigation to enforce our patent rights, and it resulted in a settlement in which we granted licenses to the defendants containing terms that are in some respects favorable to them, including a right of first refusal to purchase our patents that we granted to one defendant (Com21, Inc.) in the event that we propose in the future to sell our patents (whether we separately or together with our other assets) to any third party. Nonetheless, we may find it necessary to institute further infringement litigation in the future, or whether third parties will bring litigation against us challenging our patents. REDUCTION IN OUR EXPENDITURES AND IN THE NUMBER OF OUR EMPLOYEES HAVE HURT OUR BUSINESS. WE PLAN TO INCREASE EXPENDITURES IN THE FUTURE, BUT WE MIGHT NOT BE ABLE TO DO SO EFFECTIVELY. Commencing in the latter part of 1998 and continuing through the first three quarters of 1999, we reduced our expenditures on research and development and on other aspects of our business. We also reduced the number of our employees. While we believe these reductions were necessary to conserve our capital resources, they have limited and delayed the enhancement of our products and our development of new products, and our sales and marketing efforts have been adversely affected. These limitations on our activities have hurt us competitively and may continue to harm our business in the future. In September 1999, we raised $18.1 million and we are now attempting to hire additional personnel on an expedited basis in order to achieve our product development goals. We operate in an extremely competitive environment for technical and other qualified personnel, and there can be no assurance that we will be able to achieve our hiring and product development goals. MARKET PRESSURE TO REDUCE PRICES MAY HURT OUR BUSINESS. The market has historically demanded increasingly lower prices for our products, and we expect downward pressure on the prices of our products to continue. Customers wishing to purchase client modems generally must also purchase an Ethernet adapter for their computer. These prices make our products relatively expensive for the consumer electronics and the small office or home office markets. Market acceptance of our products, and our future success, will depend in significant part on reductions in the unit cost of our client modems. In a number of instances, the prices of our competitors' products are lower than ours. Our ability to reduce our prices has been limited by a number of factors, including our reliance on a single manufacturer of our modems and on single- sources for certain of the components of our products. One of the principal objectives of our research and development efforts has been to reduce the cost of our products through design and engineering changes, although, as indicated above, we have recently had to reduce the scope of our research and development efforts due to lack of capital resources. We have no assurance that we will be able to redesign our products to achieve substantial cost reductions or that we will otherwise be able to reduce our manufacturing and other costs, or that any reductions in cost will be sufficient to improve our gross margins, which have been negative until the fourth quarter of 1999 and which must substantially improve in order for us to operate profitably. 29 We expect that the market price pressure to reduce the prices on our products will continue to exert downward pressure on our gross margins. Our gross margins are also affected by the sales mix of our headends and routers. In the past the sales mix has been weighted toward our lower-margin routers, and we anticipate that this will continue. WE RELY ON A SINGLE MANUFACTURER FOR OUR END-USER PRODUCTS AND ON SINGLE-SOURCE COMPONENTS. Our Series 2000 client routers are manufactured only by Sharp, and we plan to have Sharp manufacture our new Wireless Broadband Router as well. Our inability to develop alternative manufacturing sources has adversely affected our ability to reduce the manufacturing costs of our modems despite competitive pressures that have caused us to reduce our selling prices. We expect downward pressure on the prices of our products to continue. In order for us to compete effectively in the sale of products, we will need to further reduce our prices, and the underlying costs. As long as Sharp is the only manufacturing source of our routers, our ability to reduce the manufacturing costs may be limited. We have subcontractors for the standard components and subassemblies for our headend products. Standard components include the Sun Microsystems Sparc 5 workstation and its Sun Operating System (OS); and Intel's Ethernet cards and Pentium-based PCI processor cards. Our CyberManager 2000 Router is built on the Sparc 5/Sun OS platform by installing our proprietary network subscriber and network management software, HybridWare. Our CyberMaster Downstream Router ("CMD") and CyberMaster Upstream Router ("CMU") are built on Intel's Pentium-based PCI/ISA-based computer cards installed in standard rack-mounted backplans from Industrial Computer Source that are configured to our specifications. Our proprietary software, Hybrid OS, is overlaid on a standard Berkeley Systems operating system for the CMD and CMU. We are dependent upon these and other key suppliers for a number of the components for our 64-QAM products. There is only one vendor for the 64-QAM demodulator semiconductors used in each of our new modem and WBR designs, and in past periods these semiconductors have been in short supply. The CCM and N type routers use BroadCom chip sets. Hitachi is the sole supplier of the processors used in certain of our routers. The former Telecom Component Products Group of Standard Telecom (now part of Intel) is currently the sole supplier for certain components used in our products. There can be no assurance that these and other single-source components will continue to be available to us, or that deliveries to us will not be interrupted or delayed (due to shortages or other factors). Having single-source components also makes it more difficult for us to reduce our cost for these components and makes us vulnerable to price increases by the component manufacturer. Any significant interruption or delay in the supply of components for our products or any increase in our costs for components, or our inability to reduce component costs, could hurt our business. OUR LONG SALES CYCLE MAKES IT DIFFICULT FOR US TO FORECAST REVENUES, REQUIRES US TO INCUR HIGH SALES COSTS AND AGGRAVATES FLUCTUATIONS IN QUARTERLY OPERATING RESULTS. The sale of our products typically involves a great deal of time and expense. Customers usually want to engage in significant technical evaluation before making a purchase commitment. There are often delays associated with our customers' internal procedures to approve the large capital expenditures that are typically involved in purchasing our products. This makes it difficult for us to predict revenue. In addition, since we incur sales costs before we make a sale or recognize related revenues, the length and uncertainty of our sales cycle increases the volatility of our operating results because we may have high costs without offsetting revenues. 30 These factors, together with the small number of our customers and the other factors referred to in this "Risk Factors" section, tend to cause our operating results to vary substantially from quarter to quarter. These fluctuations have adversely affected the prices of our Common Stock in the past and may adversely affect such prices in the future. WE DEPEND ON KEY PERSONNEL. Our success depends in significant part upon the continued services of our key technical, sales and management personnel. Any officer or employee can terminate his or her relationship with us at any time. Our future success will also depend on our ability to attract, train, retain and motivate highly qualified technical, marketing, sales and management personnel. Competition for such personnel is intense, and there can be no assurance that we will be able to attract and retain key personnel. The loss of the services of one or more of our key personnel or our failure to attract additional qualified personnel could have a material adverse effect on our business, operating results and financial condition. WE MAY BE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY. We rely on a combination of patent, trade secret, copyrights and trademark laws and contractual restrictions to establish and protect our intellectual property rights. We cannot assure you that our patents will cover all the aspects of our technology that require patent protection or that our patents will not be challenged or invalidated, or that the claims allowed in our patents will be of sufficient scope or strength to provide meaningful protection or commercial advantage to us. We have initiated one patent infringement lawsuit to enforce our patent rights, and it resulted in a settlement in which we granted licenses to the defendants containing certain terms that are in some respects favorable for them, including a right of first refusal to purchase our patents that we granted to one defendant (Com21, Inc.) in the event that in the future we propose to sell our patents (separately or together with our other assets) to any third party. We do not know whether we will bring litigation in the future in an effort to assert our patent rights, or whether other companies will bring litigation challenging our patents. Any such litigation could be time consuming and costly for us and could result in our patents being held invalid or unenforceable. Furthermore, even if the patents are upheld or are not challenged, third parties might be able to develop other technologies or products without infringing any such patents. We have entered into confidentiality and invention assignment agreements with our employees, and we enter into non-disclosure agreements with certain of our suppliers, distributors and customers, in order to limit access to and disclosure of our proprietary information. There can be no assurance that these contractual arrangements or the other steps we take to protect our intellectual property will prove sufficient to prevent misappropriation of our technology or deter independent third-party development of similar technologies. The laws of certain foreign countries may not protect our products or intellectual property rights to the same extent as do the laws of the United States. We have in the past, received, and may in the future receive, notices from third parties claiming that our products, software or asserted proprietary rights infringe the proprietary rights of third parties. We expect that developers of wireless and cable modems will be increasingly subject to infringement claims as the number of products and competitors in our market grows. While we are not currently subject to any such claim, any future claim, with or without merit, could be time consuming, result in costly litigation, cause product shipment delays or require us to enter into royalty or licensing agreements. Such royalty or licensing agreements might not be available on terms acceptable to us or at all. In the future, we may also file lawsuits to enforce our intellectual property rights, to protect our trade secrets or to determine the validity and scope of the proprietary rights of others. Such litigation, 31 whether successful or not, could result in substantial costs and diversion of resources. As indicated above we were engaged during 1998 in an infringement lawsuit that we brought against two third parties. In 1999, in order to stop the diversion of resources caused by the litigation, we entered into a settlement pursuant to which the defendants obtained licenses to our products on terms that in certain respects were favorable to the defendants. Nonetheless, we may find it necessary to institute further infringement litigation in the future. DEFECTS IN OUR PRODUCTS COULD CAUSE PRODUCT RETURNS AND PRODUCT LIABILITY. Products as complex as those offered by us frequently contain undetected errors, defects or failures, especially when first introduced or when new versions are released. In the past, such errors have occurred in our products and there can be no assurance that errors will not be found in our current and future products. The occurrence of such errors, defects or failures could result in product returns and other losses. They could also result in the loss of or delay in market acceptance of our products. GOVERNMENT REGULATION MAY ADVERSELY AFFECT OUR BUSINESS. We are subject to varying degrees of governmental, federal, state and local regulation. For instance, the jurisdiction of the FCC extends to high speed Internet access products such as ours. The FCC has promulgated regulations that, among other things, set installation and equipment standards for communications systems. Further, regulation of our customers may adversely affect our business. Changes in previous decisions (filing window for 2-way licenses) by FCC to open up MMDS spectrum brand full flexible use for upstream and downstream will adversely affect our future growth. There can be no assurance that the FCC will or will not change its decisions on opening the MMDS spectrum for full utilization which could limit the future growth of the wireless industry. VOLATILITY OF OUR STOCK PRICE. Our Common Stock has been delisted from the Nasdaq National Market and has not traded on Nasdaq since mid-June 1998. Until June 1999, there had not been current information regarding our business and financial condition for over one year, and our previous financial statements have been restated. The market price of our Common Stock has fluctuated in the past and is likely to fluctuate in the future. INTERNATIONAL SALES COULD INVOLVE GREATER RISKS. To date, sales of our products outside of the United States have represented an insignificant portion of our net sales. To the extent that we sell our products internationally, such sales will be subject to a number of risks, including longer payment cycles, export and import restrictions, foreign regulatory requirements, greater difficulty in accounts receivable collection, potentially adverse tax consequences, currency fluctuations and political and economic instability. IMPACT OF YEAR 2000 Even though we have not experienced any immediate adverse impact from the transition to the year 2000, we cannot provide any assurance that our suppliers and customers have not been affected in a manner that is not yet apparent. In addition, some computer programs which may function properly at the beginning of the year 2000 may not have been programmed to process the year 2000 as a leap year, and any negative effects of this failure remain unknown. As a result, we will continue to monitor our year 2000 compliance and the year 2000 compliance of our suppliers and customers. 32 The year 2000 poses issues for business and consumer computing, particularly the functionality of software for two-digit storage of dates and special meanings for dates such as 9/9/99. The problem exists for many kinds of software, including software for mainframes, personal computers and embedded systems. In assessing the effect of the year 2000 problem, we determined that there existed three general areas that needed to be evaluated: - Software applications in products sold to customers; - Internal infrastructure; and - Supplier/third party relationships. A discussion of the various activities related to assessment and actions resulting from those evaluations is below. SOFTWARE APPLICATIONS IN PRODUCTS SOLD TO CUSTOMERS We did not distribute any software applications or any hardware that were not declared to be year 2000 compliant. If, however, the computer systems that view or utilize our applications are not year 2000 compliant, the application may not function properly. Given the variability of definitions of compliance with year 2000 issues and the many different combinations of software, firmware and hardware that may use our applications, we cannot estimate at this time what year 2000 deficiencies may exist or what difficulties they may cause, including any product liability costs for our customers and adverse effects on our business. INTERNAL INFRASTRUCTURE We have required that all purchased technology be year 2000 compliant.The costs related to these efforts were not material to our business. SUPPLIERS/THIRD PARTY RELATIONSHIPS We rely on outside vendors for water, electrical and telecommunications services as well as climate control and other infrastructure services. We did not independently evaluate the year 2000 compliance of the systems utilized to supply these services. However, we have received assurance of compliance from the providers of these services. Any failure of these third parties to resolve year 2000 problems with their systems could have a material adverse effect on our business. CONTINGENCY PLANS Based on these actions, we have not developed a formal plan to be implemented as part of our efforts to identify and correct year 2000 problems affecting our internal systems. However, if we believe it is necessary, we may take the following actions: - Short to medium term use of backup equipment and software; and - Increased work hours for our personnel. If we are required to implement any of these contingency plans, the plans could have a material adverse effect on our business. Based on the actions taken to date, and the lack of any problems to date, we are reasonably certain that we have identified and resolved all year 2000 problems that could hurt our business. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable. 33 ITEM 8. FINANCIAL STATEMENTS INDEX TO FINANCIAL STATEMENTS Independent Auditor's Report................................ 35 Balance Sheets as of December 31, 1999 and 1998............. 36 Statements of Operations for the Years Ended December 31, 1999, 1998 and 1997....................................... 37 Statement of Stockholders' Equity (Deficit) for the Years Ended December 31, 1999, 1998 and 1997............................................. 38 Statements of Cash Flows for the Years Ended December 31, 1999, 1998 and 1997....................................... 39 Notes to Financial Statements............................... 40
34 INDEPENDENT AUDITOR'S REPORT The Stockholders and Board of Directors Hybrid Networks, Inc. San Jose, California We have audited the accompanying balance sheets of Hybrid Networks, Inc. as of December 31, 1999 and 1998, and the related statements of operations, stockholders' equity (deficit), and cash flows for each of the years in the three year period ended December 31, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits 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 Hybrid Networks, Inc. as of December 31, 1999 and 1998, and the results of its operations and its cash flows for each of the years in the three year period ended December 31, 1999, in conformity with generally accepted accounting principles. /s/ HEIN + ASSOCIATES LLP HEIN + ASSOCIATES LLP Certified Public Accountants Orange, California February 10, 2000 35 HYBRID NETWORKS, INC. BALANCE SHEETS (IN THOUSANDS, EXCEPT PER SHARE DATA)
DECEMBER 31, ------------------- 1999 1998 -------- -------- ASSETS Current assets: Cash and cash equivalents................................. $13,394 $ 3,451 Restricted cash........................................... -- 515 Accounts receivable, net of allowance for doubtful accounts of $200 in 1999 and 1998....................... 1,138 1,433 Inventories............................................... 3,755 5,224 Prepaid expenses and other current assets................. 234 864 ------- ------- Total current assets.................................... 18,521 11,487 Property and equipment, net................................. 2,244 3,438 Intangibles and other assets................................ 387 495 ------- ------- Total assets............................................ $21,152 $15,420 ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current liabilities: Convertible debenture..................................... $ 5,500 $ 5,500 Current portion of capital lease obligations.............. 336 465 Accounts payable.......................................... 2,035 2,063 Accrued liabilities and other............................. 4,623 4,271 ------- ------- Total current liabilities............................... 12,494 12,299 Convertible debentures--long term........................... 18,327 -- Capital lease obligations, less current portion............. 29 365 Other long-term liabilities................................. 122 54 ------- ------- Total liabilities....................................... 30,972 12,718 ------- ------- Commitments and contingencies (Notes 2, 5, 7, 8 and 9) Stockholders' equity (deficit): Convertible preferred stock, $.001 par value: Authorized: 5,000 shares; Issued and outstanding: no shares in 1999 or 1998....... -- -- Common stock, $.001 par value: Authorized: 100,000 shares; Issued and outstanding: 11,481 shares in 1999 and 10,473 shares in 1998........................................ 11 10 Additional paid-in capital................................ 75,823 66,261 Unrealized gain on available-for-sale securities.......... 107 -- Accumulated deficit....................................... (85,761) (63,569) ------- ------- Total stockholders' equity (deficit).................... (9,820) 2,702 ------- ------- Total liabilities and stockholders' equity (deficit).... $21,152 $15,420 ======= =======
The accompanying notes are an integral part of these financial statements. 36 HYBRID NETWORKS, INC. STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA)
YEARS ENDED DECEMBER 31, ------------------------------ 1999 1998 1997 -------- -------- -------- Net sales................................................... $ 13,016 $ 12,418 $ 4,120 Cost of sales............................................... 13,341 14,046 8,899 -------- -------- -------- Gross loss.................................................. (325) (1,628) (4,779) -------- -------- -------- Operating expenses: Research and development.................................. 4,191 7,771 7,831 Sales and marketing....................................... 1,740 3,642 4,678 General and administrative................................ 7,660 8,933 2,964 Asset impairment charge................................... -- 1,250 -- Write off of technology license........................... -- 1,283 -- -------- -------- -------- Total operating expenses................................ 13,591 22,879 15,473 -------- -------- -------- Loss from operations.................................. (13,916) (24,507) (20,252) Interest income and other................................... 171 779 316 Interest expense............................................ (8,447) (897) (1,666) -------- -------- -------- Net loss.............................................. $(22,192) $(24,625) $(21,602) ======== ======== ======== Basic and diluted loss per share............................ $ (2.08) $ (2.37) $ (6.10) ======== ======== ======== Shares used in basic and diluted per share calculation...... 10,678 10,410 3,541 ======== ======== ========
The accompanying notes are an integral part of these financial statements. 37 HYBRID NETWORKS, INC. STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT) (IN THOUSANDS)
PREFERRED STOCK COMMON STOCK ADDITIONAL ------------------- ------------------- PAID-IN COMPREHENSIVE SHARES AMOUNT SHARES AMOUNT CAPITAL INCOME (LOSS) -------- -------- -------- -------- ---------- -------------- Balances, January 1, 1997...................... 12,069 $ 12 2,520 $ 2 $25,037 $ -- Exercise of common stock options............. -- -- 150 -- 94 -- Repurchase of common stock................... -- -- (12) -- (7) -- Grant of stock bonus awards.................. -- -- 13 -- 26 -- Issuance of common stock for services rendered................................... -- -- 9 -- 181 -- Issuance of Series H preferred stock......... 494 1 1,999 -- Issuance of warrants in connection with convertible subordinated notes............. -- -- -- -- 870 -- Issuance of warrants in connection with technology support and development agreement.................................. -- -- -- -- 2,200 -- Issuance of common stock, net of issuance costs of $1,185............................ -- -- 2,836 3 35,737 -- Conversion of preferred stock to common stock...................................... (12,563) (13) 4,653 5 8 -- Issuance of common stock upon net exercise of warrants................................... -- -- 176 -- -- -- Unrealized gain on investments............... -- -- -- -- -- 92 Net loss..................................... -- -- -- -- -- -- Comprehensive loss........................... -- -- -- -- -- -- ------- ---- ------ ---- ------- ---- Balances, December 31, 1997.................... -- -- 10,345 10 66,145 92 Exercise of common stock options............. -- -- 127 -- 87 -- Grant of stock bonus awards.................. -- -- 1 5 -- Charge due to acceleration of options........ -- -- -- -- 24 -- Reclassification for gains included in net loss....................................... -- -- -- -- -- (92) Net loss..................................... -- -- -- -- -- -- Comprehensive loss........................... -- -- -- -- -- -- ------- ---- ------ ---- ------- ---- Balances, December 31, 1998.................... -- -- 10,473 10 66,261 -- Exercise of common stock options............. -- -- 251 -- 345 -- Stock issued for services.................... -- -- 7 -- 56 -- Sales discount recognized on issuance of warrants to customers...................... -- -- -- -- 407 -- Compensation recognized on issuance of stock options.................................... -- -- -- -- 975 -- Class action settlement stock issued......... -- -- 750 1 385 -- Discount related to beneficial conversion of debentures................................. -- -- -- -- 7,394 -- Unrealized gain on investments............... -- -- -- -- 107 Net loss..................................... -- -- -- -- -- -- Comprehensive loss........................... -- -- -- -- -- -- ------- ---- ------ ---- ------- ---- Balances, December 31, 1999.................... -- $ -- 11,481 $ 11 $75,823 $107 ======= ==== ====== ==== ======= ==== ACCUMULATED COMPREHENSIVE DEFICIT TOTAL LOSS ------------ -------- -------------- Balances, January 1, 1997...................... $(17,342) $ 7,709 Exercise of common stock options............. -- 94 Repurchase of common stock................... -- (7) Grant of stock bonus awards.................. -- 26 Issuance of common stock for services rendered................................... -- 181 Issuance of Series H preferred stock......... -- 2,000 Issuance of warrants in connection with convertible subordinated notes............. -- 870 Issuance of warrants in connection with technology support and development agreement.................................. -- 2,200 Issuance of common stock, net of issuance costs of $1,185............................ -- 35,740 Conversion of preferred stock to common stock...................................... -- -- Issuance of common stock upon net exercise of warrants................................... -- -- Unrealized gain on investments............... -- 92 $ 92 Net loss..................................... (21,602) (21,602) (21,602) -------- Comprehensive loss........................... -- -- $(21,510) -------- -------- ======== Balances, December 31, 1997.................... (38,944) 27,303 Exercise of common stock options............. -- 87 Grant of stock bonus awards.................. -- 5 Charge due to acceleration of options........ -- 24 Reclassification for gains included in net loss....................................... -- (92) $ (92) Net loss..................................... (24,625) (24,625) (24,625) -------- Comprehensive loss........................... -- -- $(24,717) -------- -------- ======== Balances, December 31, 1998.................... (63,569) 2,702 Exercise of common stock options............. -- 345 Stock issued for services.................... -- 56 Sales discount recognized on issuance of warrants to customers...................... -- 407 Compensation recognized on issuance of stock options.................................... -- 975 Class action settlement stock issued......... -- 386 Discount related to beneficial conversion of debentures................................. -- 7,394 Unrealized gain on investments............... -- 107 $ 107 Net loss..................................... (22,192) (22,192) (22,192) -------- Comprehensive loss........................... -- -- $(22,085) -------- -------- ======== Balances, December 31, 1999.................... $(85,761) $ (9,820) ======== ========
The accompanying notes are an integral part of these financial statements. 38 HYBRID NETWORKS, INC. STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEARS ENDED DECEMBER 31, ------------------------------ 1999 1998 1997 -------- -------- -------- Cash flows from operating activities: Net loss.................................................. $(22,192) $(24,625) $(21,602) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization........................... 1,323 1,883 1,130 Amortization of discount related to beneficial conversion feature..................................... 7,394 -- -- Asset impairment charge................................. -- 1,250 -- Provision for doubtful accounts......................... -- 200 -- Provision for excess and obsolete inventory............. 529 1,691 2,759 Compensation recognized upon issuance of stock and stock options................................................ 1,031 -- 181 Sales discounts recognized on issuance of warrants...... 407 -- -- Stock bonus............................................. -- 5 26 Charge for accelerated vesting of options............... -- 24 -- Interest added to principal of convertible debentures... 226 -- -- Interest related to issuance of warrant in connection with convertible subordinated note..................... -- -- 870 Gain on available for sale of securities................ 107 -- Write off technology license............................ -- 1,283 -- Changes in assets and liabilities: Restricted cash....................................... 515 (515) -- Accounts receivable................................... 295 (505) 220 Inventories........................................... 940 (645) (8,086) Prepaid expenses and other current assets............. 630 (502) (237) Accounts payable...................................... (28) (222) 861 Other long-term liabilities........................... 68 -- -- Accrued liabilities and other......................... 738 1,376 2,201 -------- -------- -------- Net cash used in operating activities................. (8,017) (19,302) (21,677) -------- -------- -------- Cash flows from investing activities: Purchase of property and equipment........................ (21) (3,907) (629) Disposal of property and equipment........................ -- 74 -- Change in other assets.................................... -- (74) (37) Purchase of short-term investments........................ -- (11,772) (893) Proceeds from disposal of short-term investments.......... -- 12,665 -- -------- -------- -------- Net cash used in investing activities................. (21) (3,014) (1,559) -------- -------- -------- Cash flows from financing activities: Repayment of capital lease obligations.................... (465) (478) (320) Net proceeds from issuance of preferred stock............. -- -- 2,000 Net proceeds from issuance of common stock................ 345 87 35,835 Repurchase of common stock................................ -- -- (7) Proceeds from issuance of convertible debentures and related common stock warrants........................... 18,101 -- 6,882 Repayment of convertible subordinated note payable and related common stock warrants........................... -- -- (6,882) Net proceeds from issuance of convertible debenture....... -- -- 5,000 -------- -------- -------- Net cash provided by (used in) financing activities... 17,981 (391) 42,508 -------- -------- -------- Increase (Decrease) in cash and cash equivalents............ 9,943 (22,707) 19,272 Cash and cash equivalents, beginning of period.............. 3,451 26,158 6,886 -------- -------- -------- Cash and cash equivalents, end of period.................... $ 13,394 $ 3,451 $ 26,158 ======== ======== ======== SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING ACTIVITIES: Common stock issued to settle class action liability...... $ 386 $ -- $ -- Property and equipment acquired under capital leases...... -- 280 688 Issuance of warrants in connection with technology support and development agreement............................... -- -- 2,200 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Interest paid............................................. 710 802 718 Income taxes paid......................................... 1 1 1
The accompanying notes are an integral part of these financial statements. 39 HYBRID NETWORKS, INC. NOTES TO FINANCIAL STATEMENTS 1. FORMATION AND BUSINESS OF THE COMPANY The Company, which was incorporated in Delaware on June 6, 1990, is a broadband access equipment company that designs, develops, manufactures and markets wireless and cable systems that provide high speed access to the Internet and corporate intranets for both businesses and consumers. The Company's products remove the bottleneck over the local connection to the end user which causes slow response time for those accessing bandwidth intensive information. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION The Company was organized in 1990 and has had operating losses since then. The Company's accumulated deficit was $85,761,000 as of December 31, 1999 and $63,569,000 as of December 31, 1998. Although the Company has raised large sums of capital in the past, including over $35 million in net proceeds from its initial public offering in November 1997 and over $18 million from the issuance and sale of convertible debentures in September 1999, the Company is losing money at a rate that will require it to raise additional capital in the future. Management has taken steps to increase sales, including negotiating an equipment purchase agreement with Sprint Corporation (as discussed in Note 5). Additionally, the Company may seek additional financing during 2000 through debt, equity or equipment lease financing or through a combination of financing vehicles (including the possible exercise of warrants issued to Sprint as discussed in Note 5). The Company's ability to continue as a going concern is dependent on obtaining additional financing to fund its current operations and, ultimately, generating sufficient revenues to obtain profitable operations. There is no assurance that the Company will be successful in these efforts. At December 31, 1999, the Company's liquidity consisted of cash and cash equivalents of $13,394,000 and working capital of $6,027,000. The Company's principal indebtedness consisted of $23.8 million in convertible debentures, of which only $5.5 million was due within the next 12 months. The Company believes that its cash balance, plus anticipated revenues from operations, and non- operating cash receipts will be sufficient to meet the Company's working capital and expenditure needs for the next 12 months. 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 reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The Company's financial statements are based upon a number of significant estimates, including the estimated useful lives selected for property and equipment, accrued liabilities related to product warranties and litigation, and valuation allowances for accounts receivable, inventory and property and equipment. Due to uncertainties inherent in the estimation process, it is at least reasonably possible that these estimates will be further revised in the near term and such revisions could be material. 40 HYBRID NETWORKS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) FAIR VALUE OF FINANCIAL INSTRUMENTS The estimated fair values for financial instruments under SFAS No. 107 "Disclosures About Fair Value of Financial Instruments," are determined at discrete points in time based on relevant market information. These estimates involve uncertainties and cannot be determined with precision. The fair value of available-for-sale securities is based on market prices for the securities and is equivalent to its carrying value. The fair values of capital leases and convertible debentures are based upon borrowing rates that are available to the Company for obligations with similar terms, collateral, and maturity. At December 31, 1999, the estimated fair value of these liabilities approximate their carrying values. BUSINESS RISKS AND CREDIT CONCENTRATION The Company sells its products primarily to broadband wireless system operators and cable system operators, principally in North America. The Company performs ongoing credit evaluations of its customers and does not require collateral. The Company also maintains allowances for potential losses on collectability of accounts receivable, as needed, and such losses have been within management's expectations. The Company operates in the intensely competitive and rapidly changing communications industry which has been characterized by rapid technological change, evolving industry standards and federal, state and local regulation which may impede the Company's penetration of certain markets. The Company currently operates in one industry segment with one product line. The Company's future success depends upon its ability to develop, introduce and market new products, its ability to obtain components from key suppliers, obtaining sufficient manufacturing capacity, and the success of the broadband access business. The Company may experience future fluctuations in operating results and declines in selling prices. Credit risk represents the accounting loss that would be recognized at the reporting date if counter parties failed completely to perform as contracted. Concentrations of credit risk (whether on or off balance sheet) that arise from financial instruments exist for groups of customers or groups of counter parties when they have similar economic characteristics that would cause their ability to meet contractual obligations to be similarly effected by changes in economic or other conditions. In accordance with SFAS No. 105, "Disclosure of Information about Financial Instruments with Off-Balance-Sheet Risk and Financial Instruments with Concentrations of Credit Risk," financial instruments that subject the Company to credit risk consist of cash balances maintained in excess of federal depository insurance limits, investments in commercial paper (which are classified as cash equivalents), and accounts receivable, which have no collateral or security. See Note 13 for business concentrations and major customers. CASH AND CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS Cash equivalents consist of highly liquid investment instruments with a maturity at the time of purchase of three months or less. Instruments with a maturity at the time of purchase of greater than three months but less than one year from the date of purchase are included in short-term investments. The Company's cash and cash equivalents as of December 31, 1999 included $12,031,000 of corporate commercial paper which was classified as available for sale. No available for sale securities were classified as cash equivalents at December 31, 1998. 41 HYBRID NETWORKS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) INVENTORIES Inventories are stated at the lower of cost (first-in, first-out basis) or market. PROPERTY AND EQUIPMENT Property and equipment are recorded at cost. Depreciation is computed on a straight-line basis over the estimated useful lives of two to five years. Leasehold improvements are amortized over the lesser of their estimated useful lives or the lease term. The cost of normal maintenance and repairs is charged to operations as incurred. Material expenditures which increase the life of an asset are capitalized and depreciated over the estimated remaining useful life of the asset. The cost of fixed assets sold, or otherwise disposed of, and the related accumulated depreciation or amortization is removed from the accounts, and any gains or losses are reflected in current operations. INTANGIBLES AND OTHER ASSETS At December 31, 1999 and 1998, intangibles and other assets included deferred financing costs relating to fees incurred in connection with the issuance of a senior convertible debenture in April 1997. The deferred financing costs are amortized over the five year life of the debenture (see Note 5). Total accumulated amortization of deferred financing costs as of December 31, 1999 and 1998 was $285,000 and $178,000, respectively. At December 31, 1997, intangibles also included the value assigned to the purchase of certain technologies relating to a technology support and development agreement signed in November 1997. In connection with entering into the technology support and development agreement, the Company issued a five-year warrant to purchase 458,295 shares of Common Stock at an exercise price of $10.91 per share. The amount attributed to the value of the warrants was $2,200,000. The Company periodically assesses the recoverability of intangible assets by determining whether the amortization of the asset balance over the remaining life can be recovered through undiscounted future operating cash flows. The amount of impairment, if any, is measured based on projected discounted future operating cash flows and is recognized as a write down of the asset to a net realizable value. The unamortized value of the technologies of approximately $1,283,000 was charged to expense in the second quarter of 1998 as it was determined to be of no further value to the Company. REVENUE RECOGNITION The Company normally ships its products based upon a bona fide purchase order and volume purchase agreement. The Company generally recognizes revenue at the time a transaction is shipped and collection of the resulting account receivable is probable. Shipments on customer orders with either acceptance criteria, installation criteria or rights of return are recognized as revenue only when the criteria are satisfied according to the contract. Revenue related to shipments to distributors is normally recognized upon receipt of payment for such transactions. For Cybermanager 2000, the hardware and software sales are generally bundled with upgrade, software maintenance, system support and service and sold for a period of three years. Revenue attributed to hardware is recognized upon shipment. Revenue attributed to software is recognized over the three year maintenance, system support and service period. When a maintenance system support and service contract is sold separately, the revenue is recognized ratably over the term of the 42 HYBRID NETWORKS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) maintenance system support and service contract, generally on a straight-line basis. Where maintenance system support and service revenue is not separately invoiced, it is unbundled from hardware and software license revenue and deferred for revenue recognition purposes. Other service revenue, primarily training and consulting, is generally recognized at the time the service is performed. The Company accrues for estimated warranty costs when the related sales revenue is recognized. The Company's third party manufacturer provides a 15 month warranty period on all cable modems manufactured by it. The warranty period begins on the date the modems are completely assembled. The Company provides a 12 month warranty on all head end equipment and modems sold. The software warranty period is 90 days from the date of delivery to customers. Actual warranty costs incurred have not differed materially from those estimated and accrued by the Company. PRODUCT DEVELOPMENT COSTS Costs related to research, design and development of products are charged to research and development expenses as incurred. Software development costs are included in research and development and are expensed as incurred. Statement of Financial Accounting Standards No. 86 (SFAS 86) requires the capitalization of certain software development costs from when technological feasibility is established, which the Company defines as completion of a working model and to when the software is available for sale to the Company's customers. The capitalized cost is then amortized on a straight-line basis over the estimated product life, or on the ratio of current revenues to total projected product revenues, whichever is greater. To date, the period between achieving technological feasibility and the general availability of such software has been short and software development costs qualifying for capitalization have been insignificant. Accordingly, the Company has not capitalized any software development costs. STOCK-BASED COMPENSATION The Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and related interpretations in accounting for its employee stock options. In accordance with Statement of Financial Accounting Standards No. 123 (SFAS 123), "Accounting for Stock-Based Compensation," the Company will disclose the impact of adopting the fair value accounting of employee stock options. Transactions in equity instruments with non-employees for goods or services have been accounted for using the fair value method prescribed by SFAS 123. INCOME TAXES The Company accounts for income taxes under the liability method, which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statements and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the difference are expected to reverse. COMPUTATION OF BASIC AND DILUTED LOSS PER SHARE Basic earnings per share excludes dilution and is computed by dividing income available to common stockholders by the weighted average number of shares of common stock outstanding for the 43 HYBRID NETWORKS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. All such securities or other contracts were anti-dilutive for all periods presented and, therefore, excluded from the computation of earnings per share. COMPREHENSIVE INCOME (LOSS) Effective January 1, 1998, the Company adopted Statement of Financial Accounting Standards No. 130 (SFAS 130), "Reporting Comprehensive Income." SFAS 130 requires that all items recognized under accounting standards as comprehensive income be reported in an annual financial statement that is displayed with the same prominence as other annual financial statements. Comprehensive income (loss) includes all changes in equity (net assets) during a period from non-owner sources. Examples of items to be included in comprehensive income,which are excluded from net income (loss), include foreign currency translation adjustments and unrealized gain/loss on available-for-sale securities. The Company has presented comprehensive income (loss) for each period presented within the Statement of Stockholder's Equity. NEW ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS 133). The new standard requires companies to record derivatives on the balance sheet as assets or liabilities, measured at fair value. Under SFAS 133, gains or losses resulting from changes in the values of derivatives are to be reported in the statement of operations or as a deferred item, depending on the use of the derivatives and whether they qualify for hedge accounting. The key criterion for hedge accounting is that the derivative must be highly effective in achieving offsetting changes in fair value or cash flows of the hedged items during the term of the hedge. This statement was amended by SFAS 137, issued in June 1999, such that it is effective for the Company's financial statements for the year ended December 31, 2001. The Company currently transacts substantially all of its revenues and costs in U.S. dollars and to date has not entered into any material amounts of derivative instruments. Accordingly, management does not currently expect adoption of this new standard to have a significant impact on the Company. RECLASSIFICATION Certain reclassifications have been made to the 1998 and 1997 financial statements in order to conform to the 1999 presentation. Such reclassifications had no effect on the previously reported net loss. 44 HYBRID NETWORKS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 3. INVENTORIES Inventories are comprised of the following (in thousands):
