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Proc-Type: 2001,MIC-CLEAR
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0000950147-01-501865.txt : 20020410
0000950147-01-501865.hdr.sgml : 20020410
ACCESSION NUMBER: 0000950147-01-501865
CONFORMED SUBMISSION TYPE: 10-Q
PUBLIC DOCUMENT COUNT: 1
CONFORMED PERIOD OF REPORT: 20010930
FILED AS OF DATE: 20011114
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: HYBRID NETWORKS INC
CENTRAL INDEX KEY: 0000900091
STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER INTEGRATED SYSTEMS DESIGN [7373]
IRS NUMBER: 770250931
STATE OF INCORPORATION: DE
FISCAL YEAR END: 1231
FILING VALUES:
FORM TYPE: 10-Q
SEC ACT: 1934 Act
SEC FILE NUMBER: 000-23289
FILM NUMBER: 1785787
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-Q
1
e14540.htm
QUARTERLY REPORT FOR THE QTR ENDED 09/30/2001
Hybrid Networks, Inc.
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2001.
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
(State or other jurisdiction of
incorporation or organization) |
77-0252931
(I.R.S. Employer Identification No.) |
6409 Guadalupe Mines Road, San Jose, California 95120
(Address of principal executive offices)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Sections 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
As used in this report on Form 10-Q, unless the context
otherwise requires, the terms "we," "us," "the Company" or "Hybrid" refer to
Hybrid Networks, Inc., a Delaware corporation.
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HYBRID NETWORKS, INC.
CONDENSED BALANCE SHEETS
(in thousands, except per share data)
|
|
September 30, 2001
|
|
December 31, 2000*
|
|
|
|
(Unaudited) |
|
|
|
ASSETS |
|
Current assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
5,129 |
|
$ |
1,878 |
|
|
Accounts receivable, net of allowance for doubtful accounts of $881 and $200 in
2001 and 2000 (Includes related party receivables of $412 and $6,164 in 2001 and 2000, respectively) |
|
|
395 |
|
|
7,699 |
|
|
Inventories (Includes inventory subject to acceptance by related party of $0 and $2,472
in 2001 and 2000, respectively) |
|
|
4,763 |
|
|
7,303 |
|
|
Prepaid expenses and other current assets |
|
|
1,028 |
|
|
519 |
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
11,315 |
|
|
17,399 |
|
Property and equipment, net |
|
|
1,794 |
|
|
2,000 |
|
Intangibles and other assets |
|
|
153 |
|
|
265 |
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
13,262 |
|
$ |
19,664 |
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) |
|
Current liabilities: |
|
|
|
|
|
|
|
|
Accounts payable |
|
|
2,424 |
|
|
4,529 |
|
|
Convertible debenture |
|
|
5,500 |
|
|
|
|
|
Current portion of capital lease obligations |
|
|
|
|
|
29 |
|
|
Accrued liabilities and other (Includes deferred revenue from a related party of
$160 and $3,710 in 2001 and 2000, respectively) |
|
|
2,871 |
|
|
6,517 |
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
10,795 |
|
|
11,075 |
|
Convertible debentures (Includes related party convertible debenture of $1 and
$1 in 2001 and 2000, respectively) |
|
|
1 |
|
|
5,501 |
|
Other long-term liabilities |
|
|
137 |
|
|
131 |
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
10,933 |
|
|
16,707 |
|
Commitments and contingencies |
|
|
|
|
|
|
|
|
Series K convertible preferred stock, $.001 par value: 8 shares authorized, issued and
outstanding at September 30, 2001, no shares at December 31, 2000 |
|
|
7,560 |
|
|
|
|
Stockholders' equity (deficit): |
|
|
|
|
|
|
|
|
Convertible preferred stock, $.001 par value: Authorized: 4,992 shares; issued
and outstanding: no shares in 2001 and no shares in 2000 |
|
|
|
|
|
|
|
|
Common stock, $.001 par value: Authorized: 100,000 shares; Issued and outstanding:
22,505 shares in 2001 and 21,935 in 2000 |
|
|
23 |
|
|
22 |
|
|
Additional paid-in capital |
|
|
128,048 |
|
|
125,899 |
|
|
Accumulated deficit |
|
|
(133,302 |
) |
|
(122,964 |
) |
|
|
|
|
|
|
|
|
Total stockholders' equity (deficit) |
|
|
(5,231 |
) |
|
2,957 |
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders' equity (deficit) |
|
$ |
13,262 |
|
$ |
19,664 |
|
|
|
|
|
|
|
*Condensed from audited financial statements |
|
|
|
|
|
|
|
The accompanying notes are an integral part of these condensed financial statements
3
HYBRID NETWORKS, INC.
UNAUDITED CONDENSED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
|
2001
|
|
2000
|
|
2001
|
|
2000
|
|
Net Sales |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products (Includes related party sales of $9,053, $1,674, $18,257 and $1,674 for the
three and nine months ended September 30, 2001 and 2000, respectively) |
|
$ |
9,292 |
|
$ |
5,167 |
|
$ |
19,235 |
|
$ |
8,985 |
|
|
Services and software (Includes related party sales of $297, $2, $668, and
$70 for the three and nine months ended September 30, 2001 and 2000, respectively) |
|
|
452 |
|
|
308 |
|
|
1,063 |
|
|
914 |
|
|
|
|
|
|
|
|
|
|
|
Total net sales |
|
|
9,744 |
|
|
5,475 |
|
|
20,298 |
|
|
9,899 |
|
Cost of sales |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products (Includes related party cost of sales of $6,281, $1,404, $13,397,
and $3,574 for the three and nine months ended September 30, 2001 and 2000, respectively) |
|
|
6,321 |
|
|
4,273 |
|
|
15,174 |
|
|
10,088 |
|
|
Services and software |
|
|
253 |
|
|
210 |
|
|
1,079 |
|
|
567 |
|
|
|
|
|
|
|
|
|
|
|
Total cost of sales |
|
|
6,574 |
|
|
4,483 |
|
|
16,253 |
|
|
10,655 |
|
|
|
|
|
|
|
|
|
|
|
Gross margin (loss) |
|
|
3,170 |
|
|
992 |
|
|
4,045 |
|
|
(756 |
) |
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development |
|
|
1,724 |
|
|
1,702 |
|
|
5,468 |
|
|
4,882 |
|
|
Sales and marketing (Includes related party expense of $0, $9,877, $0,
and $13,670 for the three and nine months ended September 30, 2001 and 2000, respectively) |
|
|
706 |
|
|
10,573 |
|
|
2,258 |
|
|
15,694 |
|
|
General and administrative |
|
|
1,237 |
|
|
1,540 |
|
|
4,351 |
|
|
8,197 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
3,667 |
|
|
13,815 |
|
|
12,077 |
|
|
28,773 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations |
|
|
(497 |
) |
|
(12,823 |
) |
|
(8,032 |
) |
|
(29,529 |
) |
Interest income and other expense, net (Includes expense for inducement
to convert related party convertible debenture of $0, 0, $0, and $1,170 for the three
and nine months ended September 30, 2001 and 2000, respectively) |
|
|
17 |
|
|
80 |
|
|
108 |
|
|
(919 |
) |
Interest expense (Includes related party interest expense of $0, $0, $0,
and $455 for the three and nine months ended September 30, 2001 and 2000, respectively) |
|
|
(442 |
) |
|
(196 |
) |
|
(2,415 |
) |
|
(1,120 |
) |
|
|
|
|
|
|
|
|
|
|
|
NET LOSS |
|
|
(922 |
) |
|
(12,939 |
) |
|
(10,339 |
) |
|
(31,568 |
) |
Other comprehensive loss: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized gain on available-for-sale securities included in net loss |
|
|
|
|
|
(30 |
) |
|
|
|
|
(96 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss |
|
$ |
(922 |
) |
$ |
(12,969 |
) |
$ |
(10,339 |
) |
$ |
(31,664 |
) |
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per share |
|
$ |
(0.04 |
) |
$ |
(0.61 |
) |
$ |
(0.46 |
) |
$ |
(1.90 |
) |
|
|
|
|
|
|
|
|
|
|
Shares used in basic and diluted per share calculation |
|
|
22,453 |
|
|
21,352 |
|
|
22,273 |
|
|
16,624 |
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these condensed financial statements
4
HYBRID NETWORKS, INC.
