-----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, HykA21fLvC1oTK7P2H+G60MCBv5RtZQvA6zw5nHJ7lm1XNkkqxu9oNUn72cDmT7f v3MnqPrpqq+yEe+p1GV8tw== 0001047469-97-003029.txt : 19971110 0001047469-97-003029.hdr.sgml : 19971110 ACCESSION NUMBER: 0001047469-97-003029 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 8 FILED AS OF DATE: 19971107 SROS: NASD 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: S-1/A SEC ACT: SEC FILE NUMBER: 333-36001 FILM NUMBER: 97709616 BUSINESS ADDRESS: STREET 1: 10161 BUBB RD CITY: CUPERTINO STATE: CA ZIP: 95014 BUSINESS PHONE: 4087253250 MAIL ADDRESS: STREET 1: 10161 BUBB RD CITY: CUPERTINO STATE: CA ZIP: 95014 S-1/A 1 FORM S-1/A AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 7, 1997 REGISTRATION NO. 333-36001 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 -------------------------- AMENDMENT NO. 2 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 -------------------------- HYBRID NETWORKS, INC. (Exact name of Registrant as specified in its charter) DELAWARE 3661 77-02520931 (State or other jurisdiction (Primary standard industrial (I.R.S. employer of classification code number) identification incorporation or organization) no.)
-------------------------- 10161 BUBB ROAD CUPERTINO, CA 95014 (408) 725-3250 (Address, including zip code, and telephone number, including area code, of Registrant's principal executive offices) -------------------------- CARL S. LEDBETTER PRESIDENT AND CHIEF EXECUTIVE OFFICER 10161 BUBB ROAD CUPERTINO, CA 95014 (408) 725-3250 (Name, address, including zip code, and telephone number, including area code, of agent for service) -------------------------- COPIES TO: DENNIS R. DEBROECK, ESQ. PATRICK J. SCHULTHEIS, ESQ. ROBERT A. FREEDMAN, ESQ. ROBERT G. DAY, ESQ. TYLER R. COZZENS, ESQ. MATTHEW MACKENZIE, ESQ. FENWICK & WEST LLP WILSON SONSINI GOODRICH & ROSATI, TWO PALO ALTO SQUARE PROFESSIONAL CORPORATION PALO ALTO, CALIFORNIA 94306 650 PAGE MILL ROAD (650) 494-0600 PALO ALTO, CA 94304 (650) 493-9300 APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after the effective date of this Registration Statement. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. / / If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / ______ If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / ______ If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / ______ If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. / / ______ -------------------------- THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. SUBJECT TO COMPLETION, DATED NOVEMBER 7, 1997 2,700,000 SHARES [LOGO] COMMON STOCK ALL OF THE SHARES OF COMMON STOCK OFFERED HEREBY ARE BEING SOLD BY HYBRID NETWORKS, INC. ("HYBRID" OR THE "COMPANY"). PRIOR TO THIS OFFERING, THERE HAS BEEN NO PUBLIC MARKET FOR THE COMMON STOCK OF THE COMPANY. IT IS CURRENTLY ESTIMATED THAT THE INITIAL PUBLIC OFFERING PRICE WILL BE BETWEEN $12.00 AND $14.00 PER SHARE. SEE "UNDERWRITING" FOR A DISCUSSION OF THE FACTORS TO BE CONSIDERED IN DETERMINING THE INITIAL PUBLIC OFFERING PRICE. THE COMMON STOCK OF THE COMPANY HAS BEEN APPROVED FOR QUOTATION ON THE NASDAQ NATIONAL MARKET UNDER THE SYMBOL "HYBR" SUBJECT TO OFFICIAL NOTICE OF ISSUANCE. THIS OFFERING INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS" COMMENCING ON PAGE 5 FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED HEREBY. ----------------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
- -------------------------------------------------------------------------------- PRICE TO UNDERWRITING PROCEEDS TO PUBLIC DISCOUNT (1) COMPANY (2) - -------------------------------------------------------------------------------- PER SHARE.......................... $ $ $ TOTAL (3).......................... $ $ $ - --------------------------------------------------------------------------------
(1) SEE "UNDERWRITING" FOR INFORMATION CONCERNING INDEMNIFICATION OF THE UNDERWRITERS AND OTHER MATTERS. (2) BEFORE DEDUCTING OFFERING EXPENSES PAYABLE BY THE COMPANY, ESTIMATED AT $850,000. (3) THE COMPANY AND CERTAIN OF THE COMPANY'S STOCKHOLDERS (THE "SELLING STOCKHOLDERS") HAVE GRANTED TO THE UNDERWRITERS A 30-DAY OPTION TO PURCHASE UP TO 405,000 ADDITIONAL SHARES OF COMMON STOCK, SOLELY TO COVER OVER-ALLOTMENTS, IF ANY. THE COMPANY WILL NOT RECEIVE ANY PROCEEDS FROM THE SALE OF SHARES BY THE SELLING STOCKHOLDERS. SEE "PRINCIPAL AND SELLING STOCKHOLDERS." IF THE UNDERWRITERS EXERCISE THIS OPTION IN FULL, THE PRICE TO PUBLIC WILL TOTAL $ , THE UNDERWRITING DISCOUNT WILL TOTAL $ , THE PROCEEDS TO COMPANY WILL TOTAL $ AND THE PROCEEDS TO SELLING STOCKHOLDERS WILL TOTAL $ . SEE "UNDERWRITING." THE SHARES OF COMMON STOCK ARE OFFERED BY THE SEVERAL UNDERWRITERS NAMED HEREIN, SUBJECT TO RECEIPT AND ACCEPTANCE BY THEM, AND SUBJECT TO THEIR RIGHT TO REJECT ANY ORDER IN WHOLE OR IN PART. IT IS EXPECTED THAT DELIVERY OF THE CERTIFICATES REPRESENTING SUCH SHARES WILL BE MADE AGAINST PAYMENT THEREFOR AT THE OFFICE OF NATIONSBANC MONTGOMERY SECURITIES, INC. ON OR ABOUT , 1997. ------------------- NATIONSBANC MONTGOMERY SECURITIES, INC. UBS SECURITIES , 1997 FRONT OF GATEFOLD [PHOTO OF HYBRID MODEM] Modems SERIES 2000 A FULLY INTEGRATED BROADBAND ACCESS SYSTEM [PHOTO OF HYBRID HEADEND SYSTEM] Headend System INSIDE GATEFOLD HIGH SPEED INTERNET AND INTRANET ACCESS OVER BROADBAND NETWORKS [DIAGRAM OF CORPORATE CONFIGURATION OF HYBRID SERIES 2000 PRODUCT] CORPORATE - Secure high speed Internet and intranet access for corporate telecommuters and remote offices - Allows corporations to expand their intranet using broadband networks - Multi-user modem supports up to 20 PCs in a networked environment - Corporate MIS manages remote workers from behind the firewall for privacy [PHOTO OF COMPUTER SCREEN, KEYBOARD AND HYBRID MODEM] [DIAGRAM OF CABLE SYSTEM CONFIGURATION OF HYBRID SERIES 2000 PRODUCT] CABLE [DIAGRAM OF WIRELESS SYSTEM CONFIGURATION OF HYBRID SERIES 2000 PRODUCT] WIRELESS - Downstream speeds up to 10Mbps - Flexible system that operates well with most cable, wireless, and telephone networks - Proprietary mixed-media technology enhances performance of asymmetric networks - Modular architecture allows separate upstream and downstream paths - Multi-user modem supports up to 20 PCs - Encryption available ------------------- CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK OFFERED HEREBY. SUCH TRANSACTIONS MAY INCLUDE STABILIZING, THE PURCHASE OF COMMON STOCK TO COVER SYNDICATE SHORT POSITIONS AND THE IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING." CyberManager-Registered Trademark- and CyberMaster-Registered Trademark- are registered trademarks of the Company. Hybrid Networks-TM- and CyberCommuter-TM- are trademarks of the Company. This Prospectus also includes trade names and trademarks of other companies. PROSPECTUS SUMMARY THE FOLLOWING SUMMARY SHOULD BE READ IN CONJUNCTION WITH, AND IS QUALIFIED IN ITS ENTIRETY BY, THE MORE DETAILED INFORMATION, INCLUDING "RISK FACTORS" AND FINANCIAL STATEMENTS AND NOTES THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS. THE DISCUSSION IN THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS. THE OUTCOME OF THE EVENTS DESCRIBED IN SUCH FORWARD-LOOKING STATEMENTS IS SUBJECT TO RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE DISCUSSED IN SUCH FORWARD-LOOKING STATEMENTS. FACTORS THAT MAY CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE THOSE DISCUSSED IN SECTIONS ENTITLED "RISK FACTORS," "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AND "BUSINESS" AS WELL AS THOSE DISCUSSED ELSEWHERE IN THIS PROSPECTUS. THE COMPANY Hybrid Networks, Inc. ("Hybrid" or the "Company") is a broadband access equipment company that designs, develops, manufactures and markets cable and wireless 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 "last mile" connection to the end-user which causes slow response time for those accessing bandwidth-intensive information over the Internet or corporate intranets. The Company is currently generating, and expects to continue to generate in the near term, substantially all of its net sales from its Series 2000 product line and related support and networking services. Hybrid's Series 2000 product line consists of secure headend routers, cable or wireless modems and management software for use with either cable TV or wireless transmission facilities. The Series 2000 system also features a router to provide corporate telecommuters and others in remote locations secure access to their files on corporate intranets. The Series 2000 is capable of supporting a combination of speeds, media and protocols in a single cable or wireless system, providing system operators with flexible, scalable and upgradeable solutions that interoperate with a range of third party networking products allowing system operators to offer cost-effective broadband access to their subscribers. The Internet has become an increasingly important source of information for businesses and consumers. The Internet's importance results from a variety of factors, including increased email usage, the emergence of the World Wide Web and the proliferation of multimedia content, such as graphics, images, video and audio, which can be accessed online. In particular, businesses are demanding high speed access to the Internet and their corporate intranets for their employees, including telecommuters. In 1997, an American Management Association International and Tierney & Partners survey indicated that 27% of businesses surveyed reported moderate to heavy Internet usage. This number is expected to increase to 64% by 1999. In addition, the 1997 American Internet Users Survey, conducted by FIND/SVP, estimated that the number of telecommuters in the United States has grown to 11 million. According to a November 1996 Jupiter Communications report, the consumer market is also growing rapidly. Jupiter Communications projects the number of houses in the United States with Internet access will grow from 14.7 million in 1996 to 36.0 million by 2000 (a compound annual growth rate of 34.8%). Demand for bandwidth-intensive content, combined with the inherent technical difficulties of delivering large amounts of data over existing copper wire telephone infrastructure, has resulted in slow response times and increasing frustration for many Internet and corporate intranet users. While cable system operators and broadband wireless system operators seek alternatives to provide high speed, cost-effective broadband access, currently these operators do not possess the enabling technology over the last mile to provide such access to their end-users. In addition, Internet service providers ("ISPs"), which have traditionally provided Internet access, will face increasing pressure to provide improved broadband access to their subscribers. Hybrid's objective is to be a leader in providing cost-effective, high speed Internet and intranet access solutions to cable system operators, broadband wireless system operators, ISPs and other businesses. Hybrid markets and sells its products through its direct sales force and a network of original equipment manufacturers ("OEMs"), value added resellers ("VARs") and distributors. The Series 2000 product line allows cable and wireless operators to conserve scarce bandwidth and to utilize a variety of data return paths, including the public switched telephone network. The Series 2000 product line enables cable system operators to offer Internet access via either one-way or two-way cable systems, thus minimizing the operators' capital investment and time-to-market pressures. The Series 2000 also facilitates the entrance of broadband wireless system operators into the high speed Internet access market. The Series 2000 has been designed to utilize an array of wireless frequencies, ranging from UHF to MMDS frequencies, and to minimize commonly experienced interference problems. Hybrid was incorporated in Delaware in June 1990. The Company's principal executive offices are located at 10161 Bubb Road, Cupertino, California 95014-4167. The Company's telephone number is (408) 725-3250. 3 THE OFFERING Common Stock offered by the Company............. 2,700,000 shares Common Stock to be outstanding after this offering...................................... 9,973,311 shares(1) Use of proceeds................................. For the repayment of approximately $6.9 million of debt, working capital and other general corporate purposes. See "Use of Proceeds." Proposed Nasdaq National Market symbol.......... HYBR
SUMMARY FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA)
NINE MONTHS ENDED YEAR ENDED DECEMBER 31, SEPTEMBER 30, ------------------------------- ----------------------- 1994 1995 1996 1997 --------- --------- --------- 1996 ---------- ----------- (UNAUDITED) STATEMENTS OF OPERATIONS DATA: Net sales.............................................. $ 668 $ 630 $ 2,962 $ 1,253 $ 9,152 Loss from operations................................... (2,826) (5,131) (8,744) (6,256) (9,886) Net loss............................................... (2,897) (5,269) (8,515) (6,132) (10,082) Pro forma net loss per share(2)........................ $ (1.24) $ (1.33) Pro forma number of shares used in per share calculation(2)....................................... 6,873 7,607
SEPTEMBER 30, 1997 --------------------------- ACTUAL AS ADJUSTED(4) ----------- -------------- BALANCE SHEET DATA: Cash, cash equivalents and short-term investments.................................... $ 5,314 $ 30,225 Working capital...................................................................... 3,565 35,108 Total assets......................................................................... 16,190 41,101 Long-term debt(3).................................................................... 6,223 6,223 Total stockholders' equity (deficit)................................................. (3) 31,540
- ------------------------------ (1) Based on shares outstanding as of September 30, 1997. Does not include (i) 1,974,242 shares of Common Stock issuable upon exercise of stock options outstanding as of September 30, 1997, at a weighted average exercise price of $2.72 per share, (ii) 2,046,213 shares of Common Stock available for future grant or issuance as of September 30, 1997 under the Company's 1993 Equity Incentive Plan, 1996 Equity Incentive Plan, Executive Officer Incentive Plan, 1997 Equity Incentive Plan, 1997 Directors Stock Option Plan and 1997 Employee Stock Purchase Plan, (iii) 1,160,558 shares of Common Stock issuable upon the exercise of warrants outstanding as of September 30, 1997 at a weighted average exercise price of $6.38 per share, (iv) 513,423 shares of Common Stock issuable as of September 30, 1997 upon the conversion of a debenture with an outstanding aggregate principal amount of $5.5 million (the "$5.5 Million Debenture"), (v) a warrant to purchase 2,659 shares of Common Stock at an exercise price of $10.91 per share issued in October 1997 in connection with obtaining a credit facility for $4.0 million (the "Credit Facility") or (vi) a warrant to purchase 458,295 shares of Common Stock at an exercise price of $10.91 per share issued in November 1997 in connection with a technology support and development arrangement. See "Capitalization," "Business-- Research and Development," "Management--Director Compensation," "Management--Employee Benefit Plans," "Description of Capital Stock" and Notes 5, 6 and 10 of Notes to Financial Statements. (2) See Note 2 of Notes to Financial Statements for an explanation of the determination of the pro forma number of shares used to compute pro forma net loss per share. (3) Includes the $5.5 Million Debenture, which is convertible into an aggregate of 513,423 shares of Common Stock at the option of the holder at any time and which automatically converts if (i) the gross proceeds to the Company from this offering are at least $15.0 million, (ii) the public offering price per share is at least $166.5 million divided by the number of fully diluted shares of capital stock of the Company (as determined pursuant to the terms of the $5.5 Million Debenture) prior to this offering (the "Minimum Price") and (iii) the closing price of the Common Stock after this offering is equal to or greater than the Minimum Price for any 90 consecutive calendar day period after this offering. See Note 6 of Notes to Financial Statements. (4) Adjusted to reflect (i) the sale and issuance of the 2,700,000 shares of Common Stock offered hereby at an assumed initial public offering price of $13.00 per share and after deducting the estimated underwriting discount and offering expenses and the application of the estimated proceeds therefrom and (ii) the conversion of all outstanding shares of Preferred Stock into Common Stock upon the closing of this offering. See "Use of Proceeds" and "Capitalization." ------------------------------ EXCEPT WHERE OTHERWISE INDICATED, ALL INFORMATION IN THIS PROSPECTUS (I) REFLECTS THE CONVERSION OF ALL OUTSTANDING SHARES OF PREFERRED STOCK OF THE COMPANY INTO SHARES OF COMMON STOCK UPON THE CONSUMMATION OF THIS OFFERING, (II) REFLECTS A 1-FOR-2.7 REVERSE SPLIT OF THE COMPANY'S COMMON STOCK, (III) ASSUMES THAT THE UNDERWRITERS' OVER-ALLOTMENT OPTION WILL NOT BE EXERCISED AND (IV) ASSUMES REPAYMENT OF APPROXIMATELY $6.9 MILLION OF SUBORDINATED NOTES (THE "SUBORDINATED NOTES") IMMEDIATELY FOLLOWING THE CLOSING OF THIS OFFERING AND THE ISSUANCE OF WARRANTS FOR THE PURCHASE OF 252,381 SHARES OF COMMON STOCK IN CONNECTION THEREWITH. 