DECEMBER 31, ------------------- 1999 1998 -------- -------- Raw materials............................................... $2,251 $1,371 Work in progress............................................ 190 386 Finished goods.............................................. 1,314 3,467 ------ ------ $3,755 $5,224 ====== ======
The allowance for excess and obsolete inventory was $2,842,000 and $3,135,000 at December 31, 1999 and 1998, respectively. The provision for excess and obsolete inventory included in cost of sales was $529,000, $1,691,000 and $2,759,000 for the years ended December 31, 1999, 1998 and 1997, respectively. 4. PROPERTY AND EQUIPMENT Property and equipment consist of the following (in thousands):
DECEMBER 31, ------------------- 1999 1998 -------- -------- Machinery and equipment................................... $ 3,059 $ 3,048 Office furniture and fixtures............................. 747 737 Leasehold improvements.................................... 1,914 1,914 ------- ------- 5,720 5,699 Less accumulated depreciation and amortization............ (3,476) (2,261) ------- ------- $ 2,244 $ 3,438 ======= =======
Furniture and equipment under capital leases included in the above table total $1,687,000 and $1,691,000, less accumulated amortization of $1,422,000 and $1,005,000 as of December 31, 1999 and 1998, respectively. Depreciation and amortization expense related to property and equipment was $1,215,000, $1,233,000 and $687,000 for the years ended December 31, 1999, 1998, and 1997, respectively. Due to the under utilization of the Company's San Jose headquarters, the 1998 financial statements include a fourth quarter charge of $1,250,000 reflecting the impairment of leasehold improvements and office furniture and fixtures. 5. CONVERTIBLE DEBENTURES In 1997, the Company issued a senior convertible secured debenture in the amount of $5,500,000, bearing interest at 12% per annum, payable quarterly, and maturing on April 30, 2002. An arrangement fee of $500,000 was paid by the Company. If the Company issues any shares (with certain exceptions for employee stock options and the like) for consideration less than the current conversion price, any such issuance would be subject to certain "weighted average" antidilution provisions. 45 HYBRID NETWORKS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 5. CONVERTIBLE DEBENTURES (CONTINUED) During 1999, the Company issued certain securities which triggered antidilution adjustments to the conversion price of the $5.5 million debenture. These issuances included: (i) Warrants issued to customers to purchase 210,000 shares of common stock at $0.50 per share, (ii) Grants of options under the Company's stock option plans to purchase up to 1,321,907 shares of common stock at $0.50 per share (which was less than the fair market value of the stock on the date of grant), (iii) Issuance of $18.1 million in convertible debentures convertible into common stock at a conversion price of $2.85 per share (subject to adjustment), and (iv) Commitment to issue 3,057,459 shares of common stock in settlement of the Class Action litigation. As a result of these issuances, the conversion price of the $5.5 million debenture decreased to $6.64 (and the total number of shares issuable upon conversion increased to 828,454). The debenture is collateralized by substantially all of the Company's assets. The Company is prohibited from making plant or fixed capital expenditures in excess of $5,500,000 and $11,000,000 during the 12 months ending March 31, 2000 and 2001, respectively. Additionally, the Company is prohibited from, among other things, declaring dividends, retiring any subordinated debt other than in accordance with the debenture's terms, or distributing its assets to any stockholder as long as the debenture remains outstanding. The Company's capital expenditures exceeded the maximum capital expenditures allowed for the 12 months ending March 31, 1999. Consequently, the debt has been classified as a current liability in the accompanying financial statements as the holder has the right to declare a default under the convertible debenture at any time. ISSUANCES OF SECURITIES TO SPRINT CORPORATION In September 1999, the Company issued to Sprint Corporation ("Sprint") a convertible debenture in the face amount of $11 million due in 2009 and bearing interest at 4% per annum, compounded monthly (accrued interest is automatically added to principal quarterly)(the "Sprint Debenture"). The Sprint Debenture is convertible at any time after December 31, 1999, at Sprint's option, into 3,907,775 shares of the Company's common stock (as of December 31, 1999) at a conversion price of $2.85 per share (including accrued interest) (subject to adjustment). At any time after December 31, 2000, the Company may require the conversion of the Sprint Debenture. The Company also issued to Sprint in September 1999 a $1,000 debenture due in 2009 which is convertible by Sprint at any time into a newly created Series J preferred stock of the Company. Under the purchase agreement for the debentures and under the terms of the Series J preferred stock, Sprint has the right to elect two directors to the Company's board of directors and Sprint's approval will be required for many types of decisions involving corporate governance (including veto rights over most material actions the Company might take, see Note 9 below). In addition, Sprint has certain rights of first refusal and preemptive rights in respect of certain issuances of securities by the Company and other rights, including a right of first refusal with respect to any change of control agreement (as defined), which right of first refusal it can assign to third parties. 46 HYBRID NETWORKS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 5. CONVERTIBLE DEBENTURES (CONTINUED) The Company also issued to Sprint in September 1999 warrants to purchase up to $8,397,873 in face amount (subject to adjustment) of convertible debentures having substantially the same terms as the Sprint Debenture (as of December 31, 1999 they would be convertible into 2,946,622 shares of the Company's common stock, subject to adjustment, at $2.85 per share, subject to adjustment). The warrants will become vested and therefore exercisable only after Sprint has submitted purchase orders to the Company for at least $1 million of the Company's products on terms that are to be negotiated. With each $1 million of purchase orders, Sprint will be entitled to exercise 10% of the warrants. In consideration for the debentures and warrants, Sprint paid $11,001,000 to the Company and agreed to purchase $10 million of the Company's products on terms that are to be negotiated. Certain terms of the proposed product purchase agreement were specified in the September 1999 securities purchase agreement, and the parties have agreed to resolve the open terms through negotiation or, failing that, through arbitration. ISSUANCES OF DEBENTURES TO OTHER INVESTORS Concurrently with the issuance of the foregoing securities to Sprint, the Company issued to certain other investors for $7.1 million convertible debentures in the face amount of $7.1 million due in 2009 and bearing interest at 4% per annum, compounded monthly (accrued interest is automatically added to principal quarterly). These debentures have substantially the same terms as the Sprint Debenture. Like the Sprint Debenture, these debentures are exercisable by the holders at any time after December 31, 1999, at their option, into 2,522,291 shares of the Company's common stock (subject to adjustment and including accrued interest). At any time after December 31, 2000, the Company may require the conversion of the debentures. The investors that purchased the debentures are (i) partnerships associated with a firm of which a director of the Company is an executive partner; (ii) a partnership managed by a firm of which a former director (who was a director at the time of the investment) is a general partner; and (iii) an individual who is a director of the Company. At December 31, 1999, the balance due on the convertible debentures issued to Sprint and other investors included the original principal of $18,101,000 plus accrued interest added to the principal of $226,000 (convertible to an additional 79,189 shares of common stock). At the time convertible debentures were issued to Sprint and other investors, the fair value of the Company's common stock was $4.00 per share, creating a beneficial conversion element valued at $7,394,000, which has been amortized to interest expense through the period ending December 31, 1999. 47 HYBRID NETWORKS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 6. ACCRUED LIABILITIES AND OTHER Accrued liabilities and other consists of the following (in thousands):
DECEMBER 31, ------------------- 1999 1998 -------- -------- Accrued payroll and related accruals........................ $ 173 $ 385 Accrued class action settlement and related legal expenses.................................................. 2,946 1,946 Deferred revenue and customer deposits...................... 797 1,381 Other liabilities........................................... 707 559 ------ ------ $4,623 $4,271 ====== ======
7. COMMITMENTS LEASE OBLIGATIONS The Company entered into certain non-cancelable operating and capital lease commitments which expire at various dates through April 2004. Capital leases bear interest at rates ranging from 7.6% to 10.1%. Future minimum lease payments under all non-cancelable leases are as follows (in thousands):
CAPITAL OPERATING LEASES LEASES -------- --------- 2000....................................................... $ 352 $ 922 2001....................................................... 30 899 2002....................................................... -- 950 2003....................................................... -- 975 2004....................................................... -- 406 ----- ------ 382 $4,152 ====== Less amount representing interest.......................... (17) ----- 365 Less current portion....................................... (336) ----- $ 29 =====
Rent expense for 1999, 1998 and 1997 was approximately $1,064,000, $955,000 and $494,000, respectively. The Company's only long-term operating lease is for approximately 55,000 square feet of office, research and development and manufacturing space in San Jose, CA. This sublease expires in April 2004. EMPLOYMENT AGREEMENTS The Company has entered into employment agreements with three officers and retention agreements with two others. The agreements provide for aggregate annual salaries of $1,065,000 until the employee voluntarily terminates or renegotiates the agreement. The agreements may be canceled at any time for cause. If the Company terminates the agreements for reasons other than cause, aggregate severance due under the agreements would be $1,065,000. 48 HYBRID NETWORKS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 8. CONTINGENCIES CLASS ACTION LITIGATION In June 1998, five class action lawsuits were filed in San Mateo County Superior Court, California against the Company, two of its directors, four former directors and two former officers. The lawsuits were brought on behalf of purchasers of the Company's Common Stock during the class period commencing November 12, 1997 (the date of the Company's initial public offering) and ending June 1, 1998. In July 1998, a sixth class action lawsuit was filed in the same court against the same defendants, although the class period was extended to June 18, 1998. All six lawsuits (the "State Actions") also named as defendants the underwriters in the Company's initial public offering, but the underwriters have since been dismissed from the cases. The complaints in the State Actions claimed that the Company and the other defendants violated the anti-fraud provisions of the California securities laws, alleging that the financial statements used in connection with the Company's initial public offering and the financial statements issued subsequently during the class period, as well as related statements made on behalf of the Company during the initial public offering and subsequently regarding the Company's past and prospective financial condition and results of operations, were false and misleading. The complaints also alleged that the Company and the other defendants made these misrepresentations in order to inflate the price of the Company's Common Stock for the initial public offering and during the class period. The Company and the other defendants denied the charges of wrongdoing. In July and August 1998, two class action lawsuits were filed in the U.S. District Court for the Northern District of California (the "Federal Actions"). Both of the Federal Actions were brought against the same defendants as the State Actions, except that the second Federal Action also named as a defendant Price Waterhouse Coopers, LLP ("PwC"), the Company's former independent accountants. (The underwriters in the Company's initial public offering were named as defendants in the first Federal Action lawsuit but were subsequently dismissed.) The class period for the first Federal Action is from November 12, 1997 to June 1, 1998, and the class period in the second Federal Action extends to June 17, 1998. The complaints in both Federal Actions claimed that the Company and the other defendants violated the anti-fraud provisions of the federal securities laws, on the basis of allegations that are similar to those made by the plaintiffs in the state class action lawsuits. The Company and the other defendants denied these charges of wrongdoing. The Company and the other parties (other than PwC) to the State Actions and the Federal Actions reached an agreement to settle the lawsuits in March 1999, which agreement was approved by the U.S. District Court for the Northern District of California in June 1999. In November 1999, the settlement of State Actions and the Federal Actions became final. The time to appeal from the court's approval of the settlement has expired. Under the settlement, (i) the Company's insurers paid $8.8 million on the behalf of the Company and the officer and director defendants, and (ii) the Company issued 3,057,459 shares of Common Stock to the plaintiffs and their counsel (750,000 shares were issued in November 1999, and 2,307,459 shares were issued in February 2000), representing 21.9% of the shares of the Company's Common Stock that were outstanding at the end of February 2000. As a result of the settlement and a related agreement between the Company and its insurers, the Company has paid, and will not be reimbursed by its insurers for, $1.2 million in attorneys fees and other litigation expenses that would otherwise be covered by its insurance, and the Company does not have insurance coverage for the attorneys fees and expenses relating to the settlement that it incurs in the future. 49 HYBRID NETWORKS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 8. CONTINGENCIES (CONTINUED) As of December 31, 1999 the Company had issued 750,000 shares (valued at $386,000) in partial settlement of the action and had accrued $1,346,000 for the value of the 2,307,459 shares then remaining to be issued in the settlement. SEC INVESTIGATION In October 1998, the Securities and Exchange Commission began a formal investigation of the Company and certain individuals with respect to the Company's 1997 financial statements and public disclosures. The Company has been producing documents in response to the Securities and Exchange Commission's subpoena and is cooperating with the investigation. A number of current and former officers and employees and outside directors have testified before the Securities and Exchange Commission's staff. In November 1999, the SEC staff attorneys informed the Company in writing that the staff intended to file a civil injunctive action and seek civil monetary penalties against the Company for alleged violations of the federal securities laws. Without admitting or denying any wrongdoing, the Company recently reached agreement with the staff pursuant to which the staff will recommend entry of an order enjoining the Company from violating the books and records and related provisions of the federal securities laws. The recommended action would not include any monetary penalties or an injunction against the violation of the antifraud provisions of the securities laws. Resolution of this matter is subject to negotiation and documentation of a final agreement with the SEC staff attorneys, the Commission's acceptance of the staff's recommendation and approval by the federal district court. At December 31, 1999, the Company has accrued $1,500,000 for legal and other costs expected to be incurred in the settlement of the investigation of the Company and its former officers. Management believes, based on current information, that this investigation will be settled within these limits. However, if a favorable resolution cannot be obtained, there will be substantial additional costs which cannot be estimated at this time. PATENT LITIGATION In January 1998, the Company brought a lawsuit in the U.S. District Court for the Eastern District of Virginia against Com21, Inc. and Celestica, Inc. in which the Company alleged that the defendants infringed the Company's patents. In response to the Company's lawsuit, Com21 initiated a declaratory judgment action six days later in the U.S. District Court for the Northern District of California to obtain a declaration that the Company's patents were invalid and unenforceable and that in any event Com21 did not infringe them. In February 1998, the action in the Eastern District of Virginia was transferred to the Northern District of California, and the two actions were consolidated. Pre-trial discovery continued in the consolidated action until September 1998 when the parties agreed to stay the proceedings while they attempted to reach a settlement. In January 1999, the Company entered into a settlement agreement with Com21, Inc. and Celestica, Inc. whereby the patent lawsuits were settled. Pursuant to the agreement, the Company granted Com21 and Celestica a nonexclusive license to the Company's patents under which they may be required to pay royalties in the event that they sell certain products in the future, subject to certain contingencies (no royalties have yet been paid), and the Company granted to Com21 a right of first refusal to purchase the patents in the event that the Company should propose in the future to sell its 50 HYBRID NETWORKS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 8. CONTINGENCIES (CONTINUED) patents (whether separately or together with the Company's other assets to any third party). The Company has agreed to pay its legal counsel in this action, as a partial contingency fee (in return for such counsel's acceptance of reduced current legal fees), an amount equal to 50% of any royalties that the Company receives from its license with the defendants in the litigation (but not in excess of $3,000,000). To date the Company has received minimum royalties from the license. PACIFIC MONOLITHICS LAWSUIT In March 1999, Pacific Monolithics, Inc. (which had filed a voluntary petition under Chapter 11 of the U.S. Bankruptcy Code and is suing as debtor-in-possession) filed a lawsuit in Santa Clara County Superior Court, California against the Company, two of its directors, four former directors (one of whom was subsequently dismissed), a former officer and PwC. The lawsuit concerns an agreement which the Company entered into in March 1998 to acquire Pacific Monolithics through a merger, which acquisition was never consummated. The complaint alleged that the Company induced Pacific Monolithics to enter into the agreement by providing it with financial statements, and by making other representations concerning the Company's financial condition and results of operations, which were false and misleading, and further alleged that the Company wrongfully failed to consummate the acquisition. The complaint claimed the defendants committed breach of contract and breach of implied covenant of good faith and fair dealing, as well as fraud and negligent misrepresentation. The complaint sought compensatory and punitive damages according to proof, plus attorneys' fees and costs. In July 1999, the court granted the Company's motion to compel arbitration and to stay the lawsuit pending the outcome of the arbitration. In October 1999, the plaintiff filed a demand for arbitration against the Company and the individual defendants with the San Francisco office of the American Arbitration Association. In the demand, the plaintiff alleges claims for breach of contract, breach of implied covenant of good faith and fair dealing, fraud and negligent misrepresentation arising out of the proposed merger between the two companies. The demand seeks unspecified compensatory and punitive damages, pre-judgement interest and attorneys' fees and costs. In November 1999, the Company and the individual defendants answered the demand by denying the claims and seeking an award of attorneys' fees and costs pursuant to the agreement for the proposed merger. The arbitration hearing is scheduled to be held in September 2000. Management believes, based on current information (which is only preliminary, since discovery has not commenced in the litigation), that the outcome of this litigation will not have a material adverse impact on the Company's financial statements. 9. STOCKHOLDERS' EQUITY PREFERRED STOCK The Board of Directors has authorized the issuance of up to 5,000,000 shares of undesignated preferred stock and the Board has the authority to issue the undesignated preferred stock in one or more series and to fix the rights, preferences, privileges and restrictions thereof. In September 1999, 51 HYBRID NETWORKS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 9. STOCKHOLDERS' EQUITY (CONTINUED) the Board authorized a new Series J preferred stock with special voting rights; including the right to elect two members of the Board and veto rights over the following: - adopting an Annual Business Plan (as defined) or taking any actions that materially deviate from such plan; - making any capital expenditures in excess of $2 million in the aggregate in any fiscal year, except to the extent contemplated in the Annual Business Plan; - making any acquisition or disposition of any interests in any other person or business enterprise or any assets, in a single transaction or a series of related transactions, in which the fair market value of the consideration paid or received by the Company exceeds $1 million; - organizing, forming or participating in any joint venture or similar entity involving the sharing of profits in which the assets or services to be contributed or provided by the Company to such joint venture or other entity have a fair market value in excess of $1 million; - forming a subsidiary - issuing any common stock, preferred stock or other capital stock or any stock or securities (including options and warrants) convertible into or exercisable or exchangeable for common stock, preferred stock or other capital stock or amending the terms of any such stock or securities or any agreements relating thereto (other than employee stock options approved by the Board of Directors of the Company and common stock issued upon exercise thereof) or effecting any stock split or reverse stock split or combination; - entering into any transaction between the Company, on the one hand, and any affiliate or associate of the Company (as defined), on the other, other than the payment of compensation and other benefits to employees and directors in the ordinary course of business; - declaring or paying any dividend or other distribution with respect to the capital stock of the Company; - incurring any indebtedness for borrowed money or capital lease obligations that are not expressly contemplated in the then-current Annual Business Plan in excess of $250,000 in the aggregate during any fiscal year; - amending the Company's Certificate of Incorporation or Bylaws or creating or amending any stockholders' rights plan; - declaring bankruptcy; or - liquidating or dissolving the Company. INITIAL PUBLIC OFFERING AND CONVERSION OF PREFERRED STOCK In November 1997, the Company filed a registration statement with the Securities and Exchange Commission permitting the Company to sell shares of its common stock to the public. The offering was completed on November 12, 1997. In connection with the initial public offering, all outstanding shares of preferred stock were converted into shares of common stock. 52 HYBRID NETWORKS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 9. STOCKHOLDERS' EQUITY (CONTINUED) WARRANTS The Company has historically issued warrants in connection with its various rounds of financing, equipment lease lines, and transfers of technology. Warrants have been valued using the Black-Scholes Option Pricing Model. In connection with the issuance of Series G preferred stock in July 1996, and the 1996 equipment lease line, the Company issued warrants to purchase 58,021 and 5,802 shares of common stock, respectively, at $10.34 per share. These warrants are exercisable at any time and expire in July 2001 and August 2006, respectively. In connection with the issuance of convertible promissory notes in June 1996, which were later converted into Series G preferred stock, the Company issued warrants to purchase 167,037 shares of common stock at $4.73 per share. In connection with the issuance of Series D preferred stock May 1995, the Company issued warrants, at $.001 per warrant, to purchase 592,593 shares of common stock at $4.73 per share. In December 1997, a warrant to purchase 132,225 shares was exercised for a net exercise of 99,850 shares of common stock. The remaining warrants are exercisable at any time and expire in June 2001. During 1996, the Company issued warrants, at $.001 per warrant, to purchase 76,245 shares of Common stock at $4.73 per share. In connection with technology transferred and the 1995 equipment lease line, the Company issued warrants to purchase 169,259 and 8,466 shares of common stock, respectively, at $4.73 per share. During 1996, a warrant to purchase 169,259 shares was exercised for a net exercise of 91,921 shares of common stock. The remaining warrants are exercisable at any time and expire in June 2001 and August 2005, respectively. In September 1997, the Company issued warrants to purchase 252,381 shares of common stock in connection with the convertible subordinated notes payable, at an exercise price of $10.91. In October 1997, the Company issued warrants to purchase 2,659 shares of common stock in connection with obtaining a bank credit facility at an exercise price of $10.91. These warrants are exercisable at any time and expire in September and October 2002. In November 1997, warrants to purchase 151,267 shares of common stock were exercised for a net exercise of 76,096 shares of common stock. In November 1997, the Company issued a five year warrant to purchase 458,295 shares of common stock at an exercise price of $10.91 per share, in connection with a technology support and development arrangement. In June 1999, the Company issued a five year warrant to purchase 210,000 shares of common stock at an exercise price of $0.50 per share to two customers in accordance with their volume purchase agreements. The fair value of the warrants of $407,000 (calculated using the Black-Scholes method) was recorded as a discount on sales. In September 1999, the Company issued to Sprint Corporation warrants to purchase $8.4 million of convertible debentures, as described in Note 5 of the Notes to Financial Statements. These debentures are convertible to 2,946,622 shares of common stock at an exercise price of $2.85 per share. The warrants will be exercisable upon the placement by Sprint of certain purchase orders on terms to be negotiated between the Company and Sprint. The fair value of these warrants will be recognized as a discount on sales upon receipt of qualifying purchase orders from Sprint. 53 HYBRID NETWORKS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 9. STOCKHOLDERS' EQUITY (CONTINUED) Substantially all of the warrants are subject to net exercise provisions. The Company has reserved shares for the exercise of all the warrants. A summary of outstanding warrants as of December 31, 1999 follows:
WARRANTS OUTSTANDING ----------------------------------------------- NUMBER EXERCISE EXPIRATION OUTSTANDING PRICE DATE ----------- -------- -------------- 703,650... $ 4.73 June 2001 58,021.... 10.34 July 2001 458,295... 10.91 November 2002 103,773... 10.91 September 2002 210,000... 0.50 June 2005 8,466..... 4.73 August 2005 5,802..... 10.34 August 2006 --------- 1,548,007 =========
STOCK OPTION PLANS In January 1999, the Company adopted a 1999 Officer Stock Option Plan and reserved 1,000,000 shares for issuance to officers of the Company or of a parent or subsidiary of the Company. In May 1999, the Company adopted a 1999 Stock Option Plan and, as amended in August 1999 and October 1999, reserved 4,000,000 shares for issuance to employees (including officers and directors who are also employees) or consultants of the Company or of a parent or subsidiary of the Company who meet the suitability standards set forth by this plan. The 1999 Officer Stock Option Plan and the 1999 Stock Option Plan will terminate ten years from the effective date or, if earlier, the date of stockholder approval of termination. In September 1997, the Company adopted the 1997 Equity Incentive Plan and reserved a total of 1,750,000 shares for issuance to employees, officers, directors, consultants, independent contractors, and advisors. The number of shares outstanding will increase automatically by 5% of the outstanding shares each year unless waived by the Board of Directors. In 1999, the Company increased the number of shares reserved for issuance under the 1997 Equity Incentive Plan by 523,501 shares. The 1997 Equity Incentive Plan expires in September 2007. Also in September 1997, the Company adopted the 1997 Directors' Stock Option Plan under which 100,000 shares of common stock have been reserved for issuance. The Directors' Plan provides for the grant of non statutory stock options to non-employee directors of the Company and expires in September 2007. In December 1996, the Company adopted the 1996 Equity Incentive Plan and reserved 185,185 shares of common stock for issuance to employees, officers, directors, consultants, independent contractors and advisors. In June 1997, the Company increased the number of shares reserved for issuance under the 1996 Equity Incentive Plan by 222,222. The 1996 Equity Incentive Plan expires in December 2006. 54 HYBRID NETWORKS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 9. STOCKHOLDERS EQUITY (CONTINUED) In December 1995, the Company adopted the Executive Officer Incentive Plan and reserved 370,370 shares of common stock for issuance to the Company's chief executive officer and other senior executive officers. In 1996 and 1997, the Company increased the number of shares reserved under this plan by 129,630 and 62,963, respectively. In the event of a merger, consolidation, liquidation or similar change of control transaction as a result of which the participants' responsibilities and position with the Company are materially diminished, options granted under this plan become fully exercisable and remain so for one year thereafter. This plan will expire in December 2005. In October 1993, the Company adopted the 1993 Equity Incentive Plan, and reserved 185,185 shares of common stock for issuance to employees, officers, directors, consultants and advisors. In 1995, 1996 and 1997, the Company increased the number of shares reserved for issuance under the 1993 Equity Incentive Plan by 351,851, 425,925 and 66,340 shares, respectively. The 1993 Equity Incentive Plan expires in October 2003. Under all of the plans, the exercise price of incentive stock options may not be less than the fair market value of the shares on the date of grant (not less than 110% of fair market value if the option is granted to a 10% stockholder). Under all of the plans other than the 1999 Stock Option Plan, nonqualified stock options may not be granted at less than 85% of fair market value on the date of grant. Options and stock awards generally vest 12.5% six months from date of grant and 2.0833% per month thereafter; although certain options vest over a shorter period of time, and the vesting of certain options accelerates in certain circumstances. Stock options generally expire three months after termination of employment and five years from date of grant, subject to exceptions in certain cases. Activity under the plans is set forth below (in thousands, except per share data):
WEIGHTED VALUE OF AVERAGE SHARES OPTIONS OPTIONS EXERCISE AVAILABLE OUTSTANDING OUTSTANDING PRICE --------- ----------- ----------- -------- Balances, January 1, 1997........... 213 1,479 $ 963 $0.65 Additional shares reserved........ 2,409 -- -- -- Options granted................... (862) 862 5,332 6.19 Stock bonus awards................ (13) -- -- -- Stock repurchased................. 12 -- -- -- Options canceled.................. 265 (265) (316) 1.19 Options exercised................. -- (150) (94) 0.63 ------ ------ ------- Balances, December 31, 1997......... 2,024 1,926 5,885 3.06 Options granted................... (1,445) 1,445 4,527 3.13 Stock bonus award................. (1) -- -- -- Options canceled.................. 511 (511) (1,871) 3.66 Options exercised................. (125) (87) 0.70 ------ ------ ------- Balances, December 31, 1998......... 1,089 2,735 8,454 3.09 ------ ------ ------- Additional shares reserved........ 5,524 Options granted................... (4,075) 4,075 9,015 2.21 Options canceled.................. 1,664 (1,664) (4,388) 2.64 Options exercised................. (251) (357) 1.42 ------ ------ ------- Balances, December 31, 1999......... 4,202 4,895 $12,724 $2.60 ====== ====== =======
55 HYBRID NETWORKS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 9. STOCKHOLDERS EQUITY (CONTINUED) For the years ended December 31, 1999, 1998 and 1997, the weighted average fair value of options granted was $2.04, $2.34 and $1.40 per share, respectively. As of December 31, 1999, the stock options outstanding were as follows (in thousands, except per share data):
WEIGHTED AVERAGE WEIGHTED WEIGHTED REMAINING AVERAGE AVERAGE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE RANGE OF EXERCISE PRICES OUTSTANDING LIFE (YEARS) PRICE EXERCISABLE PRICE - ------------------------ ----------- ------------ --------- ----------- -------- $ 0.50 to $ 0.54....... 2,433 5.50 $ 0.51 1,260 $ 0.52 $ 1.08 to $ 2.19....... 515 3.84 2.10 160 1.97 $ 3.63 to $ 5.13....... 1,418 4.83 3.74 41 4.93 $ 5.31 to $ 8.78....... 281 7.07 8.33 92 8.38 $11.04 to $11.25....... 248 3.31 11.10 105 11.04 ----- ----- 4,895 5.11 $ 2.60 1,658 $ 1.87 ===== =====
As of December 31, 1998 and 1997, options to purchase 917,000 and 539,000 shares were exercisable at an average weighted exercise price of $2.56 and $0.76 per share, respectively. The Company has elected to continue to follow the provisions of APB 25, "Accounting for Stock Issued to Employees," for financial reporting purposes and has adopted the disclosure-only provisions of SFAS 123. Compensation cost has been recognized for the Company's stock option plans under APB 25 where options were granted to employees at an exercise price which is below market value at the date of grant. Had compensation cost for the Company's stock option plans been determined based on the fair value at the grant date for awards in years ended 1999, 1998 and 1997 consistent with the provisions of SFAS 123, the Company's net loss and net loss per share for 1999, 1998, and 1997 would have been increased to the pro forma amounts indicated below (in thousands, except per share amounts):
YEARS ENDED DECEMBER 31, ------------------------------ 1999 1998 1997 -------- -------- -------- Net loss as reported........................... $(22,192) $(24,625) $(21,602) ======== ======== ======== Net loss--pro forma............................ $(23,061) $(25,109) $(21,670) ======== ======== ======== Net loss per share--as reported................ $ (2.08) $ (2.37) $ (6.10) ======== ======== ======== Net loss per share--pro forma.................. $ (2.16) $ (2.41) $ (6.12) ======== ======== ========
The above pro forma disclosures are not necessarily representative of the effects on reported net income or loss for future years. In accordance with the provisions of SFAS 123, the fair value of each option is estimated using the following weighted average assumptions for grants during 1999, 1998 and 1997: dividend yield of 0%, volatility of 0% for options issued prior to the Company's Initial Public Offering, 75% thereafter in 1997, 113% in 1998, and 117% in 1999, risk-free interest rates at the date of grant, and an expected term of four years. 56 HYBRID NETWORKS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 9. STOCKHOLDERS EQUITY (CONTINUED) EMPLOYEE STOCK PURCHASE PLAN In September 1997, the Company's Board of Directors approved an Employee Stock Purchase Plan. Under this plan, employees of the Company can purchase Common Stock through payroll deductions. A total of 225,000 shares have been reserved for issuance under this plan. As of December 31, 1999, no shares had been purchased and all employees have withdrawn from the plan. 10. INCOME TAXES Provision for income taxes for each of the years ended December 31, 1999, 1998 and 1997 was $0. Total income tax benefit differed from the amounts computed by applying the U.S. federal statutory tax rates to pre-tax income as follows:
FOR THE YEARS ENDED ------------------------------ 1999 1998 1997 -------- -------- -------- Total benefit computed by applying the U.S. statutory rate............................................... (34.00)% (34.00)% (34.00)% Permanent differences.............................. 11.40% 0.10% 0.10% Change in valuation allowance...................... 22.60% 33.90% 33.90% ------ ------ ------ 0% 0% 0% ====== ====== ======
Temporary differences which gave rise to significant portions of deferred tax assets are as follows (in thousands):
DECEMBER 31, ------------------- 1999 1998 -------- -------- Current deferred assets: Allowance for doubtful accounts....................... $ 80 $ 80 Inventory reserves.................................... 1,132 1,307 UNICAP................................................ 644 174 Unearned revenue...................................... 302 281 Accrued liabilities................................... 1,443 1,072 Book compensation for stock options................... 417 29 -------- -------- Total current deferred assets......................... 4,018 2,943 Valuation allowance................................... (4,018) (2,943) -------- -------- $ -- $ -- ======== ======== Long-term deferred assets: Net operating loss carryforwards...................... $ 16,946 $ 18,205 Capitalized research expenditures..................... 7,146 4,128 Tax credit carryforwards.............................. 2,524 1,905 Depreciation and amortization......................... 679 411 -------- -------- Total long-term deferred assets....................... 27,295 24,649 Valuation allowance................................... (27,295) (24,649) -------- -------- $ -- $ -- ======== ========
57 HYBRID NETWORKS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 10. INCOME TAXES (CONTINUED) In accordance with generally accepted accounting principles, a valuation allowance must be established for a deferred tax asset if it is uncertain that a tax benefit may be realized from the asset in the future. Management believes that, based on a number of factors, the available objective evidence creates sufficient uncertainty regarding the realizability of the deferred tax assets such that a full valuation allowance has been recorded. These factors include the Company's history of losses, recent increases in expense levels, the fact that the market in which the Company competes is intensely competitive and characterized by rapidly changing technology, the lack of carryback capacity to realize deferred tax assets, and the uncertainty regarding market acceptance of the Company's products. The Company will continue to assess the realizability of the deferred tax assets in future periods. The valuation allowance increased by $3,721,000, and $9,790,000 in 1999 and 1998, respectively. The Company had federal and state net operating loss carry forwards of approximately $44,602,000 and $20,154,000, respectively, as of December 31, 1999 available to offset future regular and alternative minimum taxable income. The Company's net operating loss carry forwards expire in 2000 through 2019, if not utilized. In addition, at December 31, 1999, the Company had the following available credits to offset future tax liabilities:
TAX EXPIRATION REPORTING DATES --------- ------------- Federal research and development credit............. $1,523 2007-2014 State research and development credit............... 861 No expiration State manufacturing investment credit............... 136 2005
The Company's net operating loss and tax credit carry forwards may be subject to limitation in the event of ownership changes, as defined by tax laws. 11. EMPLOYEE BENEFIT PLAN The Company adopted a defined contribution retirement plan (the "Plan"), which qualifies under Section 401(k) of the Internal Revenue Code of 1986. The Plan covers essentially all employees. Eligible employees may make voluntary contributions to the Plan up to 15% of their annual compensation and the employer is allowed to make discretionary contributions. In 1999, 1998, 1997, the Company made no employer contributions. 12. RELATED PARTY TRANSACTIONS The Company had net sales to stockholders of $482,000 for the year ended December 31, 1998. An executive officer of the Company purchased for $500,000 or 7% of the $6,882,000 convertible subordinated notes issued by the Company in September 1997. These notes were repaid in November 1997 with the proceeds from the Company's initial public offering. See also Notes 5, 9 and 13 for transactions with Sprint, Accel Partners, OSSCO III L.P and Gary Lauder. 58 HYBRID NETWORKS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 13. BUSINESS SEGMENT AND MAJOR CUSTOMERS The Company operates in a single industry segment and primarily sells its products to customers in the U.S. Sales by industry segment during 1999 consist of 52% to cable customers and 48% to wireless customers. Sales to international customers represented 5.5%, 0%, and 13.5% of revenues in 1999, 1998 and 1997, respectively. International sales in any one geographic area were insignificant. Individual customers that comprise 10% or more of the Company's net sales are as follows:
YEARS ENDED DECEMBER 31, ------------------------------ 1999 1998 1997 -------- -------- -------- RCN Corporation............................................ 31% 25% 13% Sprint owned wireless operators............................ 28% -- -- Knology Holdings, Inc...................................... -- 13% -- Jones Intercable........................................... -- -- 12%
At December 31, 1999 and 1998, these customers accounted for $423,000 and $203,000, respectively, and 32% and 12%, respectively, of total accounts receivable. 14. SUBSEQUENT EVENTS In January 1999, the Company entered into a separation agreement with a director whereby the Company accelerated vesting of 109,668 options with exercise prices ranging from $0.54 to $11.04 per share. The accelerated options are exercisable through July 2000. The value of the options was remeasured on the date the separation agreement was entered into, resulting in a charge to compensation expense of $1,304,000 in the first quarter of 2000. Pursuant to the settlement of certain class action litigation, the Company issued in February 2000, 2,307,459 shares of Common Stock to the plaintiffs and their counsel in the class action litigation. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE In June 1998, PwC (then Coopers & Lybrand), our independent accountants, notified us that its reports with respect to our financial statements as of December 31, 1997 and for the year then ended, and as of September 30, 1997 and for the nine months then ended, should no longer be relied upon and that PwC's consent included with our Registration Statement on Form S-4 filed with the Securities and Exchange Commission in May 1998 in connection with the pending acquisition by us of Pacific Monolithics, Inc. was being withdrawn (the "Withdrawn Reports"). In July 1998, PwC resigned as our independent auditors. PwC stated that it was not specifying a reason for its resignation but informed us, for the first time, that PwC was of the view that our 1997 financial statements (which PwC had audited and reported upon) needed to be restated. PwC indicated the restatement would relate to revenue recognition but did not identify the items or quantify the amounts involved. PwC further informed us that PwC believed it was not in the best interests of PwC or the Company for PwC to continue to act as our independent auditors and that PwC would not address any restatement of the Company's financial statements. PwC acknowledged that we have cooperated fully with PwC in connection with its review of our financial statements and that there were no disagreements between PwC and us on any matter of our accounting principles or practices, financial statement disclosure or auditing scope or procedure during the two most recent fiscal years 59 HYBRID NETWORKS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 14. SUBSEQUENT EVENTS (CONTINUED) and through July 9, 1998. None of the Withdrawn Reports or PwC's report on our financial statements contained an adverse opinion or a disclaimer of opinion or was qualified or modified as to uncertainty, audit scope or accounting principles. In August 1998, we engaged AA as our independent accountants to audit the financial statements of the Company as of December 31, 1997 and for the year then ended and to act as our independent accountants on a continuing basis. In November 1998, AA resigned as our independent public accountants for the Company. AA informed us that, in AA's view, material weaknesses existed in our internal controls of a nature that prevented AA from being able to form an opinion on our conclusions as to the appropriate timing and amount of revenue recognition for the purposes of our financial statements for the year ended December 31, 1997. During the course of its work, AA had notified us and discussed with our audit committee AA's conclusion that (i) AA needed to expand significantly the scope of its audit, which it did with our approval and cooperation, and (ii) while AA did not complete an audit of our 1997 financial statements, those financial statements were materially misstated. There were no disagreements between AA and us on any matter of our accounting principles or practices, financial statement disclosure, or auditing scope or procedure. In December 1998, we engaged Hein as our independent accountants to audit our financial statements as of December 31, 1997 and for the year then ended and to act as our independent accountants on a continuing basis, which engagement included performing an audit of our financial statements as of December 31, 1998 and 1997 and for the years then ended. Prior to hiring Hein, neither we nor anyone acting on our behalf consulted Hein during our two most recent fiscal years or the subsequent interim periods. 60 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY. The information required by Item 10 regarding our directors is incorporated by reference to the information under the caption "Proposal No. 1--Election of Directors" in Company's definitive Proxy Statement for the Company's annual stockholders' meeting in 2000 (the "Proxy Statement") which Hybrid will file with the Securities and Exchange Commission within 120 days after the end of the calendar year covered by this report. ITEM 11. EXECUTIVE COMPENSATION The information required by Item 11 of Form 10-K is incorporated by reference to the information contained in the section captioned "Executive Compensation" in the Proxy Statement. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information regarding this item is incorporated herein by reference from the section entitled "Security Ownership of Certain Beneficial Owners and Management" in the Proxy Statement. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information with respect to this item is incorporated herein by reference from the section entitled "Certain Relationships and Related Transactions" in the Proxy Statement. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