UNAUDITED CONDENSED STATEMENTS OF CASH FLOWS
(in thousands)
|
|
Nine Months Ended September 30,
|
|
|
|
2001
|
|
2000
|
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(10,339 |
) |
$ |
(31,568 |
) |
|
Adjustments to reconcile net loss to net cash used in operating activities: |
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
1,029 |
|
|
841 |
|
|
|
Allowance for doubtful accounts |
|
|
681 |
|
|
|
|
|
|
Issuance of stock in settlement of litigation |
|
|
|
|
|
2,000 |
|
|
|
Sales discounts recognized on issuance of warrants |
|
|
740 |
|
|
16,133 |
|
|
|
Stock issued for services |
|
|
65 |
|
|
|
|
|
|
Common stock issued to induce conversion of debenture (Includes expense
for inducement to convert related party convertible debenture) |
|
|
|
|
|
1,170 |
|
|
|
Compensation recognized on issuance of stock and stock options |
|
|
332 |
|
|
2,483 |
|
|
|
Interest added to principal of convertible debentures (Includes interest
to a related party of $0 and $224 for the nine months ended September 30, 2001 and 2000, respectively) |
|
|
60 |
|
|
368 |
|
|
|
Provision for excess and obsolete inventory |
|
|
1,057 |
|
|
(862 |
) |
|
|
Amortization of beneficial conversion of convertible debentures |
|
|
1,375 |
|
|
149 |
|
|
|
Change in unrealized gain on securities |
|
|
|
|
|
(96 |
) |
|
Change in assets and liabilities: |
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
6,624 |
|
|
(1,509 |
) |
|
|
Inventories |
|
|
1,482 |
|
|
(4,298 |
) |
|
|
Prepaid expenses and other assets |
|
|
(1,406 |
) |
|
(430 |
) |
|
|
Accounts payable |
|
|
(2,106 |
) |
|
2,375 |
|
|
|
Other long term liabilities |
|
|
6 |
|
|
6 |
|
|
|
Accrued liabilities and other |
|
|
(3,577 |
) |
|
2,301 |
|
|
|
|
|
|
|
|
Net cash used in operating activities |
|
|
(3,977 |
) |
|
(10,937 |
) |
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Purchase of property and equipment |
|
|
(538 |
) |
|
(353 |
) |
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(538 |
) |
|
(353 |
) |
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Proceeds from issuance of convertible debenture |
|
|
7,500 |
|
|
|
|
|
Repayment of capital lease obligations |
|
|
(29 |
) |
|
(265 |
) |
|
Proceeds from exercise of stock options and warrants |
|
|
295 |
|
|
997 |
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
7,766 |
|
|
732 |
|
|
|
|
|
|
|
Increase (Decrease) in cash and cash equivalents |
|
|
3,251 |
|
|
(10,558 |
) |
Cash and cash equivalents, beginning of period |
|
|
1,878 |
|
|
13,394 |
|
|
|
|
|
|
|
Cash and cash equivalents, end of period |
|
$ |
5,129 |
|
$ |
2,836 |
|
|
|
|
|
|
|
SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|
Common stock issued upon conversion of convertible debentures |
|
$ |
|
|
$ |
18,694 |
|
|
Preferred stock issued upon conversion of convertible debenture |
|
|
2,211 |
|
|
|
|
|
Common stock issued to settle bonus accrual |
|
|
68 |
|
|
|
|
|
Common stock issued to settle class action liability |
|
|
|
|
|
1,303 |
|
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: |
|
|
|
|
|
|
|
|
Interest paid |
|
|
653 |
|
|
678 |
|
|
Income taxes paid |
|
|
|
|
|
|
|
The accompanying notes are an integral part of these condensed financial statements.
5
HYBRID NETWORKS, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
BASIS OF PRESENTATION
The accompanying condensed financial statements of Hybrid
Networks, Inc. (the "Company" or "Hybrid") have been prepared in accordance with
generally accepted accounting principles for interim financial information and
with the instructions for Form 10-Q and Article 10 of Regulation S-X. The
balance sheet as of September 30, 2001, the statements of operations for the
three and nine months ended September 30, 2001 and September 30, 2000 and the
statements of cash flows for the nine month periods ended September 30, 2001 and
September 30, 2000, are unaudited but include all adjustments (consisting only
of normal recurring adjustments) which the Company considers necessary for a
fair presentation of the financial position at such dates and the operating
results and cash flows for those periods. Although the Company believes that the
disclosures in the accompanying financial statements are adequate to make the
information presented not misleading, certain information normally included in
financial statements and related footnotes prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to the
rules and regulations of the Securities and Exchange Commission. The December
31, 2000 condensed balance sheet data included herein were derived from audited
financial statements but do not include all disclosures required by generally
accepted accounting principles. The accompanying financial statements should be
read in conjunction with the financial statements as contained in the Company's
Annual Report on Form 10-K for the year ended December 31, 2000.
Results for any interim period are not necessarily
indicative of results for any other interim period or for the entire year.
The Company was organized in 1990 and has had operating
losses since then. The Company's accumulated deficit was $133,302,000 as of
September 30, 2001 and $122,964,000 as of December 31, 2000. In 1997, we raised
$42.5 million in net proceeds through our initial public offering and other debt
and equity financing. In September 1999, we raised $18.1 million through the
issuance and sale of convertible debentures to Sprint Corporation and certain
venture capital sources. In February 2001, we entered into an agreement with
Halifax Fund L.P., under which we have raised $7.5 million and may raise up to
an additional $7.5 million upon the exercise of warrants issued to Halifax under
this agreement.
On August 13, 2001, Halifax entered into an exchange
agreement with the Company to exchange a $7.5 million debenture for 6%
Cumulative Convertible Preferred Stock, amend a previous Registration Rights
Agreement, and eliminate a previously issued adjustment warrant. The existing 6%
convertible debenture and accompanying adjustment warrant were exchanged for
that number of shares equal to $7.5 million, plus accrued but unpaid interest,
divided by the $1,000 face value of the newly designated Series K $0.001 par
value Preferred Stock, which will accrete in value at a rate of 6% per annum.
Such accretions will compound on June 30 and December 31 of each year until
converted or redeemed.
Other than the agreement with Halifax, as of September
30, 2001, we have no available line of credit or other source of borrowings or
financing. We believe that, with respect to our current operations, our cash
balance, after giving effect to the financing transaction in February 2001, plus
revenues from operations and non-operating cash receipts will be sufficient to
meet our working capital and expenditure needs through 2001. We may seek
additional financing during 2001 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.