4 RISK FACTORS THIS OFFERING INVOLVES A HIGH DEGREE OF RISK. IN ADDITION TO THE OTHER INFORMATION SET FORTH IN THIS PROSPECTUS, THE FOLLOWING RISK FACTORS SHOULD BE CONSIDERED CAREFULLY IN EVALUATING THE COMPANY AND ITS BUSINESS BEFORE PURCHASING ANY OF THE SHARES OF COMMON STOCK OF THE COMPANY. THIS PROSPECTUS CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES, SUCH AS STATEMENTS OF THE COMPANY'S PLANS, OBJECTIVES, EXPECTATIONS AND INTENTIONS. THE CAUTIONARY STATEMENTS MADE IN THIS PROSPECTUS SHOULD BE READ AS BEING APPLICABLE TO ALL RELATED FORWARD-LOOKING STATEMENTS WHEREVER THEY APPEAR IN THIS PROSPECTUS. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE DISCUSSED IN THIS PROSPECTUS. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE THOSE DISCUSSED BELOW, AS WELL AS THOSE DISCUSSED ELSEWHERE IN THIS PROSPECTUS. LIMITED OPERATING HISTORY; HISTORY OF LOSSES The Company was organized in 1990 and has experienced operating losses each year since that time. As of September 30, 1997, the Company had an accumulated deficit of approximately $27.4 million. Because the Company and the market for broadband access through cable modems is still in an emerging stage, there can be no assurance that the Company will ever achieve profitability on a quarterly or an annual basis or will sustain profitability once achieved. The Company began shipment of its first products, the Series 1000 product line in 1994 and sold only minimal quantities before replacing them with its Series 2000 product line, which was first shipped in October 1996. The revenue and profit potential of the Company's business and the industry is unproven, and the Company's limited operating history makes its future operating results difficult to predict. The Company believes that its growth and future success will be substantially dependent upon cable system operators, broadband wireless system operators and ISPs adopting its technologies, purchasing its products and selling its client modems to cable, wireless and ISP subscribers. The Company has had limited experience selling its products to cable system operators, broadband wireless system operators, ISPs and other businesses, and there are many impediments to its being able to do so. See "--Inexperience in Emerging Market." The market for the Company's products has only recently begun to develop, is rapidly changing and is characterized by an increasing number of competitors and competing technologies. Certain competitors of the Company currently offer more price competitive products. In the event that the Company's current or future competitors release new products or technologies with more advanced features, better performance or lower prices than the Company's current and future products, demand for the Company's products would decline. See "--Competition." Failure of the Company's products to achieve market acceptance could have a material adverse effect on the Company's business, operating results and financial condition. Although the Company has experienced significant growth in net sales in recent periods, the Company does not believe that this growth rate is sustainable or indicative of future operating results. In addition, the Company has had negative gross margins in past periods, and there can be no assurance that any continued growth in net sales will result in positive gross profits or operating profits. Future operating results will depend on many factors, including the growth of the cable and wireless modem system markets, demand for the Series 2000 and future product lines, purchasing decisions by cable and wireless companies and their subscribers, the level of product and price competition, market acceptance of competing technologies to deliver high speed Internet access, evolving industry standards, the ability of the Company to develop and market new products and control costs, general economic conditions and other factors. The Company believes that it will continue to experience net losses for the foreseeable future. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." FLUCTUATIONS IN OPERATING RESULTS; ABSENCE OF SIGNIFICANT BACKLOG; CONTINUING DECLINE OF AVERAGE SELLING PRICES The Company has experienced, and expects to continue to experience, significant fluctuations in its results of operations on a quarterly and an annual basis. Historically, the Company's quarterly net sales 5 have been unpredictable due to a number of factors. Factors that have influenced and will continue to influence the Company's results of operations in a particular period include: the size and timing of customer orders and subsequent shipments, particularly with respect to the Company's headend equipment; customer order deferrals in anticipation of new products or technologies; timing of product introductions or enhancements by the Company or its competitors; market acceptance of new products; technological changes in the cable, wireless and telecommunications industries; competitive pricing pressures; the effects of extended payment terms, promotional pricing, service, marketing or other terms offered to customers; accuracy of customer forecasts of end-user demand; changes in the Company's operating expenses; personnel changes; quality control of products sold; regulatory changes; customer's capital spending; delays of orders by customers; customers' delay in or failure to pay accounts receivable; and general economic conditions. In addition, the inability to obtain components from suppliers or manufacturers has adversely affected the Company's operating results in the past and may materially adversely affect the Company's operating results in the future. For example, in the second quarter and a portion of the third quarter of 1997, the Company did not receive the full shipment of modems anticipated from Sharp Corporation, its primary modem manufacturer, because of technical delays in product integration. As a result, the Company was unable to fill all customer orders for the second quarter. While such problems have since been resolved, there can be no assurance that the Company will not experience similar supply problems in the future with respect to Sharp or any other supplier or manufacturer. The timing and volume of customer orders are difficult to forecast because cable and wireless companies typically require delivery of products within 30 days, thus a substantial majority of the Company's net sales are booked and shipped in the same quarter. Accordingly, the Company has a limited backlog of orders, and net sales for any future quarter are difficult to predict. Further, sales are generally made pursuant to purchase orders, which can be rescheduled, reduced or cancelled with little or no penalty. Historically, a substantial majority of the Company's net sales in a given quarter have been recorded in the third month of the quarter, with a concentration of such net sales in the last two weeks of the quarter. Because of the relatively large dollar size of the Company's typical transaction, any delay in the closing of a transaction can have a significant impact on the Company's operating results for a particular period. See "--Lengthy Sales Cycle." Historically, average selling prices ("ASPs") in the cable and wireless systems industry have decreased over the life of individual products and technologies. In the past, the Company has experienced decreases in unit ASPs of each of its products. The Company anticipates that unit ASPs of its products will continue to decrease, which would cause continuing downward pressure on the gross margins for these products. The Company's gross margins are also impacted by the sales mix of points of presence headend equipment ("PoPs" or "headends") and modems. The Company's single-user modems generally have lower margins than its multi-user modems, both of which have lower margins than the Company's headends. Due to current customer demand, the Company anticipates that the sales mix of modems will continue to be weighted toward lower-margin single-user modems in the foreseeable future. See "--Need to Reduce Cost of Client Modems" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." LENGTHY SALES CYCLE The sale of the Company's products typically involves a significant technical evaluation and commitment of capital and other resources, with the delays frequently associated with customers' internal procedures to approve large capital expenditures, to engineer deployment of new technologies within their networks and to test and accept new technologies that affect key operations. For these and other reasons, the sales cycle associated with the Company's products is typically lengthy, generally lasting three to nine months and is subject to a number of significant risks, including customers' budgetary constraints and internal acceptance reviews, that are beyond the Company's control. Because of the lengthy sales cycle and the large size of customers' orders, if orders forecasted for a specific customer for a particular quarter are 6 not realized in that quarter, the Company's operating results for that quarter could be materially adversely affected. See "--Fluctuations in Quarterly Operating Results; Absence of Significant Backlog; Continuing Decline of Average Selling Prices" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." DEPENDENCE ON RECENTLY INTRODUCED PRODUCTS AND PRODUCTS UNDER DEVELOPMENT; RAPID TECHNOLOGICAL CHANGE The market for high speed Internet access products is characterized by rapidly changing technologies and short product life cycles. Prior to October 1996, substantially all of the Company's product sales were attributable to its Series 1000 product line. In October 1996, the Company introduced its Series 2000 product line (which replaced the Series 1000 product lines). The Company is currently generating, and expects to continue to generate in the near term, substantially all of its net sales from its Series 2000 product line and related support and networking services. To date, substantially all products sold have been for telephone return based systems and have involved single-user modems. Since the Series 2000 products have been subject to only limited single-user testing, the reliability, performance and market acceptance of the Company's products are uncertain, and there is increased risk that the products will be affected by problems beyond those that are generally associated with new products. The failure of the current generation of products to perform acceptably in certain beta test situations has caused the Company to make engineering changes to such products, and the Company continues to modify the designs of its products in an attempt to increase their reliability and performance. There can be no assurance that the Company's engineering and product design efforts will be successful. The Company's future success will depend in part upon its ability to develop, introduce and market new products or enhancements to existing products in a timely manner and to respond to competitive pressures, changing industry standards or technological advances. For example, the Company is currently developing products for two-way cable transmission using QPSK technology which the Company believes its customers will require. In addition, the Company is developing products for two-way broadband wireless transmission. There can be no assurance that the Company will successfully develop or introduce new products, or that any new products will achieve market acceptance. Any failure to release new products or to fix, upgrade or redesign existing products on a timely basis could have a material adverse effect on the Company's business, operating results and financial condition. In addition, as the Company introduces new products that cause existing products to become obsolete, the Company could experience inventory writeoffs, which could have a material adverse effect on the Company's business, operating results and financial condition. See "Business--Products, Technology and Services" and "Business--Research and Development." INEXPERIENCE IN EMERGING MARKET Cable system operators, broadband wireless system operators, distributors and other customers may prefer to purchase products from larger, more established manufacturing companies, including certain of the Company's competitors, that can demonstrate the capability to supply large volumes of products on short notice. In addition, many cable system operators, broadband wireless system operators and other customers may be reluctant to adopt technologies that have not gained wide acceptance among their industry peers. Certain competitors of the Company have already established relationships in the market, further limiting the Company's ability to sell products to such potential customers. While the Company has sold products to certain cable system operators, broadband wireless system operators and other customers, most of these sales are not based on long-term contracts and such customers may terminate their relationships with the Company at any time. Further, the Company's contracts generally do not contain significant minimum purchase requirements. In addition, in order to address the needs and competitive factors facing the broadband access market sales the Company has and in the future may need to offer extended payment, pricing, service, marketing or other promotional terms which could have a material adverse effect on the Company's business, operating results and financial condition. If the Company is unable to market and sell its products to a significant number of cable system operators, broadband wireless system operators and other customers, or if such entities should cease doing business with the Company, the Company's business, operating results and financial condition could be materially adversely affected. See "Business--Customers." 