PAGE NO. -------- (a) Documents filed as part of this Report: 1. FINANCIAL STATEMENTS. See the Index to Financial Statements at Item 8 of this Report.................................. 35 2. FINANCIAL STATEMENT SCHEDULES. Schedules not listed below have been omitted because they are not applicable or are not required or the information required to be set forth in those schedules is included in the financial statements or related notes. Schedule II--Valuation and qualifying accounts.............. 69 3. EXHIBITS. The following exhibits are filed as part of, or incorporated by reference into, this report on Form 10-K:
EXHIBIT NUMBER EXHIBIT TITLE --------------------- ------------- 3.01 Registrant's Amended and Restated Certificate of Incorporation.(1) 3.02 Certificate of Designations of Series J Non-Convertible Preferred Stock of the Registrant.(2) 3.03 Registrant's Amended and Restated Bylaws, as amended on April 14, 1999 10.01 Amended and Restated Investors Rights Agreement, dated as of September 18, 1997 between Registrant and certain investors, as amended October 13, 1997 and as amended November 6, 1997.(3) 10.02 Registrant's 1993 Equity Incentive Plan.(3)(10) 10.03 Registrant's 1996 Equity Incentive Plan.(3)(10)
61 ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (CONTINUED)
EXHIBIT NUMBER EXHIBIT TITLE --------------------- ------------- 10.04 Registrant's Executive Officer Incentive Plan.(3)(10) 10.05 Registrant's 1997 Equity Incentive Plan.(3)(10) 10.06 Registrant's 1997 Directors Stock Option Plan.(3)(10) 10.07 Registrant's 1997 Employee Stock Purchase Plan.(3)(10) 10.08 Registrant's 1999 Stock Option Plan 10.09 Registrant's 1999 Officer Stock Option Plan 10.10 Form of Indemnity Agreement entered into by Registrant with each of its directors and officers.(4) 10.12 Senior Secured Convertible $5.5 Million Debenture Purchase Agreement between Registrant and London Pacific Life & Annuity Company dated April 30, 1997 and related Senior Secured Convertible $5.5 Million Debenture Due 2002 and Security Agreement and Senior Secured Convertible $5.5 Million Debenture Due.(3) 10.15 Collaboration Agreement among Registrant, Sharp Corporation and Itochu Corporation dated November 25, 1996 and Addendum No. 1 thereto dated November 25, 1996.(3) 10.16 Sales and Purchase Agreement between Registrant and Itochu Corporation dated January 10, 1997.(3)(9) 10.17 Stipulation of settlement, dated March 3, 1999 among the Registrant and lead counsel for the plaintiffs in class action litigation against the Registrant 10.24 Sublease between the Registrant and Viking Freight, Inc. dated February 9, 1998.(5) 10.26 Employment Letter from the Registrant to Judson Goldsmith dated November 12, 1998.(6)(10) 10.27 Product Purchase Agreement between the Registrant and RCN Operating Services, Inc. dated June 30, 1997(6) 10.29 Modification of Retention Bonus Agreements dated January 6, 1999 between the Registrant and (a) William M. Daniher, (b) Thara M. Edson, (c) Vishwas Godbole and (d) Jane Zeletes.(7)(10) 10.30 Separation Agreement and General Release between the Registrant and William M. Daniher dated March 17, 1999.(7)(10) 10.1 Securities Purchase Agreement between Sprint Corporation and the Registrant dated August 30, 1999.(8) 10.2 Warrant Agreement between Sprint Corporation and the Registrant dated as of September 9, 1999.(8) 10.3 1999 Amended and Restated Investor Rights Agreement dated as of September 9, 1999.(8) 10.4 Form of 4% Convertible Class A Debenture due 2009.(8) 10.5 Form of 4% Convertible Class B debenture due 2009.(8) 10.6 Securities Purchase Agreement among the Registrant and certain investors dated as of August 30, 1999.(8) 10.7 Form of 4% Convertible Debenture due 2009.(8) 23.01 Consent of Independent Auditors for 1999 27.01 Financial Data Schedule
- ------------------------ (1) Incorporated by reference to Exhibit 3.03 to the Registrant's Registration Statement on Form S-1, File No. 333-36001, declared effective by the SEC on November 11, 1997 (the "Form S-1"). 62 ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (CONTINUED) (2) Incorporated by reference to Exhibit 3.1 to the Registrants current report on Form 8-K filed September 24, 1999. (3) Incorporated by reference to the Exhibit with the same number to the Form S-1. (4) Incorporated by reference to Exhibit 10.08 to the Form S-1. (5) Incorporated by reference to Exhibit with the same number to the Registrant's Registration Statement on Form S-4, File No. 333-52083 (filed on May 7, 1998). (6) Incorporated by reference to the Exhibit with the same number to the Registrant's Annual Report Form 10-K for the year ended December 31, 1998. (7) Incorporated by reference to the Exhibit with the same number to the Registrant's Quarterly Report on Form 10-Q for the three months ended March 31, 1999. (8) Incorporated by reference to the Exhibit with the same number in the Company's current report on Form 8-K filed September 24, 1999. (9) Confidential treatment has been granted with respect to certain portions of this agreement. Such portions have been omitted from the filing and have been filed separately with the SEC. (10) Represents a management agreement or compensatory plan. (b) Reports on Form 8-K. The following Current Reports on Form 8-K were filed by the Company since September 30, 1999. 1. On October 12, 1999, the Company reported under Item 5. "Other Events" the appointment of Thara M. Edson as Vice President, Finance and Chief Financial Officer. 2. On October 28, 1999, the Company reported under Item 5. "Other Events" the resignation of Carl S. Ledbetter, its Chief Executive Officer, and the appointment of James R. Flach as acting Chief Executive Officer. 3. On January 19, 2000, the Company reported under Item 5. "Other Events" the appointment of Michael D. Greenbaum as President and Chief Executive Officer. 4. On January 31, 2000, the Company reported under Item 5. "Other Events" the appointment of James R. Flach as Chairman of the Board of Directors and Michael D. Greenbaum as a member of the board and the resignation of Carl S. Ledbetter as Chairman and member of the Board of Directors. (c) Exhibits. See (a)(3) above. (d) Financial Statement Schedules. See (a)(2) above. 63 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Exchange Act, the Registrant caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. March , 2000 HYBRID NETWORKS, INC. By: /s/ MICHAEL D. GREENBAUM ----------------------------------------- Michael D. Greenbaum CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Exchange Act, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
NAME TITLE DATE ---- ----- ---- PRINCIPAL EXECUTIVE OFFICER /s/ MICHAEL D. GREENBAUM ------------------------------------------- Chief Executive Officer March , 2000 Michael D. Greenbaum PRINCIPAL FINANCIAL OFFICER AND PRINCIPAL ACCOUNTING OFFICER: /s/ THARA M. EDSON ------------------------------------------- Vice President, Finance March , 2000 Thara M. Edson Chief Financial Officer ADDITIONAL DIRECTORS: /s/ JAMES R. FLACH ------------------------------------------- Chairman, Board of Directors March , 2000 James R. Flach /s/ GARY M. LAUDER ------------------------------------------- Director March , 2000 Gary M. Lauder /s/ TIMOTHY S. SUTTON ------------------------------------------- Director March , 2000 Timothy S. Sutton /s/ THEODORE H. SCHELL ------------------------------------------- Director March , 2000 Theodore H. Schell
64 INDEPENDENT AUDITOR'S REPORT To the Stockholders and Board of Directors Hybrid Networks, Inc. San Jose, California Our report on the financial statements of Hybrid Networks, Inc. is included on page 36 of this Form 10-K. In connection with our audits of such financial statements, we have also audited the related financial statement schedule listed in Item 14 (a) (2) of this Form 10-K. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information required to be included therein. /s/ HEIN + ASSOCIATES LLP Hein + Associates LLP Orange, California February 10, 2000 65 HYBRID NETWORKS, INC. SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS (IN THOUSANDS) ALLOWANCE FOR DOUBTFUL ACCOUNTS
ADDITIONS WEIGHTED BALANCE AT CHARGED TO CHARGED BALANCE BEGINNING COSTS AND TO OTHER AT END OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS OF PERIOD ---------- ---------- -------- ---------- --------- For the year ended: December 31, 1999.......................... $200 $ -- -- -- $200 December 31, 1998.......................... -- 200 -- -- 200 December 31, 1997.......................... -- -- -- -- --
INVENTORY RESERVES
ADDITIONS WEIGHTED BALANCE AT CHARGED TO CHARGED BALANCE BEGINNING COSTS AND TO OTHER AT END OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS OF PERIOD ---------- ---------- -------- ---------- --------- For the year ended: December 31, 1999.......................... $3,135 $ 529 -- $ (822) $2,842 December 31, 1998.......................... 3,015 1,691 -- (1,571) 3,135 December 31, 1997.......................... 256 2,759 -- -- 3,015
66 EX-3.03 2 EX-3.03 AMENDED AND RESTATED BYLAWS OF HYBRID NETWORKS, INC. (A DELAWARE CORPORATION) ARTICLE I OFFICES SECTION 1. REGISTERED OFFICE. The registered office shall be in the City of Wilmington, County of New Castle, State of Delaware. SECTION 2. OTHER OFFICES. Additional offices of the corporation shall be located at such place or places, within or outside the State of Delaware, as the board of Directors may from time to time authorize or the business of the corporation may require. ARTICLE II MEETINGS OF STOCKHOLDERS AND VOTING RIGHTS SECTION 3. PLACE OF MEETINGS. All meetings of the stockholders for the election of directors shall be held at such place as may be fixed from time to time by the Board of Directors, or at such other place either within or without the State of Delaware as shall be designated from time to time by the Board of Directors and stated in the notice of the meeting. Meetings of stockholders for any other purpose may be held at such time and place, within or without the State of Delaware, as shall be stated in the notice of the meeting or in a duly executed waiver of notice thereof. SECTION 4. ANNUAL MEETING. Annual meetings of stockholders, commencing with the year 1991, shall be held at such date and time as shall be designated from time to time by the Board of Directors and stated in the notice of the meeting. At such annual meeting, directors shall be elected and any other business may be transacted which may properly come before the meeting. SECTION 5. POSTPONEMENT OF ANNUAL MEETING. The Board of Directors and the President shall each have authority to hold at an earlier date and/or time, or to postpone to a later date and/or time, the annual meeting of stockholders. SECTION 6. SPECIAL MEETINGS. (a) Special meetings of the stockholders, for any purpose or purposes, may be called by the Chairman of the Board of Directors, or by the Chairman or the Secretary at the written request of a majority of the total number of directors which the corporation would have if there were no vacancies. (b) Upon written request to the Chairman of the Board of Directors, the President, any vice president or the Secretary of the corporation by any person or persons (other than the Board of Directors) entitled to call a special meeting of the stockholders, such officer forthwith shall cause notice to be given to the stockholders entitled to vote, that a meeting will be held at a time requested by the person or persons calling the meeting, such time to be not less than 10 nor more than 60 days after receipt of such request. If such notice is not given within 20 days after receipt of such request, the person or persons calling the meeting may give notice thereof in the manner provided by law or in these bylaws. Nothing contained in this Section 6 shall be construed as limiting, fixing or affecting the time or date when a meeting of stockholders called by action of the Board of Directors may be held. SECTION 7. NOTICE OF MEETINGS. Except as otherwise may be required by law and subject to Section 6 (b) above, written notice of each meeting of stockholders shall be given to each stockholder entitled to vote at that meeting (see Section 14 below), by the Secretary, assistant secretary or other person charged with that duty, not less than 10 nor more than 60 days before such meeting. Notice of any meeting of stockholders shall state the date, place and hour of the meeting and, (a) in the case of a special meeting, the general nature of the business to be transacted; (b) in the case of an annual meeting, the general nature of matters which the Board of Directors, at the time the notice is given, intends to present for action by the stockholders; and (c) in the case of any meeting at which directors are to be elected, the names of the nominees intended at the time of the notice to be presented by management for election. At a special meeting, notice of which has been given in accordance with this Section, action may not be taken with respect to business, the general nature of which has not been stated in such notice. At an annual meeting, action may be taken with respect to business started in the notice of such meeting and any other business as may properly come before the meeting. SECTION 8. MANNER OF GIVING NOTICE. Notice of any meeting of stockholders shall be given either personally or by first-class mail, telegraphic or other written communication, addressed to the stockholder at the address of that stockholder appearing on the books of the corporation or given by the stockholder to the corporation for the purpose of notice. If no such address appears on the corporation's books or is given, notice shall be deemed to have been given if sent to that stockholder by first-class mail or telegraphic or other written communication to the corporation's principal executive office, or if published at least once in a newspaper of general circulation in the county where that office is located. Notice shall be deemed to have been given at the time when delivered personally or deposited in the mail or sent by telegram or other means of written communication. If any notice addressed to a stockholder at the address of that stockholder appearing on the books of the corporation is returned to the corporation by the United States Postal Service marked to indicate that the United States Postal Service is unable to deliver the notice to the stockholder at that addresses, all future notices shall be deemed to have been duly given without further mailing if these shall be available to the stockholder on written demand by the stockholder at the principal executive office of the corporation for a period of one year from the date of the giving of the notice. An affidavit of mailing of any notice or report in accordance with the provisions of this Section 8, executed by the Secretary, Assistant Secretary or any transfer agent, shall be prima facie evidence of the giving of the notice. SECTION 9. QUORUM AND TRANSACTION OF BUSINESS. (a) At any meeting of the stockholders, a majority of the shares entitled to vote, represented in person or by proxy, shall constitute a quorum. If a quorum is present, the affirmative vote of the majority of shares represented at the meeting and entitled to vote on any matter shall be the act of the stockholders, unless the vote of a greater number or voting by classes is required by law or by the Certificate of Incorporation, and except as provided in Section 9(c). (b) At any meeting of the stockholders, only such business shall be conducted as shall have been brought before the meeting (1) pursuant to the corporation's notice of meeting, (2) by or at the direction of the Board of Directors or (3) by any stockholder of the corporation who is a stockholder of record at the time of giving of the notice provided for in this bylaw, who shall be entitled to vote at such meeting and who complies with the notice procedures set forth in this bylaw. For business to be properly brought before any meeting by a stockholder pursuant to clause (3) of this Section 9 (b), the stockholder must have given timely notice thereof in writing to the Secretary of the corporation. To be timely, a stockholder's notice must be delivered to or mailed and received at the principal executive offices of the corporation not less than 20 days nor more than 60 days prior to the date of the meeting. A stockholder's notice to the Secretary shall set forth as to each matter the stockholder proposes to bring before the meeting (i) a brief description of the business desired to be brought before the meeting and the reasons for conducting such business at the meeting, (ii) the name and address, as they appear on the corporation's books, of the stockholder proposing such business, and the name and address of the beneficial owner, if any, on whose behalf the proposal is made, (iii) the class and number of shares of the corporation which are owned beneficially and of record by such stockholder of record and by the beneficial owner, if any, on whose behalf of the proposal is made and (iv) any material interest of such stockholder of record and the beneficial owner, if any, on whose behalf the proposal is made in such business. Notwithstanding anything in these bylaws to the contrary, no business shall be conducted at a meeting except in accordance with procedures set forth in this Section 9 (b). The presiding officer of the meeting shall, if the facts warrant, determine and declare to the meeting that business was not properly brought before the meeting and in accordance with the procedures prescribed by this Section 9 (b), and if such person should so determine, such person shall so declare to the meeting and any such business not properly brought before the meeting shall not be transacted. Notwithstanding the foregoing provisions of this Section 9 (b), a stockholder shall also comply with all applicable requirements of the Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder with respect to the matters set forth in this Section 9 (b). (c) The stockholders present at a duly called or held meeting of the stockholders at which a quorum is present may continue to do business until adjournment, notwithstanding the withdrawal of enough stockholders to leave less than a quorum, provided that any action taken (other than adjournment) is approved by at least a majority of the shares required to constitute a quorum. (d) In the absence of a quorum, no business other than adjournment may be transacted, except as described in Section 9 (c). SECTION 10. ADJOURNMENT AND NOTICE OF ADJOURNED MEETINGS. Any meeting of stockholders may be adjourned from time to time, whether or not a quorum is present, by the affirmative vote of a majority of shares represented at such meeting either in person or by proxy and entitled to vote at such meeting. In the event any meeting is adjourned, it shall not be necessary to give notice of the time and place of such adjourned meeting pursuant to Sections 7 and 8; provided that if any of the following three events occur, such notice must be given: (1) announcement of the adjourned meeting's time and place is not made at the original meeting which it continues or (2) such meeting is adjourned for more than 30 days from the date set for the original meeting or (3) after the adjournment a new record date is fixed for the adjourned meeting. At the adjourned meeting, the corporation may transact any business which might have been transacted at the original meeting. SECTION 11. WAIVER OF NOTICE, CONSENT TO MEETING OR APPROVAL OF MINUTES. (a) Subject to this Section 11(b), the transactions of any meeting of stockholders, however called and noticed, and wherever held, shall be as valid as though made at a meeting duly held after regular call and notice, if a quorum is present either in person or by proxy, and if, either before or after the meeting, each of the persons entitled to vote but not present in person or by proxy signs a written waiver of notice or a consent to holding of the meeting or an approval of the minutes thereof. (b) A waiver of notice, consent to the holding of a meeting or approval of the minutes thereof need not specify the business to be transacted or transacted at nor the purpose of the meeting. (c) All waivers, consents and approvals shall be filed with the corporate records or made a part of the minutes of the meeting. (d) A person's attendance at a meeting shall constitute waiver of notice of and presence at such meeting, except when such person objects at the beginning of the meeting to transaction of any business because the meeting is not lawfully called or convened and except that attendance at a meeting is not a waiver of any right to object to the consideration of matters which are required by law or these bylaws to be in such notice (including those matters described in subsection (d) of Section 7 of these bylaws), but are not so included if such person expressly objects to consideration of such matter or matters at any time during the meeting. SECTION 12. ACTION BY WRITTEN CONSENT WITHOUT A MEETING. Effective upon the closing of the corporation's initial public offering of securities pursuant to a registration statement filed under the Securities Act of 1933, as amended, the stockholders of the corporation may not take action by written consent without a meeting but must take any such actions at a duly called annual or special meeting. SECTION 13. VOTING. The stockholders entitled to vote at any meeting of stockholders shall be determined in accordance with the provisions of Section 14. Unless otherwise provided in the Certificate of Incorporation each stockholder shall at every meeting of the stockholders be entitled to one vote in person or by proxy for each share of the capital stock having voting power held by such stockholder. Any stockholder may vote part of such stockholders shares in favor of a proposal and refrain from voting the remaining shares or vote them against the proposal, other than elections to office, but, if the stockholder fails to specify the number of shares such stockholder is voting affirmatively, it will be conclusively presumed that the stockholder's approving vote is with respect to all shares such stockholder is entitled to vote. SECTION 14. PERSONS ENTITLED TO VOTE OR CONSENT. The officer who has charge of the stock ledger of the corporation shall prepare and make, at least ten days before every meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder who is present. SECTION 15. PROXIES. Every person entitled to vote or execute consents may do so either in person or by one or more agents authorized to act by a written proxy executed by the person or such person's duly authorized agent and filed with the Secretary of the corporation; provided that no such proxy shall be valid after the expiration of three years from the date of its execution, unless the proxy provides for a longer period. The manner of execution, suspension, revocation, exercise and effect of proxies is governed by law. SECTION 16. INSPECTORS OF ELECTION. Before any meeting of stockholders, the Board of Directors may appoint one or more persons, other than nominees for office, to act as inspectors of election at the meeting or its adjournment. If no inspectors of election are so appointed, the chairman of the meeting may, and on the request of any stockholder or a stockholder's proxy shall, appoint inspectors of election at the meeting. If any person appointed as inspector fails to appear or fails or refuses to act, the chairman of the meeting may, and upon the request of any stockholder or a stockholders proxy shall, appoint a person to fill that vacancy. These inspectors shall: (i) determine the number of shares outstanding and the voting power of each, the shares represented at the meeting, the existence of a quorum, and the authenticity, validity, and effect of proxies; (ii) receive votes, ballots, or consents; (iii) hear and determine all challenges and questions in any way arising in connection with the right to vote; (iv) count and tabulate all votes or consents; (v) determine when the polls shall close; (vi) determine the result; and (vii) do any other acts that may be proper to conduct the election or vote with fairness to all stockholders. ARTICLE III BOARD OF DIRECTORS SECTION 17. POWERS. The business of the corporation shall be managed by or under the direction of its board of directors which may exercise all such powers of the corporation and do all such lawful acts and things as are not by statute or by the certificate of incorporation or by these bylaws directed or required to be exercised or done by the stockholders. SECTION 18. NUMBER OF DIRECTORS. The authorized number of directors of this corporation shall be not less than five and not more than nine. As of the date of the adoption of these bylaws, the number of directors shall be 5, and thereafter the number of directors shall be fixed from time to time exclusively by resolution of the Board of Directors adopted by an affirmative vote of a majority of the total number of directors that the corporation would have if there were no vacancies. No reduction in the number of directors shall remove any director prior to the expiration of such director's term of office. Any bylaw amendment adopted by the Board of Directors increasing or reducing the authorized number of directors shall require the affirmative vote of a majority of the total number of directors which the corporation would have if there were no vacancies. In the event of any increase or reduction in the authorized number of directors: (i) each director then serving shall nevertheless continue as a director of the class of which such director is a member until the expiration of such director's current term, or such director's earlier resignation, removal from office or death, and (ii) the newly created or eliminated directorship or directorships resulting from such increase or reduction shall be apportioned by the Board of Directors, by resolution adopted by an affirmative vote of a majority of the total number of directors that the corporation would have if there were no vacancies, among the three classes of directors so as to maintain such classes as nearly equal in number as possible. SECTION 19. ELECTION OF DIRECTORS, TERM, QUALIFICATIONS. The directors shall be divided into three classes. The term of office of the first class, which class shall consist of two directors, shall expire at the annual meeting of stockholders held in 1998; the term of office of the second class, which class shall consists of one director, shall expire at the annual meeting of stockholders held in 1999; and the term of office of the third class, which class shall consist of two directors, shall expire at the annual meeting of stockholders held in 2000. Thereafter, each term of each class shall expire at each third succeeding annual meeting of stockholders after the meeting of stockholders at which the director or directors in such class were elected. Each Director shall serve until his or her successor is elected and qualified, or until his or her earlier resignation or removal. Nominations for election to the Board of Directors must be made by the Board of Directors or by any stockholder of any outstanding class of capital stock of the corporation entitled to vote for the election of directors. Nominations, other than those made by the Board of Directors of the corporation, must be preceded by notification in writing received by the Secretary of the corporation not less than 20 days nor more than 60 days prior to any meeting of stockholders called for the election of directors. Such notification shall contain the written consent of each proposed nominee to serve as a director if so elected and the following information as to each proposed nominee and as to each person, acting alone or in conjunction with one or more other persons as a partnership, limited partnership, syndicate or other group, who participates or is expected to participate in making such nomination or in organizing, directing or financing such nomination or solicitation of proxies to vote for the nominee: (a) the name, age, residence, address, and business address of each proposed nominee and of each such person; (b) the principal occupation or employment, the name, type of business and address of the corporation or other organization in which such employment is carried on of each proposed nominee and of each such person; (c) the amount of stock of the corporation owned beneficially, either directly or indirectly, by each proposed nominee and each such person; and (d) a description of any arrangement or understanding of each proposed nominee and of each such person with each other or any other person regarding future employment or any future transaction to which the corporation will or may be a party. The presiding officer of the meeting shall have the authority to determine and declare to the meeting that a nomination not preceded by notification made in accordance with the foregoing procedure shall be disregarded. SECTION 20. RESIGNATIONS. Any director of the corporation may resign effective upon giving written notice to the Chairman of the Board, the President, the Secretary or the Board of Directors of the corporation, unless the notice specifies a later time for the effectiveness of such resignation. If the resignation specifies effectiveness at a future time, a successor may be elected pursuant to Section 22 to take office on the date that the resignation becomes effective. SECTION 21. REMOVAL. The entire Board of Directors or any individual director may be removed from office, with or without cause, by the affirmative vote of at least a majority of the combined voting power of all shares of the corporation entitled to vote generally in the election of directors, voting together as a single class. SECTION 22. VACANCIES. A vacancy or vacancies on the Board of Directors shall be deemed to exist in case of the death, resignation or removal of any director, or upon increase in the authorized number of directors or if stockholders fail to elect the full authorized number of directors at an annual meeting of stockholders or if, for whatever reason, there are fewer directors on the Board of Directors than the full number authorized. Such vacancy or vacancies may be filled by a majority of the remaining directors, though less than a quorum, or by a sole remaining director, and the directors so chosen shall hold office for the remainder of the term of the class of the director for which such vacancy exists and until their earlier resignation or removal. If there are no directors in office, then an election of directors may be held in the manner provided by statute. SECTION 23. REGULAR MEETINGS. Regular meetings of the Board of Directors shall be held at such times, places and dates as fixed in these bylaws or by the Board of Directors; provided, however, that if the date for such a meeting falls on a legal holiday, then the meeting shall be held at the same time on the next succeeding full business day. Regular meetings of the Board of Directors held pursuant to this Section 23 may be held without notice. SECTION 24. PARTICIPATION BY TELEPHONE. Members of the Board of Directors may participate in a meeting through use of conference telephone or similar communications equipment, so long as all members participating in such meeting can hear one another. Such participation constitutes presence in person at such meeting. SECTION 25. SPECIAL MEETINGS. Special meetings of the Board of Directors for any purpose may be called by the Chairman of the Board or the President or any vice president or the Secretary of the corporation or any two directors. SECTION 26. NOTICE OF MEETINGS. Notice of the date, time and place of all meetings of the Board of Directors, other than regular meetings held pursuant to Section 24, shall be delivered personally, orally or in writing, or by telephone, telegraph or facsimile, to each director at least 48 hours before the meeting, or sent in writing to each director by first-class mail, charges prepaid, at least four days before the meeting. Such notice may be given by the Secretary of the corporation or by the person or persons who called a meeting. Such notice need not specify the purpose of the meeting. Notice of any meeting of the Board of Directors need not be given to any director who signs a waiver of notice of such meeting, or a consent to holding the meeting or an approval of the minutes thereof, either before or after the meeting, or who attends the meeting without protesting prior thereto or at its commencement such director's lack of notice. All such waivers, consents and approvals shall be filed with the corporate records or made a part of the minutes of the meeting. SECTION 27. PLACE OF MEETINGS. Meetings of the Board of Directors may be held at any place within or without the state which has been designated in the notice of the meeting or, if not stated in the notice or there is no notice, designated in the bylaws or by resolution of the Board of Directors. SECTION 28. ACTION BY WRITTEN CONSENT WITHOUT A MEETING. Any action required or permitted to be taken by the Board of Directors may be taken without a meeting, if all members of the Board of Directors individually or collectively consent in writing to such action. Such written consent or consents shall be filed with the minutes of the proceedings of the Board of Directors. Such action by written consent shall have the same force and effect as a unanimous vote of such directors. SECTION 29. QUORUM AND TRANSACTION OF BUSINESS. A majority of the authorized number of directors shall constitute a quorum for the transaction of business. Every act or decision done or made by a majority of the authorized number of directors present at a meeting duly held at which a quorum is present shall be the act of the Board of Directors, unless the law, the Certificate of Incorporation or these bylaws specifically require a greater number. A meeting at which a quorum is initially present may continue to transact business, notwithstanding withdrawal of directors, if any action taken is approved by at least a majority of the number of directors constituting a quorum for such meeting. In the absence of a quorum at any meeting of the Board of Directors, a majority of the directors present may adjourn the meeting, as provided in Section 30 of these bylaws. SECTION 30. ADJOURNMENT. Any meeting of the Board of Directors, whether or not a quorum is present, may be adjourned to another time and place by the affirmative vote of a majority of the directors present. If the meeting is adjourned for more than 24 hours, notice of such adjournment to another time or place shall be given prior to the time of the adjourned meeting to the directors who were not present at the time of the adjournment. SECTION 31. ORGANIZATION. The Chairman of the Board shall preside at every meeting of the Board of Directors, if present. If there is no Chairman of the Board or if the Chairman is not present, a Chairman chosen by a majority of the directors present shall act as chairman. The Secretary of the corporation or, in the absence of the Secretary, any person appointed by the Chairman shall act as secretary of the meeting. SECTION 32. COMPENSATION. Unless otherwise restricted by the certificate of incorporation or these bylaws, the Board of Directors shall have the authority to fix the compensation of directors. The directors may be paid their expenses, if any, of attendance at each meeting of the Board of Directors and may be paid a fixed sum for attendance at each meeting of the Board of Directors or a stated salary as director. No such payment shall preclude any director from serving the corporation in any other capacity and receiving compensation therefor. Members of special or standing committees may be allowed like compensation for attending committee meetings. SECTION 33. COMMITTEES. The Board of Directors may, by resolution passed by a majority of the whole board, designate one or more committees, each committee to consist of one or more of the directors of the corporation. The Board may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. In the absence of disqualification of a member of a committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of any such absent or disqualified member. Any such committee, to the extent provided in the resolution of the Board of Directors, shall have and may exercise all the powers and authority of the Board of Directors in the management of the business and affairs of the corporation, and may authorize the seal of the corporation to be affixed to all papers that may require it; but no such committee shall have the power or authority in reference to amending the certificate of incorporation, adopting an agreement of merger or consolidation, recommending to the stockholders the sale, lease or exchange of all or substantially all of the corporation's property and assets, recommending to the stockholders a dissolution of the corporation or a revocation of a dissolution, or amending the bylaws of the corporation; and, unless the resolution or the certificate of incorporation expressly so provide, no such committee shall have the power or authority to declare a dividend or to authorize the issuance of stock. Such committee or committees shall have such name or names as may be determined from time to time by resolution adopted by the Board of Directors. Each committee shall keep regular minutes of its meetings and report the same to the Board of Directors when required. ARTICLE IV OFFICERS SECTION 34. OFFICERS. The officers of the corporation shall be a President, Chief Financial Officer and a Secretary. The Board of Directors may elect from among its members a Chairman of the Board and a Vice Chairman of the Board. The Board of Directors may also choose one or more Vice-Presidents, Assistant Secretaries and Assistant Treasurers. Any number of offices may be held by the same person, unless the certificate of incorporation or these bylaws otherwise provide. SECTION 35. APPOINTMENT. All officers shall be chosen and appointed by the Board of Directors. The Board of Directors at its first meeting after each annual meeting of stockholders shall choose a President, a Treasurer, and a Secretary and may choose Vice Presidents. The Board of Directors may appoint such other officers and agents as it shall deem necessary who shall hold their offices for such terms and shall exercise such powers and perform such duties as shall be determined from time to time by the board. SECTION 36. INABILITY TO ACT. In the case of absence or inability to act of any officer of the corporation or of any person authorized by these bylaws to act in such officer's place, the Board of Directors may from time to time delegate the powers or duties of such Officer to any other officer, or any director or other person whom it may select, for such period of time as the Board of Directors deems necessary. SECTION 37. RESIGNATION. Any officer may resign at any time upon written notice to the corporation, without prejudice to the rights, if any, of the corporation under any contract to which such officer is a party. Such resignation shall be effective upon its receipt by the Chairman of the Board, the President, the Secretary or the Board of Directors, unless a different time is specified in the notice for effectiveness of such resignation. The acceptance of any such resignation shall not be necessary to make it effective unless otherwise specified in such notice. SECTION 38. REMOVAL. Any officer may resign at any time upon written notice to the corporation, without prejudice to the rights, if any, of the corporation under any contract to which such officer is a party. Such resignation shall be effective upon its receipt by the Chairman of the Board, the President, the Secretary or the Board of Directors, unless a different time is specified in the notice for effectiveness of such resignation. The acceptance of any such resignation shall not be necessary to make it effective unless otherwise specified in such notice. Any officer may be removed from office at any time, with or without cause, but subject to the rights, if any, of such officer under any contract of employment, by the Board of Directors or by any committee to whom such power of removal has been duly delegated, or, with regard to any officer who has been appointed by the chief executive officer pursuant to Section 35, by the chief executive officer or any other officer upon whom such power of removal may be conferred by the Board of Directors. SECTION 39. VACANCIES. A vacancy occurring in any office for any cause may be filled by the Board of Directors, in the manner prescribed by this Article of the bylaws for initial appointment to such office. SECTION 40. CHAIRMAN OF THE BOARD. The Chairman of the Board, if any, shall preside at all meetings of the Board of Directors and of the stockholders at which he shall be present. He/she shall have and may exercise such powers as are, from time to time, assigned to him by the Board and as may be provided by law. In the absence of the Chairman of the Board, the Vice Chairman of the Board, if any, shall preside at all meetings of the Board of Directors and of the stockholders at which he shall be present. He shall have and may exercise such powers as are, from time to time, assigned to him by the Board and as may be provided by law. SECTION 41. PRESIDENT. Subject to such powers, if any, as may be given by the Board of Directors to the Chairman of the Board, if there be such an officer, the President shall be the general manager and chief executive officer of the corporation and shall have general supervision, direction, and control over the business and affairs of the corporation, subject to the control of the Board of Directors. The President may sign and execute, in the name of the corporation, any instrument authorized by the Board of Directors, except when the signing and execution thereof shall have been expressly delegated by the Board of Directors or by these bylaws to some other officer or agent of the corporation. The President shall have all the general powers and duties of management usually vested in the president of a corporation, and shall have such other powers and duties as may be prescribed from time to time by the Board of Directors or these bylaws. The President shall have discretion to prescribe the duties of other officers and employees of the corporation in a manner not inconsistent with the provisions of these bylaws and the directions of the Board of Directors. SECTION 42. VICE PRESIDENTS. In the absence or disability of the President, in the event of a vacancy in the office of President, or in the event such officer refuses to act, the Vice President shall perform all the duties of the President and, when so acting, shall have all the powers of, and be subject to all the restrictions on, the President. If at any such time the corporation has more than one vice president, the duties and powers of the President shall pass to each vice president in order of such vice president's rank as fixed by the Board of Directors or, if the vice presidents are not so ranked, to the vice president designated by the Board of Directors. The vice presidents shall have such other powers and perform such other duties as may be prescribed for them from time to time by the Board of Directors or pursuant to Sections 34 and 35 or otherwise pursuant to these bylaws. SECTION 43. SECRETARY AND ASSISTANT SECRETARY. The Secretary shall: (a) Keep, or cause to be kept, minutes of all meetings of the corporation's stockholders, Board of Directors, and committees of the Board of Directors, if any. Such minutes shall be kept in written form. (b) Keep, or cause to be kept, at the principal executive office of the corporation, or at the office of its transfer agent or registrar, if any, a record of the corporation's stockholders, showing the names and addresses of all stockholders, and the number and classes of shares held by each. Such records shall be kept in written form or any other form capable of being converted into written form. (c) Give, or cause to be given, notice of all meetings of stockholders, directors and committees of the Board of Directors, as required by law or by these bylaws. (d) Keep the seal of the corporation, if any, in safe custody. (e) Exercise such powers and perform such duties as are usually vested in the office of secretary of a corporation, and exercise such other powers and perform such other duties as may be prescribed from time to time by the Board of Directors or these bylaws. If any assistant secretaries are appointed, the assistant secretary, or one of the assistant secretaries in the order of their rank as fixed by the Board of Directors or, if they are not so ranked, the assistant secretary designated by the Board of Directors, in the absence or disability of the Secretary or in the event of such officer's refusal to act or if a vacancy exists in the office of Secretary, shall perform the duties and exercise the powers of the Secretary and discharge Such duties as may be assigned from time to time pursuant to these bylaws or by the Board of Directors. SECTION 44. CHIEF FINANCIAL OFFICER. The Chief Financial Officer shall: (a) Be responsible for all functions and duties of the treasurer of the corporation. (b) Keep and maintain, or cause to be kept and maintained, adequate and correct books and records of account for the corporation. (c) Receive or be responsible for receipt of all monies due and payable to the corporation from any source whatsoever; have charge and custody of, and be responsible for, all monies and other valuables of the corporation and be responsible for deposit of all such monies in the name and to the credit of the corporation with such depositories as may be designated by the Board of Directors or a duly appointed and authorized committee of the Board of Directors. (d) Disburse or be responsible for the disbursement of the funds of the corporation as may be ordered by the Board of Directors or a duly appointed and authorized committee of the Board of Directors. (e) Render to the chief executive officer and the Board of Directors a statement of the financial condition of the corporation if called upon to do so. (f) Exercise such powers and perform such duties as are usually vested in the office of chief financial officer of a corporation, and exercise such other powers and perform such other duties as may be prescribed by the Board of Directors or these bylaws. If any assistant financial officer is appointed, the assistant financial officer, or one of the assistant financial officers, if there are more than one in the order of their rank as fixed by the Board of Directors or, if they are not so ranked, the assistant financial officer designated by the Board of Directors, shall, in the absence or disability of the Chief Financial Officer or in the event of such officer's refusal to act, perform the duties and exercise the powers of the Chief Financial Officer, and shall have such powers and discharge such duties as may be assigned from time to time pursuant to these bylaws or by the Board of Directors. SECTION 45. COMPENSATION. The compensation of the officers shall be fixed from time to time by the Board of Directors, and no officer shall be prevented from receiving such compensation by reason of the fact that such officer is also a director of the corporation. ARTICLE V CONTRACTS, LOANS, BANK ACCOUNTS, CHECKS AND DRAFTS SECTION 46. EXECUTION OF CONTRACTS AND OTHER INSTRUMENTS. Except as these bylaws may otherwise provide, the Board of Directors or its duly appointed and authorized committee may authorize any officer or officers, agent or agents, to enter into any contract or execute and deliver any instrument in the name of and on behalf of the corporation, and such authorization may be general or confined to specific instances. Except as so authorized or otherwise expressly provided in these bylaws, no officer, agent, or employee shall have any power or authority to bind the corporation by any contract or engagement or to pledge its credit or to render it liable for any purpose or in any amount. SECTION 47. LOANS. No loans shall be contracted on behalf of the corporation and no negotiable paper shall be issued in its name, unless and except as authorized by the Board of Directors or its duly appointed and authorized committee. When so authorized by the Board of Directors or such committee, any officer or agent of the corporation may effect loans and advances at any time for the corporation from any bank, trust company, or other institution, or from any firms, corporation or individual, and for such loans and advances may make, execute and deliver promissory notes, bonds