At September 30, 2001, the Company's liquidity consisted
of cash and cash equivalents of $5,129,000 and working capital of $520,000. The
Company's principal indebtedness consisted of $5,500,000 in convertible
debentures due in April 2002.
6
REVENUE RECOGNITION
We normally ship our products based upon a bona fide
purchase order and volume purchase agreement. We recognize revenue at the time a
transaction is shipped and collection of the resulting account receivable is
probable. Shipments on customer orders with acceptance criteria, installation
criteria or rights of return are recognized as revenue only when the criteria
are satisfied. Revenue related to shipments to distributors is normally
recognized upon receipt of payment for such transactions. As of September 30,
2001 the total amount of shipments not recognized as revenue due to acceptance
or testing criteria or because they were sold to a distributor was $900,000.
We generally sell our software together with a one-year
technical support contract, for which we charge separately, to provide upgrades,
maintenance, system support and service. We recognize revenue on the software
sale without reference to the maintenance contract, and we recognize revenue on
the technical support contract over its term on a straight-line basis. Other
service revenue, primarily training, is generally recognized at the time the
service is performed.
In September 1999, Sprint committed to purchase $10
million of our products subject to certain conditions. In connection with
Sprint's commitment, we issued to Sprint warrants to purchase up to $8,397,873
in debentures that are convertible into 2,946,622 shares of our common stock at
$2.85 per share. In accordance with the Statement of Financial Accounting
Standards No. 123 (SFAS 123), "Accounting for Stock-Based Compensation,"
transactions in equity instruments with non-employees for goods or services are
accounted for using the fair value method prescribed by SFAS 123. SFAS 123
requires that in each period in which the warrants are earned, a non-cash charge
is to be recorded. Using the Black-Scholes valuation model, we determined that
the estimated value of the warrant was $20.8 million. We applied $7.2 million of
this amount as sales discounts during the four quarters of 2000 and the balance
of $13.6 million was charged as an expense of the Sales and Marketing department
over the first three quarters of 2000.
Effective July 3, 2001, Sprint committed to purchase an
additional $9.6 million of our products under terms that were different from
those agreed to in the master purchase agreement dated May 1, 2000. In
connection with this new commitment, we issued to Sprint warrants to purchase up
to 600,000 shares of our common stock at $1.20 per share. All of the shipments
relating to these purchase warrants were made during the quarter ending
September 30, 2001. These purchases were not subject to acceptance criteria. In
accordance with SFAS 123, and utilizing the Black-Scholes valuation model, we
determined that the estimated value of these purchase warrants was $740,000 and
this amount has been applied as a sales discount during the quarter ending
September 30, 2001.
CONVERTIBLE DEBENTURES AND PREFERRED STOCK
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.
Under a securities purchase agreement between us and the
Halifax Fund, a fund managed by the Palladin Group, we issued and sold to the
Halifax Fund on February 16, 2001 securities, including:
- a $7.5 million principal amount 6% convertible debenture due 2003, which was
convertible into shares of our common stock;
- a common stock purchase warrant to purchase 833,333 shares of common stock; and
- an adjustment warrant.
In consideration for such securities, Halifax paid an
initial purchase price of $7.5 million. We granted to Halifax in the purchase
agreement, rights of first refusal, preemptive rights
7
and other rights. We also entered into a
Registration Rights Agreement with Halifax and agreed to register for resale all
shares of common stock issuable upon conversion of the debentures and upon
exercise of the purchase warrant and adjustment warrant.
In August 2001, we entered into an exchange agreement
with Halifax by which we exchanged shares of our new Series K Cumulative
Convertible Preferred Stock for the debenture and adjustment warrant, which were
cancelled in the exchange. The purchase warrant remained outstanding and was
modified, primarily affecting our ability to require its exercise. Halifax did
not pay any additional consideration in this exchange.
We issued 7,560 shares of newly established Series K
Preferred Stock. Each share of the preferred stock has an initial liquidation
value of $1,000 and accretes additional value at the annual rate of 6% on June
30 and December 31 of each year. If any shares of preferred stock are still
outstanding on February 2006, we are required to redeem those shares of
preferred stock at their liquidation value in February 2006, although the
holders of the preferred stock have the right to delay the redemption for up to
12 months. The redemption price is to be paid in cash or, at our election, in
common stock valued at 95% of its volume weighted average prices during a
pricing period centered on the redemption date.
The preferred stock is convertible into our common stock.
The preferred shares convert into a number of shares of common stock equal to
the accreted liquidation value divided by the conversion price. For the first
1,875 shares of preferred stock, the conversion price is $1.25 per share,
provided these preferred shares are converted prior to the end of the first
pricing period. The first pricing period will end on a date to be determined,
based on the release date of our 2001 fiscal year results, between February 15,
2002 and April 1, 2002. Thus, each of the first 1,875 shares will convert into
800 shares of common stock, before giving effect to the 6% accretion to the
liquidation value, or a total of 1.5 million shares. The conversion price of the
remaining shares is equal to the then applicable floor price plus one-half of
the amount by which the volume weighted average price of our common stock for
the trading day preceding the conversion exceeds the floor price. The floor
price is initially equal to $1.25, and provided that if we satisfy specific
conditions, which include the continued listing of our common stock on an agreed
upon market, at the end of the first pricing period the floor price will adjust
to an amount equal to the average of the daily volume weighted average price of
our common stock for a period of 15 consecutive trading days immediately
following the end of the first pricing period. The floor price cannot be less
than $1.25 or greater than $5.00.
The maximum number of shares of common stock issuable
upon conversion of all of the preferred stock, before giving effect to the 6%
annual accretion to the liquidation value, is 6,048,000, which would be the
number of shares issued if the conversion price for all shares is $1.25. The
exchange documents do provide for certain penalties, including reduction of the
conversion price to the then current market value, if we do not satisfy
covenants and conditions contained in the exchange documents.
Assuming certain conditions are met, we have the right to
compel conversion of the preferred shares. If the closing price for our stock is
above $6.3212 per share for at least 20 out of 30 trading days, we can require
the holders to convert the preferred shares, provided that the volume weighted
average price of our common stock is equal to or greater than the conversion
price on the day that we give notice of the required conversion through the date
of conversion. Further, if the closing bid price for our common stock is equal
to or greater than 120% of the conversion price on a given day, we can require
the conversion of preferred shares, up to the forced conversion limit, during
the 10 trading day period following the day we give notice of the required
conversion. The forced conversion limit is a number of shares of common stock
equal to 10% of the total number of shares of common stock traded during the 10
day period following our giving this notice, excluding from this total specified
block trades, transactions that are not bona fide transactions between
unaffiliated parties and any shares traded on a day when there is a trading
price less then 120% of the conversion price in effect on that day.
We also have the right to redeem the preferred shares for
cash. The redemption price is equal to the greater of 120% of the liquidation
value of the preferred shares, or 120% of the then current market value of the
common stock into which the preferred stock is then convertible. If more than
2.5 million common shares have then been issued upon conversion of the preferred
stock, the redemption price is equal to the liquidation value.
The Emerging Issues Task Force (EITF) Topic No. D-98
addresses the classification and measurement of redeemable securities. In D-98,
the EITF staff has issued an opinion that all of the events that could trigger
redemption should be evaluated separately and that the possibility that any
triggering event that is not solely within the control of the issuer could
occur, without regard to probability, would require the security to be
classified outside permanent equity. Accordingly, we have recorded the
$7,560,000 of Series K convertible preferred stock as outside permanent equity
on the balance sheet as of September 30, 2001.