7 LIMITED PENETRATION OF TWO-WAY CABLE; DEPENDENCE ON CABLE OPERATOR INSTALLATIONS Although wired cable systems pass a significant percentage of U.S. households, very few of those households are currently served by cable plants that support two-way data access. Further, a limited number of businesses, a major target market for the Company, currently have cable access. To support upstream data on existing hybrid fiber coax ("HFC") cable plants, a cable operator must install two-way amplifiers in the cable network to use the portion of the cable spectrum allocated for upstream use. There can be no assurance that cable system operators will choose to upgrade existing cable systems or provide new cable systems with two-way capability. In particular, certain large cable system operators have announced their intention to slow or halt plans to upgrade existing cable systems. Adding upstream capabilities to new or existing cable systems is expensive and generally requires portions of existing systems to be unavailable during the installation process. Cable system operators may decide to wait for the next generation of wired infrastructure, such as optical fiber, before deciding whether to provide two-way communication. The Federal Communications Commission ("FCC") has required cable system operators to dedicate the frequency spectrum from 5 MHz to 42 MHz for upstream transmissions, but because this portion of spectrum is small in comparison to the downstream portion, it is more susceptible to ingress noise and other impairments and it can support a more limited bandwidth. Due to a scarcity of channels, cable system operators have been and may continue to be reluctant to dedicate a portion of their frequency spectrum to new uses such as those for which the Company's products are designed. Consequently, the Company expects that upstream data traffic on cable systems will be limited to narrow or congested parts of the spectrum, thus limiting the number of potential simultaneous users. If cable system operators do not install two-way capability on their cable systems in a timely fashion or if such operators do not dedicate sufficient frequency spectrum for upstream traffic, the use of cable for upstream data traffic will be limited. Any such limitation could have a material adverse effect on the Company's business, operating results and financial condition. See "Business--Industry Background" and "Business--Customers." DEPENDENCE ON CABLE SYSTEM OPERATORS The Company depends on cable system operators to purchase its cable modem systems and to sell its client cable modems to end-users. Cable system operators have a limited number of programming channels over which they can offer services, and there can be no assurance that they will choose to provide Internet access. Even if cable system operators choose to provide Internet access, there can be no assurance that they would provide such access over anything other than that portion of their cable system that has two-way cable transmission capabilities. In addition, there can be no assurance that if such cable system operators provide Internet access, they would use the Company's products. The Company is currently developing a two-way cable transmission solution utilizing the QPSK technology required by cable system operators, but there can be no assurance that the Company will be successful in such efforts or that once introduced such products will gain market acceptance. While many cable system operators are in the process of upgrading, or have announced their intention to upgrade, their HFC cable infrastructures to provide increased quality and speed of transmission and, in certain cases, two-way transmission capabilities, some cable operators have delayed their planned upgrades indefinitely. Cable system operators have limited experience with these upgrades, and investments in upgrades have placed a significant strain on the financial, managerial, operational and other resources of the cable system operators, most of which are already highly leveraged and facing intense competition from telephone companies ("telcos"), satellite TV and broadband wireless system operators. Because of the substantial capital cost of upgrading cable systems for higher quality and two-way data transmission, it is uncertain whether such cable upgrades and additional services, such as Internet access, will be offered in the near term, or at all. For example, to increase television programming capacity to compete with other modes of multichannel entertainment delivery systems, cable system operators may choose to roll out digital set-top boxes, which do not support high speed Internet access. Cable system operators may not have the capital required to upgrade their infrastructure or to offer new services that require substantial start-up costs. In addition, the Company is highly dependent on cable system operators to continue to maintain their cable infrastructure in such a 8 manner that the Company will be able to provide consistently high performance and reliable service. Therefore, the success and future growth of the Company's business is subject to economic and other factors affecting the cable television industry generally, particularly the industry's ability to finance substantial capital expenditures. See "Business--Industry Background" and "Business--Customers." DEPENDENCE ON BROADBAND WIRELESS SYSTEM OPERATORS The Company depends on broadband wireless system operators to purchase its wireless modem products and to sell its client wireless modems to end-users. Many broadband wireless system companies are in the early stage of development or are in need of capital to upgrade and expand their services in order to compete effectively with cable system operators, satellite TV and telcos. Accordingly, to address the needs of and competitive factors facing these customers, the Company on occasion has provided certain broadband wireless system operators and other customers extended payment, promotional pricing or other terms which could have a material adverse effect on the Company's business, operating results and financial condition. 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. Therefore, despite a typical range of up to 35 miles, a number of factors, such as buildings, trees or uneven terrain, can interfere with reception, thus limiting broadband wireless system operators' customer bases. It is estimated that there are only approximately 1.0 million wireless cable customers in the United States today. In addition, current technical and legislative restrictions have limited the number of analog channels that wireless cable companies can offer to 33. In order to better compete with cable system operators, satellite TV and telcos, broadband wireless system operators have begun to examine the implementation of both digital TV and Internet access to create new revenue streams. To the extent that such operators choose to invest in digital TV, such decision will limit the amount of capital available for investment in deploying other services, such as Internet access. Broadband wireless system operators will require substantial capital to introduce and market Internet access products. There can be no assurance that broadband wireless system operators will have the capital to supply Internet services in a competitive environment. In addition, there can be no assurance that the broadband wireless system operators' current customer bases have significant interest in high speed Internet connectivity at a price greater than that offered by telcos or that broadband wireless system operators can attract customers, particularly in the business community, which have not traditionally subscribed to wireless cable services. While broadband wireless system operators are currently utilizing telephone return for upstream data transmission, the Company believes that wireless operators will demand two-way wireless transmission as more of these entities obtain licenses for additional frequencies. Currently, the Company is developing its products to satisfy the two-way transmission needs of the broadband wireless system operators. There can be no assurance that the Company will be successful in such development efforts. The failure of the Company's products to gain market acceptance could have a material adverse effect on the Company's business, operating results and financial condition. See "Management's Discussion and Analysis of Financial Condition." CUSTOMER CONCENTRATION To date, a small number of customers has accounted for a substantial portion of the Company's net sales. The Company expects that net sales from the sale of its Series 2000 products to a small number of customers will continue to account for a substantial portion of its net sales for the foreseeable future. The Company expects that its largest customers in future periods could be different from its largest customers in prior periods due to a variety of factors, including customers' deployment schedules and budget considerations. As a result, the Company has experienced, and expects to continue to experience, significant fluctuations in its results of operations on a quarterly and annual basis. Because limited numbers of cable system operators and broadband wireless system operators account for a majority of capital equipment purchases in their respective markets, the Company's future success will depend upon its ability to establish and maintain relationships with these companies. In addition, as the market for high speed Internet and corporate intranet access over cable and broadband wireless systems continues to evolve, the composition of companies participating in this market will continue to change. For instance, in 9 1994, 1995 and 1996, Intel accounted for 59.6%, 51.6% and 20.7%, respectively, of the Company's net sales. From 1994 to 1996, Intel manufactured certain products based on the Company's design and jointly marketed the Company's products with its own. However, in 1996 Intel stopped purchasing products from the Company as it scaled back its direct participation in the cable and wireless market, though it continues to be a significant stockholder of the Company and maintains certain licensing and manufacturing rights to certain of the Company's products. Should Intel decide to purchase or support designs or products from competitors of the Company it could have a material adverse effect on the Company's business, operating results and financial condition. The loss of any one of the Company's major customers could have a material adverse effect on the Company's business, financial condition and results of operations. Further, the Company's customers include companies in the early stage of development or in need of capital to upgrade or expand their services. Accordingly, in order to address the needs of and competitive factors facing the emerging broadband access markets, the Company on occasion has provided customers extended payment, promotional pricing or other terms. For instance, Internet Ventures, Inc., which accounted for 10.2% of the Company's net sales for the nine months ended September 30, 1997, has recently been provided extended payment terms and accounted for 12% of the Company's accounts receivable as of September 30, 1997. The provision of extended payment terms, or the extension of promotional payment, pricing or other terms could have a material adverse effect on the Company's business, operating results and financial condition. The Company's future success will depend in significant part upon the decision of the Company's current and prospective customers to continue to purchase products from the Company. There can be no assurance that the Company's current customers will continue to place orders with the Company or that the Company will be able to obtain orders from new customers. If orders from current customers are cancelled, decreased or delayed, or the Company fails to obtain significant orders from new customers, or any significant customer delays payment or fails to pay, the Company's business, operating results and financial condition could be materially adversely affected. Further, the Company's headend equipment does not operate with other companies' modems and, accordingly, the Company is typically a sole source provider to its customers. As a result, the Company's operating results could be materially and adversely affected if a major customer were to implement other technologies that impact the future utilization of the Company's products. See "Business--Customers." COMPETITION The market for high speed network connectivity products and services is intensely competitive. The principal competitive factors in this market include product performance and features (including speed of transmission and upstream transmission capabilities), reliability, price, size and stability of operations, breadth of product line, sales and distribution capability, technical support and service, relationships with cable and broadband wireless system operators and ISPs, standards compliance and general industry and economic conditions. Certain of these factors are outside of the Company's control. The existing conditions in the high speed network connectivity 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 the Company's products or render them obsolete. Similarly, the continued emergence or evolution of industry standards or specifications may put the Company at a disadvantage in relation to its competitors. The Company's current and potential competitors include providers of asymmetric cable modems, other types of cable modems and other broadband access products. Most of the Company's 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 the Company. In addition, many of the Company's competitors are in a better position to withstand any significant reduction in capital spending by cable or broadband wireless system operators. Certain of the Company's competitors have established relationships with cable system operators and telcos and, based on these relationships, may have more direct access to the decision-makers of such cable system operators and telcos. In addition, the Company could face potential competition from certain of its suppliers, such as Sharp if it were to develop or license modems for sale to others. In addition, suppliers such as Cisco Systems, which 10 manufactures routers, and Stanford Telecom, which manufactures QPSK components, could become competitors should they decide to enter the Company's market directly. There can be no assurance that the Company will be able to compete effectively in its target markets. The principal competitors in the cable modem market include Bay Networks, Motorola, NextLevel Systems and 3Com and its subsidiary U.S. Robotics. Other cable modem competitors include Cisco Systems, Com21, Hayes Microcomputer Products, Phasecom, Scientific-Atlanta, Terayon, Toshiba and Zenith Electronics, as well as a number of smaller, more specialized companies. Certain competitors have entered into partnerships with computer networking companies that may give such competitors greater visibility in this market. Certain of the Company's competitors have already introduced or announced high speed connectivity products that are priced lower than the Company's, and certain other competitors are more focused on and experienced in selling and marketing two-way cable transmission products. There can be no assurance that additional competitors will not introduce new products that will be priced lower, provide superior performance or achieve greater market acceptance than the Company's products. The Company's principal competitors in the wireless modem market, Bay Networks, Harmonic Lightwaves through its proposed acquisition of New Media Communications, Motorola, NextLevel Systems and Stanford Telecommunications, are providing wireless Internet connectivity over wireless cable and LMDS frequencies. To be successful, the Company's Series 2000 products must achieve market acceptance and the Company must respond promptly and effectively to the challenges of new competitive products and tactics, alternate technologies, technological changes and evolving industry standards. The Company must continue to develop products with improved performance over two-way cable transmission facilities and with the ability to perform over two-way wireless transmission facilities. There can be no assurance that the Company will meet these challenges, that it will be able to compete successfully against current or future competitors, or that the competitive pressures faced by the Company will not materially and adversely affect the Company's business, operating results and financial condition. Further, as a strategic response to changes in the competitive environment, the Company may make certain promotional pricing, service, marketing or other decisions or enter into acquisitions or new ventures that could have a material adverse effect on the Company's business, operating results or financial condition. Cable and broadband wireless system operators face competition from providers of alternative high speed connectivity systems. In the wireless high speed access market, broadband wireless system operators compete with satellite TV providers. In telephony networks, Digital Subscriber Line ("xDSL") technology enables digitally compressed video signals to be transmitted through existing telephone lines to the home. In the event that any competing architecture or technology were to limit or halt the deployment of coaxial or HFC systems, the Company's business, operating results and financial condition would be materially adversely affected. See "Business--Competition." COMPETING TECHNOLOGIES AND EVOLVING INDUSTRY STANDARDS The market for high speed Internet access products is characterized by competing technologies, evolving industry standards and frequent new product introductions. Market acceptance of alternative wired technologies, such as Integrated Services Digital Network ("ISDN") or xDSL, or wireless technologies, such as DBS, could decrease the demand for the Company's products or render such products obsolete if such alternatives are viewed as providing faster access, greater reliability or improved cost-effectiveness. In particular, it is possible that the perceived high