or other evidences of indebtedness of the corporation and, when authorized as aforesaid, may mortgage, pledge, hypothecate or transfer any and all stocks, securities and other property, real or personal, at any time held by the corporation, and to that end endorse, assign and deliver the same as security for the payment of any and all loans, advances, indebtedness, and liabilities of the corporation. Such authorization may be general or confined to specific instances. SECTION 48. BANK ACCOUNTS. The Board of Directors or its duly appointed and authorized committee from time to time may authorize the opening and keeping of general and/or special bank accounts with such banks, trust companies, or other depositories as may be selected by the Board of Directors, its duly appointed and authorized committee or by any officer or officers, agent or agents, of the corporation to whom such power may be delegated from time to time by the Board of Directors. The Board of Directors or its duly appointed and authorized committee may make such rules and regulations with respect to said bank accounts, not inconsistent with the provisions of these bylaws, as are deemed advisable. SECTION 49. CHECKS, DRAFTS, ETC. All checks, drafts or other orders for the payment of money, notes, acceptances or other evidences of indebtedness issued in the name of the corporation shall be signed by such officer or officers, agent or agents, of the corporation, and in such manner, as shall be determined from time to time by resolution of the Board of Directors or its duly appointed and authorized committee. Endorsements for deposit to the credit of the corporation in any of its duly authorized depositories may be made, without counter-signature by the President or any vice president or the Chief Financial Officer or any assistant financial officer or by any other officer or agent of the corporation to whom the Board of Directors or its duly appointed and authorized committee, by resolution, shall have delegated such power or by hand-stamped impression in the name of the corporation. ARTICLE VI CERTIFICATES FOR STOCK AND THEIR TRANSFER SECTION 50. CERTIFICATE FOR STOCK. Every holder of shares in the corporation shall be entitled to have a certificate signed in the name of the corporation by the Chairman or Vice Chairman of the Board or the President or a Vice President and by the Chief Financial Officer or an assistant financial officer or by the Secretary or an assistant secretary, certifying the number of shares and the class or series of shares owned by the stockholder. Any or all of the signatures on the certificate may be facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the corporation with the same effect as if such person were an officer, transfer agent or registrar at the date of issue. In the event that the corporation shall issue any shares as only partly paid, the certificate issued to represent such partly paid shares shall have stated thereon the total consideration to be paid for such shares and the amount paid thereon. If the corporation shall be authorized to issue more than one class of stock or more than one series of any class, the powers, designations, preferences and relative, participating, optional or other special rights of each class of stock or series thereof and the qualification, limitations or restrictions of such preferences and/or rights shall be set forth in full or summarized on the face or back of the certificate that the corporation shall issue to represent such class or series of stock, provided that, except as otherwise provided in Section 202 of the General Corporation Law of Delaware, in lieu of the foregoing requirements, there may be set forth on the face or back of the certificate that the corporation shall issue to represent such class or series of stock, a statement that the corporation will furnish without charge to each stockholder who so requests the powers, designations, preferences and relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights. SECTION 51. TRANSFER ON THE BOOKS. Upon surrender to the Secretary or transfer agent (if any) of the corporation of a certificate for shares of the corporation duly endorsed, with reasonable assurance that the endorsement is genuine and effective, or accompanied by proper evidence of succession, assignment or authority to transfer and upon compliance with applicable federal and state securities laws and if the corporation has no statutory duty to inquire into adverse claims or has discharged any such duty and if any applicable law relating to the collection of taxes has been complied with, it shall be the duty of the corporation, by its Secretary or transfer agent, to cancel the old certificate, to issue a new certificate to the person entitled thereto and to record the transaction on the books of the corporation. SECTION 52. LOST, DESTROYED AND STOLEN CERTIFICATES. The holder of any certificate for shares of the corporation alleged to have been lost, destroyed or stolen shall notify the corporation by making a written affidavit or affirmation of such fact. Upon receipt of said affidavit or affirmation the Board of Directors, or its duly appointed and authorized committee or any officer or officers authorized by the Board so to do, may order the issuance of a new certificate for shares in the place of any certificate previously issued by the corporation and which is alleged to have been lost, destroyed or stolen. However, the Board of Directors or such authorized committee, officer or officers may require the owner of the allegedly lost, destroyed or stolen certificate, or such owner's legal representative, to give the corporation a bond or other adequate security sufficient to indemnify the corporation and its transfer agent and/or registrar, if any, against any claim that may be made against it or them on account of such allegedly lost, destroyed or stolen certificate or the replacement thereof. Said bond or other security shall be in such amount, on such terms and conditions and, in the case of a bond, with such surety or sureties as may be acceptable to the Board of Directors or to its duly appointed and authorized committee or any officer or officers authorized by the Board of Directors to determine the sufficiency thereof. The requirement of a bond or other security may be waived in particular cases at the discretion of the Board of Directors or its duly appointed and authorized committee or any officer or officers authorized by the Board of Directors so to do. SECTION 53. ISSUANCE, TRANSFER AND REGISTRATION OF SHARES. The Board of Directors may make such rules and regulations, not inconsistent with law or with these bylaws, as it may deem advisable concerning the issuance, transfer and registration of certificates for shares of the capital stock of the corporation. The Board of Directors may appoint a transfer agent or registrar of transfers, or both, and may require all certificates for shares of the corporation to bear the signature of either or both. ARTICLE VII INSPECTION OF CORPORATE RECORDS SECTION 54. INSPECTION BY DIRECTORS. Every director shall have the absolute right at any reasonable time to inspect and copy all books, records, and documents of every kind of the corporation and any of its subsidiaries and to inspect the physical properties of the corporation and any of its subsidiaries. Such inspection may be made by the director in person or by agent or attorney, and the right of inspection includes the right to copy and make extracts. SECTION 55. INSPECTION BY STOCKHOLDERS. (a) INSPECTION OF CORPORATE RECORDS. Any stockholder, in person or by attorney or other agent, shall, upon written demand under oath stating the purpose thereof, have the right during the usual hours for business to inspect for any proper purpose the corporation's stock ledger, a list of its stockholders, and its other books and records, and to make copies or extracts therefrom. A proper purpose shall mean a purpose reasonably related to such person's interest as a stockholder. In every instance where an attorney or other agent shall be the person who seeks the right to inspection, the demand under oath shall be accompanied by a power of attorney or such other writing which authorizes the attorney or other agent to so act on behalf of the stockholder. The demand under oath shall be directed to the corporation at is registered office in the State of Delaware or at its principal place of business. (b) INSPECTION OF BYLAWS. The original or a copy of these bylaws shall be kept as provided in Section 43 and shall be open to inspection by the stockholders at all reasonable times during office hours. A current copy of these bylaws shall be furnished to any stockholder upon written request. SECTION 56. WRITTEN FORM. If any record subject to inspection pursuant to Section 55 is not maintained in written form, a request for inspection is not complied with unless and until the corporation at its expense makes such record available in written form. ARTICLE VIII MISCELLANEOUS SECTION 57. FISCAL YEAR. Unless otherwise freed by resolution of the Board of Directors, the fiscal year of the corporation shall end on the 31st day of December in each calendar year. SECTION 58. ANNUAL REPORT. (a) Subject to the provisions of Section 58 (b), the Board of Directors shall cause an annual report to be/sent to each stockholder of the corporation in the manner provided in Section 8 of these bylaws not later than 120 days after the close of the corporation's fiscal year. Such report shall include a balance sheet as of the end of such fiscal year and an income statement and statement of changes in financial position for such fiscal year, accompanied by any report thereon of independent accountants or, if there is no such report, the certificate of an authorized officer of the corporation that such statements were prepared without audit from the books and records of the corporation. Such report shall be sent to stockholders at least 15 (or, if sent by third-class mail, 35) days prior to the next annual meeting of stockholders after the end of the fiscal year to which it relates. (b) If and so long as there are fewer than 100 holders of record of the corporation's shares, the requirement of sending of an annual report to the stockholders of the corporation is hereby expressly waived. SECTION 59. RECORD DATE. The Board of Directors may fix a time in the future as a record date for the determination of the stockholders entitled to notice of or to vote at any meeting or entitled to receive payment of any dividend or other distribution or allotment of any rights or entitled to exercise any rights in respect of any change, conversion or exchange of shares or entitled to exercise any rights in respect of any other lawful action. The record date so fixed shall not be more than 60 days nor less than 10 days prior to the date of the meeting nor more than 60 days prior to any other action or event for the purpose of which it is fixed. If no record date is fixed, the provisions of Section 14 shall apply with respect to notice of meetings, votes, and contents and the record date for determining stockholders for any other purpose shall be at the close of business on the day on which the Board of Directors adopt the resolutions relating thereto, or the 60th day prior to the date of such other action or event, whichever is later. Only stockholders of record at the close of business on the record date shall be entitled to notice and to vote or to receive the dividend, distribution or allotment of rights or to exercise the rights, as the case may be, notwithstanding any transfer of any shares on the books of the corporation after the record date, except as otherwise provided in the Certificate of Incorporation, by agreement or by law. SECTION 60. BYLAW AMENDMENTS. In furtherance and not in limitation of the powers conferred by law, the Board of Directors is expressly authorized to make, alter, amend and repeal these bylaws subject to the power of the holders of capital stock of the corporation to alter, amend or repeal the bylaws; provided, however, that, with respect to the powers of holders of capital stock to make, alter, amend and repeal bylaws of the corporation, notwithstanding any other provision of these bylaws or any provision of law which might otherwise permit a lesser vote or no vote, but in addition to any affirmative vote of the holders of any particular class or series of the capital stock of the corporation required by law, these bylaws or any preferred stock, the affirmative vote of the holders of at least a majority of the combined voting power of all of the then-outstanding shares entitled to vote generally in the election of directors, voting together as a single class, shall be required to make, alter, amend or repeal any provision of these bylaws. SECTION 61. CONSTRUCTION AND DEFINITION. Unless the context requires otherwise, the general provisions, rules of construction, and definitions contained in the Delaware General Corporation Law shall govern the construction of these bylaws. Without limiting the foregoing, "shall" is mandatory and "may" is permissive. SECTION 62. REGISTERED STOCKHOLDERS. The corporation shall be entitled to recognize the exclusive right of a person registered on its books as the owner of shares to receive dividends, and to vote as such owner, and to hold liable for calls and assessments a person registered on its books as the owner of shares and shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise provided by the laws of Delaware. SECTION 63. DIVIDENDS. Dividends upon the capital stock of the corporation, subject to the provisions of the certificate of incorporation, if any, may be declared by the Board of Directors at any regular or special meeting, pursuant to law. Dividends may be paid in cash, in property, or in shares of the capital stock, subject to the provisions of the certificate of incorporation. Before payment of any dividend, there may be set aside out of any funds of the corporation available for dividends such sum of sums as the directors from time to time, in their absolute discretion, think proper as a reserve or reserves to meet contingencies, or for equalizing dividends, or for repairing or maintaining any property of the corporation, or for such other purposes as the directors shall think conducive to the interest of the corporation, and the directors may modify or abolish any such reserve in the manner in which it was created. ARTICLE IX. INDEMNIFICATION OF DIRECTORS AND OFFICERS SECTION 64. RIGHT TO INDEMNIFICATION. Each person who was or is made a party or is threatened to be made a party to or is otherwise involved in any action, suit or proceeding, whether civil, criminal, administrative or investigative (hereinafter a "proceeding"), by reason of the fact that he or she is or was a director or an executive officer of the corporation or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation or of a partnership, joint venture, trust or other enterprise, including service with respect to an employee benefit plan (hereinafter an "indemnitee"), whether the basis of such proceeding is alleged action in an official capacity as a director, officer, employee or agent or in any other capacity while serving as a director, officer, employee or agent, shall be indemnified and held harmless by the corporation to the fullest extent authorized by the Delaware General Corporation Law, as the same exists or may hereafter be amended (but, in the case of any such amendment, only to the extent that such amendment permits the corporation to provide broader indemnification rights than such law permitted the corporation to provide prior to such amendment), against all expense, liability and loss (including attorneys' fees, judgments, fines, ERISA excise taxes or penalties and amounts paid in settlement) reasonably incurred or suffered by such indemnitee in connection therewith; provided, however, that, except as provided in Section 66 with respect to proceedings to enforce rights to indemnification, the corporation shall indemnify any such indemnitee in connection with a proceeding (or part thereof) initiated by such indemnitee only if such proceeding (or part thereof) was authorized by the Board of Directors of the corporation. SECTION 65. RIGHT TO ADVANCEMENT OF EXPENSES. The right to indemnification conferred in Section 64 shall include the right to be paid by the corporation the expenses (including attorney's fees) incurred in defending any such proceeding in advance of its final disposition (hereinafter an "advancement of expenses"); provided, however, that, if the Delaware General Corporation Law requires, an advancement of expenses incurred by an indemnitee in his or her capacity as a director or officer (and not in any other capacity in which service was or is rendered by such indemnitee, including, without limitation, service to an employee benefit plan) shall be made only upon delivery to the corporation of an undertaking (hereinafter an "undertaking"), by or on behalf of such indemnitee, to repay all amounts so advanced if it shall ultimately be determined by final judicial decision from which there is no further right to appeal (hereinafter a "final adjudication") that such indemnitee is not entitled to be indemnified for such expenses under this Section 65 or otherwise. The rights to indemnification and to the advancement of expenses conferred in Sections 64 and 65 shall be contract rights and such rights shall continue as to an indemnitee who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the indemnitee's heirs, executors and administrators. SECTION 66. RIGHT OF INDEMNITEE TO BRING SUIT. If a claim under Section 64 or 65 of this ARTICLE IX is not paid in full by the corporation within 60 days after a written claim has been received by the corporation, except in the case of a claim for an advancement of expenses, in which case the applicable period shall be 20 days, the indemnitee may at any time thereafter bring suit against the corporation to recover the unpaid amount of the claim. If successful in whole or in part in any such suit, or in a suit brought by the corporation to recover an advancement of expenses pursuant to the terms of an undertaking, the indemnitee shall be entitled to be paid also the expense of prosecuting or defending such suit. In (i) any suit brought by the indemnitee to enforce a right to indemnification hereunder (but not in a suit brought by the indemnitee to enforce a right to an advancement of expenses) it shall be a defense that, and (ii) in any suit brought by the corporation to recover an advancement of expenses pursuant to the terms of an undertaking, the corporation shall be entitled to recover such expenses upon a final adjudication that, the indemnitee has not met any applicable standard for indemnification set forth in the Delaware General Corporation Law. Neither the failure of the corporation (including its Board of Directors, independent legal counsel, or its stockholders) to have made a determination prior to the commencement of such suit that indemnification of the indemnitee is proper in the circumstances because the indemnitee has met the applicable standard of conduct set forth in the Delaware General Corporation Law, nor an actual determination by the corporation (including its Board of Directors, independent legal counsel, or its stockholders) that the indemnitee has not met such applicable standard of conduct, shall create a presumption that the indemnitee has not met the applicable standard of conduct or, in the case of such a suit brought by the indemnitee, be a defense to such suit. In any suit brought by the indemnitee to enforce a right to indemnification or to an advancement of expenses hereunder, or brought by the corporation to recover an advancement of expenses pursuant to the terms of an undertaking, the burden of proving that the indemnitee is not entitled to be indemnified, or to such advancement of expenses, under this ARTICLE IX or otherwise shall be on the corporation. SECTION 67. NON-EXCLUSIVITY OF RIGHTS. The rights to indemnification and to the advancement of expenses conferred in this ARTICLE IX shall not be exclusive of any other right which any person may have or hereafter acquire under any statute, the corporation's Certificate of Incorporation, bylaws, agreement, vote of stockholders or disinterested directors or otherwise. SECTION 68. INSURANCE. The corporation may maintain insurance, at its expense, to protect itself and any director, officer, employee or agent of the corporation or another corporation, partnership, joint venture, trust or other enterprise against any expense, liability or loss, whether or not the corporation would have the power to indemnify such person against such expense, liability or loss under the Delaware General Corporation Law. SECTION 69. INDEMNIFICATION OF EMPLOYEES AND AGENTS OF THE CORPORATION. The corporation may, to the extent authorized from time to time by the Board of Directors, grant rights to indemnification and to the advancement of expenses to any officer, employee or agent of the corporation to the fullest extent of the provisions of this Article with respect to the indemnification and advancement of expenses of directors and executive officers of the corporation. EX-10.08 3 EX-10.08 HYBRID NETWORKS, INC. 1999 STOCK OPTION PLAN AS ADOPTED AS OF MAY 5, 1999 AND AMENDED AS OF AUGUST 10, 1999 AND OCTOBER 7, 1999 1. PURPOSE. The purpose of this Plan is to provide incentives to attract, retain and motivate eligible persons whose present and potential contributions are important to the success of the Company by offering them an opportunity to participate in the Company's future performance through awards of Options. CAPITALIZED TERMS NOT DEFINED IN THE TEXT ARE DEFINED IN SECTION 20 HEREOF. 2. SHARES SUBJECT TO THE PLAN. 2.1 NUMBER OF SHARES AVAILABLE. Subject to Sections 2.2 and 15 hereof, the total number of Shares reserved and available for grant and issuance pursuant to this Plan will be 4,000,000 Shares. Subject to Sections 2.2 and 15 hereof, Shares will again be available for grant and issuance in connection with future Awards under this Plan to the extent such Shares: (a) cease to be subject to issuance upon exercise of an Option, other than due to exercise of such Option; or (b) are subject to an Award that otherwise terminates without Shares being issued. At all times the Company will reserve and keep available a sufficient number of Shares as will be required to satisfy the requirements of all Awards granted under this Plan. 2.2 ADJUSTMENT OF SHARES. In the event that the number of outstanding shares of the Company's Common Stock is changed by a stock dividend, recapitalization, stock split, reverse stock split, subdivision, combination, reclassification or similar change in the capital structure of the Company without consideration, then (a) the number of Shares reserved for issuance under this Plan and (b) the Exercise Prices of and number of Shares subject to outstanding Options will be proportionately adjusted, subject to any required action by the Board or the stockholders of the Company and compliance with applicable securities laws; provided, however, that fractions of a Share will not be issued but will either be paid in cash at Fair Market Value of such fraction of a Share or will be rounded down to the nearest whole Share, as determined by the Committee. 3. ELIGIBILITY. Awards may be granted only to employees (including officers and directors who are also employees) or consultants of the Company or of a Parent or Subsidiary of the Company who meet the suitability standards set forth below in this Section 3. A person may be granted more than one Award under this Plan. To be eligible to receive options under this Plan, a person must meet the following suitability standards: Such person must either (a) be an officer or director of the Company, (b) have a pre-existing personal or business relationship with the Company or any of its officers, directors or controlling persons or (c) by reason of such person's business or financial experience or the business or financial experience of such person's professional advisor who is unaffiliated with and who is not compensated by the Company or any affiliate or selling agent of the Company, directly or indirectly, could be reasonably assumed to protect such person's own interests in connection with the Options. The foregoing suitability standards are intended to comply, and shall be interpreted in a manner consistent with, the excemption from qualification under the California securities laws provided by Section 25102(f) of the California Corporations Code and the regulations thereunder. 4. ADMINISTRATION. 4.1 COMMITTEE AUTHORITY. This Plan will be administered by the Committee or by the Board acting as the Committee. Subject to the general purposes, terms and conditions of this Plan, and to the direction of the Board, the Committee will have full power to implement and carry out this Plan. Without limitation, the Committee will have the authority to: (a) construe and interpret this Plan, any Stock Option Agreement and any other agreement or document executed pursuant to this Plan; (b) prescribe, amend and rescind rules and regulations relating to this Plan or any Award; (c) select persons to receive Awards; (d) determine the form and terms of Awards; (e) determine the number of Shares or other consideration subject to Awards; (f) determine whether Awards will be granted singly, in combination with, in tandem with, in replacement of, or as alternatives to, other Awards under this Plan or awards under any other incentive or compensation plan of the Company or any Parent or Subsidiary of the Company; (g) grant waivers of Plan or Award conditions; (h) determine the vesting, exercisability and payment of Awards; (i) correct any defect, supply any omission, or reconcile any inconsistency in this Plan, any Award, any Stock Option Agreement or any Exercise Agreement; and (j) make all other determinations necessary or advisable for the administration of this Plan. 4.2 COMMITTEE DISCRETION. Any determination made by the Committee with respect to any Award will be made in its sole discretion at the time of grant of the Award or, unless in contravention of any express term of this Plan or Award, and subject to Section 5.8 hereof, at any later time, and such determination will be final and binding on the Company and on all persons having an interest in any Award under this Plan. The Committee may delegate to one or more officers of the Company the authority to grant an Award under this Plan. 5. OPTIONS. The Committee may grant Options to eligible persons and will determine whether such Options will be Incentive Stock Options within the meaning of the Code ("ISOs") or Nonqualified Stock Options ("NQSOs"), the number of Shares subject to the Option, the Exercise Price of the Option, the period during which the Option may be exercised and all other terms and conditions of the Option, subject to the following: 5.1 FORM OF OPTION GRANT. Each Option granted under this Plan will be evidenced by a Stock Option Agreement which will expressly identify the Option as an ISO or an NQSO and will be in such form and contain such provisions (which need not be the same for each Participant) as the Committee may from time to time approve, and which will comply with and be subject to the terms and conditions of this Plan. 5.2 DATE OF GRANT. The date of grant of an Option will be the date on which the Committee makes the determination to grant such Option, unless otherwise specified by the Committee. The Stock Option Agreement and a copy of this Plan will be delivered to the Participant within a reasonable time after the granting of the Option. 5.3 EXERCISE PERIOD. Options may be exercisable within the times or upon the events determined by the Committee as set forth in the Stock Option Agreement governing such Option; provided, however, that no Option will be exercisable after the expiration of ten years from the date the Option is granted and provided further that no ISO granted to a person who directly or by attribution owns more than 10% of the total combined voting power of all classes of stock of the Company or any Parent or Subsidiary of the Company ("TEN PERCENT STOCKHOLDER") will be exercisable after the expiration of five years from the date the ISO is granted. The Committee also may provide for Options to become exercisable at one time or from time to time, periodically or otherwise, in such number of Shares or percentage of Shares as the Committee determines. Notwithstanding the foregoing, Options to Participants who are not officers, directors or consultants of the Company, or of any Parent or Subsidiary of the Company, must become exercisable at a rate of at least 20% per year over five years from the date the Option is granted, subject to earlier termination of the Option pursuant to Sections 5.6 and 15. 5.4 EXERCISE PRICE. The Exercise Price of an Option will be determined by the Committee when the Option is granted, provided that: (i) the Exercise Price of an ISO will not be less than 100% of the Fair Market Value of the Shares on the date of grant; and (ii) the Exercise Price of any Option granted to a Ten Percent Stockholder will not be less than 110% of the Fair Market Value of the Shares on the date of grant. Payment for the Shares purchased must be made in accordance with Section 6 hereof. 5.5 METHOD OF EXERCISE. Options may be exercised only by delivery to the Company of a written stock option exercise agreement (the "EXERCISE AGREEMENT") in a form approved by the Committee (which need not be the same for each Participant), stating the number of Shares being purchased, the restrictions imposed on the Shares purchased under such Exercise Agreement, if any, and such representations and agreements regarding Participant's investment intent and access to information and other matters, if any, as may be required or desirable by the Company to comply with applicable securities laws, together with payment in full of the Exercise Price, and any applicable taxes, for the number of Shares being purchased. 5.6 TERMINATION. Subject to earlier termination pursuant to Section 15 hereof and notwithstanding the exercise periods set forth in the Stock Option Agreement, exercise of an Option will always be subject to the following: (a) If the Participant is Terminated for any reason except death, Disability or for Cause, then the Participant may exercise such Participant's Options only to the extent that such Options are exercisable upon the Termination Date and such Options must be exercised by the Participant, if at all, as to all or some of the Vested Shares calculated as of the Termination Date, within three months after the Termination Date (or within such shorter time period, not less than 30 days, or within such longer time period, not exceeding five years, as may be determined by the Committee, with any exercise beyond three months after the Termination Date deemed to be an ISO), but in any event no later than the expiration date of the Options. (b) If the Participant is Terminated because of Participant's death or Disability (or the Participant dies within three months after a Termination other than because of Participant's death or Disability), then Participant's Options may be exercised only to the extent that such Options would have been exercisable by Participant on the Termination Date and must be exercised by Participant (or Participant's legal representative or authorized assignee), no later than 12 months after the Termination Date (or within such shorter time period, not less than six months, or within such longer time period, not exceeding five years, as may be determined by the Committee, with any such exercise beyond (i) three months after the Termination Date when the Termination is for any reason other than the Participant's death or Disability or (ii) 12 months after the Termination Date when the Termination is for the Participant's death or Disability, deemed to be an NQSO), but in any event no later than the expiration date of the Options. (c) Notwithstanding the provisions in paragraph 5.6(a) above, if a Participant is terminated for Cause, neither the Participant, the Participant's estate nor such other person who may then hold the Option shall be entitled to exercise any Option with respect to any Shares whatsoever, after termination of service, whether or not after termination of service the Participant may receive payment from the Company or Subsidiary for vacation pay, for services rendered prior to termination, for services rendered for the day on which termination occurs, for salary in lieu of notice, or for any other benefits. In making such determination, the Board shall give the Participant an opportunity to present to the Board evidence on his behalf. For the purpose of this paragraph, termination of service shall be deemed to occur on the date when the Company dispatches notice or advice to the Participant that his service is terminated. 5.7 LIMITATIONS ON EXERCISE. The Committee may specify a reasonable minimum number of Shares that may be purchased on any exercise of an Option, provided that such minimum number will not prevent Participant from exercising the Option for the full number of Shares for which it is then exercisable. 5.8 LIMITATIONS ON ISOs. The aggregate Fair Market Value (determined as of the date of grant) of Shares with respect to which ISOs are exercisable for the first time by a Participant during any calendar year (under this Plan or under any other incentive stock option plan of the Company, Parent or Subsidiary of the Company) will not exceed $100,000. If the Fair Market Value of Shares on the date of grant with respect to which ISOs are exercisable for the first time by a Participant during any calendar year exceeds $100,000, then the Options for the first $100,000 worth of Shares to become exercisable in such calendar year will be ISOs and the Options for the amount in excess of $100,000 that become exercisable in that calendar year will be NQSOs. In the event that the Code or the regulations promulgated thereunder are amended after the Effective Date of this Plan to provide for a different limit on the Fair Market Value of Shares permitted to be subject to ISOs, such different limit will be automatically incorporated herein and will apply to any Options granted after the effective date of such amendment. 5.9 MODIFICATION, EXTENSION OR RENEWAL. The Committee may modify, extend or renew outstanding Options and authorize the grant of new Options in substitution therefor, provided that any such action may not, without the written consent of a Participant, impair any of such Participant's rights under any Option previously granted. Any outstanding ISO that is modified, extended, renewed or otherwise altered will be treated in accordance with Section 424(h) of the Code. The Committee may reduce the Exercise Price of outstanding Options without the consent of Participants affected by a written notice to them; provided, however, that the Exercise Price may not be reduced below the minimum Exercise Price that would be permitted under Section 5.4 hereof for Options granted on the date the action is taken to reduce the Exercise Price. 5.10 NO DISQUALIFICATION. Notwithstanding any other provision in this Plan, no term of this Plan relating to an ISO will be interpreted, amended or altered, nor will any discretion or authority granted under this Plan be exercised, so as to disqualify this Plan under Section 422 of the Code or, without the consent of the Participant affected, to disqualify any ISO under Section 422 of the Code. 6. PAYMENT FOR SHARE PURCHASES. 6.1 PAYMENT. Payment for Shares purchased pursuant to this Plan may be made in cash (by check) or, where expressly approved for the Participant by the Committee and, where permitted by law, by any of the means set forth below: (a) by cancellation of indebtedness of the Company to the Participant; (b) by surrender of shares that: (i) either (A) have been owned by Participant for more than six months and have been paid for within the meaning of SEC Rule 144 (and, if such shares were purchased from the Company by use of a promissory note, such note has been fully paid with respect to such shares) or (B) were obtained by Participant in the public market and (ii) are clear of all liens, claims, encumbrances or security interests; (c) by tender of a full recourse promissory note having such terms as may be approved by the Committee and bearing interest at a rate sufficient to avoid imputation of income under Sections 483 and 1274 of the Code; provided, however, that the portion of the Exercise Price equal to the par value of the Shares must be paid in cash or other legal consideration permitted by Delaware General Corporation Law (Participants who are not employees or directors of the Company will not be entitled to purchase Shares with a promissory note unless the note is adequately secured by collateral other than the Shares); (d) by waiver of compensation due or accrued to the Participant for services rendered; (e) with respect only to purchases upon exercise of an Option, and provided that a public market for the Company's stock exists: (1) through a "same day sale" commitment from the Participant and a broker-dealer that is a member of the National Association of Securities Dealers (an "NASD DEALER") whereby the Participant irrevocably elects to exercise the Option and to sell a portion of the Shares so purchased to pay for the Exercise Price, and whereby the NASD Dealer irrevocably commits upon receipt of such Shares to forward the Exercise Price directly to the Company; or (2) through a "margin" commitment from the Participant and an NASD Dealer whereby the Participant irrevocably elects to exercise the Option and to pledge the Shares so purchased to the NASD Dealer in a margin account as security for a loan from the NASD Dealer in the amount of the Exercise Price, and whereby the NASD Dealer irrevocably commits upon receipt of such Shares to forward the Exercise Price directly to the Company; or (f) by any combination of the foregoing. 6.2 LOAN GUARANTEES. The Committee may help the Participant pay for Shares purchased under this Plan by authorizing a guarantee by the Company of a third-party loan to the Participant. 7. WITHHOLDING TAXES. 7.1 WITHHOLDING GENERALLY. Whenever Shares are to be issued in satisfaction of Awards granted under this Plan, the Company may require the Participant to remit to the Company an amount sufficient to satisfy federal, state and local withholding tax requirements prior to the delivery of any certificate or certificates for such Shares. Whenever, under this Plan, payments in satisfaction of Awards are to be made in cash, such payment will be net of an amount sufficient to satisfy federal, state, and local withholding tax requirements. 7.2 STOCK WITHHOLDING. When, under applicable tax laws, a Participant incurs tax liability in connection with the exercise or vesting of any Award that is subject to tax withholding and the Participant is obligated to pay the Company the amount required to be withheld, the Committee may in its sole discretion allow the Participant to satisfy the minimum withholding tax obligation by electing to have the Company withhold from the Shares to be issued that number of Shares having a Fair Market Value equal to the minimum amount required to be withheld, determined on the date that the amount of tax to be withheld is to be determined. All elections by a Participant to have Shares withheld for this purpose will be made in accordance with the requirements established by the Committee for such elections and be in writing in a form acceptable to the Committee. 8. PRIVILEGES OF STOCK OWNERSHIP. 8.1 VOTING AND DIVIDENDS. No Participant will have any of the rights of a stockholder with respect to any Shares until the Shares are issued to the Participant. After Shares are issued to the Participant, the Participant will be a stockholder and have all the rights of a stockholder with respect to such Shares, including the right to vote and receive all dividends or other distributions made or paid with respect to such Shares. The Company will comply with Section 260.140.1 of Title 10 of the California Code of Regulations with respect to the voting rights of Common Stock. 8.2 FINANCIAL STATEMENTS. The Company will provide financial statements to each Participant prior to such Participant's purchase of Shares under this Plan, and to each Participant annually during the period such Participant has Options outstanding, or as otherwise required under Section 260.140.46 of Title 10 of the California Code of Regulations. Notwithstanding the foregoing, the Company will not be required to provide such financial statements to Participants when issuance is limited to Participants whose services in connection with the Company assure them access to equivalent information. 9. TRANSFERABILITY. Options granted under this Plan, and any interest therein, will not be transferable or assignable by Participant, and may not be made subject to execution, attachment or similar process, otherwise than by will or by the laws of descent and distribution or as determined by the Committee and set forth in the Stock Option Agreement with respect to Options that are not ISOs. During the lifetime of the Participant an Option will be exercisable only by the Participant or Participant's legal representative, and any elections with respect to an Option may be made only by the Participant or Participant's legal representative unless otherwise determined by the Committee and set forth in the Stock Option Agreement with respect to Options that are not ISOs. 10. CERTIFICATES. All certificates for Shares or other securities delivered under this Plan will be subject to such stock transfer orders, legends and other restrictions as the Committee may deem necessary or advisable, including restrictions under any applicable federal, state or foreign securities law, or any rules, regulations and other requirements of the SEC or any stock exchange or automated quotation system upon which the Shares may be listed or quoted. 11. ESCROW; PLEDGE OF SHARES. To enforce any restrictions on a Participant's Shares, the Committee may require the Participant to deposit all certificates representing Shares, together with stock powers or other instruments of transfer approved by the Committee, appropriately endorsed in blank, with the Company or an agent designated by the Company to hold in escrow until such restrictions have lapsed or terminated, and the Committee may cause a legend or legends referencing such restrictions to be placed on the certificates. Any Participant who is permitted to execute a promissory note as partial or full consideration for the purchase of Shares under this Plan will be required to pledge and deposit with the Company all or part of the Shares so purchased as collateral to secure the payment of Participant's obligation to the Company under the promissory note; provided, however, that the Committee may require or accept other or additional forms of collateral to secure the payment of such obligation and, in any event, the Company will have full recourse against the Participant under the promissory note notwithstanding any pledge of the Participant's Shares or other collateral. In connection with any pledge of the Shares, Participant will be required to execute and deliver a written pledge agreement in such form as the Committee will from time to time approve. The Shares purchased with the promissory note may be released from the pledge on a pro rata basis as the promissory note is paid. 12. EXCHANGE AND BUYOUT OF AWARDS. The Committee may, at any time or from time to time, authorize the Company, with the consent of the respective Participants, to issue new Awards in exchange for the surrender and cancellation of any or all outstanding Awards. The Committee may at any time buy from a Participant an Award previously granted with payment in cash, shares of Common Stock of the Company or other consideration, based on such terms and conditions as the Committee and the Participant may agree. 13. SECURITIES LAW AND OTHER REGULATORY COMPLIANCE. An Award will not be effective unless such Award is in compliance with all applicable federal and state securities laws, rules and regulations of any governmental body, and the requirements of any stock exchange or automated quotation system upon which the Shares may then be listed or quoted, as they are in effect on the date of grant of the Award and also on the date of exercise or other issuance. Notwithstanding any other provision in this Plan, the Company will have no obligation to issue or deliver certificates for Shares under this Plan prior to (a) obtaining any approvals from governmental agencies that the Company determines are necessary or advisable, and/or (b) compliance with any exemption, completion of any registration or other qualification of such Shares under any state or federal law or ruling of any governmental body that the Company determines to be necessary or advisable. The Company will be under no obligation to register the Shares with the SEC or to effect compliance with the exemption, registration, qualification or listing requirements of any state securities laws, stock exchange or automated quotation system, and the Company will have no liability for any inability or failure to do so. 14. NO OBLIGATION TO EMPLOY. Nothing in this Plan or any Award granted under this Plan will confer or be deemed to confer on any Participant any right to continue in the employ of, or to continue any other relationship with, the Company or any Parent or Subsidiary of the Company or limit in any way the right of the Company or any Parent or Subsidiary of the Company to terminate Participant's employment or other relationship at any time, with or without Cause. 15. CORPORATE TRANSACTIONS. 15.1 ASSUMPTION OR REPLACEMENT OF AWARDS BY SUCCESSOR OR ACQUIRING CORPORATION. In the event of (a) a dissolution or liquidation of the Company, (b) a merger or consolidation in which the Company is not the surviving corporation (other than a merger or consolidation with a wholly-owned subsidiary, a reincorporation of the Company in a different jurisdiction, or other transaction in which there is no substantial change in the stockholders of the Company or their relative stock holdings and the Awards granted under this Plan are assumed, converted or replaced by the successor or acquiring corporation, which assumption, conversion or replacement will be binding on all Participants), (c) a merger in which the Company is the surviving corporation but after which the stockholders of the Company immediately prior to such merger (other than any stockholder which merges with the Company in such merger, or which owns or controls another corporation which merges, with the Company in such merger) cease to own their shares or other equity interests in the Company, (d) the sale of all or substantially all of the assets of the Company or (e) the acquisition, sale or transfer of more than 50% of the outstanding shares of the Company by tender offer or similar transaction, any or all outstanding Awards may be assumed, converted or replaced by the successor or acquiring corporation (if any), which assumption, conversion or replacement will be binding on all Participants. In the alternative, the successor or acquiring corporation may substitute equivalent Awards or provide substantially similar consideration to Participants as was provided to stockholders (after taking into account the existing provisions of the Awards). The successor or acquiring corporation may also issue, in place of outstanding Shares of the Company held by the Participant, substantially similar shares or other property subject to repurchase restrictions and other provisions no less favorable to the Participant than those which applied to such outstanding Shares immediately prior to such transaction described in this Section 15.1. In the event such successor or acquiring corporation (if any) refuses to assume or substitute Awards, as provided above, pursuant to a transaction described in this Section 15.1, then notwithstanding any other provision in this Plan to the contrary, such Awards will expire on such transaction at such time and on such conditions as the Board will determine; provided, however, that the Committee may, in its sole discretion, provide that the vesting of any or all Awards granted pursuant to this Plan will accelerate. If the Committee exercises such discretion with respect to Options, such Options will become exercisable in full prior to the consummation of such event at such time and on such conditions as the Committee determines, and if such Options are not exercised prior to the consummation of the corporate transaction, they shall terminate at such time as determined by the Committee. 