8
The Common Stock Purchase Warrant is exercisable by
Halifax to purchase 833,333 shares of our common stock. If the closing bid price
of our common stock is at least $3.50 per share, we may require Halifax to
exercise the warrant, provided that specified conditions are satisfied,
including that all preferred shares have either been converted or redeemed. The
exercise price of the warrant would then be the lower of $9.00 per share or 94%
of the volume weighted average price of our common stock, during the 20
consecutive trading days before the exercise of the warrant.
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 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.
INVENTORIES
Inventories are comprised of the following (in thousands):
|
|
September 30, 2001
|
|
December 31, 2000
|
Raw materials |
|
$ |
3,738 |
|
$ |
2,633 |
Work in progress |
|
|
572 |
|
|
1,144 |
Finished goods |
|
|
453 |
|
|
3,526 |
|
|
|
|
|
|
|
$ |
4,763 |
|
$ |
7,303 |
|
|
|
|
|
At September 30, 2001 and December 31, 2000, finished
goods inventory included $385,000 and $2,730,000, respectively, of equipment
that had been shipped to customers but for which the related revenue was
deferred pending final customer acceptance.
The allowance for excess and obsolete inventory was
$923,000 and $1,980,000 at September 30, 2001 and December 31, 2000,
respectively. The provision for excess and obsolete inventory included in cost
of sales reduced cost of sales by $101,000 for the nine months ending September
30, 2001 and increased cost of sales by $235,000 for the year ended December 31,
2000.
9
ITEM 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The discussion in this Item should be read in
conjunction with the Condensed Financial Statements and the Notes thereto
included in Item 1 of this report on Form 10-Q. The discussion in this Item
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 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, 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-Q.
OVERVIEW
GENERAL
We are a broadband access equipment company that designs,
develops, manufactures and markets wireless systems that provide high-speed
access to the Internet for businesses and consumers. Our systems provide
consumers with a wireless alternative for high-speed Internet access. Our
products greatly accelerate the response time for accessing bandwidth-intensive
information. Since 1996, our principal product line has been the Hybrid Series
2000, which consists of base station routers, network and subscriber management
tools and a line of wireless end-user routers or Customer Premise Equipment
(CPE).
In the past, the majority of our products have been sold
in the United States and Canada. Our customers include broadband wireless system
operators, national and regional telephone companies, and systems integrators
who market our product and extend our sales channel worldwide. To date, we
believe our systems are deployed across more than 85% of the active MMDS
frequencies in the U.S. and we continue to market our products to operators
worldwide who have licensed wireless frequencies below 6 GHz. We expect to
remain dependant on a small number of customers for the majority of our net
sales.
The sales cycle for our products is lengthy, and is
subject to a number of significant risks, including our customers' capital
budget constraints and the processing time for an application for the use of
licensed radio frequencies submitted to governmental regulatory agencies. 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 highly competitive. On going factors affecting our business
include:
- A slow adoption rate of fixed broadband wireless systems by service
providers. Systems operators have been cautious in their approach to the
fixed broadband wireless market and they have been slow to make significant
capital investments.
- Constant technology change and the development of new product features. New
competitors have entered the fixed broadband wireless market with products
that they claim will outperform our products due to improved functionality,
new features, and different technologies. Should any of these claims prove
to be true, we would be adversely affected.
- Evolving industry standards. The fixed broadband wireless industry has yet
to adopt industry standards and this has an adverse affect on equipment
sales and earnings. Hybrid maintains active participation in standards
committees affecting the fixed broadband wireless industry. We believe
increased investment in our R&D efforts will be necessary in the future to
meet new standards. If a technology different than ours is selected as the
industry standard, future sales growth will be directly affected by our
ability to modify our existing products to comply with that standard.
10
We are developing a second-generation product that is
designed to overcome line-of-site limitations, reduce the cost of the CPE, and
improve the ease of installation. However, if we are unable to develop and offer
products with these features on a timely basis our business could be adversely
affected. We anticipate continued 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.
At September 30, 2001, we had 71 full-time employees and
4 part-time employees.
REVENUE RECOGNITION
We normally ship our products based upon a bona fide
purchase order and volume purchase agreement. We recognize revenue at the time a
transaction is shipped and collection of the resulting account receivable is
probable. Shipments on customer orders with acceptance criteria, installation
criteria or rights of return are recognized as revenue only when the criteria
are satisfied. Revenue related to shipments to distributors is normally
recognized upon receipt of payment for such transactions. As of September 30,
2001 the total amount of shipments not recognized as revenue due to acceptance
or testing criteria or because they were sold to a distributor was $900,000.
We generally sell our software together with a one-year
technical support contract, for which we charge separately, to provide upgrades,
maintenance, system support and service. We recognize revenue on the software
sale without reference to the maintenance contract, and we recognize revenue on
the technical support contract over its term on a straight-line basis. Other
service revenue, primarily training and consulting, is generally recognized at
the time the service is performed.
RESULTS OF OPERATIONS
NET SALES. Our net sales increased by 78% to $9,744,000
for the quarter ended September 30, 2001 from $5,475,000 for the quarter ended
September 30, 2000. For the three months ended September 30, 2001, broadband
wireless systems operators accounted for 100% of net sales. During the same period in
2000, broadband wireless system operators accounted for 92% of net sales and
cable system operators accounted for 8% of net sales. One customer, Sprint
Corporation, accounted for 94% of net sales during the third quarter of 2001
compared to three customers who accounted for 34%, 24%, and 23% of net sales
during the third quarter of 2000. International sales accounted for less than 1%
of net sales during the three months ended September 30, 2001, and 24% of net
sales for the comparable period in 2000.
Net sales for the nine months ended September 30, 2001
increased 104% to $20,298,000 from $9,899,000 for the nine months ended
September 30, 2000. Non-cash sales discounts in connection with shipments to
Sprint during the nine months ended September 30, 2001 were $740,000 compared to
$2,463,000 for the first nine months of 2000. Sprint
Corporation accounted for 95% of net sales during the nine months ended
September 30, 2001.
Effective July 3, 2001, Sprint committed to purchase an
additional $9.6 million of our products under terms that were different from
those agreed to in the master purchase agreement dated May 1, 2000. In
connection with this commitment, we issued to Sprint warrants to purchase up to
600,000 shares of our common stock at $1.20 per share. All of the shipments
relating to these purchase warrants were made during the quarter ending
September 30, 2001. These purchases were not subject to acceptance criteria. In
accordance with SFAS 123 and
11
utilizing the Black-Scholes valuation model, we
determined that the estimated value of these purchase warrants was $740,000 and
this amount has been applied as a sales discount during the quarter ending
September 30, 2001.
GROSS MARGIN. Gross margin was 33% and 18% of net sales
for the quarters ended September 30, 2001 and 2000, respectively.
Additionally, there was a decrease in the reserve for excess and obsolete
inventory from $1,980,000 as of September 30, 2000 to $923,000 as of
September 30, 2001 to reflect the changes in forecasted sales of base station
equipment at the comparable periods. For the nine months ended September 30,
2001, gross margin was a positive 19% compared to a negative margin of 8% for
the same period in 2000.