speed access advantage provided by cable and broadband wireless systems may be undermined by the need to share bandwidth, which results in the reduction in individual throughput speeds. In addition, the emergence or evolution of industry standards, through either adoption by official standards committees or widespread use by cable system operators, broadband wireless system operators or telcos, could require the Company to redesign its products, resulting in delays in the introduction of such products. For instance, the Company's products are not in full compliance with the DAVIC specifications that are supported in Europe or the recently announced preliminary versions of the MCNS specifications or IEEE standards. If such standards do become 11 widespread and the Company's products are not in compliance, the Company's customers and potential customers may refuse to purchase the Company's products, materially adversely affecting its business, operating results and financial condition. Further, the Company's products are not compatible with headend equipment and modems of other suppliers of broadband Internet access products. As a result, potential customers who wish to purchase broadband Internet access products from multiple suppliers may be reluctant to purchase the Company's products. The rapid development of new competing technologies and standards increases the risk that current or new competitors could develop products that would reduce the competitiveness of the Company's products. Market acceptance of new technologies or the failure of the Company to develop and introduce new products or enhancements directed at new industry standards could have a material adverse effect on the Company's business, operating results and financial condition. See "Business--Industry Background" and "Business--Competition." NEED TO REDUCE COST OF CLIENT MODEMS The list prices for the Series 2000 client modems currently range from approximately $450 to $900, depending upon features and volume. Customers wishing to purchase client modems generally must also purchase an Ethernet adapter for their computer. These prices make the Company's products relatively expensive for the consumer electronics and the small office or home office markets. Market acceptance of the Company's products, and the Company's future success, will depend in significant part on reductions in the unit cost of the Company's client modems. Certain of the Company's competitors currently offer products at prices lower than those for the Company's modems. While the Company has initiated cost reduction programs to offset pricing pressures on its products, there can be no assurance that these cost reduction efforts will continue to keep pace with competitive pricing pressures or lead to improved gross margins. If the Company is unable to continue to obtain cost reductions, its gross margins and profitability will be adversely affected. To address continuing competitive and pricing pressures, the Company expects that it will have to continue to reduce the cost of manufacturing client modems significantly through design and engineering changes. Such changes may involve redesigning the Company's products to utilize more highly integrated components and more automated manufacturing techniques. The Company has entered into high-volume purchase and supply agreements with Sharp and Itochu Corporation ("Itochu") and may evaluate the use of low-cost third party suppliers and manufacturers to further reduce costs. There can be no assurance that the Company will be successful in redesigning its products or using more automated manufacturing techniques, that a redesign can be made on a timely basis and without introducing significant errors and product defects or that a redesign will result in sufficient cost reductions to allow the Company to reduce the list price of its client modems. Moreover, there can be no assurance that additional volume purchase or manufacturing agreements will be available to the Company on terms that the Company considers acceptable. To the extent that the Company enters into a high-volume or long-term purchase or supply agreement and then decides that it cannot use the products or services provided for in the agreement, the Company's business, operating results and financial condition could be materially adversely affected. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business--Manufacturing." LIMITED MANUFACTURING EXPERIENCE; SOLE SOURCE MANUFACTURING The Company's future success will depend, in significant part, on its ability to manufacture, or have others manufacture, its products successfully, cost-effectively and in sufficient volumes. The Company maintains a limited in-house manufacturing capability at its headquarters in Cupertino for performing system integration and testing on all headend products and for manufacturing small quantities of modems. The Company entered into an agreement pursuant to which Sharp to date has been the exclusive OEM supplier through Itochu of certain of the Company's client modems, including the substantial majority of those utilized in the Series 2000. In the second quarter and a portion of the third quarter of 1997, the Company did not receive the full shipment of modems anticipated from Sharp because of technical delays in product integration. While these problems have since been resolved, there can be no assurance that the Company will not experience similar supply problems in the future from Sharp or any other manufacturer. 12 The Company is exploring the possibility of entering into supply arrangements with other manufacturers to provide additional or alternative sources of supply for certain of the Company's products, although there can be no assurance that such arrangements will be entered into or that they will provide for the prompt manufacture of products or subassemblies in quantities or on terms required to meet the needs of the Company's customers. The Company has had only limited experience manufacturing its products to date, and there can be no assurance that the Company or Sharp or any other manufacturer of the Company's products will be successful in increasing the volume of its manufacturing efforts. The Company may need to procure additional manufacturing facilities and equipment, adopt new inventory controls and procedures, substantially increase its personnel and revise its quality assurance and testing practices, and there can be no assurance that any of these efforts will be successful. See "Business--Manufacturing." DEPENDENCE ON COMPONENT AVAILABILITY AND KEY SUPPLIERS The Company is dependent upon certain key suppliers for a number of the components for its products. For example, the Company currently only has one vendor, BroadCom Corporation, for the 64 QAM demodulator semiconductors that are used in the Company's server and client modem products, and in past periods these semiconductors have been in short supply. Recently, BroadCom announced a program to develop with certain of the Company's competitors high-speed cable data modems and headend equipment based on BroadCom's MCNS compliant semiconductor. As a result of such program, certain of BroadCom's technological and product enhancements may be made available to certain of the Company's competitors before making them available to the Company. This could have the effect of putting the Company at a competitive disadvantage with regard to time to market or cause the Company to have to redesign its products if competitors influence changes in BroadCom's products. Hitachi is the sole supplier of the processors used in certain of the Company's modems. In addition, certain other components for products that the Company has under development are currently only available from a single source. There can be no assurance that delays in key components or product deliveries will not occur in the future due to shortages resulting from a limited number of suppliers, the financial or other difficulties of such suppliers or the possible limitation in component product capacities due to significant worldwide demand for such components. Any significant interruption or delay in the supply of components for the Company's products or significant increase in the price of components due to short supply or otherwise could have a material adverse effect on the Company's ability to manufacture its products and, therefore, could have a material adverse effect on its business, operating results and financial condition. See "Business--Manufacturing." DEPENDENCE ON THE INTERNET AND INTERNET INFRASTRUCTURE DEVELOPMENT The commercial market for products designed for the Internet and the TCP/IP networking protocol has only recently begun to develop, and the Company's success will depend in large part on increased use of the Internet. Critical issues concerning the commercial use of the Internet, including security, reliability, cost, ease of access and quality of service, remain unresolved and are likely to affect the development of the market for the Company's products. The adoption of the Internet for commerce and communications, particularly by enterprises that have historically relied upon alternative means of commerce and communications, generally requires the acceptance of a new way of conducting business and exchanging information. In addition, the Company is dependent on the growth of the use of the Internet by businesses, particularly for applications that utilize multimedia content and thus require high bandwidth. If the Internet as a commercial or business medium fails to develop or develops more slowly than expected, the Company's business, operating results and financial condition could be materially adversely affected. The recent growth in the use of the Internet has caused frequent periods of performance degradation, requiring the upgrade of routers, telecommunications links and other components forming the infrastructure of the Internet by ISPs and other organizations with links to the Internet. Any perceived degradation in the performance of the Internet as a whole could undermine the benefits of the Company's products. Potentially increased performance provided by the products of the Company and others is ultimately limited by and reliant upon the speed and reliability of the Internet backbone itself. Consequently, the emergence and growth of the market for the Company's products is dependent on improvements being made to the entire Internet infrastructure to alleviate overloading and congestion. See "Business-- Industry Background." 13 DEPENDENCE ON ACCEPTANCE OF ASYMMETRIC NETWORKING The Company's products are designed to transmit data from the Internet in the downstream direction (i.e., to the end-user) much more quickly than data is transmitted in the upstream direction (i.e., from the end-user). This "asymmetric" architecture has not been widely used and is relatively unproven in computer networking. Certain networking protocols and standards, including the TCP/IP protocol, were designed with the expectation that the network would be symmetric, and the Company has spent considerable engineering resources to enable its products to work with such protocols. There can be no assurance that the Company's current or future products will be compatible with symmetric standards or that errors will not occur in connecting the symmetric protocols with the Company's asymmetric design. Because of this asymmetric design, certain applications do not benefit from the connection to a high bandwidth cable system. Computer applications that need to transmit data as quickly to the Internet as from the Internet will not exhibit the performance improvements that are only available to downstream data traffic, particularly if the upstream traffic is sent via Plain Old Telephone Service ("POTS"). Certain applications will not run fast enough in the upstream direction to be acceptable for some users. As a result, some end-users may not perceive a significant benefit from the greater downstream performance of the Company's products. There can be no assurance that potential customers will consider the downstream performance benefits sufficient to justify the purchase and installation costs of the Company's asymmetric products. Failure of asymmetric networking to gain market acceptance, or any delay in such acceptance, could have a material adverse effect on the Company's business, operating results and financial condition. See "Business--Industry Background." POSSIBLE NEED FOR ADDITIONAL FINANCING In the past, the Company has required substantial amounts of capital to design, develop, market and manufacture its products. The Company's future capital requirements will depend on many factors, including, but not limited to, the evolution of the market for broadband access systems, the market acceptance of the Company's products, competitive pressure on the price of the Company's products, the levels at which the Company maintains inventory, the levels of promotion and marketing required to launch such products and attain a competitive position in the marketplace, the extent to which the Company invests in new technology and improvements on its existing technology, and the response of competitors to the Company's products. While the Company believes that the net proceeds of this offering, available bank borrowings, existing cash balances and funds generated from operations, if any, will provide the Company with sufficient funds to repay the Subordinated Notes and to finance its operations for at least the next 12 months, to the extent that the funds generated by this offering, together with existing resources, are insufficient to fund the Company's activities over the long-term, the Company may need to raise additional funds through public or private equity or debt financing or from other sources. The sale of additional equity or convertible debt may result in additional dilution to the Company's stockholders and such securities may have rights, preferences or privileges senior to those of the Common Stock. To the extent that the Company relies upon debt financing, the Company will incur the obligation to repay the funds borrowed with interest and may become subject to covenants and restrictions that restrict operating flexibility. No assurance can be given that additional equity or debt financing will be available or that, if available, it can be obtained on terms favorable to the Company or its stockholders. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." RISKS OF PRODUCT DEFECTS, PRODUCT RETURNS AND PRODUCT LIABILITY Products as complex as those offered by the Company 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 the Company's products and there can be no assurance that errors will not be found in the Company's current and future products. The occurrence of such errors, defects or failures could result in 14 product returns and other losses to the Company or its customers. Such occurrence could also result in the loss of or delay in market acceptance of the Company's products, which could have a material adverse effect on the Company's business, operating results and financial condition. The Company's products generally carry a one year warranty which includes factory and on-site repair services as needed for replacement of parts. Due to the relatively recent introduction of the Series 2000 products, the Company has limited experience with the problems that could arise with this generation of products. In addition, the Company's purchase agreements with its customers typically contain provisions designed to limit the Company's exposure to potential product liability claims. It is possible, however, that the limitation of liability provisions contained in the Company's purchase agreements may not be effective as a result of federal, state or local laws or ordinances or unfavorable judicial decisions. Although the Company has not experienced any product liability claims to date, the sale and support of the Company's products entails the risk of such claims. A successful product liability claim brought against the Company could have a material adverse effect on the Company's business, operating results and financial condition. See "Business-- Manufacturing." DEPENDENCE ON KEY PERSONNEL The Company's success depends in significant part upon the continued services of its key technical, sales and senior management personnel, including the Company's President and Chief Executive Officer, Carl S. Ledbetter. Mr. Ledbetter is a party to an employment agreement with the Company, and the Company carries a $1.5 million "key man" life insurance policy on him. See "Management--Employment Agreement." Any officer or employee of the Company can terminate his or her relationship with the Company at any time. The Company's future success will also depend on its 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 the Company will be able to attract and retain key personnel. The loss of the services of one or more of the Company's executive officers or key employees or the Company's failure to attract additional qualified personnel could have a material adverse effect on the Company's business, operating results and financial condition. See "Business--Employees" and "Management." MANAGEMENT OF GROWTH The Company is currently experiencing a period of rapid growth in net sales. This growth has placed, and if it continues is expected to continue to place, a significant strain on the Company's financial, management, operational and other resources. There can be no assurance that the Company's management, personnel, systems, procedures and controls will be adequate to support the Company's existing and future operations. The Company's ability to manage its growth effectively will require it to continue to expand its operating, manufacturing and financial procedures and controls, to replace or upgrade its operational, financial and management information systems and to attract, train, motivate, manage and retain key employees. The Company has hired many key employees and officers only recently, including its Chief Financial Officer, Vice President, Engineering and Controller, and as a result, the Company's entire management team has worked together for only a brief time. If the Company's executives are unable to manage growth effectively, the Company's business, operating results and financial condition could be materially adversely affected. See "Management." REGULATION OF THE COMMUNICATIONS INDUSTRY The Company and its customers are subject to varying degrees of federal, state and local regulation. For instance, the jurisdiction of the Federal Communications Commission (the "FCC") extends to high speed Internet access products such as those of the Company. The FCC has promulgated regulations that, among other things, set installation and equipment standards for communications systems. Further, regulation of the Company's customers may adversely impact the Company's business, operating results 15 and financial condition. For example, FCC regulatory policies affecting the availability of cable, wireless and telco services, and other terms on which cable, wireless and telco companies conduct their business, may impede the Company's penetration of certain markets. Changes in current or future laws or regulations which negatively impact the Company's products and technologies, in the United States or elsewhere, could materially and adversely affect the Company's business, operating results and financial condition. PROTECTION AND ENFORCEMENT OF INTELLECTUAL PROPERTY RIGHTS The Company relies on a combination of patent, trade secret, copyright and trademark laws and contractual restrictions to establish and protect proprietary rights in its products. The Company currently has two patents issued in the United States, as well as pending patent applications in the United States, Europe and Japan that relate to its network and modem technology and the communication processes implemented in those devices. In the future, the Company intends to seek additional United States and foreign patents on its technology. There can be no assurance any of these patents will issue from any of the Company's pending applications or applications in preparation or that any claims allowed will be of sufficient scope or strength, or issue in sufficient countries where the Company's products can be sold, to provide meaningful protection or any commercial advantage to the Company. Moreover, any patents that have been or may be issued might be challenged. Any such challenge could result in time consuming and costly litigation and result in the Company's patents being held invalid or unenforceable. Furthermore, even if the patents are not challenged or are upheld, third parties might be able to develop other technologies or products without infringing any such patents. The Company has entered into confidentiality and invention assignment agreements with its employees, and non-disclosure agreements with certain of its suppliers, distributors and customers in order to limit access to and disclosure of its proprietary information. There can be no assurance that these contractual arrangements or the other steps taken by the Company to protect its intellectual property will prove sufficient to prevent misappropriation of the Company's technology or to deter independent third-party development of similar technologies. The laws of certain foreign countries may not protect the Company's products or intellectual property rights to the same extent as do the laws of the United States. In the past, the Company has received, and in the future may receive, notices from third parties claiming that the Company's products or proprietary rights infringe the proprietary rights of third parties. The Company expects that developers of cable and wireless modems will be increasingly subject to infringement claims as the number of products and competitors in the Company's industry segment grows. Any such claim, whether meritorious or not, could be time consuming, result in costly litigation, cause product shipment delays or require the Company to enter into royalty or licensing agreements. Such royalty or licensing agreements might not be available on terms acceptable to the Company or at all, which could have a material adverse effect upon the Company's business, operating results and financial condition. The Company has and in the future may license its patents or proprietary rights for commercial or other reasons, to parties who are or may become competitors of the Company. Further the Company may also elect to initiate claims or litigation against third parties for infringement of the Company's patents or proprietary rights or to establish the validity of the Company's patents or proprietary right. The Company has sent notices to certain third parties offering to license the Company's patents for products that may be infringing the Company's patent rights. The Company has not yet determined if it will assert any claims against these parties or others. There can be no assurance that such notifications will not lead to potential litigation initiated by the Company or related countersuits by third parties seeking to challenge the Company's patents or asserting infringement by the Company. Such litigation could be time consuming and costly and have a material adverse effect on the Company's business, operating results and financial condition. 16 RISKS OF INTERNATIONAL SALES To date, sales of the Company's products outside of the United States have represented an insignificant portion of net sales. While the Company intends to expand its operations in North America and Europe, this will require significant management attention and financial resources. In order to gain market acceptance internationally, the Company's products will have to be designed to meet industry standards of foreign countries, such as the DAVIC specifications that are supported in Europe. The Company has committed and continues to commit resources to developing international sales and support channels. International sales are subject to a number of risks, including longer payment cycles, unexpected changes in regulatory requirements, import and export restrictions and tariffs, the burden of complying with a variety of foreign laws, greater difficulty in accounts receivable collection, potentially adverse tax consequences, currency fluctuations and political and economic instability. Additionally, the protection of intellectual property may be more difficult to enforce outside of the United States. In the event the Company is successful in expanding its international operations, the imposition of exchange or price controls or other restrictions on foreign currencies could materially adversely affect the Company's business, operating results and financial condition. If the Company increases its international sales, its net sales may also be affected to a greater extent by seasonal fluctuations resulting from lower sales that typically occur during the summer months in Europe and other parts of the world. CONTROL BY PRINCIPAL STOCKHOLDERS, EXECUTIVE OFFICERS AND DIRECTORS Upon completion of this offering, the Company's current executive officers, directors and greater than 5% stockholders (and their affiliates) will, in the aggregate, beneficially own approximately 56.8% of the Company's outstanding Common Stock. As a result, such persons, acting together, will have the ability to control all matters submitted to stockholders of the Company for approval (including the election and removal of directors and any merger, consolidation or sale of all or substantially all of the Company's assets) and to control the management and affairs of the Company. Accordingly, such concentration of ownership may have the effect of delaying, deferring or preventing a change in control of the Company, impede a merger, consolidation, takeover or other business combination involving the Company or discourage a potential acquirer from making a tender offer or otherwise attempting to obtain control of the Company, which in turn could have an adverse effect on the market price of the Company's Common Stock. See "Management" and "Principal Stockholders." RESTRICTIVE DEBT COVENANTS Under the terms of the outstanding $5.5 Million Debenture, the Company is subject to certain restrictive covenants which could adversely affect the Company's operations. Under the $5.5 Million Debenture the Company is subject to limitations on the amount of capital expenditures it may incur in any 12 month period and may not declare dividends, retire any subordinated debt other than in accordance with its terms, or distribute its assets to any stockholder as long as the $5.5 Million Debenture remains outstanding. The $5.5 Million Debenture is collateralized by substantially all the Company's assets. In September 1997, the Company entered into the Subordinated Notes which have restrictive covenants that limit the amount of capital expenditures it may incur in any 12 month period and the borrowing of additional funds and prohibit the Company from, among other things, declaring dividends and distributing assets so long as the Subordinated Notes are outstanding. In addition, in October 1997, the Company entered into the Credit Facility, which prohibits the Company from declaring dividends. See "Management's Discussion and Analysis of Financial Condition and Results of Operation," "Certain Transactions," "Description of Capital Stock--Convertible $5.5 Million Debenture" and "--Subordinated Notes" and Notes 5, 6 and 16 of Notes to Financial Statements. 17 SHARES ELIGIBLE FOR FUTURE SALE Sales of substantial amounts of the Company's Common Stock (including shares issued upon the exercise of outstanding options and warrants and upon the conversion of the $5.5 Million Debenture) in the public market after this offering could adversely affect the market price of the Common Stock prevailing from time to time and could impair the Company's ability to raise capital through the sale of equity or debt securities. In addition to the 2,700,000 shares of Common Stock offered hereby (assuming no exercise of the Underwriters' over-allotment option), as of the date of this Prospectus, there will be 7,273,311 shares of Common Stock outstanding, all of which are restricted shares ("Restricted Shares") under the Securities Act of 1933, as amended (the "Securities Act"). As of such date, no Restricted Shares will be eligible for sale in the public market. The 7,273,311 Restricted Shares will be available for sale in the public market following the expiration of 180-day lock-up agreements. In addition, under certain circumstances, the $5.5 Million Debenture could automatically convert into 513,423 shares of Common Stock and the holders of warrants for 1,163,217 shares of Common Stock can exercise such warrants at any time, but such shares could not be sold until the expiration of the 180-day lock-up period following the date of the Prospectus. See "Description of Capital Stock--Convertible $5.5 Million Debenture" and "Description of Capital Stock--Warrants." NationsBanc Montgomery Securities, Inc. also may, in its sole discretion and at any time without notice, release all or any portion of the securities subject to lock-up agreements. In addition, beginning six months after the date of this Prospectus the holders of 6,257,827 Restricted Shares, the holders of warrants for 1,148,949 shares of Common Stock and the holder of the $5.5 Million Debenture, which may be converted at the option of the holder at any time into 513,423 shares of Common Stock, are entitled to certain rights with respect to registration of such shares for sale in the public market, assuming no exercise of the Underwriters' over-allotment option. In addition, in November 1997 the Company issued to a subsidiary of Alcatel Alsthom ("Alcatel") a five-year warrant to purchase 458,295 shares of Common Stock at an exercise price of $10.91 per share. The Company has granted registration rights to Alcatel with respect to this warrant, but the warrant and the shares underlying such warrant are subject to a 180-day lock-up agreement. See "Business--Research and Development." If such holders sell in the public market, such sales could have a material adverse effect on the market price of the Company's Common Stock. Immediately after this offering, the Company intends to file a registration statement covering shares of Common Stock subject to outstanding options under the Company's Executive Officer Incentive Plan (the "Executive Officer Plan"), 1993 Equity Incentive Plan (the "1993 Plan") and 1996 Equity Incentive Plan (the "1996 Plan") and reserved for issuance under the Company's 1997 Equity Incentive Plan (the "1997 Incentive Plan"), the 1997 Directors Stock Option Plan (the "Directors Plan") and the 1997 Employee Stock Purchase Plan (the "Purchase Plan"). Based on the number of shares subject to outstanding options at September 30, 1997 and currently reserved for issuance under all such plans, such registration would cover approximately 4,020,455 shares. Such registration statement will automatically become effective upon filing, but optionholders are subject to 180-day lock-up agreements. See "Shares Eligible for Future Sale." BROAD MANAGEMENT DISCRETION IN ALLOCATION OF PROCEEDS The net proceeds to the Company from the sale of the shares of Common Stock offered hereby at an assumed initial public offering price of $13.00 per share, after deducting the estimated underwriting discount and offering expenses, are estimated to be approximately $31,793,000. The primary purposes of this offering are to repay the approximately $6.9 million principal amount of the Subordinated Notes, obtain additional capital, create a public market for the Common Stock and facilitate future access to public markets. Other than repayment of the Subordinated Notes, the Company expects to use the net proceeds primarily for working capital and other general corporate purposes. A portion of the net proceeds also may be used to acquire or invest in complementary businesses or products or to obtain the right to use complementary technologies. Accordingly, the Company's management will retain broad 18 discretion as to the allocation of the proceeds of this offering. The failure of management to apply such funds effectively could have a material adverse effect on the Company's business, operating results and financial condition. See "Use of Proceeds." ANTI-TAKEOVER PROVISIONS Upon completion of this offering, the Company's Board of Directors will have the authority to issue up to 5,000,000 shares of Preferred Stock and to determine the price, rights, preferences, privileges and restrictions, including voting rights, of those shares without any further vote or action by the stockholders. The rights of the holders of Common Stock will be subject to, and may be adversely affected by, the rights of the holders of any Preferred Stock that may be issued in the future. The issuance of Preferred Stock, while providing flexibility in connection with possible