15.2 OTHER TREATMENT OF AWARDS. Subject to any greater rights granted to Participants under the foregoing provisions of this Section 15, in the event of the occurrence of any transaction described in Section 15.1 hereof, any outstanding Awards will be treated as provided in the applicable agreement or plan of merger, consolidation, dissolution, liquidation or sale of assets. 15.3 ASSUMPTION OF AWARDS BY THE COMPANY. The Company, from time to time, also may substitute or assume outstanding awards granted by another company, whether in connection with an acquisition of such other company or otherwise, by either (a) granting an Award under this Plan in substitution of such other company's award or (b) assuming such award as if it had been granted under this Plan if the terms of such assumed award could be applied to an Award granted under this Plan. Such substitution or assumption will be permissible if the holder of the substituted or assumed award would have been eligible to be granted an Award under this Plan if the other company had applied the rules of this Plan to such grant. In the event the Company assumes an award granted by another company, the terms and conditions of such award will remain unchanged (except that the exercise price and the number and nature of shares issuable upon exercise of any such option will be adjusted appropriately pursuant to Section 424(a) of the Code). In the event the Company elects to grant a new Option rather than assuming an existing option, such new Option may be granted with a similarly adjusted Exercise Price. 16. ADOPTION OF PLAN. This Plan will become effective on the date that it is adopted by the Board (the "EFFECTIVE DATE"). If any Options are ISOs, this Plan will be approved by the stockholders of the Company (excluding Shares issued pursuant to this Plan), consistent with applicable laws, within 12 months after the Plan is adopted by the Board (if such approval is not obtained, the Options will be NQSOs). Upon the Effective Date, the Committee may grant Options pursuant to this Plan; provided, however, that the following requirements will be met for any Option that is an ISO (otherwise the Option will be an NQSO): (a) the Option may not be exercised prior to initial stockholder approval of this Plan, and (b) any Option granted pursuant to an increase in the number of Shares subject to this Plan approved by the Board may not be exercised prior to approval of such increase by the stockholders of the Company. 17. TERM OF PLAN/GOVERNING LAW. Unless earlier terminated as provided herein, this Plan will terminate ten years from the Effective Date or, if earlier, the date of stockholder approval. This Plan and all agreements hereunder shall be governed by and construed in accordance with the laws of the State of California excluding that body of law pertaining to conflict of laws. 18. AMENDMENT OR TERMINATION OF PLAN. The Board may at any time terminate or amend this Plan in any respect, including without limitation amendment of any form of Stock Option Agreement or instrument to be executed pursuant to this Plan; provided, however, that the Board will not, without the approval of the stockholders of the Company, amend this Plan in any manner that requires such stockholder approval. 19. NONEXCLUSIVITY OF THE PLAN. Neither the adoption of this Plan by the Board, the submission of this Plan to the stockholders of the Company for approval, nor any provision of this Plan will be construed as creating any limitations on the power of the Board to adopt such additional compensation arrangements as it may deem desirable, including, without limitation, the granting of stock options and other equity awards otherwise than under this Plan, and such arrangements may be either generally applicable or applicable only in specific cases. 20. DEFINITIONS. As used in this Plan, the following terms will have the following meanings: "AWARD" means any award of Options under this Plan. "BOARD" means the Board of Directors of the Company. "CAUSE" means Termination because of (a) any willful material violation by the Participant of any law or regulation applicable to the business of the Company or a Parent or Subsidiary of the Company, the Participant's conviction for, or guilty plea to, a felony or a crime involving moral turpitude, any willful perpetration by the Participant of a common law fraud, (b) the Participant's commission of an act of personal dishonesty which involves personal profit in connection with the Company or any other entity having a business relationship with the Company, (c) any material breach by the Participant of any provision of any agreement or understanding between the Company or any Parent or Subsidiary of the Company and the Participant regarding the terms of the Participant's service as an employee, director or consultant to the Company or a Parent or Subsidiary of the Company, including without limitation, the willful and continued failure or refusal of the Participant to perform the material duties required of such Participant as an employee, director or consultant of the Company or a Parent or Subsidiary of the Company, other than as a result of having a Disability, or a breach of any applicable invention assignment and confidentiality agreement or similar agreement between the Company and the Participant, (d) Participant's disregard of the policies of the Company or any Parent or Subsidiary of the Company so as to cause loss, damage or injury to the property, reputation or employees of the Company or a Parent or Subsidiary of the Company or (e) any other misconduct by the Participant which is materially injurious to the financial condition or business reputation of, or is otherwise materially injurious to, the Company or a Parent or Subsidiary of the Company. "CODE" means the Internal Revenue Code of 1986, as amended. "COMMITTEE" means the committee appointed by the Board to administer this Plan, or if no committee is appointed, the Board. "COMPANY" means Hybrid Networks, Inc., or any successor corporation. "DISABILITY" means a disability, whether temporary or permanent, partial or total, within the meaning of Section 22(e)(3) of the Code, as determined by the Committee. "EXERCISE PRICE" means the price at which a holder of an Option may purchase the Shares issuable upon exercise of the Option. "FAIR MARKET VALUE" means, as of any date, the value of a share of the Company's Common Stock determined as follows: (a) if such Common Stock is then quoted on the Nasdaq National Market, its closing price on the Nasdaq National Market on the date of determination as reported in THE WALL STREET JOURNAL; (b) if such Common Stock is publicly traded and is then listed on a national securities exchange, its closing price on the date of determination on the principal national securities exchange on which the Common Stock is listed or admitted to trading as reported in THE WALL STREET JOURNAL; (c) if such Common Stock is publicly traded but is not quoted on the Nasdaq National Market nor listed or admitted to trading on a national securities exchange, and if current information about the Company is publicly available so as to comply with SEC Rule 144(c), the average of the closing bid and asked prices on the date of determination as reported by THE WALL STREET JOURNAL (or, if not so reported, as otherwise reported by any newspaper or other source as the Board may determine); or (d) if none of the foregoing is applicable, by the Committee in good faith. "OPTION" means an award of an option to purchase Shares pursuant to Section 5 hereof. "PARENT" means any corporation (other than the Company) in an unbroken chain of corporations ending with the Company if each of such corporations other than the Company owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in such chain "PARTICIPANT" means a person who receives an Award under this Plan "PLAN" means this Hybrid Networks, Inc. 1999 Stock Option Plan, as amended from time to time. "SEC" means the Securities and Exchange Commission. "SECURITIES ACT" means the Securities Act of 1933, as amended. "SHARES" means shares of the Company's Common Stock reserved for issuance under this Plan, as adjusted pursuant to Sections 2 and 15 hereof, and any successor security. "STOCK OPTION AGREEMENT" means, with respect to each Option, the signed written agreement between the Company and the Participant setting forth the terms and conditions of the Award. "SUBSIDIARY" means any corporation (other than the Company) in an unbroken chain of corporations beginning with the Company if each of the corporations other than the last corporation in the unbroken chain owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. "TERMINATION" or "TERMINATED" means, for purposes of this Plan with respect to a Participant, that the Participant has for any reason ceased to provide substantial services as (a) an employee, officer, director, consultant or independent contractor to the Company or a Parent or Subsidiary or affiliate of the Company, or (b) as a consultant, independent contractor or advisor to the Board of Directors of the Company. A Participant will not be deemed to have ceased to provide services in the case of (i) sick leave, (ii) military leave, or (iii) any other leave of absence approved by the Committee, provided that such leave is for a period of not more than 90 days unless reinstatement upon the expiration of such leave is guaranteed by contract or statute, or unless provided otherwise pursuant to formal policy adopted from time to time by the Company and issued and promulgated in writing. In the case of any Participant on (i) sick leave, (ii) military leave or (iii) an approved leave of absence, the Committee may make such provisions respecting suspension of vesting of the Award while on leave from the Company or a Parent or Subsidiary of the Company as it may deem appropriate, except that in no event may an Option be exercised after the expiration of the term set forth in the Stock Option Agreement. The Committee will have sole discretion to determine whether a Participant has ceased to provide services and the effective date on which the Participant ceased to provide services (the "TERMINATION DATE"). EX-10.09 4 EX-10.09 HYBRID NETWORKS, INC. 1999 OFFICER STOCK OPTION PLAN AS ADOPTED JANUARY 26, 1999 1. PURPOSE. The purpose of this Plan is to provide incentives to attract, retain and motivate eligible persons whose present and potential contributions are important to the success of the Company by offering them an opportunity to participate in the Company's future performance through awards of Options. Capitalized terms not defined in the text are defined in Section 20 hereof. 2. SHARES SUBJECT TO THE PLAN. 2.1 NUMBER OF SHARES AVAILABLE. Subject to Sections 2.2 and 15 hereof, the total number of Shares reserved and available for grant and issuance pursuant to this Plan will be 1,000,000 Shares. Subject to Sections 2.2 and 15 hereof, Shares will again be available for grant and issuance in connection with future Awards under this Plan to the extent such Shares: (a) cease to be subject to issuance upon exercise of an Option, other than due to exercise of such Option; or (b) are subject to an Award that otherwise terminates without Shares being issued. At all times the Company will reserve and keep available a sufficient number of Shares as will be required to satisfy the requirements of all Awards granted under this Plan. 2.2 ADJUSTMENT OF SHARES. In the event that the number of outstanding shares of the Company's Common Stock is changed by a stock dividend, recapitalization, stock split, reverse stock split, subdivision, combination, reclassification or similar change in the capital structure of the Company without consideration, then (a) the number of Shares reserved for issuance under this Plan and (b) the Exercise Prices of and number of Shares subject to outstanding Options will be proportionately adjusted, subject to any required action by the Board or the stockholders of the Company and compliance with applicable securities laws; provided, however, that fractions of a Share will not be issued but will either be paid in cash at Fair Market Value of such fraction of a Share or will be rounded down to the nearest whole Share, as determined by the Committee. 3. ELIGIBILITY. Awards may be granted only to officers of the Company or of a Parent or Subsidiary of the Company. A person may be granted more than one Award under this Plan. 4. ADMINISTRATION. 4.1 COMMITTEE AUTHORITY. This Plan will be administered by the Committee or the Board acting as the Committee. Subject to the general purposes, terms and conditions of this Plan, and to the direction of the Board, the Committee will have full power to implement and carry out this Plan. Without limitation, the Committee will have the authority to: (a) construe and interpret this Plan, any Stock Option Agreement and any other agreement or document executed pursuant to this Plan; (b) prescribe, amend and rescind rules and regulations relating to this Plan or any Award; (c) select persons to receive Awards; (d) determine the form and terms of Awards; (e) determine the number of Shares or other consideration subject to Awards; 1 (f) determine whether Awards will be granted singly, in combination with, in tandem with, in replacement of, or as alternatives to, other Awards under this Plan or awards under any other incentive or compensation plan of the Company or any Parent or Subsidiary of the Company; (g) grant waivers of Plan or Award conditions; (h) determine the vesting, exercisability and payment of Awards; (i) correct any defect, supply any omission, or reconcile any inconsistency in this Plan, any Award, any Stock Option Agreement or any Exercise Agreement; and (j) make all other determinations necessary or advisable for the administration of this Plan. 4.2 COMMITTEE DISCRETION. Any determination made by the Committee with respect to any Award will be made in its sole discretion at the time of grant of the Award or, unless in contravention of any express term of this Plan or Award, and subject to Section 5.8 hereof, at any later time, and such determination will be final and binding on the Company and on all persons having an interest in any Award under this Plan. The Committee may delegate to one or more officers of the Company the authority to grant an Award under this Plan. 5. OPTIONS. The Committee may grant Options to eligible persons and will determine whether such Options will be Incentive Stock Options within the meaning of the Code ("ISOs") or Nonqualified Stock Options ("NQSOs"), the number of Shares subject to the Option, the Exercise Price of the Option, the period during which the Option may be exercised and all other terms and conditions of the Option, subject to the following: 5.1 FORM OF OPTION GRANT. Each Option granted under this Plan will be evidenced by a Stock Option Agreement which will expressly identify the Option as an ISO or a NQSO and will be in such form and contain such provisions (which need not be the same for each Participant) as the Committee may from time to time approve, and which will comply with and be subject to the terms and conditions of this Plan. 5.2 DATE OF GRANT. The date of grant of an Option will be the date on which the Committee makes the determination to grant such Option, unless otherwise specified by the Committee. The Stock Option Agreement and a copy of this Plan will be delivered to the Participant within a reasonable time after the granting of the Option. 5.3 EXERCISE PERIOD. Options may be exercisable within the times or upon the events determined by the Committee as set forth in the Stock Option Agreement governing such Option; provided, however, that no Option will be exercisable after the expiration of ten years from the date the Option is granted and provided further that no ISO granted to a person who directly or by attribution owns more than 10% of the total combined voting power of all classes of stock of the Company or any Parent or Subsidiary of the Company ("TEN PERCENT STOCKHOLDER") will be exercisable after the expiration of five years from the date the ISO is granted. The Committee also may provide for Options to become exercisable at one time or from time to time, periodically or otherwise, in such number of Shares or percentage of Shares as the Committee determines. 5.4 EXERCISE PRICE. The Exercise Price of an Option will be determined by the Committee when the Option is granted and may not be less than 85% of the Fair Market Value of the Shares on the date of grant, provided that: (i) the Exercise Price of an ISO will not be less than 100% of the Fair Market Value of the Shares on the date of grant; and (ii) the Exercise Price of any ISO granted to a Ten Percent Stockholder will not be less than 110% of the Fair Market Value of the Shares on the date of 2 grant. Payment for the Shares purchased must be made in accordance with Section 6 hereof. 5.5 METHOD OF EXERCISE. Options may be exercised only by delivery to the Company of a written stock option exercise agreement (the "EXERCISE AGREEMENT") in a form approved by the Committee (which need not be the same for each Participant), stating the number of Shares being purchased, the restrictions imposed on the Shares purchased under such Exercise Agreement, if any, and such representations and agreements regarding Participant's investment intent and access to information and other matters, if any, as may be required or desirable by the Company to comply with applicable securities laws, together with payment in full of the Exercise Price, and any applicable taxes, for the number of Shares being purchased. 5.6 TERMINATION. Subject to earlier termination pursuant to Section 15 hereof and notwithstanding the exercise periods set forth in the Stock Option Agreement, exercise of an Option will always be subject to the following: (a) If the Participant is Terminated for any reason except death, Disability or for Cause, then the Participant may exercise such Participant's Options only to the extent that such Options are exercisable upon the Termination Date and such Options must be exercised by the Participant, if at all, as to all or some of the Vested Shares calculated as of the Termination Date, within three months after the Termination Date (or within such shorter time period, not less than 30 days, or within such longer time period, not exceeding five years, as may be determined by the Committee, with any exercise beyond three months after the Termination Date deemed to be an ISO), but in any event no later than the expiration date of the Options. (b) If the Participant is Terminated because of Participant's death or Disability (or the Participant dies within three months after a Termination other than because of Participant's death or Disability), then Participant's Options may be exercised only to the extent that such Options would have been exercisable by Participant on the Termination Date and must be exercised by Participant (or Participant's legal representative or authorized assignee), no later than 12 months after the Termination Date (or within such shorter time period, not less than six months, or within such longer time period, not exceeding five years, as may be determined by the Committee, with any such exercise beyond (a) three months after the Termination Date when the Termination is for any reason other than the Participant's death or Disability or (b) 12 months after the Termination Date when the Termination is for the Participant's death or Disability, deemed to be an NQSO), but in any event no later than the expiration date of the Options. (c) Notwithstanding the provisions in paragraph 5.6(a) above, if a Participant is terminated for Cause, neither the Participant, the Participant's estate nor such other person who may then hold the Option shall be entitled to exercise any Option with respect to any Shares whatsoever, after termination of service, whether or not after termination of service the Participant may receive payment from the Company or Subsidiary for vacation pay, for services rendered prior to termination, for services rendered for the day on which termination occurs, for salary in lieu of notice, or for any other benefits. In making such determination, the Board shall give the Participant an opportunity to present to the Board evidence on his behalf. For the purpose of this paragraph, termination of service shall be deemed to occur on the date when the Company dispatches notice or advice to the Participant that his service is terminated. 5.7 LIMITATIONS ON EXERCISE. The Committee may specify a reasonable minimum number of Shares that may be purchased on any exercise of an Option, provided that such minimum 3 number will not prevent Participant from exercising the Option for the full number of Shares for which it is then exercisable. 5.8 LIMITATIONS ON ISOs. The aggregate Fair Market Value (determined as of the date of grant) of Shares with respect to which ISOs are exercisable for the first time by a Participant during any calendar year (under this Plan or under any other incentive stock option plan of the Company, Parent or Subsidiary of the Company) will not exceed $100,000. If the Fair Market Value of Shares on the date of grant with respect to which ISOs are exercisable for the first time by a Participant during any calendar year exceeds $100,000, then the Options for the first $100,000 worth of Shares to become exercisable in such calendar year will be ISOs and the Options for the amount in excess of $100,000 that become exercisable in that calendar year will be NQSOs. In the event that the Code or the regulations promulgated thereunder are amended after the Effective Date of this Plan to provide for a different limit on the Fair Market Value of Shares permitted to be subject to ISOs, such different limit will be automatically incorporated herein and will apply to any Options granted after the effective date of such amendment. 5.9 MODIFICATION, EXTENSION OR REMOVAL. The Committee may modify, extend or renew outstanding Options and authorize the grant of new Options in substitution therefor, provided that any such action may not, without the written consent of a Participant, impair any of such Participant's rights under any Option previously granted. Any outstanding ISO that is modified, extended, renewed or otherwise altered will be treated in accordance with Section 424(h) of the Code. The Committee may reduce the Exercise Price of outstanding Options without the consent of Participants affected by a written notice to them; provided, however, that the Exercise Price may not be reduced below the minimum Exercise Price that would be permitted under Section 5.4 hereof for Options granted on the date the action is taken to reduce the Exercise Price. 5.10 NO DISQUALIFICATION. Notwithstanding any other provision in this Plan, no term of this Plan relating to an ISO will be interpreted, amended or altered, nor will any discretion or authority granted under this Plan be exercised, so as to disqualify this Plan under Section 422 of the Code or, without the consent of the Participant affected, to disqualify any ISO under Section 422 of the Code. 6. PAYMENT FOR SHARE PURCHASES. 6.1 PAYMENT. Payment for Shares purchased pursuant to this Plan may be made in cash (by check) or, where expressly approved for the Participant by the Committee and where permitted by law: (a) by cancellation of indebtedness of the Company to the Participant; (b) by surrender of shares that: (i) either (A) have been owned by Participant for more than six months and have been paid for within the meaning of SEC Rule 144 (and, if such shares were purchased from the Company by use of a promissory note, such note has been fully paid with respect to such shares) or (B) were obtained by Participant in the public market and (ii) are clear of all liens, claims, encumbrances or security interests. (c) by tender of a full recourse promissory note having such terms as may be approved by the Committee and bearing interest at a rate sufficient to avoid imputation of income under Sections 483 and 1274 of the Code; provided, however, that the portion of the Exercise Price equal to the par value of the Shares must be paid in cash or other legal consideration permitted by Delaware General Corporation Law; (d) by waiver of compensation due or accrued to the Participant for services rendered; 4 (e) with respect only to purchases upon exercise of an Option, and provided that a public market for the Company's stock exists: (1) through a "same day sale" commitment from the Participant and a broker-dealer that is a member of the National Association of Securities Dealers (an "NASD DEALER") whereby the Participant irrevocably elects to exercise the Option and to sell a portion of the Shares so purchased to pay for the Exercise Price, and whereby the NASD Dealer irrevocably commits upon receipt of such Shares to forward the Exercise Price directly to the Company; or (2) through a "margin" commitment from the Participant and an NASD Dealer whereby the Participant irrevocably elects to exercise the Option and to pledge the Shares so purchased to the NASD Dealer in a margin account as security for a loan from the NASD Dealer in the amount of the Exercise Price, and whereby the NASD Dealer irrevocably commits upon receipt of such Shares to forward the Exercise Price directly to the Company; or (f) by any combination of the foregoing. 6.2 LOAN GUARANTEES. The Committee may help the Participant pay for Shares purchased under this Plan by authorizing a guarantee by the Company of a third-party loan to the Participant. 7. WITHHOLDING TAXES. 7.1 WITHHOLDING GENERALLY. Whenever Shares are to be issued in satisfaction of Awards granted under this Plan, the Company may require the Participant to remit to the Company an amount sufficient to satisfy federal, state and local withholding tax requirements prior to the delivery of any certificate or certificates for such Shares. Whenever, under this Plan, payments in satisfaction of Awards are to be made in cash, such payment will be net of an amount sufficient to satisfy federal, state, and local withholding tax requirements. 7.2 STOCK WITHHOLDING. When, under applicable tax laws, a Participant incurs tax liability in connection with the exercise or vesting of any Award that is subject to tax withholding and the Participant is obligated to pay the Company the amount required to be withheld, the Committee may in its sole discretion allow the Participant to satisfy the minimum withholding tax obligation by electing to have the Company withhold from the Shares to be issued that number of Shares having a Fair Market Value equal to the minimum amount required to be withheld, determined on the date that the amount of tax to be withheld is to be determined. All elections by a Participant to have Shares withheld for this purpose will be made in accordance with the requirements established by the Committee for such elections and be in writing in a form acceptable to the Committee. 8. PRIVILEGES OF STOCK OWNERSHIP. 8.1 VOTING AND DIVIDENDS. No Participant will have any of the rights of a stockholder with respect to any Shares until the Shares are issued to the Participant. After Shares are issued to the Participant, the Participant will be a stockholder and have all the rights of a stockholder with respect to such Shares, including the right to vote and receive all dividends or other distributions made or paid with respect to such Shares. The Company will comply with Section 260.140.1 of Title 10 of the California Code of Regulations with respect to the voting rights of Common Stock. 8.2 FINANCIAL STATEMENTS. The company will provide financial statements to each 5 Participant prior to such Participant's purchase of Shares under this Plan, and to each Participant annually during the period such Participant has Options outstanding, or as otherwise required under Section 260.140.46 of Title 10 of the California Code of Regulations. Notwithstanding the foregoing, the Company will not be required to provide such financial statements to Participants when issuance is limited to Participants whose services in connection with the Company assure them access to equivalent information. 9. TRANSFERABILITY. Options granted under this Plan, and any interest therein, will not be transferable or assignable by Participant, and may not be made subject to execution, attachment or similar process, otherwise than by will or by the laws of descent and distribution or as determined by the Committee and set forth in the Stock Option Agreement with respect to Options that are not ISOs. During the lifetime of the Participant an Option will be exercisable only by the Participant or Participant's legal representative, and any elections with respect to an Option may be made only by the Participant or Participant's legal representative unless otherwise determined by the Committee and set forth in the Stock Option Agreement with respect to Options that are not ISOs. 10. CERTIFICATES. All certificates for Shares or other securities delivered under this Plan will be subject to such stock transfer orders, legends and other restrictions as the Committee may deem necessary or advisable, including restrictions under any applicable federal, state or foreign securities law, or any rules, regulations and other requirements of the SEC or any stock exchange or automated quotation system upon which the Shares may be listed or quoted. 11. ESCROW; PLEDGE OF SHARES. To enforce any restrictions on a Participant's Shares, the Committee may require the Participant to deposit all certificates representing Shares, together with stock powers or other instruments of transfer approved by the Committee, appropriately endorsed in blank, with the Company or an agent designated by the Company to hold in escrow until such restrictions have lapsed or terminated, and the Committee may cause a legend or legends referencing such restrictions to be placed on the certificates. Any Participant who is permitted to execute a promissory note as partial or full consideration for the purchase of Shares under this Plan will be required to pledge and deposit with the Company all or part of the Shares so purchased as collateral to secure the payment of Participant's obligation to the Company under the promissory note; provided, however, that the Committee may require or accept other or additional forms of collateral to secure the payment of such obligation and, in any event, the Company will have full recourse against the Participant under the promissory note notwithstanding any pledge of the Participant's Shares or other collateral. In connection with any pledge of the Shares, Participant will be required to execute and deliver a written pledge agreement in such form as the Committee will from time to time approve. The Shares purchased with the promissory note may be released from the pledge on a pro rata basis as the promissory note is paid. 12. EXCHANGE AND BUYOUT OF AWARDS. The Committee may, at any time or from time to time, authorize the Company, with the consent of the respective Participants, to issue new Awards in exchange for the surrender and cancellation of any or all outstanding Awards. The Committee may at any time buy from a Participant an Award previously granted with payment in cash, shares of Common Stock of the Company or other consideration, based on such terms and conditions as the Committee and the Participant may agree. 13. SECURITIES LAW AND OTHER REGULATORY COMPLIANCE. An Award will not be effective unless such Award is in compliance with all applicable federal and state securities laws, rules and regulations of any governmental body, and the requirements of any stock exchange or automated quotation system upon which the Shares may then be listed or quoted, as they are in effect on the date of grant of the Award and also on the date of exercise or other issuance. Notwithstanding any other provision in this Plan, the Company will have no obligation to issue or deliver certificates for Shares under this Plan prior to (a) obtaining any approvals from governmental agencies that the Company determines are necessary or advisable, and/or (b) compliance with any exemption, completion of any registration or other qualification of such Shares under any state or federal law or ruling of any 6 governmental body that the Company determines to be necessary or advisable. The Company will be under no obligation to register the Shares with the SEC or to effect compliance with the exemption, registration, qualification or listing requirements of any state securities laws, stock exchange or automated quotation system, and the Company will have no liability for any inability or failure to do so. 14. NO OBLIGATION TO EMPLOY. Nothing in this Plan or any Award granted under this Plan will confer or be deemed to confer on any Participant any right to continue in the employ of, or to continue any other relationship with, the Company or any Parent or Subsidiary of the Company or limit in any way the right of the Company or any Parent or Subsidiary of the Company to terminate Participant's employment or other relationship at any time, with or without Cause. 15. CORPORATE TRANSACTIONS. 15.1 ASSUMPTION OR REPLACEMENT OF AWARDS BY SUCCESSOR OR ACQUIRING CORPORATION. In the event of (a) a dissolution or liquidation of the Company, (b) a merger or consolidation in which the Company is not the surviving corporation (other than a merger or consolidation with a wholly-owned subsidiary, a reincorporation of the Company in a different jurisdiction, or other transaction in which there is no substantial change in the stockholders of the Company or their relative stock holdings and the Awards granted under this Plan are assumed, converted or replaced by the successor or acquiring corporation, which assumption, conversion or replacement will be binding on all Participants), (c) a merger in which the Company is the surviving corporation but after which the stockholders of the Company immediately prior to such merger (other than any stockholder which merges with the Company in such merger, or which owns or controls another corporation which merges, with the Company in such merger) cease to own their shares or other equity interests in the Company, (d) the sale of all or substantially all of the assets of the Company or (e) the acquisition, sale or transfer of more than 50% of the outstanding shares of the Company by tender offer or similar transaction, any or all outstanding Awards may be assumed, converted or replaced by the successor or acquiring corporation (if any), which assumption, conversion or replacement will be binding on all Participants. In the alternative, the successor or acquiring corporation may substitute equivalent Awards or provide substantially similar consideration to Participants as was provided to stockholders (after taking into account the existing provisions of the Awards). The successor or acquiring corporation may also issue, in place of outstanding Shares of the Company held by the Participant, substantially similar shares or other property subject to repurchase restrictions and other provisions no less favorable to the Participant than those which applied to such outstanding Shares immediately prior to such transaction described in this Section 15.1. In the event such successor or acquiring corporation (if any) refuses to assume or substitute Awards, as provided above, pursuant to a transaction described in this Section 15.1, then notwithstanding any other provision in this Plan to the contrary, such Awards will expire on such transaction at such time and on such conditions as the Board will determine; provided, however, that the Committee may, in its sole discretion, provide that the vesting of any or all Awards granted pursuant to this Plan will accelerate. If the Committee exercises such discretion with respect to Options, such Options will become exercisable in full prior to the consummation of such event at such time and on such conditions as the Committee determines, and if such Options are not exercised prior to the consummation of the corporate transaction, they shall terminate at such time as determined by the Committee. 15.2 OTHER TREATMENT OF AWARDS. Subject to any greater rights granted to Participants under the foregoing provisions of this Section 15, in the event of the occurrence of any transaction described in Section 15.1 hereof, any outstanding Awards will be treated as provided in the applicable agreement or plan of merger, consolidation, dissolution, liquidation or sale of assets. 15.3 ASSUMPTION OF AWARDS BY THE COMPANY. The Company, from time to time, also may substitute or assume outstanding awards granted by another company, whether in connection with an acquisition of such other company or otherwise, by either (a) granting an Award under this Plan in substitution of such other company's award or (b) assuming such award as if it had been granted under this Plan if the terms of such assumed award could be applied to an Award granted under this Plan. Such 7 substitution or assumption will be permissible if the holder of the substituted or assumed award would have been eligible to be granted an Award under this Plan if the other company had applied the rules of this Plan to such grant. In the event the Company assumes an award granted by another company, the terms and conditions of such award will remain unchanged (except that the exercise price and the number and nature of shares issuable upon exercise of any such option will be adjusted appropriately pursuant to Section 424(a) of the Code). In the event the Company elects to grant a new Option rather than assuming an existing option, such new Option may be granted with a similarly adjusted Exercise Price. 16. ADOPTION OF PLAN. This Plan will become effective on the date that it is adopted by the Board (the "EFFECTIVE DATE"). If any Options are ISOs, this Plan will be approved by the stockholders of the Company (excluding Shares issued pursuant to this Plan), consistent with applicable laws, within 12 months after the Plan is adopted by the Board (if such approval is not obtained, the Options will be NQSOs). Upon the Effective Date, the Committee may grant Options pursuant to this Plan; provided, however, that the following requirements will be met for any Option that is an ISO (otherwise the Option will be an NQSO): (a) the Option may not be exercised prior to initial stockholder approval of this Plan, and (b) any Option granted pursuant to an increase in the number of Shares subject to this Plan approved by the Board may not be exercised prior to approval of such increase by the stockholders of the Company. 17. TERM OF PLAN/GOVERNING LAW. Unless earlier terminated as provided herein, this Plan will terminate ten years from the Effective Date or, if earlier, the date of stockholder approval. This Plan and all agreements hereunder shall be governed by and construed in accordance with the laws of the State of California excluding that body of law pertaining to conflict of laws. 18. AMENDMENT OR TERMINATION OF PLAN. The Board may at any time terminate or amend this Plan in any respect, including without limitation amendment of any form of Stock Option Agreement or instrument to be executed pursuant to this Plan; provided, however, that the Board will not, without the approval of the stockholders of the Company, amend this Plan in any manner that requires such stockholder approval. 19. NONEXCLUSIVITY OF THE PLAN. Neither the adoption of this Plan by the Board nor any provision of this Plan will be construed as creating any limitations on the power of the Board to adopt such additional compensation arrangements as it may deem desirable, including, without limitation, the granting of stock options and other equity awards otherwise than under this Plan, and such arrangements may be either generally applicable or applicable only in specific cases. 20. DEFINITIONS. As used in this Plan, the following terms will have the following meanings: "AWARD" means any award of Options under this Plan. "BOARD" means the Board of Directors of the Company. "CAUSE" means Termination because of (i) any willful material violation by the Participant of any law or regulation applicable to the business of the Company or a Parent or Subsidiary of the Company, the Participant's conviction for, or guilty plea to, a felony or a crime involving moral turpitude, any willful perpetration by the Participant of a common law fraud, (ii) the Participant's commission of an act of personal dishonesty which involves personal profit in connection with the Company or any other entity having a business relationship with the Company, (iii) any material breach by the Participant of any provision of any agreement or understanding between the Company or any Parent or Subsidiary of the Company and the Participant regarding the terms of the Participant's service as an employee, director or consultant to the Company or a Parent or Subsidiary of the Company, including without limitation, the willful and continued failure or refusal of the Participant to perform the material duties required of such Participant as an employee, director or consultant of the Company or a Parent or Subsidiary of the Company, other than as a result of having a Disability, or a breach of any applicable 8 invention assignment and confidentiality agreement or similar agreement between the Company and the Participant, (iv) Participant's disregard of the policies of the Company or any Parent or Subsidiary of the Company so as to cause loss, damage or injury to the property, reputation or employees of the Company or a Parent or Subsidiary of the Company, or (v) any other misconduct by the Participant which is materially injurious to the financial condition or business reputation of, or is otherwise materially injurious to, the Company or a Parent or Subsidiary of the Company. "CODE" means the Internal Revenue Code of 1986, as amended. "COMMITTEE" means the committee appointed by the Board to administer this Plan, or if no committee is appointed, the Board. "COMPANY" means Hybrid Networks, Inc., or any successor corporation. "DISABILITY" means a disability, whether temporary or permanent, partial or total, as determined by the Committee. "EXERCISE PRICE" means the price at which a holder of an Option may purchase the Shares issuable upon exercise of the Option. "FAIR MARKET VALUE" means, as of any date, the value of a share of the Company's Common Stock determined as follows: (a) if such Common Stock is then quoted on the Nasdaq National Market, its closing price on the Nasdaq National Market on the date of determination as reported in THE WALL STREET JOURNAL; (b) if such Common Stock is publicly traded and is then listed on a national securities exchange, its closing price on the date of determination on the principal national securities exchange on which the Common Stock is listed or admitted to trading as reported in THE WALL STREET JOURNAL; (c) if such Common Stock is publicly traded but is not quoted on the Nasdaq National Market nor listed or admitted to trading on a national securities exchange, the closing bid price on the date of determination as reported by THE WALL STREET JOURNAL (or, if not so reported, as otherwise reported by any newspaper or other source as the Board may determine); or (d) if none of the foregoing is applicable, by the Committee in good faith. "OPTION" means an award of an option to purchase Shares pursuant to Section 5 hereof. "PARENT" means any corporation (other than the Company) in an unbroken chain of corporations ending with the Company if each of such corporations other than the Company owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in such chain "PARTICIPANT" means a person who receives an Award under this Plan "PLAN" means this Hybrid Networks, Inc. 1999 Officer Stock Option Plan, as amended from time to time. "SEC" means the Securities and Exchange Commission. "SECURITIES ACT" means the Securities Act of 1933, as amended. 9 "SHARES" means shares of the Company's Common Stock reserved for issuance under this Plan, as adjusted pursuant to Sections 2 and 15 hereof, and any successor security. "STOCK OPTION AGREEMENT" means, with respect to each Option, the signed written agreement between the Company and the Participant setting forth the terms and conditions of the Award. "SUBSIDIARY" means any corporation (other than the Company) in an unbroken chain of corporations beginning with the Company if each of the corporations other than the last corporation in the unbroken chain owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. "TERMINATION" or "TERMINATED" means, for purposes of this Plan with respect to a Participant, that the Participant has for any reason ceased to provide substantial services as (i) an employee, officer, director, consultant or independent contractor to the Company or a Parent or Subsidiary or affiliate of the Company, or (ii) as a consultant, independent contractor or advisor to the Board of Directors of the Company. A Participant will not be deemed to have ceased to provide services in the case of (i) sick leave, (ii) military leave, or (iii) any other leave of absence approved by the Committee, provided that such leave is for a period of not more than 90 days unless reinstatement upon the expiration of such leave is guaranteed by contract or statute, or unless provided otherwise pursuant to formal policy adopted from time to time by the Company and issued and promulgated in writing. In the case of any Participant on (i) sick leave, (ii) military leave or (iii) an approved leave of absence, the Committee may make such provisions respecting suspension of vesting of the Award while on leave from the Company or a Parent or Subsidiary of the Company as it may deem appropriate, except that in no event may an Option be exercised after the expiration of the term set forth in the Stock Option Agreement. The Committee will have sole discretion to determine whether a Participant has ceased to provide services and the effective date on which the Participant ceased to provide services (the "TERMINATION DATE"). 