RESEARCH AND DEVELOPMENT. Research and development
expenses include ongoing base station, customer premises equipment, and software
development expenses, as well as expenditures associated with cost reduction
programs for existing products. Research and development expenses increased 1%
to $1,724,000 for the quarter ended September 30, 2001 from $1,702,000 for the
quarter ended September 30, 2000. Research and development expenses as a
percentage of net sales were 18% and 31% for the third quarter of 2001 and 2000,
respectively, and were 27% and 49% for the first nine months of 2001 and 2000,
respectively. Personnel and related costs increased $413,000 during the quarter
ended September 30, 2001 compared to the third quarter of 2000. This increase
was partially offset by a reduction in the use of outside consultants
and by a reduction in the use of research and development materials. For the first
nine months of 2001, research and development costs increased 12% to $5,468,000
from $4,882,000 in the comparable period in 2000. Personnel and related costs for
the first nine months of 2001 increased 47% to $3,927,000 from the comparable period
in 2000 and represented our successful efforts to increase our engineering and
research and development capabilities. At the same time, we were able to reduce our
reliance on outside consultants and contracts by $393,000, a reduction of 46%
compared to the first nine months of 2000.
SALES AND MARKETING. Sales and marketing expenses consist
of salaries and related payroll costs for sales and marketing personnel,
commissions, advertising, promotions and travel. Sales and marketing expenses
decreased 93.3% to $706,000 for the quarter ended September 30, 2001 from
$10,573,000 for the quarter ended September 30, 2000. Sales and marketing
expenses as a percentage of net sales were 7% and 193% for the third quarters of
2001 and 2000, respectively. Excluding the $9.9 million in customer acquisition
expenses booked during the third quarter of 2000, which related to the Sprint
purchase warrants, sales and marketing expenses increased 5% in the third
quarter of 2001 compared to the third quarter of 2000. For the first nine months
of 2001 sales and marketing expenses of $2,258,000 represented a 12% increase
over the comparable period in 2000 (after excluding the $13,670,000 in non- cash
customer acquisition expenses that were booked during the nine months ended
September 30, 2000). Of this increase, $177,000 was accounted for by increases
in salary and related expenses and represented our efforts to expand our sales
and marketing capabilities.
GENERAL AND ADMINISTRATIVE. General and administrative
expenses consist primarily of executive personnel compensation, travel expenses,
legal fees and other costs of outside services. General and administrative
expenses decreased 20% to $1,237,000 for the quarter ended September 30, 2001
from $1,540,000 for the quarter ended September 30, 2000. General and
administrative expenses as a percentage of net sales were 13% and 28% for the
third quarters of 2001 and 2000, respectively. The decline in general and
administrative expenses for the third quarter of 2001 was due primarily to a
reduction in legal and outside consultant expenses compared to the similar
period in 2000. For the nine months ended September 30, 2001, general and
administrative expenses decreased 47% to $4,351,000 from $8,197,000 for the same
period in 2000. The decrease was due primarily to reductions in legal expenses
($2,429,000) and a reduction in charges relating to stock compensation
($1,440,000).
INTEREST INCOME (EXPENSE) AND OTHER EXPENSE, NET. We
incurred net interest income (expense) and other expense of $425,000 for the
three months ended September 30, 2001 compared to net interest and other expense
of $116,000 for the three months ended September 30, 2000. Interest and other
expenses incurred during the third quarter of 2001 included interest on
12
convertible debentures of $169,000 and
amortization of the discount related to convertible debentures of $250,000. For
the nine months ended September 30, 2001, net interest income (expense) and
other expense was a net expense of $2,307,000 compared to a net expense of
$2,039,000 for the same period in 2000 and represented continued interest and
discount amortizations related to convertible debentures.
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. 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). During the quarter ended June 30, 2000, at the request
of the Company, the holders agreed to convert the entire principal, amounting to
a face value of $18.1 million plus accrued interest through June 30, 2000 of
$594,000, into 6,559,310 shares of common stock. Upon the conversion, we paid a
premium, as an inducement to the holder's, equivalent to the interest that would
have been added to the principal of the debentures for the third and fourth
quarters of 2000, amounting to $375,750. The premium was paid in the form of
additional shares of common stock calculated at the conversion price of $2.85
per share and was equivalent to 131,842 shares of common stock.
Additionally, Sprint acquired warrants to purchase up to
$8.4 million of additional convertible debentures, which debentures were
convertible at December 31, 2000 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 accept shipments of at least
$10 million of our products. The amount of shipments in 2000 totaled at least
$10,000,000. In accordance with the Statement of Financial Accounting Standards
No. 123 (SFAS 123), "Accounting for Stock-Based Compensation," transactions in
equity instruments with non-employees for goods or services are accounted for
using the fair value method prescribed by SFAS 123. SFAS 123 requires that in
each period in which the warrants are earned, a non-cash charge is to be
recorded. Using the Black-Scholes valuation model, we determined that the
estimated value of the warrant was $20.8 million. We applied $7.2 million of
this amount as sales discounts during the four quarters of 2000 and the balance
of $13.6 million was charged as an expense of the Sales and Marketing department
over the first three quarters of 2000.
Effective July 3, 2001, Sprint committed to purchase an
additional $9.6 million of our products under terms that were different from
those agreed to in the master purchase agreement dated May 1, 2000. In
connection with this commitment, we issued to Sprint warrants to purchase up to
600,000 shares of our common stock at $1.20 per share. All of the shipments
relating to these purchase warrants were made during the quarter ending
September 30, 2001. These purchases were not subject to acceptance criteria. In
accordance with SFAS 123 and utilizing the Black-Scholes valuation model, we
determined that the estimated value of these purchase warrants was $740,000 and
this amount has been applied as a sales discount during the quarter ending
September 30, 2001.
Assuming that as of September 30, 2001, Sprint exercised
all its warrants, it would own 7,613,068 shares of our common stock,
representing approximately 29.2% of the 26,051,663 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 September 30, 2001, all other security holders exercised
their options, warrants and conversion privileges as well as Sprint, Sprint
would own approximately 18.8% of the 40,426,667 fully diluted shares of our
common stock that would then be outstanding.
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.
13
Under a securities purchase agreement between us and the
Halifax Fund, a fund managed by the Palladin Group, we issued and sold to the
Halifax Fund on February 16, 2001 securities, including:
- a $7.5 million principal amount 6% convertible debenture due 2003, which
was convertible into shares of our common stock;
- a common stock purchase warrant to purchase 833,333 shares of common stock;
- an adjustment warrant.
In consideration for such securities, Halifax paid an
initial purchase price of $7.5 million. We granted to Halifax in the purchase
agreement, rights of first refusal, preemptive rights and other rights. We also
entered into a Registration Rights Agreement with Halifax and agreed to register
for resale all shares of common stock issuable upon conversion of the debentures
and upon exercise of the purchase warrant and adjustment warrant.
In August 2001, we entered into an exchange agreement
with Halifax by which we exchanged shares of our new Series K Cumulative
Convertible Preferred Stock for the debenture and adjustment warrant, which were
cancelled in the exchange. The purchase warrant remained outstanding and was
modified, primarily affecting our ability to require its exercise. Halifax did
not pay any additional consideration in this exchange.
We issued 7,560 shares of newly established Series K
Preferred Stock. Each share of the preferred stock has an initial liquidation
value of $1,000 and accretes additional value at the annual rate of 6% on June
30 and December 31 of each year. If any shares of preferred stock are still
outstanding in February 2006, we are required to redeem those shares of
preferred stock at their liquidation value in February 2006, although the
holders of the preferred stock have the right to delay the redemption for up to
12 months. The redemption price is to be paid in cash or, at our election, in
common stock valued at 95% of its volume weighted average prices during a
pricing period centered on the redemption date.
The preferred stock is convertible into our common stock.