acquisitions and other corporate purposes, could have the effect of making it more difficult for a third party to acquire a majority of the outstanding voting stock of the Company. The Company has no current plans to issue shares of Preferred Stock. The Company is also subject to certain provisions of Delaware law which could have the effect of delaying, deterring or preventing a change in control of the Company, including Section 203 of the Delaware General Corporation Law, which prohibits a Delaware corporation from engaging in any business combination with any interested stockholder for a period of three years from the date the person became an interested stockholder unless certain conditions are met. In addition, the Company's certificate of incorporation and bylaws contain certain provisions that, together with the ownership position of the officers, directors and their affiliates, could discourage potential takeover attempts and make more difficult attempts by stockholders to change management, which could adversely affect the market price of the Company's Common Stock. See "Description of Capital Stock." The Company's Board of Directors is classified into three classes of directors serving staggered, three-year terms and has the authority, without action by the Company's stockholders, to fix the rights and preferences and issue shares of the Preferred Stock, and to impose various procedural and other requirements that could make it more difficult for stockholders to effect certain corporate actions. Any vacancy on the board of directors may be filled only by vote of the majority of directors then in office. NO PRIOR MARKET FOR COMMON STOCK Prior to this offering, there has been no public market for the Company's Common Stock, and there can be no assurance that an active public market will develop or be sustained after this offering or that investors will be able to sell the Common Stock should they desire to do so. The initial public offering price will be determined by negotiations between the Company and the representatives of the Underwriters and may bear no relationship to the price at which the Common Stock will trade upon completion of this offering. See "Underwriting" for a discussion of the factors to be considered in determining the initial public offering price. POSSIBLE VOLATILITY OF STOCK PRICE The market price of the shares of Common Stock is likely to be highly volatile and could be subject to wide fluctuations in response to factors such as actual or anticipated variations in the Company's results of operations, announcements of technological innovations, new products introduced by the Company or its competitors, developments with respect to patents, copyrights or proprietary rights, changes in financial estimates by securities analysts, conditions and trends in the Internet and modem systems industries, general market conditions and other factors. Further, the stock markets, and in particular the Nasdaq National Market, have experienced extreme price and volume fluctuations that have particularly affected the market prices of equity securities of many technology companies and that often have been unrelated or disproportionate to the operating performance of such companies. The trading prices of many technology companies' stocks are at or near historical highs and reflect price earnings ratios substantially above historical levels. There can be no assurance that these trading prices and price earnings ratios will be 19 sustained. These broad market factors may adversely affect the market price of the Company's Common Stock. These market fluctuations, as well as general economic, political and market conditions such as recessions, interest rates or international currency fluctuations, may adversely affect the market price of the Common Stock. In the past, following periods of volatility in the market price of a company's securities, securities class action litigation has often been instituted against such company. Such litigation, if instituted, could result in substantial costs and a diversion of management's attention and resources, which would have a material adverse effect on the Company's business, operating results and financial condition. NO DIVIDENDS The Company has not paid any cash dividends on its capital stock to date. The Company currently anticipates that it will retain any future earnings for use in its business and does not anticipate paying any cash dividends in the foreseeable future. The terms of the $5.5 Million Debenture prevent the Company from paying any cash dividends for so long as the $5.5 Million Debenture remains outstanding. See "Dividend Policy." IMMEDIATE AND SUBSTANTIAL DILUTION Purchasers of the Common Stock in this offering will suffer immediate and substantial dilution of $9.92 per share in the net tangible book value of the Common Stock from the initial public offering price. To the extent that outstanding options or warrants to purchase the Company's Common Stock are exercised or that the $5.5 Million Debenture is converted into Common Stock, there may be further dilution. See "Dilution." 20 USE OF PROCEEDS The net proceeds to the Company from the sale of the 2,700,000 shares of Common Stock offered hereby are estimated to be $31,793,000 (approximately $33,438,000 if the Underwriters' overallotment option is exercised in full) at an assumed initial public offering price of $13.00 per share and after deducting the estimated underwriting discount and offering expenses. The Company will not receive any proceeds from the sale of shares by the Selling Stockholders if the over-allotment option is exercised. The primary purposes of this offering are to repay the approximately $6.9 million principal amount of the Subordinated Notes, obtain additional capital, create a public market for the Common Stock and facilitate future access to public markets. Other than repayment of the Subordinated Notes the Company expects to use the net proceeds primarily for working capital and other general corporate purposes. See "Risk Factors--Broad Management Discretion in Allocation of Proceeds." A portion of the proceeds may also be used to acquire or invest in complementary businesses or products or to obtain the right to use complementary technologies. In the ordinary course of business, the Company evaluates potential acquisitions of such businesses, products or technologies. However, the Company has no present understandings, commitments or agreements with respect to any acquisition of businesses, products or technologies. Pending use of the net proceeds for the above purposes, the Company intends to invest such funds in short-term, interest-bearing, investment-grade securities. DIVIDEND POLICY The Company has not paid any cash dividends on its capital stock to date. The Company currently anticipates that it will retain any future earnings for use in its business and does not anticipate paying any cash dividends in the foreseeable future. The terms of the $5.5 Million Debenture and the Subordinated Notes prohibit the Company from paying any cash dividends for so long as the $5.5 Million Debenture or the Subordinated Notes, as the case may be, remain outstanding. In addition, the Credit Facility prohibits the Company from paying any cash dividends. 21 CAPITALIZATION The following table sets forth (i) the actual capitalization of the Company as of September 30, 1997 and (ii) the actual capitalization as adjusted to reflect the sale and issuance of the 2,700,000 shares of Common Stock offered hereby at an assumed initial public offering price of $13.00 per share after deducting the estimated underwriting discount and offering expenses, the application of the estimated proceeds therefrom and the automatic conversion of all outstanding shares of Preferred Stock into Common Stock upon closing of this offering.
SEPTEMBER 30, 1997 ----------------------- ACTUAL AS ADJUSTED ---------- ----------- (IN THOUSANDS) Long-term debt(1)........................................................................ $ 6,223 $ 6,223 ---------- ----------- Stockholders' equity (deficit)(2): Convertible Preferred Stock, $0.001 par value per share: 18,000,000 shares authorized, actual; 5,000,000 shares authorized, as adjusted; 12,562,868 shares issued and outstanding, actual; no shares issued or outstanding, as adjusted.................... 13 -- Common Stock, $0.001 par value per share: 34,000,000 shares authorized, actual; 100,000,000 shares authorized, as adjusted; 2,619,726 shares issued and outstanding, actual; 9,973,311 shares issued and outstanding, as adjusted............................................................. 2 18 Additional paid-in capital............................................................. 27,406 59,196 Accumulated deficit.................................................................... (27,424) (27,674) ---------- ----------- Total stockholders' equity (deficit)................................................. (3) 31,540 ---------- ----------- Total capitalization............................................................... $ 6,220 $ 37,763 ---------- ----------- ---------- -----------
- ------------------------------ (1) Includes the $5.5 Million Debenture, which is convertible into an aggregate of 513,423 shares of Common Stock at the option of the holder at any time and which automatically converts if (i) the gross proceeds to the Company from this offering are at least $15.0 million, (ii) the public offering price per share is at least equal to the Minimum Price and (iii) the closing price of the Common Stock after this offering is equal to or greater than the Minimum Price for any 90 consecutive calendar day period after this offering. See Note 6 of Notes to Financial Statements. (2) Does not include (i) 1,974,242 shares of Common Stock issuable upon exercise of stock options outstanding as of September 30, 1997 at a weighted average exercise price of $2.72 per share, (ii) 2,046,213 shares of Common Stock available for future grant or issuance as of September 30, 1997 under the Company's 1993 Equity Incentive Plan, 1996 Equity Incentive Plan, Executive Officer Incentive Plan, 1997 Equity Incentive Plan, 1997 Directors Stock Option Plan and 1997 Employee Stock Purchase Plan, (iii) 1,160,558 shares of Common Stock issuable upon the exercise of warrants outstanding as of September 30, 1997 at a weighted average exercise price of $6.38 per share, (iv) 513,423 shares of Common Stock issuable as of September 30, 1997 upon the conversion of the $5.5 Million Debenture, (v) a warrant to purchase 2,659 shares of Common Stock at an exercise price of $10.91 per share issued in October 1997 in connection with obtaining a credit facility for $4.0 million (the "Credit Facility") or (vi) a warrant to purchase 458,295 shares of Common Stock at an exercise price of $10.91 per share issued in November 1997 in connection with a technology support and development arrangement. See "Business--Research and Development," "Management--Director Compensation," "Management--Employee Benefit Plans," "Description of Capital Stock" and Notes 5, 6 and 10 of Notes to Financial Statements. 22 DILUTION The pro forma net tangible book deficit of the Company as of September 30, 1997, assuming the conversion of all outstanding shares of Preferred Stock into shares of Common Stock, was $(870,000), or $(0.12) per share of Common Stock. "Pro forma net tangible book deficit per share" is determined by dividing the number of outstanding shares of Common Stock into the net tangible book deficit of the Company (total tangible assets less total liabilities). After giving effect to the sale by the Company of the 2,700,000 shares of Common Stock offered hereby (based upon an assumed initial public offering price of $13.00 per share and after deducting the estimated underwriting discount and offering expenses), and the repayment of approximately $6.9 million in Subordinated Notes, the pro forma net tangible book value of the Company as of September 30, 1997 would have been approximately $30,673,000, or $3.08 per share. This represents an immediate increase in pro forma net tangible book value of $3.20 per share to existing stockholders and an immediate dilution of $9.92 per share to new investors purchasing shares at the initial public offering price. The following table illustrates the per share dilution: Assumed initial public offering price per share............................. $ 13.00 Pro forma net tangible book deficit per share as of September 30, 1997...... $ (0.12) Increase per share attributable to new investors............................ 3.20 --------- Pro forma net tangible book value per share after offering.................. 3.08 --------- Dilution per share to new investors......................................... $ 9.92 --------- ---------
The following table summarizes, on a pro forma basis as of September 30, 1997, the number of shares of Common Stock purchased from the Company, the total consideration paid to the Company and the average price per share paid by the existing stockholders and by the investors purchasing shares of Common Stock in this offering, based upon an assumed initial public offering price of $13.00 per share (before deducting the estimated underwriting discount and offering expenses):
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE ----------------------- -------------------------- PRICE PER NUMBER PERCENT AMOUNT PERCENT SHARE ---------- ----------- ------------- ----------- ----------- Existing stockholders(1)........... 7,273,311 72.9% $ 27,171,000 43.6% $ 3.74 New investors(1)................... 2,700,000 27.1 35,100,000 56.4 13.00 ---------- ----- ------------- ----- Total............................ 9,973,311 100.0% $ 62,271,000 100.0% ---------- ----- ------------- ----- ---------- ----- ------------- -----
- ------------------------ (1) If the Underwriters' over-allotment option is exercised in full, the number of shares held by existing stockholders will be reduced by 268,947 shares to 7,004,364, or 70.2% of the total shares of Common Stock to be outstanding after this offering, and the number of shares held by new investors will be increased to 2,968,947, or 29.8% of the total shares of Common Stock to be outstanding after this offering. As of September 30, 1997, there were options outstanding to purchase a total of 1,974,242 shares of Common Stock at a weighted average exercise price of $2.72 per share, warrants outstanding to purchase a total of 1,160,558 shares of Common Stock at a weighted average exercise price of $6.38 per share and 513,423 shares of Common Stock issuable upon the conversion of the $5.5 Million Debenture. In addition, in October 1997 the Company issued a warrant to purchase 2,659 shares of Common Stock at an exercise price of $10.91 per share in connection with obtaining the Credit Facility, and in November 1997 the Company issued a 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. To the extent that any of these options or warrants is exercised or the $5.5 Million Debenture is converted, there will be further dilution to new investors. See "Capitalization," "Business--Research and Development," "Description of Capital Stock" and Notes 5, 6 and 10 of Notes to Financial Statements. 23 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 Prospectus. The statement of operations data for each of the three years in the period ended December 31, 1996 and for the nine months ended September 30, 1997 and the balance sheet data as of December 31, 1995 and 1996 and September 30, 1997 are derived from financial statements of the Company that have been audited by Coopers & Lybrand LLP, independent accountants, and are included elsewhere in this Prospectus. The statement of operations data for the years ended December 31, 1992 and 1993 and the balance sheet data as of December 31, 1992, 1993 and 1994 are derived from unaudited financial statements not included herein. The statements of operations data for the nine months ended September 30, 1996 are derived from unaudited financial statements of the Company that include all adjustments consisting of normal recurring accruals, which the Company considers necessary for a fair presentation of the results of operations for the period. Operating results for the nine months ended September 30, 1997 are not necessarily indicative of the results that may be expected for the year ending December 31, 1997 or any future period. The information presented below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations."