10 EX-10.17 5 EXHIBIT 10.17 MILBERG WEISS BERSHAD HYNES & LERACH LLP WILLIAM S. LERACH (68581) KEITH F. PARK (54275) 600 West Broadway, Suite 1800 San Diego, CA 92101 Telephone: 619/231-1058 - and - REED R. KATHREIN (139304) KIMBERLY C. EPSTEIN (169012) 222 Kearny Street, 10th Floor San Francisco, CA 94108 Telephone: 415/288-4545 COHEN, MILSTEIN, HAUSFELD & TOLL, P.L.L.C. STEVEN J. TOLL KRISTOPHER A. KINKADE 999 Third Avenue, Suite 3600 Seattle, WA 98104 Telephone: 206/521-0080 Co-Lead Counsel for Plaintiffs UNITED STATES DISTRICT COURT NORTHERN DISTRICT OF CALIFORNIA SAN JOSE DIVISION MARK ALAN ROSENBERG, et al., On ) No. C-98-20956-RMW Behalf of Themselves and All ) (Consolidated with No. Others Similarly Situated, ) C-98-20888-RMW) ) Plaintiffs, ) CLASS ACTION ) ------------ vs. ) ) HYBRID NETWORKS, INC., et al., ) ) Defendants. ) - ----------------------------------- STIPULATION OF SETTLEMENT This Stipulation of Settlement, dated as of March 3, 1999 (the "Stipulation"), is made and entered into by and among the following parties (as defined further in SectionIV hereof) to the above-entitled action: (i) Representative Plaintiffs (on behalf of themselves and each of the other Settlement Class Members), by and through their Settlement Counsel; and (ii) Settling Defendants, by and through their Counsel of Record. The Stipulation is intended by the Settling Parties to fully, finally and forever resolve, discharge and settle the Released Claims and the Litigation, with respect to the Settling Parties and their Related Parties, and to bar all future claims relating to the subject matter of the Litigation against the Settling Defendants and their Related Parties including claims by the Non-Settling Defendant, upon and subject to the terms and conditions hereof. I. THE LITIGATION On and after July 10, 1998, the following class actions were filed in the United States District Court for the Northern District of California (the "Court"): ROSENBERG V. NATIONSBANC MONTGOMERY SECURITIES, INC., ET AL., C-98-2731-SI and NGUYEN V. HYBRID NETWORKS, INC., ET AL., C-98-20888-RMW. These actions were subsequently consolidated (the "Federal Action"). The Federal Action names as defendants Hybrid Networks, Inc. ("Hybrid" or the "Company"), certain of its present and former officers and directors, the lead underwriters of Hybrid's initial public offering and its auditors, and alleges violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (the "Exchange Act") and Rule 10b-5 promulgated thereunder and violations of Sections 11, 12 -1- and 15 of the Securities Act of 1933. Hybrid is a broadband access equipment provider which designs, develops, manufactures and markets wireless and cable systems. The Federal Action alleges that, during the Class Period, the Defendants disseminated false financial statements and made other misrepresentations regarding Hybrid and its operations. On September 8, 1998, the plaintiffs in the NGUYEN action filed their motion to be appointed Lead Plaintiffs and for approval of Milberg Weiss Bershad Hynes & Lerach LLP and Cohen, Milstein, Hausfeld & Toll, P.L.L.C. to act as Lead Plaintiffs' Counsel. The Court granted the motion on December 11, 1998. On and after June 5, 1998 the following actions were filed in the Superior Court for the State of California, County of Santa Clara (the "State Court"): PARNES V. NATIONSBANC MONTGOMERY SECURITIES, ET AL., ---------------------------------------------------- CV774486 NUSSBAUM V. NATIONSBANC MONTGOMERY SECURITIES, ET AL., ------------------------------------------------------ CV774572 SCHNECK V. NATIONSBANC MONTGOMERY SECURITIES, ET AL., ----------------------------------------------------- CV774641 BICKELL V. HYBRID NETWORKS, INC., ET AL., ----------------------------------------- CV774769 BRAINARD V. NATIONSBANC MONTGOMERY SECURITIES, ET AL., ------------------------------------------------------ CV775464 MAGGIARO V. NATIONSBANC MONTGOMERY SECURITIES, ET AL., ------------------------------------------------------ CV774855 (the "State Actions"). The State Actions were consolidated by Order dated October 29, 1998. The State Actions and the Federal Action are based on the same factual allegations. The Federal Action and the State Actions are collectively referred to herein as the "Litigation." -2- Class Counsel have performed substantial investigation with respect to the claims asserted and the defenses that were or could be asserted in the Litigation. Among other things, Class Counsel consulted with experts, including damages and accounting experts; subpoenaed documents from 24 third parties and underwriters, and analyzed approximately 5,000 pages of produced documents, as well as Hybrid's public filings, annual reports, and other public statements; reviewed related public filings and reports by securities analysts; and researched the applicable law with respect to the claims asserted and the potential defenses thereto. In addition, Settling Defendants' Counsel of Record met several times with Plaintiffs' Settlement Counsel to discuss the class's allegations and key internal documents. II. CLAIMS OF THE REPRESENTATIVE PLAINTIFFS AND BENEFITS OF SETTLEMENT The Representative Plaintiffs and Plaintiffs' Settlement Counsel have concluded that it is in the best interests of the Representative Plaintiffs and Settlement Class Members that the Litigation be settled on the terms and conditions set forth in this Stipulation. The Representative Plaintiffs and Plaintiffs' Settlement Counsel have reached this conclusion after considering the risks and uncertainties of prevailing on the claims at the pleading stage, summary judgment or trial due to the defenses that have been or could be asserted by Settling Defendants. These include, among other things, whether Representative Plaintiffs have met the requirements for pleading a claim; whether Settling Defendants ever issued any false or misleading statements; whether -3- any statements, if false or misleading, were material; whether any Settling Defendant acted with scienter; and whether the Representative Plaintiffs or any Settlement Class Member suffered any loss as a result of any alleged action or statement by any of the Settling Defendants. Further considerations supporting the decision to enter into the Settlement described herein were the expense and length of continued proceedings necessary to prosecute the Litigation against Settling Defendants through trial and through appeals and the substantial benefits the Settlement confers upon the Representative Plaintiffs and the Settlement Class. III. SETTLING DEFENDANTS' STATEMENT AND DENIALS OF WRONGDOING AND LIABILITY Settling Defendants have denied and continue to deny each and all of the claims and contentions alleged by the Representative Plaintiffs in the Litigation. Nonetheless, Settling Defendants have concluded that it is in their best interests that the Litigation be settled on the terms and conditions set forth in this Stipulation. Settling Defendants have reached this conclusion after (1) analyzing the factual and legal issues in the Litigation; (2) determining that further conduct of the Litigation would be protracted and expensive, including potential litigation not only through trial, but also through any appeals that might be taken; and (3) considering the substantial benefits to Settling Defendants and Hybrid's shareholders of a final resolution of the Litigation, including avoiding further expenses, disposing of burdensome and protracted litigation, and permitting Settling Defendants to -4- conduct their business unhampered by the distractions of continued litigation. IV. DEFINED TERMS OF STIPULATION AND AGREEMENT OF SETTLEMENT NOW, THEREFORE, IT IS HEREBY STIPULATED AND AGREED by the Representative Plaintiffs for themselves and on behalf of the other Settlement Class Members, and by Settling Defendants, by and through their respective counsel, that subject to the approval of the Court, the Litigation and the Released Claims shall be finally and fully compromised, settled and released, and the Litigation shall be dismissed with prejudice, as to the Settling Parties, upon and subject to the terms and conditions of the Stipulation, as follows: 1. DEFINITIONS As used in the Stipulation, the following terms have the meanings specified below: 1.1 "Authorized Claimant" means any claimant whose timely claim for recovery has been allowed pursuant to the terms of the Stipulation and the Plan of Allocation. 1.2 "Authorized Stock Recipient" means a Person who is to receive shares of the Settlement Stock. 1.3 "Claimant" means any Settlement Class Member who files a Proof of Claim in such form and manner, and within such time, as the Court shall prescribe. 1.4 "Claims Administrator" or the "Receiver" means Gilardi & Co., P.O. Box 5100, Larkspur, California 94977-5100. -5- 1.5 "Defendants" means Hybrid, Carl S. Ledbetter, Dan E. Steimle, James R. Flach, Stephen E. Halprin, Gary M. Lauder, Douglas M. Leone, Gustavo Ezcurra, Howard L. Strachman and PriceWaterhouseCoopers LLP. 1.6 "Effective Date" means the first date by which all of the events and conditions specified in PARA10.1 of the Stipulation have occurred or have been met. 1.7 "Escrow Agent" means Milberg Weiss Bershad Hynes & Lerach LLP or its successors. 1.8 "Final" means the latest of: (a) the date of final affirmance of any appeal of any judgment or order of dismissal, the expiration of the time for a petition for a writ of certiorari or writ of review to review any judgment or order of dismissal and, if certiorari or review is granted, the date of final affirmance of any judgment or order of dismissal following review pursuant to that grant; or (b) the date of final dismissal or withdrawal of any appeal from any judgment or order of dismissal or the final dismissal, denial or withdrawal of any proceeding on certiorari or writ of review to review any judgment or order of dismissal; (c) the expiration date of the time for the filing or noticing of any appeal from any judgment or order of dismissal; or (d) for purposes of this paragraph, an "appeal" shall include any petition for a writ of certiorari or other writ that may be filed in connection with approval or disapproval of this Settlement, but shall not include any appeal that concerns only the issue of attorneys' fees and reimbursement of costs and disbursements awarded to Class Counsel or any Plan of Allocation. -6- 1.9 "Hybrid" or the "Company" means Hybrid Networks, Inc. or any of its predecessors, successors, parents, subsidiaries, divisions, affiliates or related affiliates, officers, directors, or employees. For purposes of Sections 4 and 5, "Hybrid" or the "Company" does not include its officers, directors or employees. 1.10 "Individual Settling Defendants" means Carl S. Ledbetter, Dan E. Steimle, James R. Flach, Stephen E. Halprin, Gary M. Lauder, Douglas M. Leone, Gustavo Ezcurra and Howard L. Strachman. 1.11 "Judgment" means the Final Judgment and Order of Dismissal to be rendered by the Court, substantially in the form attached hereto as Exhibit B. 1.12 "Non-Settling Defendant" means PriceWaterhouseCoopers LLP. 1.13 "Notice Order" means the Order preliminarily approving the Settlement provided for in PARA6.1. 1.14 "Parties" or "Settling Parties" means, collectively, each of the Settling Defendants, and the Representative Plaintiffs on behalf of themselves and the other Members of the Settlement Class. 1.15 "Person" means a natural person, individual, corporation, partnership, limited partnership, association, joint venture, joint stock company, estate, legal representative, trust, unincorporated association, government or any political subdivision or agency thereof, and any business or legal entity and their/its heirs, executors, administrators, predecessors, successors, representatives, or assignees. 1.16 "Plaintiffs' Settlement Counsel" or "Settlement Counsel" means the following counsel for the Representative Plaintiffs in the Litigation: Milberg Weiss Bershad Hynes & Lerach LLP, Keith F. -7- Park, Reed R. Kathrein, 600 W. Broadway, Suite 1800, San Diego, California, 92101, Telephone: 619/231-1058 and Steven J. Toll, Cohen, Milstein, Hausfeld & Toll, P.L.L.C., 1100 New York Avenue, N.W., West Tower, Suite 500, Washington, DC 20005-3964, Telephone: 202/408-4600. 1.17 "Plan of Allocation" means a plan or formula of allocation of the Settlement Fund which shall be described in the "Notice of Pendency and Settlement of Class Action and Settlement Hearing" to be sent to Settlement Class Members in connection with the Settlement whereby the Settlement Fund shall be distributed to Authorized Claimants after payment of expenses of notice and administration of the Settlement, any taxes, penalties or interest or tax preparation fees owed by the Settlement Fund, and such attorneys' fees, costs, expenses and interest as may be awarded by the Court. The Plan of Allocation is not part of the Stipulation. 1.18 "Preliminary Approval" means the signed Notice Order or an order signed by the Court substantially in the form attached hereto as Exhibit A. 1.19 "Related Parties" means each of any Settling Defendants' past, present or future directors, officers, employees, partnerships and partners, principals, agents (except securities brokers and dealers), controlling shareholders, any entity in which any Settling Defendant and/or any member(s) of that Settling Defendant's immediate family has or have a controlling interest, attorneys, accountants, auditors (except the Non-Settling Defendant), advisors, personal or legal representatives, underwriters, syndicate members, banks, investment banks or investment bankers, analysts, associates, insurers, co-insurers and -8- reinsurers, predecessors, successors, parents, subsidiaries, divisions, assigns, joint ventures and joint venturers, spouses, heirs, executors, administrators, related or affiliated entities, any members of an Individual Settling Defendant's immediate family, or any trust of which any Settling Defendant is the settlor or which is for the benefit of any Individual Settling Defendant and/or member(s) of his family. Related Parties does not include the Non-Settling Defendant. 1.20 "Released Claims" means the "Released Class Claims" and "Unknown Claims" as defined herein. 1.21 "Released Class Claims" means any and all claims, actions, demands, rights, liabilities, suits, and causes of action of every nature and description whatsoever, known or unknown, that were asserted or that could or might have been asserted in any pleading or amended pleading by the Representative Plaintiffs, by the Representative Plaintiffs on behalf of the class, or by any of the other Settlement Class Members against Released Persons, based upon, arising from, or in any way related to both the purchase of Hybrid common stock by the Representative Plaintiffs or the other Settlement Class Members during the Settlement Class Period and the facts, transactions, events, occurrences, disclosures, statements, acts or omissions or failures to act which were or could have been alleged in the Litigation; or any claim that the Settling Defendants or their Related Parties improperly defended or settled the Litigation and/or the Released Claims. 1.22 "Released Persons" means each and all of the Settling Defendants, and their respective Related Parties. Released Persons does not include the Non-Settling Defendant. -9- 1.23 "Representative Plaintiffs" or "Plaintiffs" means each Person named as a Plaintiff in the Federal Action. 1.24 "Representative Plaintiffs' Counsel" or "Class Counsel" means the law firms representing the Representative Plaintiffs. 1.25 "Settlement" means the terms and conditions set forth in the Stipulation of Settlement. 1.26 "Settlement Class" or "Class" means all Persons who purchased Hybrid common stock between November 12, 1997 and June 17, 1998, inclusive. Excluded from the Class are the Defendants named in the Litigation, members of the immediate family of the Individual Defendants, any entity in which any Defendant has a controlling interest, and the legal representatives, heirs, successors, or assigns of the Defendants. Also excluded are those Persons who timely and validly request exclusion from the Class pursuant to the "Notice of Pendency and Settlement of Class Action and Settlement Hearing" to be sent to the Class substantially in the form of Exhibit A-1 hereto. 1.27 "Settlement Class Member" or "Member of the Settlement Class" means a Person who falls within the definition of the Settlement Class as set forth in PARA1.26 of the Stipulation. 1.28 "Settlement Class Period" or "Class Period" means the period from November 12, 1997 through June 17, 1998, inclusive. 1.29 "Settlement Fund" means (a) the principal amount of Eight Million Eight Hundred Thousand Dollars ($8.8 million) in cash together with any interest earned or accrued while in escrow or as provided by PARA2.1 of this Stipulation; and (b) Three Million (3.0 million) shares of Hybrid common stock (the "Settlement Stock") subject to the terms and conditions of PARAS4.1-4.5 hereof; (c) if -10- prior to December 3, 1999, Hybrid is sold, acquired or merged in a transaction in which the consideration for such sale, acquisition or merger is paid by the acquirer to Hybrid's stockholders (rather than to Hybrid itself for ultimate distribution to its stockholders as provided in PARA(d) below), Hybrid shall pay or cause to be paid, within 30 days after such sale, acquisition or merger, an amount in cash, freely tradable securities or other property that is equal to 10% of the consideration paid by the acquirer to Hybrid's stockholders in the sale, acquisition or merger; and (d) if Hybrid sells all or substantially all its assets on or before December 3, 1999 (or after that date but the sale is the subject of ongoing negotiations before that date), Hybrid shall pay or cause to be paid, within 30 days after such sale, an amount equal to 10% of the consideration it receives from such sale, except that, if any portion of the proceeds of such sale are used in a liquidation or partial liquidation of Hybrid to pay Hybrid's creditors, then Hybrid shall pay into the Settlement Fund an amount equal to 10% of the amount of such net proceeds that it would otherwise distribute to its stockholders in such liquidation, which payment shall be made on or before the date on which distribution of any such net proceeds is made to such stockholders. In no event shall Hybrid make payments pursuant to both (c) and (d) of this PARA1.29. 1.30 "Settlement Hearing" means the hearing to determine whether the proposed Settlement of the Federal Action should be approved as fair, reasonable and adequate; whether the proposed Plan of Allocation of the Net Settlement Fund should be approved; and whether the application of Class Counsel for attorneys' fees, costs and expenses should be approved. -11- 1.31 "Settling Defendants" means Hybrid, Carl S. Ledbetter, Dan E. Steimle, James R. Flach, Stephen E. Halprin, Gary M. Lauder, Douglas M. Leone, Gustavo Ezcurra and Howard L. Strachman. 1.32 "Settling Defendants' Counsel of Record" means Morrison & Foerster LLP. 1.33 "Settling Parties" means, collectively, each of the Settling Defendants, and the Representative Plaintiffs on behalf of themselves and each of the Settlement Class Members. 1.34 "State Court Judgment" means the Judgment provided for in the Stipulation and [Proposed] Order Re: Entry of Judgment attached hereto as Exhibit C. 1.35 "Stipulation" means this Stipulation of Settlement. 1.36 "Unknown Claims" means any Released Class Claims which the Representative Plaintiffs or any other Settlement Class Member do not know or suspect to exist in their favor at the time of the release of the Released Persons which, if known by them, might have affected their Settlement with and release of the Released Persons, or might have affected their decision not to object to this Settlement. With respect to any and all Released Class Claims against the Released Persons, the Parties stipulate and agree that, upon the Effective Date, the Representative Plaintiffs shall expressly waive and relinquish, and the other Settlement Class Members shall be deemed to have, and by operation of the Judgment shall have, expressly waived and relinquished, to the fullest extent permitted by law, the provisions, rights, and benefits conferred by Section1542 of the California Civil Code, which provides: A general release does not extend to claims which the creditor does not know or suspect to exist in his favor at the time of executing the release, which if known by -12- him must have materially affected his settlement with the debtor and by any law of any state or territory of the United States, or principle of common law, or of international or foreign law, which is similar, comparable or equivalent to Section1542 of the California Civil Code. The Representative Plaintiffs and the other Settlement Class Members may hereafter discover facts in addition to or different from those which he, she or it now knows or believes to be true with respect to the Released Class Claims, but hereby stipulate and agree that upon the Effective Date, the Representative Plaintiffs fully, finally and forever settle and release, and each other Settlement Class Member shall be deemed to have, and by operation of the Judgment shall have, fully, finally, and forever settled and released any and all Released Class Claims against the Released Persons, known or unknown, suspected or unsuspected, contingent or non-contingent, whether or not concealed or hidden, which now exist, or heretofore have existed, upon any theory of law or equity now existing or coming into existence in the future, including, but not limited to, conduct which is negligent, intentional, with or without malice, or a breach of any duty, law or rule, without regard to the subsequent discovery or existence of such different or additional facts. The Settling Parties acknowledge that the foregoing waiver was bargained for and a key element of the Settlement of which the release in this PARA1.36 is a part. 2. ESTABLISHMENT AND MAINTENANCE OF THE SETTLEMENT FUND 2.1 The Settling Defendants directors' and officers' insurer paid or caused to be paid Eight Million Eight Hundred Thousand -13- ($8.8 million) into an interest bearing escrow account maintained by the Escrow Agent on March 15, 1999, receipt of which Representative Plaintiffs' Counsel acknowledges. 3. ADMINISTRATION OF THE SETTLEMENT FUND a. THE ESCROW AGENT 3.1 The Escrow Agent shall invest the cash portion of the Settlement Fund in instruments backed by the full faith and credit of the United States Government or fully insured by the United States Government or an agency thereof and shall reinvest the proceeds of these instruments as they mature in similar instruments at the then-current market rates. Neither Settling Defendants nor Settling Defendants' Counsel of Record shall have any responsibility or liability for investment decisions. 3.2 The Escrow Agent shall not disburse the Settlement Fund except as provided for in the Stipulation, or by an Order of the Court, or with the written agreement of Settling Defendants' Counsel of Record and Plaintiffs' Settlement Counsel. 3.3 The Escrow Agent is authorized to execute such transactions on behalf of the Settlement Class Members as are consistent with the terms of the Stipulation. 3.4 All funds held by the Escrow Agent shall be deemed and considered to be in CUSTODIA LEGIS of the Court, and shall remain subject to the jurisdiction of the Court, until such time as such funds shall be distributed pursuant to the Stipulation, the Plan of Allocation and/or further order(s) of the Court. 3.5 Within ten (10) days after the transfer of the Settlement Fund or a portion thereof to the Escrow Agent, the Escrow Agent may establish a "Notice and Administration Fund," and $50,000 may be -14- transferred from the Settlement Fund to it. The Notice and Administration Fund may be used by Plaintiffs' Settlement Counsel to pay costs and expenses reasonably and actually incurred in connection with providing notice to the Settlement Class, locating Settlement Class Members, assisting with the filing of claims, administering and distributing the Settlement Fund to the Members of the Settlement Class, processing Proof of Claim and Release forms and paying escrow fees and costs, if any. The Notice and Administration Fund may also be invested and earn interest as provided for in PARA3.1 of this Stipulation. 3.6 On the Effective Date, any balance (including interest) then remaining in the Notice and Administration Fund, less expenses incurred but not yet paid, may be transferred by the Escrow Agent to, and deposited and credited as part of, the Settlement Fund to be applied as set forth in PARA8.2 below. Thereafter, Plaintiffs' Settlement Counsel shall have the right to use such portions of the Settlement Fund as are, in their exercise of reasonable judgment, necessary to carry out the purposes set forth in PARA3.5. b. TAXES 3.7 (a) The Parties and the Escrow Agent agree to treat the Settlement Fund as being at all times a "qualified Settlement fund" within the meaning of Treas. Reg. Section1.468B-1. In addition, the Escrow Agent and, as required, the Settling Defendants contributing any settlement consideration shall jointly and timely make the "relation-back election" (as defined in Treas. Reg. Section1.468B-1) back to the earliest permitted date. Such election shall be made in compliance with the procedures and requirements contained in such regulations. It shall be the responsibility of the Escrow Agent to -15- timely and properly prepare and deliver the necessary documentation for signature by all necessary parties, and thereunder to cause the appropriate filing to occur. (b) For the purposes of Section468B of the Internal Revenue Code of 1986, and Treas. Reg. Section1.468B, the "administrator" shall be the Escrow Agent. The Escrow Agent shall timely and properly file all informational and other tax returns necessary or advisable with respect to the Settlement Fund (including without limitation the returns described in Treas. Reg. Section1.468B-2(k)). Such returns (as well as the election described in PARA3.7(a)) shall be consistent with this PARA3.7 and in all events shall reflect that all taxes (including any estimated taxes, interest or penalties) on the income earned by the Settlement Fund shall be paid out of the Settlement Fund as provided in PARA3.7(c) hereof. (c) All (i) taxes (including any estimated taxes, interest or penalties) arising with respect to the income earned by the Settlement Fund ("Taxes") and (ii) expenses and costs incurred in connection with the operation and implementation of this PARA3.7 (including, without limitation, expenses of tax attorneys and/or accountants and mailing and distribution costs and expenses relating to filing (or failing to file) the returns described in this PARA3.7) ("Tax Expenses"), shall be paid out of the Settlement Fund; in all events the Settling Defendants shall have no liability or responsibility for the Taxes, the Tax Expenses, or the filing of any tax returns or other documents with the Internal Revenue Service or any other state or local taxing authority. The Escrow Agent shall indemnify and hold Settling Defendants harmless for Taxes and Tax Expenses (including, without limitation, Taxes -16- payable by reason of any such indemnification). Further, Taxes and Tax Expenses shall be treated as, and considered to be, a cost of administration of the Settlement and shall be timely paid by the Escrow Agent out of the Settlement Fund without prior order from the Court, and the Escrow Agent shall be obligated (notwithstanding anything herein to the contrary) to withhold from distribution to Authorized Claimants any funds necessary to pay such amounts (as well as any amounts that may be required to be withheld under Treas. Reg. Section1.468B-2(1)-(2)); the Settling Defendants are not responsible and shall have no liability therefor, or for any reporting requirements that may relate thereto. The Settling Parties hereto agree to cooperate with the Escrow Agent, each other, and their tax attorneys and accountants to the extent reasonably necessary to carry out the provisions of this PARA3.7. c. TERMINATION 3.8 In the event that the Stipulation is not approved, or is terminated, canceled, or fails to become effective for any reason, the Settlement Fund (including accrued interest) and the funds in the Notice and Administration Fund (described in PARA3.5 above), less expenses actually paid, incurred or due and owing in connection with the Settlement provided for herein, shall be refunded to Settling Defendants as provided in PARA8.5 below. d. WARRANTIES 3.9 Each Settling Defendant warrants as to himself or itself, that he or it has a good faith belief that the payments made or caused to be made by him or it or on his or its behalf on March 15, 1999 pursuant to PARA2.1 above, did not render him or it insolvent within the meaning of and/or for the purposes of United States -17- Bankruptcy Code Section101(32) and/or Section547. This warranty is made by each such Settling Defendant and not by each Settling Defendant's Counsel of Record. 3.10 If a case is commenced with respect to any Defendant under Title 11 of the United States Code (Bankruptcy), or a trustee, receiver or conservator is appointed under any similar law, and in the event of the entry of a final order of a court of competent jurisdiction determining the transfer of the March 15, 1999 payment pursuant to PARA2.1, or any portion thereof, to be a preference, voidable transfer, fraudulent conveyance or similar transaction as to a Settling Defendant, then, as to such Settling Defendant only, the releases given and Judgment entered in favor of such Settling Defendant pursuant to this Stipulation shall be null and voidable by Representative Plaintiffs, but only to the extent of any recovery of such preference, voidable transfer, fraudulent conveyance, or similar transaction. 4. RIGHTS WITH RESPECT TO THE SETTLEMENT STOCK 4.1 To facilitate the issuance and distribution of the Settlement Stock, the Parties shall request the Court to appoint Gilardi & Co. LLC as Receiver in connection therewith. Hybrid shall hold Gilardi & Co. LLC harmless from all claims, demands, liabilities, rights, causes of action, or proceedings asserted against Gilardi & Co. LLC for the distribution of unregistered securities in its capacity as Receiver. 4.2 Notwithstanding anything to the contrary in this Stipulation, Hybrid shall not issue any Settlement Stock unless: (i) the Court has held a hearing (the "Settlement Hearing") on the fairness of the terms and conditions of this Stipulation and the -18- issuance of the Settlement Stock pursuant hereto; (ii) all Persons to whom any Settlement Stock is to be issued receive notice of the Settlement Hearing and of the right to be heard at such hearing; (iii) the Court is advised prior to the hearing that registration of the Settlement Stock under the Securities Act of 1933, as amended (the "Securities Act"), will not be required by virtue of the Court's approval of this Stipulation and the issuance of the Settlement Stock; and (iv) the Court approves the fairness of this Stipulation and the issuance of the Settlement Stock. In order that the Settlement Stock may be distributed to, and be fully and freely traded by, the recipients who are not deemed affiliates of Hybrid within the meaning of Rule 144(a)(1) of the Securities Act ten (10) days before the Settlement Hearing date, Hybrid shall provide Plaintiffs' Settlement Counsel with the written opinion of outside counsel substantially to the effect that, upon approval of the Settlement by the Court in accordance with the procedures set forth herein and the filing of the Judgment: (a) the issuance of the Settlement Stock will be exempt from the registration requirements of the Securities Act; (b) the shares of Settlement Stock will not be "restricted securities" as defined in Rule 144(a)(3) under the Securities Act; (c) the Authorized Stock Recipients who acquire the Settlement Stock and who are not deemed affiliates of Hybrid within the meaning of Rule 144(a)(1) may sell such shares without registration under the Securities Act without compliance with Rule 144 under the Securities Act; (d) the Authorized Stock Recipients who acquire the Settlement Stock and who are deemed affiliates of Hybrid within the meaning of Rule 144(a)(1) under the Securities Act may sell such shares in -19- compliance with Rule 144 under the Securities Act, but without regard to the holding period requirements of Rule 144(d); and (e) when issued in accordance with the procedures provided for in this Stipulation, such shares will be fully paid and non-assessable. Within 30 days after the Claims Administrator shall have provided Hybrid with a written list identifying the states in which the Settlement Class Members are located, Hybrid shall provide Plaintiffs' Settlement Counsel with the written opinion of outside counsel substantially to the effect that, upon approval of the Settlement by the Court in accordance with the procedures set forth herein, the filing of the Judgment and the issuance of the Settlement Stock in such states to such Persons in accordance with the procedures provided for herein, such issuance will be qualified or exempt from qualification under the blue sky laws of such states, except that, to the extent that qualification is required in any state and the state securities administrator has not granted qualification by the Effective Date, the shares that would otherwise be distributed in such state will be held by the Claims Administrator until such counsel has certified that such qualification has been granted, except that, if such qualification has not been granted six months after the Effective Date, those affected Authorized Claimants shall receive equivalent cash consideration from the Settlement Fund in lieu of the payment of stock. 4.3 Within five (5) business days of the completion of claims administration, the Claims Administrator shall provide Hybrid's transfer agent with a list identifying each Settlement Class Member who is entitled to receive stock and the number of shares of -20- Settlement Stock to be issued to each such Person. Hybrid shall direct its stock transfer agent to issue and distribute the certificates representing the Settlement Stock within ten (10) business days of receipt of the list of the Persons and in the amounts shown on said list. Any reasonable costs associated with the distribution of the Settlement Stock, including all reasonable fees charged by the transfer agent, shall be considered a cost of administration of the Settlement and shall be paid from the Settlement Fund. 4.4 To the extent that the Court authorizes the distribution of a portion of the Settlement Stock as payment of any portion of the attorneys' fees to counsel for the Representative Plaintiffs, Hybrid shall direct its stock transfer agent to issue and distribute the stock on or before the fifth business day following the Effective Date. 4.5 The remainder of the Settlement Stock shall be distributed pursuant to PARA4.3 hereof. 4.6 The number of shares of Settlement Stock is predicated on the assumption that there are and will be no more than 10.5 million shares of Hybrid outstanding as of the Effective Date and that there will be no further dilution of the stock until after these shares have been issued, except as described in the following sentence. If additional stock is distributed or otherwise becomes outstanding before the Effective Date, the number of Settlement Shares shall be increased proportionately so that the number of shares of Settlement Stock as compared to the number of shares of Hybrid outstanding at the Effective Date shall remain at a proportion of 3 to 13.5. If the Company is sold, acquired or -21- merged prior to the Effective Date, the Settlement Shares shall be treated for purposes of such corporate transaction as if they had been issued, distributed and outstanding prior to the closing of the transaction, and will receive the same proportionate treatment as such other shares as follows: To the extent that any consideration paid in such sale, acquisition or merger is received by Hybrid's stockholders (directly or indirectly through distribution of such consideration by Hybrid to its stockholders after paying debts and other obligations), Hybrid shall pay or cause to be distributed on the Effective Date (or, if later, on the date of distribution to its stockholders) a proportionate amount of like consideration that is received by such stockholders. 5. ADDITIONAL CONSIDERATION FOR THE SETTLEMENT 5.1 Upon the execution of this Stipulation, Hybrid shall assign to Representative Plaintiffs any and all claims it has against the Non-Settling Defendant (or its legal predecessor or successor) (the "Auditor Claim"), which claims shall revert back to Hybrid if the Settlement does not become Final. 5.2 In the event Representative Plaintiffs shall assert any Auditor Claims, Representative Plaintiffs agree that any recovery by Representative Plaintiffs for the Class on an Auditor Claim shall be reduced by the proportionate share of fault that the trier of fact shall allocate or apportion to any Settling Defendant so as to extinguish any contribution, indemnity, apportionment or other similar rights that the Non-Settling Defendant might otherwise arguably have against the Settling Defendants. Plaintiffs agree to use their best efforts to seek such a determination of -22- proportionate shares of fault in any proceeding in which they elect to pursue any Auditor Claim. 5.3 Immediately upon the signing of the Stipulation of Settlement the Settling Defendants will provide complete and full cooperation in the prosecution of the class's claims against the Non-Settling Defendant arising out of acts or transactions that are the subject of the Litigation. Such cooperation includes full access to the Company's documents, employees, consultants, experts and the defendants for review and interviews, as reasonable under the circumstances, and subject to a protective order entered into by the Parties. Settling Defendants will produce documents and appear for deposition as requested by plaintiffs without need for subpoena. Settling Defendants will use their best efforts to assist in drafting or amendment of Plaintiffs' complaint against the Non-Settling Defendant. 6. NOTICE ORDER AND SETTLEMENT HEARING 6.1 Promptly after execution of the Stipulation, the Parties shall submit the Stipulation together with its Exhibits to the Court and shall jointly apply for entry of an order (the "Notice Order"), substantially in the form of Exhibit A hereto, certifying the Settlement Class solely for the purpose of effectuating this Settlement, requesting preliminary approval of the Settlement set forth in the Stipulation, and approval for the mailing and publication of a "Notice of Pendency and Settlement of Class Action and Settlement Hearing" ("Notice") which shall include the general terms of the Settlement set forth in the Stipulation, the proposed Plan of Allocation, the general terms of the Fee and Expense -23- Application (as defined in PARA9.1) and the date of the Settlement Hearing (as defined below in PARA6.2). 6.2 The Parties shall request that, after notice is given, the Court hold the Settlement Hearing and finally approve this Settlement as set forth herein. At or after the Settlement Hearing, Representative Plaintiffs' Counsel also will request that the Court approve the proposed Plan of Allocation and the Fee and Expense Application. 7. RELEASES 7.1 Upon the Effective Date, the Representative Plaintiffs hereby fully, finally, and forever release, relinquish and discharge all Released Claims (including Unknown Claims) against each and all of the Released Persons. 7.2 Upon the Effective Date, each and all Settlement Class Members shall be deemed to have fully, finally, and forever released, relinquished and discharged all Released Claims (including Unknown Claims) against each and all of the Released Persons, whether or not such Settlement Class Member executes and delivers the Proof of Claim and Release. 7.3 Upon the Effective Date, each of the Settling Defendants shall fully, finally, and forever release, relinquish and discharge the Representative Plaintiffs and each and all of the other Settlement Class Members, and Representative Plaintiffs' Counsel, from all claims (including Unknown Claims) arising out of, relating to, or in connection with the institution, prosecution, assertion or resolution of the Litigation or the Released Claims. 7.4 Upon the Effective Date, each of the Settling Defendants hereby fully, finally, and forever releases, relinquishes and -24- discharges against each of the other Settling Defendants the following: all claims arising out of, relating to, or in connection with (1) the Released Claims; (2) the payments provided for in PARA1.29 of this Stipulation; and (3) the payment of attorneys' fees, costs and expenses incurred in defense of this Litigation. Specifically excluded from the releases in this paragraph are: (i) any claims, rights, demands, causes of action, liabilities, and suits arising out of the claims that are or may be asserted by any Person falling within the definition of the Settlement Class who validly and timely requests to be excluded from the Settlement of the Litigation as provided for in this Stipulation; and (ii) any obligation on the part of Hybrid to indemnify its present and former officers and directors to the extent required by Hybrid's articles of incorporation and by-laws, any existing agreements, or any resolution or otherwise, of the Board of Directors of Hybrid. 7.5 Only those Settlement Class Members filing valid and timely Proof of Claim and Release forms shall be entitled to participate in the Settlement and receive a distribution from the Settlement Fund. The Proof of Claim and Release to be executed by the Settlement Class Members shall release all Released Claims against the Released Persons, and shall be in the form contained in Exhibit A-2 hereto. All Settlement Class Members shall be bound by the releases set forth in this Section7 whether or not they submit a valid and timely Proof of Claim and Release. 8. ADMINISTRATION AND CALCULATION OF CLAIMS, FINAL AWARDS AND SUPERVISION AND DISTRIBUTION OF SETTLEMEN FUND 8.1 Plaintiffs' Settlement Counsel, or their authorized agents, acting on behalf of the Settlement Class shall administer -25- and calculate the claims submitted by Settlement Class Members and shall oversee distribution of that portion of the Settlement Fund which is finally awarded by the Court to the Settlement Class Members. Settling Defendants shall have no role in or responsibility for the review or evaluation of Proof of Claim and Release forms. This is not a claims-made Settlement and, if all conditions under the Stipulation are satisfied, the Settlement becomes Final, and the Settlement is not successfully collaterally attacked, no portion of the Settlement Fund will be returned to any Settling Defendant. 8.2 The Settlement Fund shall be applied as follows: (a) To pay all unpaid costs and expenses reasonably and actually incurred in connection with providing notice, including locating Settlement Class Members, assisting with the filing of claims, administering and distributing the Settlement Fund to the Settlement Class, processing Proof of Claim and Release forms and paying escrow fees and costs, if any; (b) To pay Taxes and Tax Expenses; (c) To pay Class Counsel's attorneys' fees, expenses and costs, with interest thereon (the "Fee and Expense Award"), if and to the extent allowed by the Court; and (d) After the Effective Date, to distribute the balance of the Settlement Fund (the "Net Settlement Fund") to Authorized Claimants as allowed by the Stipulation, the Plan of Allocation and the Court. 8.3 After the Effective Date and subject to such further approval and further order(s) of the Court as may be required, the -26- Net Settlement Fund shall be distributed to Authorized Claimants, subject to and in accordance with the following: (a) Within ninety (90) days after the mailing of the Notice or such other time as may be set by the Court, each Person claiming to be an Authorized Claimant shall be required to submit to the Claims Administrator a separate completed Proof of Claim and Release in the form of Exhibit A-2 hereto, signed under penalty of perjury and supported by such documents as are specified in the Proof of Claim and Release and as are reasonably available to the Authorized Claimant. (b) Except as otherwise ordered by the Court, all Settlement Class Members who fail to timely submit valid Proof of Claim and Release forms within such period, or such other period as may be ordered by the Court, shall be forever barred from receiving any payments pursuant to the Stipulation and the Settlement set forth herein, but will in all other respects be subject to and bound by the provisions of the Stipulation, the Settlement and releases contained herein, and the Judgment. (c) After the Effective Date, the Net Settlement Fund shall be distributed to the Authorized Claimants in accordance with and subject to the Plan of Allocation to be described in the Notice mailed to Settlement Class Members. The proposed Plan of Allocation shall not be a part of the Stipulation. 8.4 The Settling Defendants shall not have any responsibility for, interest in, or liability whatsoever with respect to the investment or distribution of the Settlement Fund, the Plan of Allocation, the determination or administration of taxes, or any losses incurred in connection therewith. No Person shall have any -27- claim of any kind against Settling Defendants, or Settling Defendants' Counsel of Record, director and officer liability insurers and reinsurers with respect to the matters set forth in this paragraph; and the Settlement Class Members and Class Counsel release Settling Defendants from any and all liability and claims arising from or with respect to the investment or distribution of the Settlement Fund. 8.5 No Person shall have any claim against Class Counsel or any Claims Administrator, or other agent designated by Class Counsel, or Settling Defendants or Settling Defendants' Counsel of Record, based on distributions made substantially in accordance with the Stipulation and the Settlement contained herein, the Plan of Allocation, or further orders of the Court. 8.6 It is understood and agreed by the Parties that any proposed Plan of Allocation of the Net Settlement Fund, including, without limitation, the calculation of an Authorized Claimant's claim, as set forth therein, is not a part of the Stipulation and is to be considered by the Court separately from the Court's consideration of the fairness, reasonableness and adequacy of the Settlement set forth in the Stipulation, and any order or proceeding relating to the Plan of Allocation shall not operate to terminate or cancel the Stipulation or affect the finality of the Court's Judgment approving the Stipulation and the Settlement set forth herein, or any other orders entered pursuant to the Stipulation. -28- 9. REPRESENTATIVE PLAINTIFFS' COUNSEL'S ATTORNEYS' FEES AND REIMBURSEMENT OF EXPENSES -29- 9.1 The Representative Plaintiffs' Counsel may submit an application or applications (the "Fee and Expense Application") for distributions to them from the Settlement Fund for: (i) an award of attorneys' fees as set forth in the Notice; plus (ii) reimbursement of all expenses and costs, including the fees of any experts or consultants incurred in connection with prosecuting the Litigation; plus (iii) interest on such attorneys' fees, costs and expenses at the same rate and for the same periods as earned by the Settlement Fund (until paid), as may be awarded by the Court. 9.2 The cash portion of the attorneys' fees, expenses and costs, including the fees of experts and consultants, as awarded by the Court shall be transferred to Plaintiffs' Settlement Counsel from the Settlement Fund immediately after the Court executes an order awarding such fees and expenses and the stock portion of the fees immediately after the Effective Date (the "Fee and Expense Award"). As received, Plaintiffs' Settlement Counsel shall thereafter allocate the Fee and Expense Award amongst Representative Plaintiffs' Counsel in a manner which Plaintiffs' Settlement Counsel in good faith believe reflects the contributions of such counsel to the prosecution and Settlement of the Litigation; provided, however, that in the event that the Stipulation and the Settlement set forth herein do not become effective for any reason, or the Judgment or the order making the Fee and Expense Award is reversed or modified on appeal, and in the event that the Fee and Expense Award has been paid to any extent, then Representative Plaintiffs' Counsel shall within five (5) business days from the event which precludes the Effective Date from occurring or such reversal or modification, refund to the -30- Settlement Fund the fees, expenses, costs and interest previously paid to them from the Settlement Fund, including accrued interest on any such amount at the average rate earned on the Settlement Fund from the time of withdrawal until the date of refund. Each such Representative Plaintiffs' Counsel's law firm, as a condition of receiving such fees and expenses, on behalf of itself and each partner and/or shareholder of it, agrees that the law firm and its partners and/or shareholders are subject to the jurisdiction of the Court for the purpose of enforcing this PARA9.2 of the Stipulation. Without limitation, each such law firm and its partners and/or shareholders agree that the Court may, upon application of Settling Defendants and notice to Representative Plaintiffs' Counsel, summarily issue orders, including but not limited to, judgments and attachment orders, and may make appropriate findings of or sanctions for contempt, against them or any of them should such law firm fail timely to repay fees and expenses pursuant to this PARA9.2 of the Stipulation. 9.3 Settling Defendants and their respective Related Parties shall have no responsibility for, and no liability whatsoever with respect to, any payment to Plaintiffs or Class Counsel from the Settlement Fund that may occur before the Effective Date. 9.4 Settling Defendants and their respective Related Parties shall have no responsibility for, and no liability whatsoever with respect to, the allocation among Class Counsel, and any other Person who may assert some claim thereto, of any Fee and Expense Awards that this Court may make, and Settling Defendants and their respective Related Parties take no position with respect to such matters. -31- 9.5 The procedure for and the allowance or disallowance by the Court of any applications by any of the Class Counsel for attorneys' fees, costs and expenses, including the fees of experts and consultants, to be paid out of the Settlement Fund, are not part of the Settlement set forth in the Stipulation, and are to be considered by the Court separately from the Court's consideration of the fairness, reasonableness and adequacy of the Settlement set forth in the Stipulation, and any order or proceedings relating to the Fee and Expense Application, or any appeal from any order relating thereto, shall not operate to terminate or cancel the Stipulation, or affect or delay the finality of the Judgment approving the Stipulation and the Settlement of the Litigation set forth herein. 