The preferred shares convert into a number of shares of common stock equal to
the accreted liquidation value divided by the conversion price. For the first
1,875 shares of preferred stock, the conversion price is $1.25 per share,
provided these preferred shares are converted prior to the end of the first
pricing period. The first pricing period will end on a date to be determined,
based on the release date of our 2001 fiscal year results, between February 15,
2002 and April 1, 2002. Thus, each of the first 1,875 shares will convert into
800 shares of common stock, before giving effect to the 6% accretion to the
liquidation value, or a total of 1.5 million shares. The conversion price of the
remaining shares is equal to the then applicable floor price plus one-half of
the amount by which the volume weighted average price of our common stock for
the trading day preceding the conversion exceeds the floor price. The floor
price is initially equal to $1.25 and, provided that if we satisfy specific
conditions, which include the continued listing of our common stock on an agreed
upon market, at the end of the first pricing period the floor price will adjust
to an amount equal to the average of the daily volume weighted average price of
our common stock for a period of 15 consecutive trading days immediately
following the end of the first pricing period. The floor price cannot be less
than $1.25 or greater than $5.00.
The maximum number of shares of common stock issuable
upon conversion of all of the preferred stock, before giving effect to the 6%
annual accretion to the liquidation value, is 6,048,000, which would be the
number of shares issued if the conversion price for all shares is $1.25. The
exchange documents do provide for certain penalties, including reduction of the
conversion price to the then current market value, if we do not satisfy
covenants and conditions contained in the exchange documents.
Assuming certain conditions are met, we have the right to
compel conversion of the preferred shares. If the closing price for our stock is
above $6.3212 per share for at least 20 out of 30 trading days, we can require
the holders to convert the preferred shares, provided that the volume weighted
average price of our common stock is equal to or greater than the conversion
price on the day that we give notice of the required conversion through the date
of conversion. Further, if the closing bid price for our common stock is equal
to or greater than 120% of the conversion price on a given day, we can require
the conversion of preferred shares, up to the forced
14
conversion limit, during the 10 trading day
period following the day we give notice of the required conversion. The forced
conversion limit is a number of shares of common stock equal to 10% of the total
number of shares of common stock traded during the 10 day period following our
giving this notice, excluding from this total specified block trades,
transactions that are not bona fide transactions between unaffiliated parties
and any shares traded on a day when there is a trading price less then 120% of
the conversion price in effect on that day.
We also have the right to redeem the preferred shares for
cash. The redemption price is equal to the greater of 120% of the liquidation
value of the preferred shares, or 120% of the then current market value of the
common stock into which the preferred stock is then convertible. If more than
2.5 million common shares have then been issued upon conversion of the preferred
stock, the redemption price is equal to the liquidation value.
The Emerging Issues Task Force (EITF) Topic No. D-98
addresses the classification and measurement of redeemable securities. In D-98,
the EITF staff has issued an opinion that all of the events that could trigger
redemption should be evaluated separately and that the possibility that any
triggering event that is not solely within the control of the issuer could
occur, without regard to probability, would require the security to be
classified outside permanent equity. Accordingly, we have recorded the
$7,560,000 of Series K convertible preferred stock as outside permanent equity
on the balance sheet as of September 30, 2001.
The Common Stock Purchase Warrant is exercisable by
Halifax to purchase 833,333 shares of our common stock. If the closing bid price
of our common stock is at least $3.50 per share, we may require Halifax to
exercise the warrant, provided that specified conditions are satisfied,
including that all preferred shares have either been converted or redeemed. The
exercise price of the warrant would then be the lower of $9.00 per share or 94%
of the volume weighted average price of our common stock, during the 20
consecutive trading days before the exercise of the warrant.
Net cash used in operating activities was $3,977,000 and
$10,937,000 during the first nine months of 2001 and 2000, respectively. The net
cash used in operating activities in the first nine months of 2001 was primarily
due to our net loss of $10,339,000, a decrease in accounts payable of
$2,106,000, and an offsetting decrease in accounts receivable of $6,624,000. Net
cash used in operating activities in the first nine months of 2000 was primarily
the result of our net loss of $31,568,000, an increase in accounts receivable of
$1,509,000 and an increase in other accrued liabilities of $2,301,000, offset by
non-cash charges attributable to (i) sales discounts recognized on the issuance
of warrants of $16,133,000 (see "Revenue Recognition") and, (ii) compensation of
$2,483,000 recognized on the issuance of stock and the vesting of stock options.
Net cash used in investing activities was $538,000 and
$353,000 during the first nine months of 2001 and 2000, respectively, and was
used in both periods for purchases of property and equipment (primarily
computers, and engineering test equipment). At September 30, 2001, we did not
have any material commitments for capital expenditures.
Net cash provided by financing activities was $7,766,000
and $732,000 during the nine months of 2001 and 2000, respectively. Net cash
provided by financing activities during the nine months of 2001 was primarily
due to the proceeds from the issuance of a convertible debenture and related
securities of $7,500,000 in February 2001. Net cash provided by financing
activities during the nine months of 2000 was primarily due to the exercise of
stock options by employees and others, offset by the repayment of capital lease
obligations.
At September 30, 2001, the Company's liquidity consisted
of cash and cash equivalents of $5,129,000 and working capital of $520,000. The
Company's principal indebtedness consisted of $5,500,000 in convertible
debentures due in April 2002. We have no available line of credit or other
source of borrowings or financing. While 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 requirements over the balance of 2001, we may seek additional
financing during 2001 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
affected by inflation.
15
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-Q BEFORE INVESTING IN OUR COMMON
STOCK. THE RISKS DESCRIBED BELOW ARE NOT THE ONLY ONES WE FACE. ADDITIONAL RISKS
THAT WE ARE NOT 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 EXPECT THAT WE WILL NEED ADDITIONAL CAPITAL TO CONTINUE
OUR OPERATIONS
Although we raised over $35 million in net proceeds from
our initial public offering in November 1997, our capital resources were nearly
exhausted by September 1999. In September 1999, we raised $18.1 million through
the issuance and sale of convertible debentures. In February 2001, we entered an
agreement with the Halifax Fund, L.P., under which we have raised $7.5 million.
We believe we have sufficient capital to continue operations through the year
2001. However, we expect that we will need to raise additional cash in the
future to support further growth in our business. If we engage in research and
development under our agreement with Sprint, we may need additional capital.
Our ability to raise additional capital may be limited by
a number of factors, including:
- Sprint's veto rights, right of first refusal and other substantial rights
and privileges,
- Halifax's substantial rights and privileges,
- our dependence upon Sprint's business and, to a lesser extent, the
business of our other customers,
- our need to reduce the cost of our existing products and develop new products,
- uncertainty about our financial condition and results of operations and,
- our history of heavy losses,
We can give no assurance that we will be able to raise
the additional capital we will need in the future. Further, any financing we may
be able to obtain may be on terms that are harmful to our business and our
ability to raise additional capital. We may not have sufficient capital or other
resources necessary to meet the requirements of our equipment purchase
agreements with Sprint or with other large customers in the future.
WE ARE LARGELY DEPENDENT ON SPRINT FOR OUR FUTURE
BUSINESS, AND SPRINT HAS A GREAT DEAL OF INFLUENCE OVER OUR CORPORATE
GOVERNANCE.
Sprint accounted for 94% of our net sales in the quarter
ending September 30, 2001, and 95% of our net sales for the nine months ending
September 30, 2001. We have only a small number of other customers.