NINE MONTHS ENDED YEAR ENDED DECEMBER 31, SEPTEMBER 30, ----------------------------------------------------- ---------------------- STATEMENTS OF OPERATIONS DATA: 1992 1993 1994 1995 1996 1996 1997 --------- --------- --------- --------- --------- ----------- --------- (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA) Net sales.................................... $ 436 $ 1,010 $ 668 $ 630 $ 2,962 $ 1,253 $ 9,152 Cost of sales................................ 294 746 1,362 761 3,130 1,602 8,214 --------- --------- --------- --------- --------- ----------- --------- Gross profit (loss)...................... 142 264 (694) (131) (168) (349) 938 --------- --------- --------- --------- --------- ----------- --------- Operating expenses: Research and development................... 5 271 1,251 3,862 5,076 3,757 5,170 Sales and marketing........................ 67 133 348 390 1,786 954 3,138 General and administrative................. 154 250 533 748 1,714 1,196 2,516 --------- --------- --------- --------- --------- ----------- --------- Total operating expenses................. 226 654 2,132 5,000 8,576 5,907 10,824 --------- --------- --------- --------- --------- ----------- --------- Loss from operations................... (84) (390) (2,826) (5,131) (8,744) (6,256) (9,886) Interest income and other expense, net....... 3 5 30 166 257 146 183 Interest expense............................. -- -- (101) (304) (28) (22) (379) --------- --------- --------- --------- --------- ----------- --------- Net loss............................... $ (81) $ (385) $ (2,897) $ (5,269) $ (8,515) $ (6,132) $ (10,082) --------- --------- --------- --------- --------- ----------- --------- --------- --------- --------- --------- --------- ----------- --------- Net loss per share(1)........................ $ (0.04) $ (0.14) $ (1.01) $ (1.83) $ (2.67) $ (1.92) $ (3.12) Shares used in per share calculation(1)...... 1,886 2,748 2,880 2,877 3,189 3,196 3,229 --------- --------- --------- --------- --------- ----------- --------- --------- --------- --------- --------- --------- ----------- --------- Pro forma net loss per share(1).............. (1.24) (1.33) --------- --------- --------- --------- Pro forma shares used in per share calculation(1)............................. 6,873 7,607 --------- --------- --------- ---------
DECEMBER 31, ----------------------------------------------------- SEPTEMBER 30, BALANCE SHEET DATA: 1992 1993 1994 1995 1996 1997 --------- --------- --------- --------- --------- ---------------------- (IN THOUSANDS) Cash, cash equivalents and short-term investments..................................... $ 545 $ 1,031 $ 1,426 $ 3,353 $ 6,886 $ 5,314 Working capital................................... 361 484 1,129 3,149 6,944 3,565 Total assets...................................... 677 1,353 1,892 4,586 10,539 16,190 Long-term debt.................................... -- 604 2,108 228 472 6,223 Total stockholders' equity (deficit).............. 369 1 (708) 3,661 7,709 (3)
- -------------------------- (1) See Note 2 of Notes to Financial Statements for an explanation of the determination of the number of shares used to compute net loss per share and pro forma net loss per share. 24 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THE FOLLOWING DISCUSSION OF THE FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF THE COMPANY SHOULD BE READ IN CONJUNCTION WITH THE FINANCIAL STATEMENTS AND RELATED NOTES THERETO INCLUDED ELSEWHERE IN THIS PROSPECTUS. THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY FROM THE RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT MAY CAUSE SUCH A DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN "RISK FACTORS." OVERVIEW Hybrid is a broadband access equipment company that designs, develops, manufactures and markets cable and wireless 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 "last mile" connection to the end-user which causes slow response time for those accessing bandwidth-intensive information over the Internet or corporate intranets. Hybrid's Series 2000 product line consists of secure headend routers, cable and wireless modems and management software for use with either cable TV or wireless transmission facilities. From its inception in June 1990 until September 1996, the Company focused on the design, development, manufacturing and market introduction of the first two generations of Hybrid's Series 1000 ("Series 1000") product line. These product generations offered 5 and 10 Mbps access speeds for downstream data. In October 1996, the Company introduced its third generation product line, the Series 2000, which provides 30 Mbps downstream access speeds. During the three years ended December 31, 1996 and nine months ended September 30, 1997, the Company sold a limited number of PoPs and cable modems from both product series, which generated an aggregate of $13,412,000 in net sales. The Company expects to generate substantially all of its future sales from its Series 2000 products, enhancements to these products, new products and related support and networking services. The Company recognizes revenue upon shipment of products and accrues for warranty costs at the time of shipment. To date, net sales include principally product sales and, to a lesser extent, support and networking services. The Company sells its products primarily in the United States, and markets its products to a variety of customers, including cable system operators, broadband wireless system operators, ISPs and certain communications equipment resellers. Historically, a small number of customers has accounted for a substantial portion of the Company's net sales. Although the Company has expanded its customer base, the Company expects that a limited number of customers will continue to account for a substantial portion of the Company's net sales for the foreseeable future. As a result, the Company has experienced, and expects to continue to experience, significant fluctuations in its results of operations on a quarterly and an annual basis. If orders from significant customers are delayed, cancelled or otherwise fail to materialize in any particular period, or any significant customer delays payment or fails to pay, the Company could experience significant operating losses in such period. Further, the Company's customers include companies in the early stage of development or in need of capital to upgrade or expand their services. Accordingly, in order to address the needs and competitive factors facing the emerging broadband access market, the Company on occasion has provided customers extended payment, promotional pricing or other terms. For instance, Internet Ventures, Inc., which accounted for 10.2% of the Company's net sales for the nine months ended September 30, 1997, has recently been provided extended payment terms and accounted for 12% of the Company's accounts receivable as of September 30, 1997. The provision of extended payment terms, or the extension of promotional payment, pricing or other terms could have a material adverse effect on the Company's business, operating results and financial condition. See "Risk Factors--Inexperience in Emerging Market," "Risk Factors--Customer Concentration," "Risk Factors-- Dependence on Broadband Wireless System Operators" and "Risk Factors--Competition." 25 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, evolving industry standards and significant price erosion over the life of a product, and the Company has experienced and expects to continue to experience pressure on its unit average selling prices ("ASPs"). While the Company has initiated cost reduction programs to offset pricing pressures on its products, there can be no assurance that these cost reduction efforts will continue to keep pace with competitive price pressures or lead to improved gross margins. If the Company is unable to continue to reduce costs, its gross margins and profitability will be adversely affected. The Company's gross margins are also impacted by the sales mix of PoPs and modems. The Company's single-user modems generally have lower margins than its multi-user modems, both of which have lower margins than the Company's headends. Due to current customer demand, the Company anticipates that the sales mix of modems will be weighted toward lower-margin single-user modems in the foreseeable future. As a result, gross margins could be adversely affected in the near term. See "Risk Factors--Need to Reduce Cost of Client Modems," "Risk Factors-- Competition" and "Risk Factors--Limited Manufacturing Experience; Sole Source Manufacturing." The Company incurred net losses for the years ended December 31, 1994, 1995 and 1996 and the first nine months of 1997 of $2,897,000, $5,269,000, $8,515,000 and $10,082,000, respectively. As a result, the Company had an accumulated deficit of $27,424,000 as of September 30, 1997. The Company expects to increase its capital expenditures, as well as its research and development and other operating expenses, in order to support and expand the Company's operations. As a result, the Company expects to incur losses for the foreseeable future. See "Risk Factors--Limited Operating History; History of Losses," "Risk Factors--Fluctuations in Operating Results; Absence of Significant Backlog; Continuing Decline of Average Selling Prices" and "Risk Factors--Lengthy Sales Cycle." As of September 30, 1997, the Company had approximately $12,516,000 in gross deferred tax assets comprised primarily of net operating loss carryforward and research and development tax credits. The Company believes that, based on a number of factors, there is 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 net losses since its inception and the fact that the market in which the Company competes is intensely competitive and characterized by rapidly changing technology. The Company believes that, based on the current available evidence, it is more likely than not that the Company will not generate taxable income through 1997 and accordingly, will not realize any portion of its deferred tax assets through 1997. 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 state provisions. The Company will continue to assess the realizability of the deferred tax assets based on actual and forecasted operating results. See Note 11 of Notes to Financial Statements. 26 RESULTS OF OPERATIONS The following table sets forth the percentage of net sales represented by the items in the Company's statements of operations for the periods indicated:
NINE MONTHS ENDED YEAR ENDED DECEMBER 31, SEPTEMBER 30, ------------------------------- ---------------------- 1994 1995 1996 1997 --------- --------- --------- 1996 --------- ----------- (UNAUDITED) Net sales.............................................. 100.0% 100.0% 100.0% 100.0% 100.0% Cost of sales.......................................... 203.9 120.8 105.7 127.9 89.8 --------- --------- --------- ----------- --------- Gross margin....................................... (103.9) (20.8) (5.7) (27.9) 10.2 --------- --------- --------- ----------- --------- Operating expenses: Research and development............................. 187.3 613.0 171.4 299.8 56.5 Sales and marketing.................................. 52.1 61.9 60.3 76.1 34.2 General and administrative........................... 79.8 118.7 57.8 95.5 27.5 --------- --------- --------- ----------- --------- Total operating expenses........................... 319.2 793.6 289.5 471.4 118.2 --------- --------- --------- ----------- --------- Loss from operations............................. (423.1) (814.4) (295.2) (499.3) (108.0) Interest income and other expense, net............... 4.5 26.3 8.7 11.7 2.0 Interest expense..................................... (15.1) (48.2) (1.0) (1.8) (4.2) --------- --------- --------- ----------- --------- Net loss......................................... (433.7)% (836.3)% (287.5)% (489.4)% (110.2)% --------- --------- --------- ----------- --------- --------- --------- --------- ----------- ---------
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 1996 NET SALES. Net sales increased to $9,152,000 for the first nine months of 1997, compared to net sales of $1,253,000 for the same period in 1996. The significant growth in net sales was primarily due to increased unit shipments as a result of the introduction of the Series 2000 product line in October 1996 offset in part by price declines on certain products in connection with volume purchases. For the first nine months of 1997, broadband wireless system operators accounted for 62.2% of net sales, cable systems operators accounted for 24.5% of net sales and ISPs accounted for 13.3% of net sales. For the first nine months of 1996, cable system operators accounted for 80.3% of net sales, ISPs accounted for 11.8% of net sales and broadband wireless system operators accounted for 7.9% of net sales. International sales accounted for 10.8% and 13.2% of net sales for the first nine months of 1997 and 1996, respectively. The Company had one customer that accounted for 10.2% of net sales during the first nine months of 1997. The Company had two customers that accounted for 48.9% and 11.8%, respectively, of net sales during the first nine months of 1996. GROSS PROFIT. Gross margin was 10.2% and negative 27.9%, for the first nine months of 1997 and 1996, respectively. The improvement in gross margin was primarily due to the shift in sales mix from the lower margin Series 1000 products to the higher margin Series 2000 products, lower per unit manufacturing costs and greater absorption of overhead. RESEARCH AND DEVELOPMENT. Research and development expenses include ongoing headend, software and cable modem development expenses, as well as design expenditures associated with product cost reduction programs and improving the ability to manufacture its existing products. Research and development expenses were $5,170,000 and $3,757,000 during the first nine months of 1997 and 1996, respectively, representing 56.5% and 299.8% of net sales, respectively. Research and development expenses grew in absolute dollars as a result of increased staffing and associated engineering costs related to new and existing product development. The Company intends to continue to increase its investment in research and 27 development programs in future periods, focusing on cost improvement, software enhancements and wireless technologies. 