10. CONDITIONS OF SETTLEMENT, EFFECT OF DISAPPROVAL, CANCELLATION OR TERMINATION 10.1 The Effective Date of the Stipulation shall be the first date by which all of the events and conditions listed below in PARA10.1(a)-(g) have occurred or have been met: (a) Plaintiffs' Settlement Counsel and Settling Defendants' Counsel of Record have executed this Stipulation; (b) Settling Defendants shall have timely transferred or caused to be timely transferred the cash portion of the Settlement Fund to the Escrow Agent as set forth in PARA2.1 above; (c) The Court has entered the Notice Order, as required by PARA6.1, above; (d) The Court has entered the Judgment, or a judgment substantially in the form of Exhibit B hereto; -32- (e) The Superior Court of Santa Clara County has entered the California judgments dismissing with prejudice the State Court Actions and all claims asserted therein; (f) Settling Defendants' Counsel of Record shall not have given notice of intent to withdraw from the Settlement pursuant to PARA10.5; and (g) The judgment of the Court referred to in PARA10.1(d), and the State Court judgments referred to in PARA10.1(e), have become Final, as defined in PARA 1.8, above. 10.2 Upon the occurrence of all of the events referenced in PARA10.1 above, any and all remaining interest or right of Settling Defendants to the Settlement Fund shall be absolutely and forever extinguished. 10.3 Neither a modification nor a reversal on appeal of any Plan of Allocation or of any amount of attorneys' fees, costs, expenses and interest awarded by the Court to any of the Representative Plaintiffs' Counsel shall constitute grounds for cancellation and termination of the Stipulation. 10.4 If all of the conditions specified in PARA10.1 are not met, then the Stipulation shall be canceled and terminated unless Plaintiffs' Settlement Counsel and Settling Defendants' Counsel of Record mutually agree in writing to proceed with the Stipulation. 10.5 If prior to the Settlement Hearing, any Persons who otherwise would be Members of the Settlement Class have timely requested exclusion ("Requests for Exclusion") from the Settlement Class in accordance with the provisions of the Notice Order and the notice given pursuant thereto, and such Persons in the aggregate purchased a number of shares of Hybrid common stock during the -33- Settlement Class Period in an amount greater than the sum specified in a separate "Supplemental Agreement" between the Settling Parties, Hybrid shall have, in its sole and absolute discretion, the option to terminate this Stipulation in accordance with the procedures set forth in the Supplemental Agreement. The Supplemental Agreement will not be filed with the Court unless and until a dispute among the Settling Parties concerning its interpretation or application arises. Copies of all Requests for Exclusion received, together with copies of all written revocations of Requests for Exclusion, shall be delivered to Settling Defendants' Counsel of Record within five (5) business days of receipt by Plaintiffs or Plaintiffs' Settlement Counsel but in no event later than seven (7) business days before the Settlement Hearing. Hybrid may terminate the Stipulation by serving written notice of termination on the Court and Plaintiffs' Settlement Counsel by hand delivery or first class mail, postmarked on or before 5 business days after the receipt of all of the copies of the Requests for Exclusion, on or before 5 business days after the Court grants additional exclusion for any reason, or on or before 3 business days before the Settlement Hearing, whichever occurs last. 10.6 Unless otherwise ordered by the Court, in the event the Stipulation shall terminate, or be canceled, or shall not become effective for any reason, within five (5) business days after written notification of such event is sent by Settling Defendants' Counsel of Record, the Representative Plaintiffs or Plaintiffs' Settlement Counsel to the Escrow Agent, the Settlement Fund (including accrued interest), plus any amount then remaining in the -34- Notice and Administration Fund (including accrued interest), less expenses and any costs which have either been disbursed pursuant to PARAS3.5 or 3.6 hereof, or are determined to be chargeable to the Notice and Administration Fund, shall be refunded by the Escrow Agent pursuant to written instructions from Settling Defendants' Counsel of Record. In such event the Settling Defendants shall be entitled to any tax refund, if any, owing to the Settlement Fund. At the request of the Settling Defendants or Settling Defendants' Counsel of Record, the Escrow Agent or its designee shall apply for any such refund and pay the proceeds, less the cost of obtaining the tax refund. 10.7 If the Effective Date does not occur, or if the Stipulation is terminated pursuant to its terms, the Settling Parties shall be restored to their respective positions in the Litigation as of March 2, 1999, the date prior to which the agreement-in-principle to settle the Litigation was reached. In such event, the terms and provisions of the Stipulation, with the exception of PARAS3.4, 3.7, 3.8, 8.4, 8.5, 9.2-9.5, 10.1-10.6 and 10.8 herein, shall have no further force and effect with respect to the Settling Parties and shall not be used in the Litigation or in any other proceeding for any purpose, except as provided herein. Any Judgment or order entered by the Court in accordance with the terms of the Stipulation shall be treated as vacated NUNC PRO TUNC. No order of the Court or modification or reversal on appeal of any order of the Court concerning the Plan of Allocation or the amount of any attorneys' fees, costs, expenses and interest awarded by the Court to the Representative Plaintiffs or Class Counsel shall -35- constitute grounds for cancellation or termination of the Stipulation. 10.8 If the Effective Date does not occur, or if the Stipulation is terminated pursuant to its terms, neither the Representative Plaintiffs nor Class Counsel shall have any obligation to repay any amounts actually and properly disbursed from the Notice and Administration Fund. In addition, any expenses already incurred and properly chargeable to the Notice and Administration Fund pursuant to PARA3.5 hereof at the time of such termination or cancellation but which have not been paid, shall be paid by the Escrow Agent from the Notice and Administration Fund in accordance with the terms of the Stipulation prior to the balance being refunded in accordance with PARA10.6 above. 11. MISCELLANEOUS PROVISIONS 11.1 The Settling Parties (a) acknowledge that it is their intent to consummate this agreement; and (b) agree to cooperate to the extent necessary to effectuate and implement all terms and conditions of the Stipulation and to exercise their best efforts to accomplish the foregoing terms and conditions of the Stipulation. 11.2 The Settling Parties agree that the amount of the Settlement Fund, as well as the other terms of the Settlement, reflects a good-faith Settlement of Representative Plaintiffs' and the other Settlement Class Members' claims in the Litigation, reached voluntarily after consultation with experienced legal counsel. Neither the Stipulation nor the Settlement contained herein, nor any act performed or document executed pursuant to or in furtherance of the Stipulation or the Settlement: (i) is or may be deemed to be or may be used as an admission of, or evidence of, -36- the validity of any Released Claim, or of any wrongdoing or liability of the Settling Defendants, or (ii) is or may be deemed to be or may be used as an admission of, or evidence of, any fault or omission of any of the Settling Defendants in any civil, criminal or administrative proceeding in any court, administrative agency or other tribunal. Released Persons may file the Stipulation and/or the Judgment from this Litigation in any other action that may be brought against them in order to support a defense or counterclaim based on principles of RES JUDICATA, collateral estoppel, release, good-faith settlement, judgment bar or reduction or any theory of claim preclusion or issue preclusion or similar defense or counterclaim. Settling Defendants have denied and continue to deny each and all of the claims alleged in the Litigation. Representative Plaintiffs or any other member of the Settlement Class may file the Stipulation in any proceeding brought to enforce any of its terms or provisions. The Parties and their counsel, and each of them, agree, to the extent permitted by law, that all agreements made and orders entered during the course of the Litigation relating to the confidentiality of information shall survive this Stipulation. 11.3 While retaining their right to deny that the claims advanced in the Litigation were meritorious, Settling Defendants do not dispute that the Federal Action was filed in compliance with Federal Rule of Civil Procedure 11, and is being settled voluntarily after consultation with competent legal counsel. 11.4 All of the Exhibits to the Stipulation are material and integral parts hereof and are fully incorporated herein by this reference. -37- 11.5 The Stipulation may be amended or modified only by a written instrument signed by or on behalf of all Parties or their successors-in-interest. 11.6 Except as provided herein, the Stipulation and the Exhibits attached hereto constitute the entire agreement among the Parties hereto, and no representations, warranties or inducements have been made to any Party concerning the Stipulation or its Exhibits other than the representations, warranties and covenants contained and memorialized in such documents. Except as otherwise provided herein, each Party shall bear its own costs. 11.7 Plaintiffs' Settlement Counsel, on behalf of the Settlement Class, are expressly authorized by the Representative Plaintiffs to take all appropriate action required or permitted to be taken by the Settlement Class pursuant to the Stipulation to effectuate its terms and also are expressly authorized to enter into any modifications or amendments to the Stipulation on behalf of the Settlement Class which they deem appropriate. 11.8 Each counsel or other Person executing the Stipulation or any of its Exhibits on behalf of any Party hereto hereby warrants that such Person has the full authority to do so. 11.9 The Stipulation may be executed in one or more counterparts. All executed counterparts and each of them shall be deemed to be one and the same instrument. Counsel for the Settling Parties to the Stipulation shall exchange among themselves signed counterparts, and a complete set of original executed counterparts shall be filed with the Court. 11.10 The Stipulation shall be binding upon, and inure to the benefit of, the successors and assigns of the Parties hereto. -38- 11.11 The Court shall retain jurisdiction with respect to implementation and enforcement of the terms of the Stipulation, and all Parties hereto submit to the jurisdiction of the Court for purposes of implementing and enforcing the Settlement embodied in the Stipulation. 11.12 The Stipulation shall be construed and enforced in accordance with the laws of the State of California without giving effect to that State's choice-of-law principles. IN WITNESS WHEREOF, the Parties hereto have caused the Stipulation to be executed, by their duly authorized attorneys. DATED: _________________ MILBERG WEISS BERSHAD HYNES & LERACH LLP WILLIAM S. LERACH KEITH F. PARK ------------------------------ KEITH F. PARK 600 West Broadway, Suite 1800 San Diego, CA 92101 Telephone: 619/231-1058 MILBERG WEISS BERSHAD HYNES & LERACH LLP REED R. KATHREIN KIMBERLY C. EPSTEIN 222 Kearny Street, 10th Floor San Francisco, CA 94108 Telephone: 415/288-4545 COHEN, MILSTEIN, HAUSFELD & TOLL, P.L.L.C. STEVEN J. TOLL KRISTOPHER A. KINKADE 999 Third Avenue, Suite 3600 Seattle, WA 98104 Telephone: 206/521-0080 Co-Lead Counsel for Plaintiffs MORRISON & FOERSTER, LLP JORDAN ETH -39- ------------------------------ JORDAN ETH 425 Market Street San Francisco, CA 94105-2482 Telephone: 415/268-7000 Counsel for Settling Defendants STIPULATION OF SETTLEMENT - C-98-20888-RMW - 40 - DECLARATION OF SERVICE BY MAIL PURSUANT TO NORTHERN DISTRICT LOCAL RULE 23-2(c)(2) I, the undersigned, declare: 1. That declarant is and was, at all times herein mentioned, a citizen of the United States and a resident of the County of San Diego, over the age of 18 years, and not a party to or interested in the within action; that declarant's business address is 600 West Broadway, Suite 1800, San Diego, California 92101. 2. That on June 14, 1999, declarant served the STIPULATION OF SETTLEMENT by depositing a true copy thereof in a United States mailbox at San Diego, California in a sealed envelope with postage thereon fully prepaid and addressed to the parties listed on the attached Service List and that this document was forwarded to the following designated Internet site at: HTTP://SECURITIES.MILBERG.COM 3. That there is a regular communication by mail between the place of mailing and the places so addressed. I declare under penalty of perjury that the foregoing is true and correct. Executed this 14th day of June, 1999, at San Diego, California. ----------------------------- DANELLE L. McNERTNEY UNITED STATES DISTRICT COURT NORTHERN DISTRICT OF CALIFORNIA SAN JOSE DIVISION MARK ALAN ROSENBERG, et al., On ) No. C-98-20956-RMW Behalf of Themselves and All Others ) (Consolidated with No. Similarly Situated, ) C-98-20888-RMW) ) Plaintiffs, ) CLASS ACTION ) vs. ) ) HYBRID NETWORKS, INC., et al., ) ) Defendants. ) ) - ----------------------------------- [PROPOSED] ORDER CERTIFYING SETTLEMENT CLASS AND PRELIMINARILY APPROVING SETTLEMENT AND APPROVING THE FORM AND MANNER OF NOTICE The Court has received the Stipulation of Settlement (the "Stipulation"), dated as of March 3, 1999, that has been entered into by the Representative Plaintiffs and Settling Defendants. The Court has reviewed the Stipulation and its attached exhibits, and, good cause appearing, IT IS HEREBY ORDERED as follows: 1. The Court, for purposes of this preliminary order, adopts all defined terms as set forth in the Stipulation. 2. The Court preliminarily approves: (1) the Settlement of the Litigation set forth in the Stipulation and each of the releases set forth therein, and (2) the proposed Plan of Allocation described in the Notice of Pendency and Settlement of Class Action and Settlement Hearing, subject to the right of any Settlement Class Member to challenge the fairness, reasonableness, and adequacy of the Stipulation or the proposed Plan of Allocation and to show cause, if any exists, why a final judgment dismissing the Litigation based on the Stipulation should not be ordered herein after due and adequate notice to the Settlement Class has been given in conformity with this Order. 3. For purposes of this Settlement only, the Court certifies a Settlement Class defined as: all Persons who purchased Hybrid Networks, Inc. ("Hybrid") common stock between November 12, 1997 and June 17, 1998, inclusive. Excluded from the Class are the Defendants named in the Litigation, members of the immediate families of the Individual Defendants, any entity in which any Defendant has a controlling interest, and the legal representatives, heirs, successors, or assigns of the Defendants. Also excluded are those Persons who timely and validly request - 1 - exclusion from the Class pursuant to the "Notice of Pendency and Settlement of Class Action and Settlement Hearing." 4. The Court approves as to form and content, and for distribution to Settlement Class Members, a Notice of Pendency and Settlement of Class Action and Settlement Hearing ("Notice") substantially in the form of Exhibit A-1 hereto, a Proof of Claim and Release ("Proof of Claim") in the form of Exhibit A-2 hereto; and for publication a Summary Notice of Proposed Settlement ("Summary Notice") in the form of Exhibit A-3 hereto. 5. Pending resolution of these Settlement proceedings, no other action now pending or hereafter filed arising out of all or any part of the subject matter of this Litigation shall be maintained as a class action, and except as provided by this or further Order of the Court, for good cause shown, all Persons are hereby enjoined during the pendency of these Settlement proceedings from filing or prosecuting purported class actions against any Person with respect to any of the Released Claims. 6. Plaintiffs' Settlement Counsel are authorized to act on behalf of the Settlement Class with respect to all acts required by, or which may be given pursuant to, the Stipulation or such other acts which are reasonably necessary to consummate the proposed Settlement set forth in the Stipulation. 7. Plaintiffs' Settlement Counsel are hereby authorized to retain the firm of Gilardi & Co. LLC as Claims Administrator to supervise and administer the notice and claims procedures. Gilardi & Co. LLC is hereby appointed as receiver for purposes of the issuance and distribution of the Settlement Stock to Authorized Claimants. - 2 - 8. Plaintiffs' Settlement Counsel shall make reasonable efforts to identify all Persons who are Members of the Settlement Class, including beneficial owners whose Hybrid common stock is held by banks, brokerage firms, or other nominees. Plaintiffs' Settlement Counsel shall cause the Claims Administrator to send the Notice and the Proof of Claim by first class mail to all Persons who appear on the transfer records of Hybrid as having transferred to their names Hybrid common stock during the period from November 12, 1997 through June 17, 1998, inclusive. The mailing of the Notice and Proof of Claim forms shall be on or before ___________, 1999 (the "Notice Date"). Pursuant to the Notice, each nominee shall either: (1) send the Notice and Proof of Claim to Settlement Class Members for which they act as nominee by first class mail within ten (10) days after the nominee receives the Notice; or (2) send a list of the names and addresses of such beneficial owners to Plaintiffs' Settlement Counsel within ten (10) days after the nominee receives the Notice and, in the event of the latter, Plaintiffs' Settlement Counsel shall send by first class mail the Notice and Proof of Claim to all Settlement Class Members who are on the list received from the nominee. Plaintiffs' Settlement Counsel shall, if requested, reimburse banks, brokerage houses or other nominees solely for their reasonable out-of-pocket expenses incurred in providing notice to beneficial owners who are Settlement Class Members, out of the Settlement Fund, which expenses would not have been incurred except for the sending of such notice, subject to further order of this Court with respect to any dispute concerning such compensation. Plaintiffs' Settlement Counsel shall file with the Court and serve upon Settling - 3 - Defendants' Counsel of Record no later than seven (7) days prior to the Settlement Hearing an affidavit or declaration describing the efforts taken to comply with this order and stating that the mailings have been completed in accordance with the terms of this Order. 9. Within ten (10) days of the Notice Date, Plaintiffs' Settlement Counsel shall publish a Summary Notice substantially in the form of Exhibit A-3 hereto once in INVESTOR'S BUSINESS DAILY. Plaintiffs' Settlement Counsel shall file with the Court and serve upon Defendants' Counsel of Record no later than seven (7) days prior to the Settlement Hearing an affidavit or declaration stating that the Summary Notice has been published in accordance with the terms of this Order. 10. The Court finds that dissemination of the Notice and Proof of Claim in the manner required by PARA8, and publication of the Summary Notice in the manner required by PARA9, constitute the best notice practicable under the circumstances to Settlement Class Members and meet the requirements of Rule 23 of the Federal Rules of Civil Procedure, due process under the United States Constitution, and any other applicable law, and shall constitute due and sufficient notice to all Persons entitled thereto. 11. Any Person falling within the definition of the Settlement Class may, upon request, be excluded from the Settlement. Any such Person must submit to the Claims Administrator a request for exclusion ("Request for Exclusion"), postmarked no later than _____________, 1999. A Request for Exclusion must state: (1) the name, address, and telephone number of the Person requesting exclusion; (2) the Person's purchases and - 4 - sales of Hybrid common stock made during the Settlement Class Period, including the dates, the number of shares, and price paid or received per share for each such purchase or sale; and (3) that the Person wishes to be excluded from the Settlement Class. All Persons who submit valid and timely Requests for Exclusion in the manner set forth in this paragraph shall have no rights under the Stipulation, shall not share in the distribution of the Settlement Fund, and shall not be bound by the Stipulation or the Final Judgment. 12. Any Settlement Class Member who objects to the Settlement of the Litigation, the proposed Plan of Allocation, or the application of counsel for attorneys' fees, costs, and expenses, shall have a right to appear and be heard at the Settlement Hearing. Any Settlement Class Member may enter an appearance through counsel of such member's own choosing and at such member's own expense or may appear on their own. However, no Settlement Class Member shall be heard at the Settlement Hearing unless, on or before ____________, 1999, such Person has filed with the Court and delivered to Plaintiffs' Settlement Counsel and Settling Defendants' Counsel of Record a written notice of objection and their grounds for opposing the Settlement, Plan of Allocation, or application for attorneys' fees, costs and expenses, along with proof of membership in the Settlement Class. The manner in which a notice of objection must be prepared, filed, and delivered shall be stated in the Notice. Only Settlement Class Members who have filed and delivered valid and timely written notices of objection will be entitled to be heard at the Settlement Hearing unless the Court orders otherwise. - 5 - 13. The Court authorizes payment out of the Notice and Administration Fund of the expenses described in PARA3.5 of the Stipulation. After the Effective Date, the notice and administration costs payable out of the Settlement Fund may be disbursed without the necessity of a court order in accordance with PARA3.6 of the Stipulation. 14. A Settlement Hearing will be held on ______________, 1999, at _____ _.m. before this Court in the United States Courthouse, 280 South First Street, San Jose, California, to determine whether the proposed Settlement of the Litigation as set forth in the Stipulation, should be approved as fair, just, reasonable and adequate as to the Settling Parties, and whether the Final Judgment approving the Settlement should be entered. If the Settlement is approved by the Court, the Settlement Stock will be issued pursuant to an exemption from registration pursuant to Section3(a)(10) of the Securities Act of 1933. The Court has been advised that registration of the Settlement Stock under the Securities Act of 1933 will not be required by virtue of the Court's approval of this Stipulation and the issuance of the Settlement Stock. The Court may adjourn or continue the Settlement Hearing without further notice to Settlement Class Members. 15. At the Settlement Hearing, the Court will determine whether Plaintiffs' Settlement Counsel's proposed Plan of Allocation of the Net Settlement Fund should be approved. 16. The passage of title and ownership of the Settlement Fund to the Escrow Agent in accordance with the terms of the Stipulation is approved. No Person that is not a Settlement Class Member or counsel for the Representative Plaintiffs shall have any right to - 6 - any portion of, or in the distribution of, the Settlement Fund unless otherwise ordered by the Court or otherwise provided in the Stipulation. 17. All funds held by the Escrow Agent shall be deemed and considered to be in CUSTODIA LEGIS of the Court in accordance with the Stipulation, and shall remain subject to the jurisdiction of the Court, until such time as such funds shall be distributed pursuant to the Stipulation, the Plan of Allocation and/or further order(s) of the Court. 18. At or after the Settlement Hearing, the Court will determine whether the application of Representative Plaintiffs' Counsel for an award of attorneys' fees, costs and expenses should be approved. 19. No later than 90 days after the Notice Date, any Settlement Class Member who wishes to participate in the Settlement Fund must submit a valid Proof of Claim form to the Claims Administrator. Proof of Claim forms shall be deemed to have been submitted when postmarked, if mailed by first class, or registered or certified mail, postage prepaid, addressed in accordance with the instructions given in the Proof of Claim. All other Proof of Claim forms shall be deemed to have been submitted at the time they are actually received by the Claims Administrator. To be valid, a Proof of Claim must be: (1) completed in a manner that permits the Claims Administrator to determine the eligibility of the claim as set forth in the Proof of Claim; and (2) signed with an affirmation that the information is true and correct. All Settlement Class Members who do not submit valid and timely Proof of Claim forms shall be forever barred from receiving any payments from the - 7 - Settlement Fund, but will in all other respects be subject to and bound by the provisions of the Stipulation and the Final Judgment, if entered. 20. Neither Settling Defendants nor Settling Defendants' Counsel of Record shall have any responsibility for the Plan of Allocation of the Settlement Fund submitted by Plaintiffs' Settlement Counsel and it will be considered separately from the fairness, reasonableness and adequacy of the Settlement. 21. No later than seven (7) days before the Settlement Hearing, all briefs supporting the Settlement, the Plan of Allocation, and the request for attorneys' fees and costs, shall be served and filed. 22. Neither the Stipulation, nor any of its terms or provisions, nor any of the negotiations or proceedings connected with it, shall be construed as an admission or concession by Settling Defendants of the truth of any of the allegations in the Litigation, or of any liability, fault, or wrongdoing of any kind, or by the Representative Plaintiffs or any other Member of the Settlement Class of the merit of any defense or lack of merit of any claim. 23. All discovery and other proceedings in the Litigation with respect to the Settling Defendants are stayed until further order of the Court, except as may be necessary to implement the Settlement or comply with the terms of the Stipulation. The Representative Plaintiffs and the other Settlement Class Members are barred from commencing or prosecuting any direct or representative action, or any action in any other capacity, - 8 - asserting any of the Released Claims unless and until the Stipulation is terminated according to its terms. 24. The Court may, for good cause, extend any of the deadlines set forth in this Order without further notice to Settlement Class Members. DATED: __________________ ___________________________________ THE HONORABLE RONALD M. WHYTE UNITED STATES DISTRICT COURT JUDGE Submitted by: MILBERG WEISS BERSHAD HYNES & LERACH LLP WILLIAM S. LERACH KEITH F. PARK - ------------------------------ KEITH F. PARK 600 West Broadway, Suite 1800 San Diego, CA 92101 Telephone: 619/231-1058 MILBERG WEISS BERSHAD HYNES & LERACH LLP REED R. KATHREIN KIMBERLY C. EPSTEIN 222 Kearny Street, 10th Floor San Francisco, CA 94108 Telephone: 415/288-4545 COHEN, MILSTEIN, HAUSFELD & TOLL, P.L.L.C. STEVEN J. TOLL KRISTOPHER A. KINKADE 999 Third Avenue, Suite 3600 Seattle, WA 98104 Telephone: 206/521-0080 Co-Lead Counsel for Plaintiffs - 9 - DECLARATION OF SERVICE BY MAIL I, the undersigned, declare: 1. That declarant is and was, at all times herein mentioned, a citizen of the United States and a resident of the County of San Diego, over the age of 18 years, and not a party to or interested in the within action; that declarant's business address is 600 West Broadway, Suite 1800, San Diego, California 92101. 2. That on June 14, 1999, declarant served the [PROPOSED] ORDER CERTIFYING SETTLEMENT CLASS AND PRELIMINARILY APPROVING SETTLEMENT AND APPROVINGTHE FORM AND MANNER OF NOTICE by depositing a true copy thereof in a United States mailbox at San Diego, California in a sealed envelope with postage thereon fully prepaid and addressed to the parties listed on the attached Service List. 3. That there is a regular communication by mail between the place of mailing and the places so addressed. I declare under penalty of perjury that the foregoing is true and correct. Executed this 14th day of June, 1999, at San Diego, California. ----------------------------- DANELLE L. McNERTNEY MILBERG WEISS BERSHAD HYNES & LERACH LLP WILLIAM S. LERACH (68581) KEITH F. PARK (54275) 600 West Broadway, Suite 1800 San Diego, CA 92101 Telephone: 619/231-1058 - and - REED R. KATHREIN (139304) KIMBERLY C. EPSTEIN (169012) 222 Kearny Street, 10th Floor San Francisco, CA 94108 Telephone: 415/288-4545 COHEN, MILSTEIN, HAUSFELD & TOLL, P.L.L.C. STEVEN J. TOLL KRISTOPHER A. KINKADE 999 Third Avenue, Suite 3600 Seattle, WA 98104 Telephone: 206/521-0080 Co-Lead Counsel for Plaintiffs UNITED STATES DISTRICT COURT NORTHERN DISTRICT OF CALIFORNIA SAN JOSE DIVISION MARK ALAN ROSENBERG, et al., On ) No. C-98-20956-RMW Behalf of Themselves and All Other ) (Consolidated with No. Similarly Situated, ) C-98-20888-RMW) ) ) Plaintiffs, ) CLASS ACTION ) vs. ) ) HYBRID NETWORKS, INC., et al., ) ) Defendants. ) ) - ----------------------------------- NOTICE OF PENDENCY AND SETTLEMENT OF CLASS ACTION AND SETTLEMENT HEARING EXHIBIT A-1 TO: ALL PERSONS WHO PURCHASED THE COMMON STOCK OF HYBRID NETWORKS, INC. ("HYBRID") DURING THE PERIOD NOVEMBER 12, 1997 THROUGH JUNE 17, 1998, INCLUSIVE. THIS NOTICE MAY AFFECT YOUR RIGHTS. YOU ARE URGED TO READ IT CAREFULLY. IF YOU PURCHASED COMMON STOCK OF HYBRID DURING THE PERIOD NOVEMBER 12, 1997 THROUGH JUNE 17, 1998, INCLUSIVE (THE "SETTLEMENT CLASS PERIOD"), YOU MAY BE A MEMBER OF THE CLASS AND MAY BE ENTITLED TO SHARE IN THE PROCEEDS OF THE SETTLEMENT DESCRIBED IN THIS NOTICE (THE "SETTLEMENT"). This Notice is given pursuant to Rule 23 of the Federal Rules of Civil Procedure and pursuant to an Order of the United States District Court for the Northern District of California (the "District Court"). The purpose of this Notice is to inform you of the pendency of this Action as a class action and of a proposed partial Settlement of the class action pursuant to a Stipulation of Settlement dated as of March 3, 1999, filed with the District Court. The proposed partial Settlement creates a fund in the amount of $8.8 million in cash and will include any interest that accrues on the fund prior to distribution as well as 3.0 million shares of Hybrid common stock subject to certain terms and conditions. The stock is to be issued exempt from the registration requirements pursuant to Section 3(a)(10) of the Securities Act of 1933. In addition, if, prior to December 3, 1999, Hybrid is sold, acquired or merged in a transaction in which the consideration for such sale, acquisition or merger is paid by the acquirer to Hybrid's stockholders (rather than to Hybrid itself for ultimate distribution to its stockholders), Hybrid shall pay or cause to be paid, within 30 days after such sale, acquisition or merger, an - 1 - amount in cash, freely tradable securities or other property that is equal to the 10% of the consideration paid by the acquirer to Hybrid's stockholders in the sale, acquisition or merger; or if Hybrid sells all or substantially all of its assets on or before December 3, 1999 (or after that date but the sale is the subject of ongoing negotiations before that date), Hybrid shall pay or cause to be paid, within 30 days after such sale, an amount equal to 10% of the consideration it receives from such sale, except that, if any portion of the proceeds of such sale are used in a liquidation or partial liquidation of Hybrid to pay Hybrid's creditors, then Hybrid shall pay into the Settlement Fund an amount equal to 10% of the amount of such net proceeds that it would otherwise distribute to its stockholders in such liquidation, which payment shall be made on or before the date on which distribution of any such net proceeds is made to such stockholders. Based on Representative Plaintiffs' estimate of the number of shares entitled to participate in the Settlement, the current price of Hybrid stock, and the anticipated number of claims to be submitted by Class members (but without giving effect to the consideration which might be paid upon the acquisition or liquidation of Hybrid) the average distribution per share would be approximately $1.55 before deduction of court-approved fees and expenses. However, your actual recovery from this fund will depend on a number of variables including the number of shares you purchased and the timing of your purchases and sales, if any. Plaintiffs and Settling Defendants do not agree on the average amount of damages per share that would be recoverable if Representative Plaintiffs were to have prevailed on each claim - 2 - alleged under the Securities Exchange Act of 1934. The issues on which the Parties disagree include (1) the appropriate economic model for determining the amount by which Hybrid common stock was allegedly artificially inflated (if at all) during the Class Period; (2) the amount by which Hybrid common stock was allegedly artificially inflated (if at all) during the Class Period; (3) the effect of various market forces influencing the trading price of Hybrid common stock at various times during the Class Period; (4) the extent to which external factors, such as general market conditions, influenced the trading price of Hybrid common stock at various times during the Class Period; (5) the extent to which the various matters that Representative Plaintiffs alleged were materially false or misleading influenced (if at all) the trading price of Hybrid common stock at various times during the Class Period; (6) the extent to which the various allegedly adverse material facts that Representative Plaintiffs alleged were omitted influenced (if at all) the trading price of Hybrid common stock at various times during the Class Period; and (7) whether the statements made or facts allegedly omitted were material or otherwise actionable under the federal securities laws. The plaintiffs believe that the proposed Settlement is a good recovery and is in the best interests of the Class. Because of the risks associated with continuing to litigate and proceeding to trial, there was a danger that Plaintiffs would not have prevailed on any of their claims, in which case the Class would receive nothing. For example, Representative Plaintiffs faced the possibility that all or many of the claims in this case could have been dismissed. In addition, the amount of damages recoverable by - 3 - the Class was and is challenged by Settling Defendants. Recoverable damages are limited to losses caused by conduct actionable under applicable securities laws and, had the Litigation gone to trial, Defendants intended to prove that all or most of the losses of Class members were caused by non-actionable market industry or general economic factors. Settling Defendants would also assert that throughout the Settlement Class Period they fully and adequately disclosed Hybrid's financial condition and all uncertainties and risks associated with Hybrid's business. Representative Plaintiffs' Counsel have not received any payment for their services in conducting this Litigation on behalf of Plaintiffs and the members of the Class, nor have they been reimbursed for their out-of-pocket expenditures. If the Settlement is approved by the District Court, counsel for the Plaintiffs will apply to the District Court for attorneys' fees of 30% of the settlement proceeds plus reimbursement of out-of-pocket expenses not to exceed $300,000 to be paid from the settlement proceeds. If the amount requested by counsel is approved by the District Court, the average cost per share would be $0.49. This Notice is not an expression of any opinion by the District Court about the merits of any of the claims or defenses asserted by any party in this Litigation or the fairness or adequacy of the proposed Settlement. For further information regarding this Settlement you may contact: Rick Nelson, Milberg Weiss Bershad Hynes & Lerach LLP, 600 West Broadway, Suite 1800, San Diego, California 92101, Telephone: 619/231-1058. Please do not call any representative of Hybrid. - 4 - I. NOTICE OF HEARING ON PROPOSED SETTLEMENT A hearing (the "Settlement Hearing") will be held on ___________, 1999, at ____ _.m. (or at any such adjourned time or times as the District Court may without further notice direct) (the "Hearing Date"), before the Honorable Ronald M. Whyte, in the United States Courthouse, 280 South First Street, San Jose, California, to determine whether the proposed Settlement of this class action (the "Federal Action") between Representative Plaintiffs, individually and on behalf of the Settlement Class described below, and Settling Defendants Hybrid, Carl S. Ledbetter, Dan E. Steimle, James R. Flach, Stephen E. Halprin, Gary M. Lauder, Douglas M. Leone, Gustavo Ezcurra and Howard L. Strachman (hereinafter referred to collectively as the "Settling Defendants"), for the consideration described above is fair, reasonable and adequate and should be approved by the District Court. The District Court has certified a class composed of purchasers of Hybrid common stock between November 12, 1997 and June 17, 1998, excluding Defendants and certain related persons or entities. Pursuant to that certification, the Settlement Class consists of the named Plaintiffs herein and all persons or entities who purchased the common stock of Hybrid at any time during the period November 12, 1997 through June 17, 1998, inclusive (the "Settlement Class Period"). Excluded from the Class are the Defendants named in the complaint, members of the immediate families of the individual defendants, any entity in which any Defendant has a controlling interest, and any of the legal representatives, heirs, successors, or assigns of the Defendants. - 5 - Further excluded from the Settlement Class are those persons who submit valid and timely requests for exclusion from the Settlement Class pursuant to the terms of this Notice. II. THE LITIGATION On and after July 10, 1998, the following class actions were filed in the United States District Court for the Northern District of California (the "Court"): ROSENBERG V. NATIONSBANC MONTGOMERY SECURITIES, INC., ET AL., C-98-2731-SI and NGUYEN V. HYBRID NETWORKS, INC., ET AL., C-98-20888-RMW. These actions were subsequently consolidated (the "Federal Action"). The Federal Action names as defendants Hybrid Networks, Inc. ("Hybrid" or the "Company"), certain of its present and former officers and directors, the lead underwriters of Hybrid's initial public offering and its auditors, and alleges violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (the "Exchange Act") and Rule 10b-5 promulgated thereunder and Sections 11, 12 and 15 of the Securities Act of 1933. Hybrid is a broadband access equipment provider which designs, develops, manufactures and markets wireless and cable systems. The Federal Action alleges that, during the Class Period, the Defendants disseminated false financial statements and made other misrepresentations regarding Hybrid and its operations. On September 8, 1998, the plaintiffs in the NGUYEN action filed their motion to be appointed Lead Plaintiffs and for approval of Milberg Weiss Bershad Hynes & Lerach LLP and Cohen, Milstein, Hausfeld & Toll, P.L.L.C. to act as Lead Plaintiffs' Counsel. The Court granted the motion on December 11, 1998. - 6 - On and after June 5, 1998 the following actions were filed in the Superior Court for the State of California, County of Santa Clara (the "State Court"): PARNES V. NATIONSBANC MONTGOMERY SECURITIES, ET AL., CV774486 NUSSBAUM V. NATIONSBANC MONTGOMERY SECURITIES, ET AL., CV774572 SCHNECK V. NATIONSBANC MONTGOMERY SECURITIES, ET AL., CV774641 BICKELL V. HYBRID NETWORKS, INC., ET AL., CV774769 BRAINARD V. NATIONSBANC MONTGOMERY SECURITIES, ET AL., CV775464 MAGGIARO V. NATIONSBANC MONTGOMERY SECURITIES, ET AL., CV774855 (the "State Actions"). The State Actions were consolidated by Order dated October 29, 1998. The State Actions and the Federal Action are based on the same factual allegations. The Federal Action and the State Actions are collectively referred to herein as the "Litigation." Class Counsel have performed substantial investigation with respect to the claims asserted and the defenses that were or could be asserted in the Litigation. Among other things, Class Counsel consulted with experts, including damages and accounting experts; subpoenaed documents from 24 third parties and underwriters, and analyzed approximately 5,000 pages of produced documents, as well as Hybrid's public filings, annual reports, and other public statements; reviewed related public filings and reports by securities analysts; and researched the applicable law with respect to the claims asserted and the potential defenses thereto. In addition, Settling Defendants' Counsel of Record met several times - 7 - with Plaintiffs' Settlement Counsel to discuss the class's allegations and key internal documents. III. SETTLING DEFENDANTS' STATEMENT AND DENIALS OF WRONGDOING AND LIABILITY Settling Defendants have denied and continue to deny each and all of the claims and contentions alleged by the Representative Plaintiffs in the Litigation. Nonetheless, Settling Defendants have concluded that it is in their best interests that the Litigation be settled on the terms and conditions set forth in this Stipulation. Settling Defendants have reached this conclusion after (1) analyzing the factual and legal issues in the Litigation; (2) determining that further conduct of the Litigation would be protracted and expensive, including potential litigation not only through trial, but also through any appeals that might be taken; and (3) considering the substantial benefits to Settling Defendants and Hybrid's shareholders of a final resolution of the Litigation, including avoiding further expenses, disposing of burdensome and protracted litigation, and permitting Settling Defendants to conduct their business unhampered by the distractions of continued litigation. IV. CLAIMS OF THE REPRESENTATIVE PLAINTIFFS AND BENEFITS OF SETTLEMENT The Representative Plaintiffs and Plaintiffs' Settlement Counsel have concluded that it is in the best interests of the Representative Plaintiffs and Settlement Class Members that the Litigation be settled on the terms and conditions set forth in this Stipulation. The Representative Plaintiffs and Plaintiffs' - 8 - Settlement Counsel have reached this conclusion after considering the risks and uncertainties of prevailing on the claims at the pleading stage, summary judgment or trial due to the defenses that have been or could be asserted by Settling Defendants. These include, among other things, whether Representative Plaintiffs have met the requirements for pleading a claim; whether Settling Defendants ever issued any false or misleading statements; whether any statements, if false or misleading, were material; whether any Settling Defendant acted with scienter; and whether the Representative Plaintiffs or any Settlement Class Member suffered any loss as a result of any alleged action or statement by any of the Settling Defendants. Further considerations supporting the decision to enter into the Settlement described herein were the expense and length of continued proceedings necessary to prosecute the Litigation against Settling Defendants through trial and through appeals and the substantial benefits the Settlement confers upon the Representative Plaintiffs and the Settlement Class. V. THE SETTLEMENT A settlement has been reached in this Litigation between the Plaintiffs and the Settling Defendants which is embodied in a Stipulation of Settlement (the "Stipulation") dated March 3, 1999, on file with the District Court. The following description of the proposed Settlement of the Federal Action and the State Court Actions is only a summary, and reference is made to the text of the Stipulation on file with the District Court for a full statement of its provisions. - 9 - The Defendants have paid into an escrow account, pursuant to the terms of the Stipulation of Settlement dated as of _______, 1999 (the "Stipulation"), cash in the amount of $8.8 million (the "Settlement Fund") which has been and will continue to earn interest for the benefit of the Settlement Class. The Settlement Fund also includes 3.0 million shares of Hybrid common stock (the "Settlement Stock") to be issued pursuant to Section 3(a)(10) of the Securities Act of 1933, as amended. The amount of stock or other consideration to be contributed to the Settlement Fund may be increased under the circumstances described at pp.