Sprint also has significant control over our corporate
governance. For example, Sprint may designate two directors to serve on our
board of directors. Further, we cannot issue any securities, with limited
exceptions, or, in most cases, take important corporate action without Sprint's
16
approval. Sprint has other rights and
privileges, including a right of first refusal as to any proposed change in our
control. This right of first refusal is assignable by Sprint to any third party.
Further, if Sprint exercises warrants it currently holds, and assuming that no
other warrant holders exercise, Sprint would beneficially own as of September
30, 2001, approximately 29.2% of our common stock. As a result, Sprint will have
a great deal of influence on us in the future. We cannot be sure that Sprint
will exercise this influence in our best interests, as Sprint's interests are in
many respects different than ours.
CHANGES IN PLANS OR CIRCUMSTANCES AT OUR LARGEST CUSTOMERS
COULD SERIOUSLY HARM OUR SALES.
We continue to provide technical support to the 14
markets launched by Sprint for its Broadband Direct service. In October 2001,
Sprint announced that it was ending customer acquisition for it's fixed wireless
services and freezing the number of markets served until substantial progress
was made on second-generation technology. This second generation technology
primarily involves the development of non-line-of-site capability and the
lowering of installation costs. We are already working to develop these
improvements but should we fail to do so or if other competitors are able to do
so before us, it would have a serious adverse affect on our business.
WE HAVE NOT BEEN PROFITABLE, AND WE MAY NEVER BE
PROFITABLE. WE EXPECT CONTINUING LOSSES IN THE FUTURE.
We have not been profitable and we cannot assure you that
we will ever achieve or sustain profitability. We were organized in 1990 and
have had operating losses every year. Our accumulated deficit was $133 million
as of September 30, 2001. The potential of our business to produce revenue and
profit is unproven. The market for our products has only recently begun to
develop and is rapidly changing. Our market has an increasing number of
competing technologies and competitors, and several of our competitors are
significantly larger than us. We have experienced pressure to lower the price of
our products in the past and we expect that these pressures will continue.
Although our quarterly net losses have declined in 2001, we expect to continue
incurring losses in the future.
WE MUST BE ABLE TO QUICKLY AND EFFECTIVELY DEVELOP NEW
PRODUCTS AND ENHANCEMENTS FOR OUR EXISTING PRODUCTS, AND DEPLOY OUR PRODUCTS ON
A MUCH LARGER SCALE THAN WE HAVE IN THE PAST. WE MIGHT NOT BE ABLE TO MEET THESE
CHALLENGES.
To meet the existing and future demands of the broadband
wireless market, we must develop new products and enhance our existing products.
We have met Sprint's requirements for its 14 launched markets and we are
developing new features and functionality to overcome line-of-site constraints,
reduce product costs, and enhance the ease of installation. However, if
another company is successful in meeting these demands before we do, our ability
to resume substantial sales to Sprint could be impaired.
WE DEPEND ON THE BROADBAND WIRELESS MARKET, WHICH IS A
NEWLY DEVELOPING MARKET THAT IS SUBJECT TO UNCERTAINTIES.
The wireless industry competes with other technologies,
including cable and digital subscriber lines to provide high-speed Internet
access. The cable modem and digital subscriber line technologies avoid the
principal disadvantage of wireless, which requires some line-of-sight between
the wireless operator's antenna and the customer's location. Wireless system
operators also face a number of licensing and regulatory restrictions.
Conditions in the wireless market could change rapidly and significantly because
of constant technological changes. Further, the development and market
acceptance of alternative technologies could decrease the demand for our
products. There can be no assurance that the wireless industry market will grow
or that our products will be widely deployed in the emerging market. We expect
to face substantial competition in this market, which could limit our sales and
impair our business.
17
In addition, during the first nine months of 2001, the
market for telecommunications equipment declined significantly, which has
adversely affected the entire telecommunications industry, including service
providers, systems integrators, and equipment providers, and has reduced the
business outlook and visibility of the industry. If the telecommunications
market, and in particular the market for broadband access equipment, does not
improve and grow, our business would be substantially harmed.
WE FACE SIGNIFICANT COMPETITION, INCLUDING COMPETITION
FROM LARGE COMPANIES.
Our market has been highly competitive, yet many larger
companies such as Nortel, Lucent and ADC have withdrawn from the fixed broadband
wireless market. In the future, we anticipate a smaller number of large
competitors, such as Cisco, Siemens, and Marconi, to compete for both domestic
and international business. A number of smaller competitors claim that their new
technologies will overcome line-of-site limitations associated with current
fixed broadband wireless systems. While only a few of these competitors have
commercially launched systems, we cannot assure you that other competitors will
not commercially launch systems or that other commercially launched systems will
not provide benefits superior to ours. We are developing additional product
enhancements to further mitigate line-of-site constraints. However, our product
development may be harmed by our lack of engineering resources. There can be no
assurance that we will be able to compete successfully in the future.
We have agreed with Sprint that in the future we will
allow third parties to license our technology and we currently depend heavily on
third parties to manufacture components that interface with our products to
produce a full, working system. It is possible that these third parties may
offer products that compete with ours, using our technology. This could create
significant new competitive challenges for us and could limit our growth and
harm our business.
WE MAY BECOME INVOLVED IN LITIGATION OVER OUR INTELLECTUAL
PROPERTY THAT COULD RESULT IN SIGNIFICANT COSTS AND MIGHT DIVERT THE ATTENTION
OF OUR MANAGEMENT.
Litigation may be necessary in the future to enforce our
intellectual property rights, to determine the validity and scope of our
patents, and to determine the validity and scope of the proprietary rights of
others. This litigation might result in substantial costs and could divert the
attention of our management. Further, others may claim that our products
infringe upon their proprietary rights. These claims, with or without merit,
could result in significant litigation costs, diversion of the attention of our
management and serious harm to our business. We may be required to enter into
royalty and license agreements that may have terms that are disadvantageous to
us. If litigation is successful against us, it could result in the invalidation
of our proprietary rights and our incurring liability for damages, which could
have a harmful effect on our business. In the past, we initiated one patent
infringement litigation to enforce our patent rights. This litigation resulted
in a settlement in which we granted licenses to the defendants containing terms
that are in some respects favorable to them. For example, we granted to one of
the defendants, Com21, Inc., a right of first refusal to purchase our patents.
We may find it necessary to institute further infringement litigation, and third
parties may institute litigation against us challenging the validity of our
patents.
WE RELY ON A SINGLE MANUFACTURER FOR OUR END-USER PRODUCTS
AND ON LIMITED SOURCES FOR OUR COMPONENTS, SOME OF WHICH ARE BECOMING
OBSOLETE
We outsource manufacturing of our Series 2000 CPE
products to a single manufacturer, Sharp Corporation, while maintaining only a
limited manufacturing capability for pre-production assembly and testing. Since
we have only one manufacturing source for our CPE products, our ability to
reduce our manufacturing costs may be limited.
We are dependent upon key suppliers for a number of other
components within our Series
18
2000 products, including Texas Instruments,
Hitachi, and Intel. 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. 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 could seriously harm 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. OUR SALES CYCLE MAY GET LONGER.
The sale of our products typically takes between six and
twelve months. Customers usually want to perform significant technical
evaluation before making a purchase. There are often delays resulting from 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. 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 have high costs
without offsetting revenues.
During the last year, a number of countries have awarded
MMDS and 3.5 GHz licenses. Our products are functional within these frequency
ranges. As new licenses are awarded, there is a long cycle associated with
vendor selection, evaluation, and, in many instances, trial system analyses.