___ above. The "Net Settlement Fund" is the balance of the Settlement Fund after deduction of Plaintiffs' attorneys' fees and reimbursement of their expenses, and the costs in connection with sending this Notice and administering the Settlement Fund, as and if permitted by the District Court. These fees, costs and expenses will be deducted from the Settlement Fund. The Settlement Fund will be applied to pay Plaintiffs' attorneys' fees and expenses to the extent as may be allowed by the District Court, and to satisfy all reasonable notice and administrative costs and any taxes due. The balance of the Settlement Fund will be distributed to Settlement Class Members who have submitted valid, timely Proof of Claim forms (the "Authorized Claimants") in accordance with the Plan of Allocation described below. If the proposed Settlement is approved by the District Court, the District Court and the State Court will enter Judgments which will dismiss the Litigation against Settling Defendants with prejudice, and bar and permanently enjoin the Representative Plaintiffs and each Settlement Class Member, whether or not such - 10 - Settlement Class Member has submitted a Proof of Claim, from prosecuting the Released Claims (defined below) against the Released Parties (defined below), and any such Settlement Class Member shall be conclusively deemed to have released any and all such Released Claims against the Released Parties. The District Court shall retain jurisdiction over implementation of the Settlement, disposition of the Settlement Fund, hearing and determining Representative Plaintiffs' applications for attorneys' fees, costs, interest, expenses (including fees and costs of experts and/or consultants), and enforcing and administering the Stipulation, including any releases executed in connection therewith. "Released Claims" means the "Released Class Claims" and "Unknown Claims" as defined herein. As used above, "Released Class Claims" shall mean any and all claims, actions, demands, rights, liabilities, suits, and causes of action of every nature and description whatsoever, known or unknown, that were asserted or that could or might have been asserted in any pleading or amended pleading by the Representative Plaintiffs, by the Representative Plaintiffs on behalf of the class, or by any of the other Settlement Class Members against Released Persons, based upon, arising from, or in any way related to both the purchase of Hybrid common stock by the Representative Plaintiffs or the other Settlement Class Members during the Settlement Class Period and the facts, transactions, events, occurrences, disclosures, statements, acts or omissions or failures to act which were or could have been alleged in the Litigation; or any claim that the Settling Defendants or their Related Parties - 11 - improperly defended or settled the Litigation and/or the Released Claims. "Unknown Claims" as used in the above definition of Released Claims means any Released Class Claims which the Representative Plaintiffs or any other Settlement Class Member do not know or suspect to exist in their favor at the time of the release of the Released Persons which, if known by them, might have affected their Settlement with and release of the Released Persons, or might have affected their decision not to object to this Settlement. With respect to any and all Released Class Claims against the Released Persons, the Parties stipulate and agree that, upon the Effective Date, the Representative Plaintiffs shall expressly waive and relinquish, and the other Settlement Class Members shall be deemed to have, and by operation of the Judgment shall have, expressly waived and relinquished, to the fullest extent permitted by law, the provisions, rights, and benefits conferred by Section 1542 of the California Civil Code, which provides: A general release does not extend to claims which the creditor does not know or suspect to exist in his favor at the time of executing the release, which if known by him must have materially affected his settlement with the debtor, and by any law of any state or territory of the United States, or principle of common law, or of international or foreign law, which is similar, comparable or equivalent to Section 1542 of the California Civil Code. The Representative Plaintiffs and the other Settlement Class Members may hereafter discover facts in addition to or different from those which he, she or it now knows or believes to be true with respect to the Released Class Claims, but hereby stipulate and agree that upon the Effective Date, the - 12 - Representative Plaintiffs fully, finally and forever settle and release, and each other Settlement Class Member shall be deemed to have, and by operation of the Judgment shall have, fully, finally, and forever settled and released any and all Released Class Claims against the Released Persons, known or unknown, suspected or unsuspected, contingent or non-contingent, whether or not concealed or hidden, which now exist, or heretofore have existed, upon any theory of law or equity now existing or coming into existence in the future, including, but not limited to, conduct which is negligent, intentional, with or without malice, or a breach of any duty, law or rule, without regard to the subsequent discovery or existence of such different or additional facts. The Settling Parties acknowledge that the foregoing waiver was bargained for and a key element of the Settlement of which this release is a part. As used above "Released Persons" means the Settling Defendants, and their respective Related Parties (I.E., each of any Settling Defendants' past, present or future directors, officers, employees, partnerships and partners, principals, agents (except securities brokers and dealers), controlling shareholders, any entity in which any Settling Defendant and/or any member(s) of that Settling Defendant's immediate family has or have a controlling interest, attorneys, accountants, auditors (except the Non-Settling Defendant), advisors, personal or legal representatives, underwriters, syndicate members, banks, investment banks or investment bankers, analysts, associates, insurers, co-insurers and reinsurers, predecessors, successors, parents, subsidiaries, divisions, assigns, joint ventures and joint venturers, spouses, heirs, executors, administrators, related or affiliated entities, - 13 - any members of an Individual Settling Defendant's immediate family, or any trust of which any Settling Defendant is the settlor or which is for the benefit of any Individual Settling Defendant and/or member(s) of his family. Related Parties does not include the Non-Settling Defendant.) Released Persons does not include the Non-Settling Defendant. The Litigation will continue against the Non-Settling Defendant PriceWaterhouseCoopers LLP. VI. THE PLAN OF ALLOCATION The Net Settlement Fund shall be distributed to Settlement Class Members who submit valid, timely Proof of Claim forms ("Authorized Claimants") under the Plan of Allocation. The Plan of Allocation provides that you will be eligible to participate in the distribution of the Settlement Fund only if you have a net loss on all transactions in Hybrid common stock during the Settlement Class Period. The Plan of Allocation was arrived at by Plaintiffs' Settlement Counsel, with the assistance of their damages consultant, considering the relative merits of the claims asserted and the likely damages that could have been recovered if the Class was successful in establishing liability at trial. To the extent there are sufficient funds in the Net Settlement Fund, each Authorized Claimant will receive an amount equal to the Authorized Claimant's claim, as defined below. If, however, the amount in the Net Settlement Fund is not sufficient to permit payment of the total claim of each Authorized Claimant, then each Authorized Claimant shall be paid the percentage that each Authorized Claimant's claim bears to the total of the claims of all - 14 - Authorized Claimants. Payment in this manner shall be deemed conclusive against all Authorized Claimants. A claim will be calculated as follows: 1. For shares of Hybrid common stock that were PURCHASED OR OTHERWISE ACQUIRED ON NOVEMBER 12, 1997 THROUGH JUNE 17, 1998, and (a) sold from November 12, 1997 through June 17, 1998, the claim per share is the difference between the price paid for the shares of Hybrid common stock and the amount realized from the sale of any such shares; (b) retained at the end of June 17, 1998, the claim per share is the difference between the price paid for the shares of Hybrid common stock and $2.188 per share (June 17, 1998 closing price). 2. The date of purchase or sale is the "contract" or "trade" date as distinguished from the "settlement" date. 3. For Settlement Class Members who made multiple purchases or multiple sales during the Settlement Class Period, the earliest subsequent sale shall be matched with the earliest purchase and chronologically thereafter for purposes of the claim calculations. 4. All profits shall be subtracted from the total of all losses to determine the claim of each Settlement Class Member. Only if a Settlement Class Member had a net loss, after profits from all transactions in Hybrid common stock during the Settlement Class Period are subtracted from the total of losses, will such Class member be eligible to receive a distribution from the Net Settlement Fund. 5. The Court has reserved jurisdiction to allow, disallow or adjust the claim of any Settlement Class Member on equitable grounds. - 15 - 6. Representative Plaintiffs' Counsel ("Class Counsel"), acting on behalf of the Settlement Class and subject to the supervision of the District Court, shall be responsible for the administration and calculation of the claims and shall oversee the distribution of the Net Settlement Fund to Settlement Class Members. 7. Any controversies that may arise concerning the distribution of the Net Settlement Fund, including the allowance or disallowance of claims and the amounts thereof, which are not resolved between Class Counsel and any Claimant, shall be presented to the District Court for resolution. 8. Any Settlement Class Member who fails to file a valid and timely Proof of Claim and Release in the manner and with the information required shall be barred from participating in the distribution of the Net Settlement Fund, but otherwise shall be bound by all of the terms of the Stipulation, including any release and the provisions of any orders and judgments made or entered pursuant to the Stipulation. VII. THE RIGHTS OF SETTLEMENT CLASS MEMBERS If you are a Member of the Settlement Class, you have the following options: 1. YOU MAY FILE A PROOF OF CLAIM. If you choose this option you will remain a Member of the Settlement Class, you will share in the proceeds of the proposed Settlement if your claim is timely and valid and if the proposed Settlement is finally approved by the Court, and you will be bound by the Judgment and release described above. - 16 - Each Settlement Class Member who desires to assert a claim for payment from the Net Settlement Fund must submit a completed and signed Proof of Claim, a copy of which is enclosed with this Notice, supported by the documents described in the Proof of Claim. The Proof of Claim must be submitted as described below to: HYBRID NETWORKS, INC. SECURITIES LITIGATION, c/o Gilardi & Co., P.O. Box 5100, Larkspur, CA 94977-5100. ALL PROOFS OF CLAIM MUST BE POSTMARKED OR OTHERWISE SUBMITTED BY _________________, 1999. Any Settlement Class Member who fails to submit a valid and timely Proof of Claim will not receive any portion of the Net Settlement Fund, but will be bound by all terms of the Settlement and of any Final Judgment or other order entered in this Action if the Settlement is approved (unless such person previously has validly and properly requested exclusion from the Settlement Class). A Proof of Claim and Release will be deemed to have been submitted when mailed, if a postmark is indicated on the envelope and it was mailed first class, postage prepaid, and addressed as indicated above. Proof of Claim forms otherwise submitted will be deemed to be submitted at the time they are actually received at the address designated above. Submission of a Proof of Claim and Release is not a waiver of certain rights with respect to the Settlement, including the right to object to the Settlement, the distribution of the Net Settlement Fund or Plaintiffs' Settlement Counsel's request for attorneys' fees or reimbursement of expenses. If you submit a Proof of Claim, Plaintiffs' Settlement Counsel is entitled to make inquiry to ensure that you are a Settlement Class Member or are entitled to a portion of the Net Settlement - 17 - Fund and to confirm the amount of your claim. By submitting a Proof of Claim, you are agreeing that the District Court has jurisdiction with respect to your claim. 2. YOU MAY REQUEST TO BE EXCLUDED. If you do not wish to be included in the Settlement Class and you do not wish to participate in the proposed Settlement described in the Notice, you may request to be excluded from the Settlement Class. VIII. PROCEDURE FOR EXCLUSION Any Settlement Class Member may exclude himself, herself or itself from the Settlement Class by mailing on or before __________________, 1999, a statement to HYBRID NETWORKS, INC. SECURITIES LITIGATION, c/o Gilardi & Co., P.O. Box 5100, Larkspur, CA 94977-5100, of his, her or its desire to be excluded from the Settlement Class in the HYBRID NETWORKS, INC. SECURITIES LITIGATION, and stating the number of shares of Hybrid common stock purchased and sold during the Settlement Class Period, the dates of purchases and/or sales and the prices paid or received for each purchase or sale. All persons who exclude themselves from the Settlement Class will not participate in or receive any portion of the Net Settlement Fund described above, nor will they be bound by the terms of the Settlement, or any Final Judgment in this Action, including any release of claims against Defendants; but they may pursue their own individual remedies, if any. No request for exclusion will be considered valid unless all of the information described above is included in any such request. If you do not request to be excluded from the Settlement Class you will be bound by any and all determinations or judgments in the - 18 - Action, whether favorable or unfavorable to the Settlement Class including, without limitation, any Final Judgment. 3. YOU MAY DO NOTHING AT ALL. If you choose this option, you will NOT share in the proceeds of the Settlement, but you WILL be bound by any Judgment entered by the Court. IX. SETTLEMENT HEARING The purpose of the Settlement Hearing scheduled for ____________, 1999, will be to determine whether the proposed partial Settlement of this Action as set forth in the Stipulation of Settlement, dated as of March 3, 1999, is fair, reasonable and adequate and, thus, whether the Settlement should be approved by the District Court, and the Litigation dismissed in its entirety as to the Defendants, with prejudice as against Settlement Class Members. The District Court will also consider at the Settlement Hearing the request of counsel for the Representative Plaintiffs and the Settlement Class for an award of attorneys' fees and reimbursement of expenses. Class Counsel will apply to the District Court for an award of attorneys' fees and for the reimbursement of expenses for the services they rendered in this Litigation. Class Counsel intend to seek attorneys' fees of thirty percent (30%) of the Settlement Fund plus their out-of-pocket expenses not to exceed $300,000. Any attorneys' fees and expenses that the District Court awards will be paid out of the Settlement Fund. Any Settlement Class Member who has not requested exclusion from the Settlement Class may appear in person or through counsel - 19 - at the hearing described above and be heard as to why the proposed Settlement of the Action, the distribution of the Net Settlement Fund, and the application by Class Counsel for an award of fees and expenses should or should not be approved as fair, reasonable and adequate, or why a Final Judgment dismissing the Action against Defendants with prejudice should or should not be entered herein; provided, however, that no Settlement Class Member shall be heard or be entitled to object to the approval of the terms and conditions of the proposed Settlement, or the distribution of the funds, or the application by Class Counsel for an award of fees and expenses, unless on or before __________, 1999 that person has filed such papers with the District Court and has served by hand or first-class mail written objections and copies of any supporting papers and briefs upon each of the following: Keith F. Park MILBERG WEISS BERSHAD HYNES & LERACH LLP 600 W. Broadway, Suite 1800 San Diego, California, 92101 Steven J. Toll COHEN, MILSTEIN, HAUSFELD & TOLL, P.L.L.C. 1100 New York Avenue, N.W. West Tower, Suite 500 Washington, DC 20005-3964 Counsel for Plaintiffs Jordan Eth, Esq. MORRISON & FOERSTER 425 Market Street San Francisco, CA 94105-2482 Counsel for Settling Defendants Any such papers served must include the number of shares of Hybrid stock the objector purchased and sold during the Settlement Class Period, and the dates of such purchase(s) and sale(s). Unless - 20 - otherwise ordered by the Court, any Member of the Settlement Class who does not make his or her objection or opposition in the manner provided shall be deemed to have waived all objections and opposition to the fairness, reasonableness and adequacy of the proposed Settlement, the Plan of Allocation and the request of Class Counsel for attorneys' fees, costs and expenses. X. NOTICE TO BANKS, BROKERS AND OTHER NOMINEES Pursuant to an order of the District Court, each bank, brokerage firm and other nominee who purchased Hybrid common stock during the Settlement Class Period for a beneficial owner is requested within ten days to forward to such persons a copy of this Notice and a copy of the Proof of Claim form enclosed herewith. Additional copies may be obtained, without charge, by written request to HYBRID NETWORKS, INC. SECURITIES LITIGATION, c/o Gilardi & Co., at the address listed below. Alternatively, nominees may provide the names and addresses of persons for whom they purchased Hybrid common stock during the Settlement Class Period to HYBRID NETWORKS, INC. SECURITIES LITIGATION, c/o Gilardi & Co. who, in turn, will mail the notices and Proof of Claim forms. The Settlement Fund will reimburse all such nominees for reasonable administrative costs incurred in providing the Notice and Proof of Claim forms to beneficial owners, upon submission of appropriate documentation. XI. EXAMINATION OF PAPERS AND INQUIRIES The foregoing is only a summary of the Action and the proposed Settlement, and does not purport to be comprehensive. For a more - 21 - detailed statement of the matters involved in the above Action and the proposed Settlement, you may refer to the pleadings, the Stipulation of Settlement and other papers filed in the above Action, which may be inspected at the Office of the Clerk of the District Court during normal business hours of each business day. All inquiries by Settlement Class Members should be directed in the first instance to HYBRID NETWORKS, INC. SECURITIES LITIGATION, c/o Gilardi & Co., P.O. Box 5100, Larkspur, CA 94977-5100, during normal business hours. INQUIRIES SHOULD NOT BE DIRECTED TO THE CLERK OF THE COURT OR TO THE JUDGE. DATED: BY ORDER OF THE UNITED STATES ------------- DISTRICT COURT FOR THE NORTHERN DISTRICT OF CALIFORNIA - 22 - MILBERG WEISS BERSHAD HYNES & LERACH LLP WILLIAM S. LERACH (68581) KEITH F. PARK (54275) 600 West Broadway, Suite 1800 San Diego, CA 92101 Telephone: 619/231-1058 - and - REED R. KATHREIN (139304) KIMBERLY C. EPSTEIN (169012) 222 Kearny Street, 10th Floor San Francisco, CA 94108 Telephone: 415/288-4545 COHEN, MILSTEIN, HAUSFELD & TOLL, P.L.L.C. STEVEN J. TOLL KRISTOPHER A. KINKADE 999 Third Avenue, Suite 3600 Seattle, WA 98104 Telephone: 206/521-0080 Co-Lead Counsel for Plaintiffs UNITED STATES DISTRICT COURT NORTHERN DISTRICT OF CALIFORNIA SAN JOSE DIVISION MARK ALAN ROSENBERG, et al., On ) No. C-98-20956-RMW Behalf of Themselves and All Others ) (Consolidated with No. Similarly Situated, ) C-98-20888-RMW) ) Plaintiffs, ) CLASS ACTION ) vs. ) ) HYBRID NETWORKS, INC., et al., ) ) Defendants. ) ) - --------------------------------------- PROOF OF CLAIM AND RELEASE EXHIBIT A-2 GENERAL INSTRUCTIONS 1. To recover as a Member of the Settlement Class based on your claims in the above-entitled action (the "Class Action"), you must complete and on page __ hereof, sign this Proof of Claim and Release. If you fail to file a properly addressed (as set forth in paragraph 3 below) Proof of Claim and Release, your claim may be rejected and you may be precluded from any recovery from the Settlement Fund created in connection with the proposed Settlement of the Class Action. 2. Submission of this Proof of Claim and Release, however, does not assure that you will share in the proceeds of Settlement in the Litigation. 3. YOU MUST MAIL YOUR COMPLETED AND SIGNED PROOF OF CLAIM AND RELEASE POSTMARKED ON OR BEFORE __________, 1999 ADDRESSED AS FOLLOWS: HYBRID NETWORKS, INC. SECURITIES LITIGATION c/o Gilardi & Co. P.O. Box 5100 Larkspur, California 94977-5100 4. If you are a Member of the Settlement Class and you do not timely request exclusion in connection with the proposed Settlement, you are bound by the terms of any judgment entered in the Class Action, WHETHER OR NOT YOU SUBMIT A PROOF OF CLAIM AND RELEASE. 5. If you are NOT a Member of the Settlement Class as defined in the Notice of Pendency and Settlement of Class Action and Settlement Hearing (the "Notice"), DO NOT submit a Proof of Claim and Release form. - 1 - CLAIMANT IDENTIFICATION 1. If you purchased Hybrid common stock, and held the certificate(s) in your name, you are the beneficial purchaser as well as the record purchaser. If, however, you purchased these securities, and the certificate(s) were registered in the name of a third party, such as a nominee or brokerage firm, you are the beneficial purchaser and the third party is the record purchaser. 2. Use Part I of this form entitled "Claimant Identification" to identify each purchaser of record, if different from the beneficial purchaser ("nominee") of Hybrid stock which forms the basis of this claim. THIS CLAIM MUST BE FILED BY THE ACTUAL BENEFICIAL PURCHASER OR PURCHASERS, OR THE LEGAL REPRESENTATIVE OF SUCH PURCHASER OR PURCHASERS, OF THE STOCK, UPON WHICH THIS CLAIM IS BASED. 3. All joint purchasers must sign this claim. Executors, administrators, guardians, conservators and trustees must complete and sign this claim on behalf of persons represented by them and their authority must accompany this claim and their titles or capacities must be stated. The Social Security (or taxpayer identification) number and telephone number of the beneficial owner may be used in verifying the claim. Failure to provide the foregoing information could delay verification of your claim or result in rejection of the claim. - 2 - CLAIM FORM 1. Use Part II of this form entitled "Schedule of Transactions in Hybrid Common Stock," to supply all required details of your transaction(s) in these securities. If you need more space or additional schedules, attach separate sheets giving all of the required information in substantially the same form. Sign and print or type your name on each additional sheet. 2. On the schedules, provide all of the requested information with respect to all of your purchases and all of your sales of Hybrid stock which took place at any time between November 12, 1997 through and including June 17, 1998 (the "Settlement Class Period"), whether such transactions resulted in a profit or a loss. Failure to report all such transactions may result in the rejection of your claim. 3. List each transaction in the Settlement Class Period separately and in chronological order, by trade date, beginning with the earliest. You must accurately provide the month, day and year of each transaction you list. 4. The term "Purchase Price" means the amount paid for the securities (including commissions and transfer taxes) and the term "Sales Price" means the amount realized on the sale of the securities (net of commissions and transfer taxes). The date of purchase or sale is the "contract" or "trade" date as distinguished from the "settlement" date. The date of covering a "short sale" is deemed to be the date of purchase of the security. The date of a "short sale" is deemed to be the date of sale of the security. 5. Broker's confirmations or other documentation of your transactions in Hybrid stock should be attached to your claim. - 3 - Failure to provide this documentation could delay verification of your claim or result in rejection of your claim. - 4 - UNITED STATES DISTRICT COURT NORTHERN DISTRICT OF CALIFORNIA ROSENBERG, ET AL. V. HYBRID NETWORKS, INC. No. C-98-20956-RMW PROOF OF CLAIM Must be Postmarked No Later Than: , 1999 ------------------ PLEASE TYPE OR PRINT PART I: CLAIMANT IDENTIFICATION - ------------------------------------------------------------------------------- Beneficial Owner's Name (First, Middle, Last) - ------------------------------------------------------------------------------- Street Address - ------------------------------ ------------------------------------ City State Zip Code - ----------------------------- -------------------------------------- Foreign Province Foreign Country Induvidual - ----------------------------- -------- Social Security Number or Taxpayer Identification Number Corporation/Other -------- (work) - ---------- ----------------- Area Code Telephone Number (home) - ---------- ----------------- Area Code Telephone Number - ------------------------------------------------------------------------------- Record Owner's Name (if different from beneficial owner listed above) - 5 - PART II: SCHEDULE OF TRANSACTIONS IN HYBRID COMMON STOCK A) The number of shares of Hybrid common stock held at the commencement of trading on November 12, 1997: _________ B) Purchases (November 12, 1997 - June 17, 1998, inclusive) of Hybrid common stock TRADE DATE NO. OF SHARES MO DAY YEAR PURCHASED PURCHASE PRICE 1. $ . ------------- -------------- ---------- --- 2. $ . ------------- -------------- ---------- --- 3. $ . ------------- -------------- ---------- --- C) Sales (November 12, 1997 - June 17, 1998, inclusive) of Hybrid common stock TRADE DATE MO DAY YEAR NO. OF SHARES SOLD SALES PRICE 1. $ . ------------- -------------- ---------- --- 2. $ . ------------- -------------- ---------- --- 3. $ . ------------- -------------- ---------- --- D) Number of shares of Hybrid common stock held at close of trading on June 17, 1998:________________. YOU MUST READ AND SIGN THE RELEASE ON PAGE____. If you require additional space, attach extra schedules in the same format as above. Copies of broker's confirmations or other documentation evidencing your transactions in Hybrid stock should be attached. - 6 - PART III: SUBMISSION TO JURISDICTION OF COURT AND ACKNOWLEDGMENTS I submit this Proof of Claim and Release under the terms of the Stipulation of Settlement described in the Notice. I also submit to the jurisdiction of the United States District Court for the Northern District of California with respect to my claim as a Settlement Class Member and for purposes of enforcing the release set forth herein and any Judgment which may be entered in the Class Action. I further acknowledge that I am bound by and subject to the terms of any judgment that may be entered in the Class Action. I agree to furnish additional information to the Claims Administrator to support this claim if required to do so. PART IV: RELEASE A. I hereby acknowledge full and complete satisfaction of, and do hereby fully, finally and forever settle, discharge and release all Released Class Claims and Unknown Claims against all Released Persons. B. "Related Parties" means each of any Settling Defendants' past, present or future directors, officers, employees, partnerships and partners, principals, agents (except securities brokers and dealers), controlling shareholders, any entity in which any Settling Defendant and/or any member(s) of that Settling Defendant's immediate family has or have a controlling interest, attorneys, accountants, auditors (except the Non-Settling Defendant), advisors, personal or legal representatives, underwriters, syndicate members, banks, investment banks or investment bankers, analysts, associates, insurers, co-insurers and reinsurers, predecessors, successors, parents, subsidiaries, - 7 - divisions, assigns, joint ventures and joint venturers, spouses, heirs, executors, administrators, related or affiliated entities, any members of an Individual Settling Defendant's immediate family, or any trust of which any Settling Defendant is the settlor or which is for the benefit of any Individual Settling Defendant and/or member(s) of his family. Related Parties does not include the Non-Settling Defendant. C. "Released Class Claims" means any and all claims, actions, demands, rights, liabilities, suits, and causes of action of every nature and description whatsoever, known or unknown, that were asserted or that could or might have been asserted in any pleading or amended pleading by the Representative Plaintiffs, by the Representative Plaintiffs on behalf of the class, or by any of the other Settlement Class Members against Released Persons, based upon, arising from, or in any way related to both the purchase of Hybrid common stock by the Representative Plaintiffs or the other Settlement Class Members during the Settlement Class Period and the facts, transactions, events, occurrences, disclosures, statements, acts or omissions or failures to act which were or could have been alleged in the Litigation; or any claim that the Settling Defendants or their Related Parties improperly defended or settled the Litigation and/or the Released Claims. D. "Released Persons" means each and all of the Settling Defendants and their respective Related Parties. Released Persons does not include the Non-Settling Defendant. E. "Settling Defendants" means Hybrid, Carl S. Ledbetter, Dan E. Steimle, James R. Flach, Stephen E. Halprin, Gary M. Lauder, Douglas M. Leone, Gustavo Ezcurra and Howard L. Strachman. - 8 - F. "Unknown Claims" means any Released Class Claims which the Representative Plaintiffs or any other Settlement Class Member do not know or suspect to exist in their favor at the time of the release of the Released Persons which, if known by them, might have affected their Settlement with and release of the Released Persons, or might have affected their decision not to object to this Settlement. With respect to any and all Released Class Claims against the Released Persons, the Parties stipulate and agree that, upon the Effective Date, the Representative Plaintiffs shall expressly waive and relinquish, and the other Settlement Class Members shall be deemed to have, and by operation of the Judgment shall have, expressly waived and relinquished, to the fullest extent permitted by law, the provisions, rights, and benefits conferred by Section 1542 of the California Civil Code, which provides: A general release does not extend to claims which the creditor does not know or suspect to exist in his favor at the time of executing the release, which if known by him must have materially affected his settlement with the debtor and by any law of any state or territory of the United States, or principle of common law, or of international or foreign law, which is similar, comparable or equivalent to Section 1542 of the California Civil Code. The Representative Plaintiffs and the other Settlement Class Members may hereafter discover facts in addition to or different from those which he, she or it now knows or believes to be true with respect to the Released Class Claims, but hereby stipulate and agree that upon the Effective Date, the Representative Plaintiffs fully, finally and forever settle and release, and each other Settlement Class Member shall be deemed to have, and by operation of the Judgment shall have, fully, finally, - 9 - and forever settled and released any and all Released Class Claims against the Released Persons, known or unknown, suspected or unsuspected, contingent or non-contingent, whether or not concealed or hidden, which now exist, or heretofore have existed, upon any theory of law or equity now existing or coming into existence in the future, including, but not limited to, conduct which is negligent, intentional, with or without malice, or a breach of any duty, law or rule, without regard to the subsequent discovery or existence of such different or additional facts. The Settling Parties acknowledge that the foregoing waiver was bargained for and a key element of the Settlement of which this release is a part. G. This release shall be of no force or effect unless and until the Court approves the Stipulation of Settlement and the Stipulation becomes Effective. H. I (we) hereby warrant and represent that I (we) have not assigned or transferred or purported to assign or transfer, voluntarily or involuntarily, any matter released pursuant to this release or any other part or portion thereof. I. I (we) certify that I am (we are) not subject to backup withholding under the provisions of Section 3406(a)(1)(C) of the Internal Revenue Code. NOTE: If you have been notified by the Internal Revenue Service that you are subject to backup withholding, please strike out the language that you are not subject to backup withholding in the certification above. - 10 - I declare under penalty of perjury under the laws of the United States of America that the foregoing information supplied by the undersigned is true and correct and that this Proof of Claim and Release form was executed this _____ day of _________________ in _____________________________________ (month) (year) (City, State, Country) ----------------------------------- (Sign your name here) ------------------------------------ (Type or print your name here) ------------------------------------ (Capacity of persons signing, e.g., Beneficial Purchaser, Executor or Administrator) ACCURATE CLAIMS PROCESSING TAKES A SIGNIFICANT AMOUNT OF TIME THANK YOU FOR YOUR PATIENCE - 11 - Reminder Checklist: 1. Please sign the above release and declaration. 2. Remember to attach copies of your supporting documentation, if available. 3. Do not send originals or copies of stock certificates. 4. Keep a copy of your claim form for your records. 5. If you desire an acknowledgment of receipt of your claim form, please send it Certified Mail, Return Receipt Requested. 6. If you move, please send us your new address. - 12 - MILBERG WEISS BERSHAD HYNES & LERACH LLP WILLIAM S. LERACH (68581) KEITH F. PARK (54275) 600 West Broadway, Suite 1800 San Diego, CA 92101 Telephone: 619/231-1058 - and - REED R. KATHREIN (139304) KIMBERLY C. EPSTEIN (169012) 222 Kearny Street, 10th Floor San Francisco, CA 94108 Telephone: 415/288-4545 COHEN, MILSTEIN, HAUSFELD & TOLL, P.L.L.C. STEVEN J. TOLL KRISTOPHER A. KINKADE 999 Third Avenue, Suite 3600 Seattle, WA 98104 Telephone: 206/521-0080 Co-Lead Counsel for Plaintiffs UNITED STATES DISTRICT COURT NORTHERN DISTRICT OF CALIFORNIA SAN JOSE DIVISION MARK ALAN ROSENBERG, et al., On ) No. C-98-20956-RMW Behalf of Themselves and All Others ) (Consolidated with No. Similarly Situated, ) C-98-20888-RMW) ) Plaintiffs, ) CLASS ACTION ) vs. ) ) HYBRID NETWORKS, INC., et al., ) ) Defendants. ) ) - ----------------------------------- SUMMARY NOTICE OF PROPOSED SETTLEMENT EXHIBIT A-3 TO: ALL PERSONS WHO PURCHASED THE COMMON STOCK OF HYBRID NETWORKS, INC. ("HYBRID") DURING THE PERIOD NOVEMBER 12, 1997 THROUGH JUNE 17, 1998, INCLUSIVE. Class litigation has been pending in the United States District Court for the Northern District of California against Hybrid and certain of its present and former officers and directors. Certain of the parties to the action have reached a proposed settlement. You are hereby notified, pursuant to Court order, that a hearing will be held on __________, 1999, at ____ _.m., before the Honorable Ronald M. Whyte, United States District Judge, at the United States Courthouse, 280 South First Street, San Jose, California (the "Settlement Hearing") to determine: (1) whether the settlement of claims in the litigation in the amount of $8.8 million in cash, plus accrued interest (the "Settlement Fund"), and 3.0 million shares of Hybrid common stock (subject to certain terms and conditions) should be approved as fair, just, reasonable and adequate to all the Settling Parties; (2) whether the proposed Plan of Allocation is fair, just, reasonable and adequate; (3) whether the application of plaintiffs' counsel for an award of attorneys' fees and expenses should be approved; and, (4) whether the action should be dismissed with prejudice as to the Settling Defendants as set forth in the Stipulation of Settlement dated as of March 3, 1999, filed with the Court. If you purchased Hybrid common stock during the period from November 12, 1997 through and including June 17, 1998, your rights may be affected by the settlement of this action. To share in the distribution of the Settlement Fund, you must establish your rights - 1 - by filing a Proof of Claim and Release form on or before __________, 1999. If you desire to be excluded from the Class, you must file a request for exclusion by _____________, 1999, in the manner and form explained in the detailed Notice referred to below. All members of the Settlement Class who have not requested exclusion from the Settlement Class will be bound by any judgment entered in the action pursuant to the settlement agreement. Any objection to the settlement must be filed no later than _____________, 1999 and show due proof of service on each of: Keith F. Park MILBERG WEISS BERSHAD HYNES & LERACH LLP 600 West Broadway, Suite 1800 San Diego, CA 92101 Steven J. Toll COHEN, MILSTEIN, HAUSFELD & TOLL, P.L.L.C. 1100 New York Avenue, N.W. West Tower, Suite 500 Washington, DC 20005-3964 Counsel for Plaintiffs Jordan Eth, Esq. MORRISON & FOERSTER 425 Market Street San Francisco, CA 94105-2482 Counsel for Settling Defendants If you are a member of the Settlement Class and have not received a detailed printed Notice of Pendency and Partial Settlement of Class Action and Settlement Hearing and a Proof of Claim and Release form, you may obtain copies by writing to: HYBRID NETWORKS, INC. SECURITIES LITIGATION, c/o Gilardi & Co., P.O. Box 5100, Larkspur, CA 94977-5100. Please do not contact the Court or the Clerk's office for information. - 2 - Any inquiries about this action can be made in WRITING to counsel for the Settlement Class, Keith F. Park, Milberg Weiss Bershad Hynes & Lerach LLP, 600 W. Broadway, Suite 1800, San Diego, California 92101 and Steven J. Toll, Cohen, Milstein, Hausfeld & Toll, P.L.L.C., 1100 New York Avenue, N.W., West Tower, Suite 500, Washington, DC 20005-3964. DO NOT TELEPHONE THE COURT REGARDING THIS NOTICE. DATED: ____________ BY ORDER OF THE UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF CALIFORNIA - 3 - UNITED STATES DISTRICT COURT NORTHERN DISTRICT OF CALIFORNIA SAN JOSE DIVISION MARK ALAN ROSENBERG, et al., On ) No. C-98-20956-RMW Behalf of Themselves and All Others ) (Consolidated with No. Others Similarly Situated, ) C-98-20888-RMW) ) Plaintiffs, ) CLASS ACTION ) ____________ vs. ) ) HYBRID NETWORKS, INC., et al., ) ) Defendants. ) ) - ----------------------------------- [PROPOSED] FINAL JUDGMENT AND ORDER OF DISMISSAL EXHIBIT B This matter came on for hearing on ___________, 1999, upon the application of the Settling Parties for approval of the Settlement set forth in the Stipulation of Settlement (the "Stipulation") dated as of March 3, 1999. Due and adequate notice having been given to the Settlement Class, and the Court having considered the Stipulation, all papers filed and proceedings had herein and all oral and written comments received regarding the proposed Settlement, and having reviewed the entire record in the Action, and good cause appearing: IT IS HEREBY ORDERED, ADJUDGED AND DECREED AS FOLLOWS: 1. The Court, for purposes of this Final Judgment and Order of Dismissal (the "Final Judgment"), adopts all defined terms as set forth in the Stipulation. 2. Pursuant to Rule 23 of the Federal Rules of Civil Procedure, this Court has certified a Settlement Class of all Persons who purchased Hybrid Networks, Inc. common stock between November 12, 1997 and June 17, 1998, inclusive. Excluded from the Class are the Defendants named in the Litigation, members of the immediate families of the Individual Defendants, any entity in which any Defendant has a controlling interest, and the legal representatives, heirs, successors, or assigns of the Defendants. Also excluded from the Settlement Class are those Persons (identified in Exhibit 1 hereto) who have timely and validly requested exclusion from the Settlement Class pursuant to the Notice of Pendency and Settlement of Class Action sent to the Settlement Class. 3. With respect to the Settlement Class, this Court finds and concludes that: (a) the members of the Class are so numerous - 1 - that joinder of all Class members in the class action is impracticable; (b) there are questions of law and fact common to the Class which predominate over any individual questions; (c) the claims of the Representative Plaintiffs are typical of the claims of the Class; (d) the Representative Plaintiffs and their counsel have fairly and adequately represented and protected the interests of the Class members; and (e) a class action is superior to other available methods for the fair and efficient adjudication of the controversy, considering: (i) the interests of the members of the Class in individually controlling the prosecution of the separate actions, (ii) the extent and nature of any litigation concerning the controversy already commenced by members of the Class, (iii) the desirability or undesirability of continuing the litigation of these claims in this particular forum, and (iv) the difficulties likely to be encountered in the management of the class action. 4. The Court has jurisdiction over the subject matter of the Action, the Representative Plaintiffs, the other Members of the Settlement Class, and the Settling Defendants. 5. The Court finds that the distribution of the Notice of Pendency and Settlement of Class Action and Settlement Hearing, Proof of Claim and Release, and publication of the Summary Notice as provided for in the Order Preliminarily Approving Settlement constituted the best notice practicable under the circumstances to all Persons within the definition of the Settlement Class, and fully met the requirements of Rule 23 of the Federal Rules of Civil Procedure, due process, the United States Constitution, and any other applicable law. - 2 - 6. Pursuant to and in accordance with the requirements of Rule 23 of the Federal Rules of Civil Procedure, the Court approves the Settlement of the above-captioned action set forth in the Stipulation, each of the releases and other terms, as fair, just, reasonable and adequate as to the Settling Parties. The Parties to the Stipulation are directed to perform in accordance with the terms set forth in the Stipulation. 7. The Court finds that the settlement set forth in the Stipulation is fair and adequate to the Settling Parties, the Non-Settling Defendant, and to all persons who may be alleged or determined to be joint tortfeasors or co-obligors with the Settling Defendants, within the parameters of Rule 23 of the Federal Rules of Civil Procedure and other applicable federal law. 8. Except as to any individual claim of those Persons (identified in Exhibit 1 hereto) who have validly and timely requested exclusion from the Settlement Class, the Action and all claims contained therein, including all of the Released Claims against the Released Persons are dismissed with prejudice as to the Representative Plaintiffs and the other Members of the Settlement Class, and the Parties are to bear their own costs, except as otherwise provided in the Stipulation. 9. Upon the Effective Date, the Representative Plaintiffs hereby fully, finally, and forever release, relinquish and discharge all Released Claims (including Unknown Claims) against each and all of the Released Persons. 10. Upon the Effective Date, each and all Settlement Class Members shall be deemed to have fully, finally, and forever released, relinquished and discharged all Released Claims - 3 - (including Unknown Claims) against each and all of the Released Persons, whether or not such Settlement Class Member executes and delivers the Proof of Claim and Release. 11. Upon the Effective Date, each of the Settling Defendants shall fully, finally, and forever release, relinquish and discharge the Representative Plaintiffs and each and all of the other Settlement Class Members, and Representative Plaintiffs' Counsel, from all claims (including "Unknown Claims") arising out of, relating to, or in connection with the institution, prosecution, assertion or resolution of the Action or the Released Claims. 12. The Court bars and permanently enjoins all Settlement Class Members from instituting or prosecuting an action or proceedings against the Settling Defendants arising out of or relating in any way to the Released Claims upon the Effective Date. 13. Only those Settlement Class Members filing valid and timely Proof of Claim and Release forms shall be entitled to participate in the Settlement and receive a distribution from the Settlement Fund. The Proof of Claim and Release to be executed by the Settlement Class Members shall release all Released Claims against the Released Persons. All Settlement Class Members shall be bound by the releases set forth herein whether or not they submit a valid and timely Proof of Claim and Release. 14. Upon the Effective Date, each of the Settling Defendants hereby fully, finally, and forever releases, relinquishes and discharges against each of the other Settling Defendants the following: all claims arising out of, relating to, or in connection with (1) the Released Claims; (2) the payments provided for in PARA1.29 of the Stipulation; and (3) the payment of attorneys' - 4 - fees, costs and expenses incurred in defense of this Litigation. Specifically excluded from the releases in this paragraph are:(i) any claims, rights, demands, causes of action, liabilities, and suits arising out of the claims that are or may be asserted by any Person falling within the definition of the Settlement Class who validly and timely requests to be excluded from the Settlement of the Litigation as provided for in the Stipulation; and (ii) any obligation on the part of Hybrid to indemnify its present and former officers and directors to the extent required by Hybrid's articles of incorporation and by-laws, any existing agreements, or any resolution or otherwise, by the Board of Directors of Hybrid. 15. The Court hereby enters a bar order pursuant to Section 21D of the Securities Exchange Act of 1934 (the "Exchange Act"), 15 U.S.C. Section 78u-4(f)(7) and FRANKLIN V. KAYPRO CORP., 884 F.2d 1222 (9th Cir. 1989) with respect to the claims asserted under the Exchange Act and the Securities Act of 1933, constituting the final discharge of all obligations to plaintiffs of the Settling Defendants arising out of the action (the "Contribution Bar Order"). This Order and Judgment bars and permanently enjoins all persons, including but not limited to the Non-Settling Defendant, from instituting or prosecuting any action or proceeding against the Settling Defendants for equitable, partial, comparative, or complete contribution, subrogation, or indemnity, however denominated, arising out of or relating in any way to the Released Claims. The Court finds that all such claims are extinguished, discharged, satisfied and made unenforceable. - 5 - 16. During the course of the Action no Settling Party or their respective counsel violated any of the requirements of Rule 11(b) of the Federal Rules of Civil Procedure. 17. Neither the Stipulation nor the Settlement contained therein, nor any act performed or document executed pursuant to or in furtherance of the Stipulation or the Settlement: (i) is or may be deemed to be or may be used as an admission of, or evidence of, the validity of any Released Claim, or of any wrongdoing or liability of the Settling Defendants, or (ii) is or may be deemed to be or may be used as an admission of, or evidence of, any fault or omission of any of the Settling Defendants in any civil, criminal or administrative proceeding in any court, administrative agency or other tribunal. Released Persons may file the Stipulation and/or the Judgment from this Action in any other action that may be brought against them in order to support a defense or counterclaim based on principles of RES JUDICATA, collateral estoppel, release, good faith settlement, judgment bar or reduction of any theory of claim preclusion or issue preclusion or similar defense or counterclaim. Settling Defendants have denied and continue to deny each and all of the claims alleged in the Action. The Representative Plaintiffs or any other Member of the Settlement Class may file the Stipulation in any proceeding brought to enforce any of its terms or provisions. 18. The Court reserves exclusive and continuing jurisdiction over the Action, the Representative Plaintiffs, the Settlement Class and the Released Persons for the purposes of: (1) supervising the implementation, enforcement, construction, and interpretation of the Stipulation, the Plan of Allocation, and this - 6 - Judgment; (2) hearing and determining any application by Class Counsel for an award of attorney's fees, costs, and expenses; and (3) supervising the distribution of the Settlement Fund. 19. There being no just reason to delay entry of this Judgment, the Clerk of the Court is ordered, pursuant to Rule 54(b) of the Federal Rules of Civil Procedure, to enter this judgment forthwith. DATED: __________________ ______________________________ THE HONORABLE RONALD M. WHYTE UNITED STATES DISTRICT JUDGE Submitted by: MILBERG WEISS BERSHAD HYNES & LERACH LLP WILLIAM S. LERACH KEITH F. PARK - ------------------------------ KEITH F. PARK 600 West Broadway, Suite 1800 San Diego, CA 92101 Telephone: 619/231-1058 MILBERG WEISS BERSHAD HYNES & LERACH LLP REED R. KATHREIN KIMBERLY C. EPSTEIN 222 Kearny Street, 10th Floor San Francisco, CA 94108 Telephone: 415/288-4545 COHEN, MILSTEIN, HAUSFELD & TOLL, P.L.L.C. STEVEN J. TOLL KRISTOPHER A. KINKADE 999 Third Avenue, Suite 3600 Seattle, WA 98104 Telephone: 206/521-0080 Co-Lead Counsel for Plaintiffs - 7 - EX-23.01 6 EX-23.01 Exhibit 23.01 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statement (333-40027) on Form S-8 of Hybrid Networks, Inc. of our report dated February 10, 2000 relating to the balance sheets as of December 31, 1999 and 1998 and the related statements of operations, stockholders' equity (deficit), and cash flows for each of the years in the three year period ended December 31, 1999, which report appears in the December 31, 1999 annual report on Form 10-K of Hybrid Networks, Inc. /s/ Hein + Associates LLP Hein + Associates LLP Certified Public Accountants Orange, California March 24, 2000 EX-27.01 7 EX-27.01
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE 12/31/99 BALANCE SHEET AND THE STATEMENT OF OPERATIONS FOR THE TWELVE MONTHS THEN ENDED AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 12-MOS DEC-31-1999 JAN-01-1999 DEC-31-1999 13394 0 1338 200 3755 18521 5720 3476 21152 12493 0 0 0 11 (9831) 21152 13016 13016 13341 13341 13591 0 8447 (22192) 0 0 0 0 0 (22192) (2.08) (2.08)
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