Delays can also be caused by the market assessment process, entailing business
model analysis by service providers. In addition, a number of small
international operators have struggled with economic downturns that have
affected their ability to secure capital. All of these factors indicate that we
will have increased selling expenses and a potentially lengthened sales cycle.
INTERNATIONAL SALES COULD INVOLVE GREATER RISKS.
Although we have sold the majority of our products
primarily in the United States and Canada, many of our new opportunities are
being pursued internationally. We believe that international sales will
represent an increasingly greater proportion of our sales in the future.
International sales accounted for less than 1% and 24% of net sales for the
quarters ending September 30, 2001 and 2000, respectively. International 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, political
and economic instability and reduced intellectual property protection. To
increase our international coverage we work closely with systems integrators.
However, some of our systems integrators do not represent our products
exclusively. Further, the frequency spectrum and amount of spectrum available
internationally varies from country to country. We currently depend on some of
our systems integrators and other third party vendors to develop radio equipment
that complies with local licenses, which may slow deployment in some
international markets.
WE DEPEND ON OUR KEY PERSONNEL, AND HIRING AND RETAINING
QUALIFIED EMPLOYEES IS DIFFICULT.
Our success significantly depends on the continued
services of our key technical, sales and management personnel. Our officers or
employees can terminate their relationships with us at any time. Our future
success may depend on our ability to attract, train, retain and motivate highly
qualified technical, marketing, sales and management personnel. 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 prevent us from meeting our product
development goals and could significantly impair our business.
19
WE MAY BE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY.
We rely on a combination of patent, trade secret,
copyright and trademark laws and contractual restrictions to establish and
protect our intellectual property rights. We cannot assure 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 may not be of sufficient scope or strength to provide meaningful
protection or commercial advantage to us. We initiated one patent infringement
lawsuit to enforce our rights, which resulted in a settlement. We do not know
whether we will need to bring litigation in the future to assert our patent
rights, or whether other companies will bring litigation challenging our
patents. This litigation could be time consuming and costly and could result in
our patents being held invalid or unenforceable. Even if the patents are upheld
or are not challenged, third parties might be able to develop other technologies
or products without infringing any of these patents.
We have entered into confidentiality and invention
assignment agreements with our employees, and we enter into non-disclosure
agreements with some of our suppliers, distributors, and customers, to limit
access to and disclosure of our proprietary information. These contractual
arrangements or the other steps we take to protect our intellectual property may
not be sufficient to prevent misappropriation of our technology or deter
independent third-party development of similar technologies. The laws of foreign
countries may not protect our products or intellectual property rights to the
same extent, as the laws of the United States.
We have in the past received, and may in the future
receive, notices from persons claiming that our products, software or asserted
proprietary rights infringe the proprietary rights of these persons. We expect
that developers of wireless technologies will be increasingly subject to
infringement claims as the number of products and competitors as our market
grows. While we are not subject to any infringement claims, 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. Royalty or licensing agreements might not be available on terms
acceptable to us or at all.
DEFECTS IN OUR PRODUCTS COULD CAUSE PRODUCT RETURNS AND
PRODUCT LIABILITY.
Products as complex as ours frequently contain undetected
errors, defects or failures, especially when introduced or when new versions are
released. In the past, our products have contained these errors, and there can
be no assurance that errors will not be found in our current and future
products. The occurrence of 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. These might also subject us to claims for
product liability.
GOVERNMENT REGULATION MAY NEGATIVELY IMPACT OUR FUTURE
GROWTH
We are subject to federal, state and local government
regulation. For instance, the regulations of the Federal Communications
Commission, or FCC, extend to high-speed Internet access products such as ours.
Further, governmental regulation of our customers may limit our growth and hurt
our business. Each of our customers has filed applications to operate within a
frequency spectrum regulated by the FCC. Delays in approvals by the FCC may
limit our future growth. If the FCC changes its decision to open the frequency
spectrum for full utilization, the future growth of the wireless industry could
be limited.
IF WE ARE DE-LISTED FROM THE NASDAQ SMALL CAP MARKET, THE
PRICE OF OUR COMMON STOCK COULD DROP, AND IT MAY BE MORE DIFFICULT TO TRADE OUR
COMMON STOCK.
On August 30, 2001, the Nasdaq Listing Qualifications
Panel transferred the listing of our common stock from the Nasdaq National
Market to the Nasdaq Small Cap Market. In order to maintain the Nasdaq Small Cap
Market listing, our Form 10-Q for the third quarter of 2001 must evidence our
continued compliance with the $2 million net tangible assets and/or $2.5 million
shareholders' equity standard. The Emerging Issues Task Force (EITF) has
issued Topic No. D-98, which addresses the classification and measurement of redeemable
securities. In compliance with the guidance in Topic No. D-98, we have recorded the
Series K convertible preferred stock as "outside of permanent equity". This has
resulted in our stockholder equity as reported on our unaudited balance sheet as of
September 30, 2001, to be below the minimum standard set by Nasdaq. We have appealed
to Nasdaq for an extension of time in which to come into compliance with the standard.
As a result of this classification, we may no longer satisfy the listing requirements
of the Nasdaq Small Cap Market and thus our common stock may be de-listed from this
market. Similarly, the Nasdaq Small Cap Market will reapply minimum bid price rules
in January 2002 that could also cause the de-listing of our shares if they are then
listed on the Nasdaq Small Cap Market.
20
De-listing of our common stock could reduce our
stockholders' ability to buy or sell shares as quickly and as inexpensively as
they have done historically. This reduced liquidity would make it more difficult
for us to raise capital in the future. The trading price of our common stock
could decline due to the change in liquidity and reduced publicity resulting
from being de-listed from the Nasdaq National Market.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK.
Not applicable.
PART II. OTHER INFORMTION
ITEM 2. CHANGES IN SECURITIES
EXCHANGE OF SECURITIES WITH HALIFAX FUND L.P.
Pursuant to an Exchange Agreement between us and the
Halifax Fund, L.P., dated August 13, 2001, we
completed an exchange of shares of a new series of convertible preferred stock
for the $7.5 million convertible debenture, and related adjustment warrant,
issued to Halifax Fund, L.P. in February 2001. We did not receive any
consideration in this transaction other than the cancellation of the previously
issued debenture and adjustment Warrant. This transaction, with a single
accredited investor, was exempt from registration under Section 4(2) of the
Securities Act of 1933 and Rule 506 of Regulation D. For a description of this
transaction and the securities issued, see "Notes to Unaudited Financial
Statements-Convertible Debentures."
ITEM 6. EXHIBIT AND REPORT OF FORM 8-K
(a) Exhibits
The following exhibit is filed as part of this report:
Exhibit No. |
|
Description of Exhibit |
99.01 |
|
Balance sheet July 2001 with pro forma (1) |
(1) Incorporated by reference to the Exhibit with the same number in the
Company's current report on Form 8-K filed September 5, 2001.
(b) Report on Form 8-K
The following report on Form 8-K has been filed by the
Company since June 30, 2001.
1. On September 5, 2001, the Company reported under Item 5 "Other Events" that
the Company had been advised by Nasdaq that its common stock would be listed on
the Nasdaq Small Cap market effective August 30, 2001.
21
HYBRID NETWORKS, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: November 14, 2001 |
|
HYBRID NETWORKS, INC. |
|
|
/s/ Michael D. Greenbaum Michael D. Greenbaum
Chief Executive Officer |
|
|
/s/ Judson W. Goldsmith Judson W. Goldsmith
Chief Financial Officer (Principal Accounting Officer) |
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