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 $3,138,000 and $954,000 during the first nine months of 1997 and 1996, respectively, representing 34.2% and 76.1% of net sales, respectively. The increase in sales and marketing expenses in absolute dollars was principally due to increased headcount and related payroll costs, increased commissions as a result of higher net sales and increased costs for marketing and promoting the Company's Series 2000 product line. The Company expects sales and marketing expenses to increase in the future. GENERAL AND ADMINISTRATIVE. General and administrative expenses consist primarily of executive personnel salaries, travel expenses, legal fees and costs of outside services. General and administrative expenses were $2,516,000 and $1,196,000 during the first nine months of 1997 and 1996, respectively, representing 27.5% and 95.5% of net sales, respectively. The increase in absolute dollars was due to increased charges to the provision for doubtful accounts headcount, increased legal costs to support the reissuance of the Company's Patents and related payroll costs. INTEREST INCOME (EXPENSE). The Company incurred net interest expense during the first nine months of 1997 of $196,000 and earned interest income of $124,000 during the first nine months of 1996. Net interest expense incurred during the first nine months of 1997 was the result of the Company's use of capital lease financing to fund a majority of its capital expenditures, as well as loans obtained to support working capital requirements. Net interest income earned during the first nine months of 1996 was primarily due to higher cash balances as a result of the issuance of Preferred Stock in December 1995 and June 1996, offset in part by the interest expense incurred on outstanding capital lease obligations. YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995 NET SALES. Net sales were $2,962,000 and $630,000 in 1996 and 1995, respectively. The increase in net sales was due primarily to the increase in unit sales due to the introduction of the Series 2000 product line in October 1996. GROSS PROFIT. Gross margin improved to negative 5.7% in 1996 compared to negative 20.8% in 1995. The improvement in gross margin was primarily attributable to the introduction of the Series 2000 product line, which generally has higher gross margins than the Series 1000 product line, and to the increase in net sales, which allowed for greater absorption of overhead. RESEARCH AND DEVELOPMENT. Research and development expenses were $5,076,000 and $3,862,000 for 1996 and 1995, respectively, representing 171.4% and 613.0% of net sales, respectively. The increase in research and development expenses in absolute dollars during 1996 was due to increased headcount and related labor costs, increased cost of development material to support product development and depreciation expenses associated with capital purchases for product testing. SALES AND MARKETING. Sales and marketing expenses were $1,786,000 and $390,000 for 1996 and 1995, respectively, representing 60.3% and 61.9% of net sales, respectively. The increase in sales and marketing expenses in absolute dollars during 1996 was principally due to increased headcount for staff level positions, the hiring of the Company's vice presidents of sales and marketing, increased commissions as a result of higher net sales and increased costs for marketing and promoting the Company's products. GENERAL AND ADMINISTRATIVE. General and administrative expenses were $1,714,000 and $748,000 for 1996 and 1995, respectively, representing 57.8% and 118.7% of net sales, respectively. The increase in general and administrative expenses in absolute dollars during 1996 was due to increased allowances for 28 doubtful accounts, higher legal costs to prosecute patents, and increased headcount and related personnel costs. INTEREST INCOME (EXPENSE). During 1996, the Company had net interest income of $229,000 compared to net interest expense of $138,000 in 1995. The increase in 1996 compared to 1995 was primarily due to higher cash balances as a result of the issuance of Preferred Stock in June 1996. The interest income earned during 1996 was offset in part by interest expense incurred on outstanding capital lease obligations. YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994 NET SALES. Net sales decreased slightly to $630,000 for 1995 as compared to $668,000 for 1994. Sales in both years consisted principally of sales of the Series 1000 products. The Company's customers initially deployed these products in trials in order to assess the Company's technology for use in cable or wireless applications. GROSS PROFIT. Gross margin improved to negative 20.8% in 1995 compared to negative 103.9% in 1994. The improvement in gross margin was primarily attributable to increased units sold which allowed for greater absorption of overhead. RESEARCH AND DEVELOPMENT. Research and development expenses were $3,862,000 and $1,251,000 in 1995 and 1994, respectively, representing 613.0% and 187.3% of net sales, respectively. The increase in research and development expenses in absolute dollars was primarily due to increased personnel costs and materials costs related to the acceleration of the design and development of the Series 2000 products. SALES AND MARKETING. Sales and marketing expenses were $390,000 and $348,000 in 1995 and 1994, respectively, representing 61.9% and 52.1% of net sales, respectively. The increase in sales and marketing expenses in absolute dollars was principally due to increased commissions as a result of higher sales, and increased headcount. GENERAL AND ADMINISTRATIVE. General and administrative expenses were $748,000 and $533,000 in 1995 and 1994, respectively, representing 118.7% and 79.8% of net sales, respectively. The increase in general and administrative expenses was primarily due to increased use of outside consultants, higher legal expenses to prosecute patents and higher payroll costs related to increased staffing. INTEREST INCOME (EXPENSE). The Company incurred interest expenses in 1995 and 1994 of $138,000 and $71,000, respectively. The amounts incurred for both periods were a result of the Company's use of capital lease financing to fund a majority of it capital expenditures, as well as loans obtained to support working capital requirements. 29 QUARTERLY RESULTS OF OPERATIONS The following table sets forth certain unaudited quarterly statements of operations data for the seven quarters ended September 30, 1997, as well as such data expressed as a percentage of net sales. The unaudited data has been prepared on the same basis as the audited financial statements appearing elsewhere in this Prospectus, and include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of such information for the periods presented. Such statement of operations data should be read in conjunction with the Financial Statements of the Company and related Notes thereto appearing elsewhere in this Prospectus. The operating results for any quarter are not indicative of the operating results for any future period.
QUARTER ENDED ---------------------------------------------------------------------------- MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, 1996 1996 1996 1996 1997 1997 1997 -------- -------- --------- -------- -------- -------- --------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Net sales............................................ $ 303 $ 455 $ 495 $ 1,709 $ 1,852 $ 3,053 $ 4,247 Cost of sales........................................ 408 528 666 1,528 1,974 2,715 3,525 -------- -------- --------- -------- -------- -------- --------- Gross profit (loss).............................. (105) (73) (171) 181 (122) 338 722 -------- -------- --------- -------- -------- -------- --------- Operating expenses: Research and development........................... 1,102 1,167 1,488 1,319 1,726 1,653 1,791 Sales and marketing................................ 103 286 565 832 1,274 990 874 General and administrative......................... 308 437 451 518 1,233 569 714 -------- -------- --------- -------- -------- -------- --------- Total operating expenses......................... 1,513 1,890 2,504 2,669 4,233 3,212 3,379 -------- -------- --------- -------- -------- -------- --------- Loss from operations........................... (1,618) (1,963) (2,675) (2,488) (4,355) (2,874) (2,657) Interest income and other expense, net............... 34 19 93 111 87 48 48 Interest expense..................................... (5) (17) -- (6) (12) (147) (220) -------- -------- --------- -------- -------- -------- --------- Net loss....................................... $(1,589) $(1,961) $(2,582) $ (2,383) $(4,280) $(2,973) $(2,829) -------- -------- --------- -------- -------- -------- --------- -------- -------- --------- -------- -------- -------- --------- Net loss per share(1)................................ $ (0.50) $ (0.61) $ (0.81) $ (0.75) $ (1.33) $ (0.92) $ (0.87) -------- -------- --------- -------- -------- -------- --------- -------- -------- --------- -------- -------- -------- --------- Shares used in per share calculations(1)............. 3,182 3,209 3,191 3,172 3,214 3,228 3,245 -------- -------- --------- -------- -------- -------- --------- -------- -------- --------- -------- -------- -------- ---------
QUARTER ENDED ---------------------------------------------------------------------------- MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, 1996 1996 1996 1996 1997 1997 1997 -------- -------- --------- -------- -------- -------- --------- Net sales............................................ 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Cost of sales........................................ 134.7 116.0 134.5 89.4 106.6 88.9 83.0 -------- -------- --------- -------- -------- -------- --------- Gross margin....................................... (34.7) (16.0) (34.5) 10.6 (6.6) 11.1 17.0 -------- -------- --------- -------- -------- -------- --------- Operating expenses: Research and development........................... 363.7 256.5 300.6 77.2 93.2 54.2 42.2 Sales and marketing................................ 34.0 62.9 114.2 48.7 68.8 32.4 20.6 General and administrative......................... 101.6 96.0 91.1 30.3 66.6 18.6 16.8 -------- -------- --------- -------- -------- -------- --------- Total operating expenses......................... 499.3 415.4 505.9 156.2 228.6 105.2 79.6 -------- -------- --------- -------- -------- -------- --------- Loss from operations........................... (534.0) (431.4) (540.4) (145.6) (235.2) (94.1) (62.6) Interest income and other expense, net............... 11.2 4.2 18.8 6.7 4.7 1.6 1.1 Interest expense..................................... (1.6) (3.8) -- (0.6) (0.7) (4.8) (5.2) -------- -------- --------- -------- -------- -------- --------- Net loss....................................... (524.4)% (431.0)% (521.6)% (139.5)% (231.2)% (97.3)% (66.7)% -------- -------- --------- -------- -------- -------- --------- -------- -------- --------- -------- -------- -------- ---------
- -------------------------- (1) See Note 2 of Notes to Financial Statements for an explanation of the determination of the number of shares used to compute net loss per share. 30 The decrease in gross margin for the quarter ended March 31, 1997 compared to the quarter ended December 31, 1996 was due to lower ASPs in the first quarter of 1997 and increased allocation of service costs associated with expanded sales of the Series 2000 products to cost of sales to support sales of Series 2000 products. The increase in operating expenses for the quarter ended March 31, 1997 was primarily due to higher charges to the provision for doubtful accounts, increased promotion costs and higher engineering material costs. The Company has experienced, and expects to continue to experience, significant fluctuations in its results of operations on a quarterly and an annual basis. Historically, the Company's quarterly net sales have been unpredictable due to a number of factors. Factors that have influenced and may continue to influence the Company's results of operations in a particular period include the size and timing of customer orders and subsequent shipments, particularly with respect to the Company's headend equipment, customer order deferrals in anticipation of new products or technologies, timing of product introductions or enhancements by the Company or its competitors, market acceptance of new products, technological changes in the cable, wireless and telecommunications industries, competitive pricing pressures, accuracy of customer forecasts of end-user demand, changes in the Company's operating expenses, personnel changes, quality control of products sold, regulatory changes, capital spending, delays of payments by customers and general economic conditions. In addition, the inability to obtain components from suppliers or manufacturers has adversely affected the Company's results in the past, and may adversely affect the Company's results of operations in the future. For example, in the second quarter and a portion of the third quarter of 1997, the Company did not receive the full shipment of modems anticipated from Sharp, its primary modem manufacturer, because of technical delays in product integration. As a result, the Company was unable to fill all customer orders for the second quarter. While such problems have since been resolved, there can be no assurance that the Company will not experience similar supply problems in the future with respect to Sharp or any other supplier or manufacturer. The timing and volume of customer orders are difficult to forecast because cable and wireless companies typically require delivery of products within 30 days. A substantial majority of the Company's net sales are booked and shipped in the same quarter. Accordingly, the Company has a limited backlog of orders and net sales for any future quarter are difficult to predict. Further, sales are generally made pursuant to standard purchase orders, which can be rescheduled, reduced or cancelled with little or no penalty. Historically, a substantial majority of the Company's net sales in a given quarter have been recorded in the third month of the quarter, with a concentration of such net sales in the last two weeks of the quarter. Because of the relatively large dollar size of the Company's typical transaction, any delay in the closing of a transaction can have a significant impact on the Company's operating results for a particular period. See "Risk Factors--Lengthy Sales Cycle." Historically, ASPs in the cable and broadband wireless systems industry have decreased over the life of individual products and technologies. In the past, the Company has experienced decreases in unit ASPs of each of its products. The Company anticipates that ASPs of its products will continue to decrease, which will cause continuing downward pressure on the gross margins for these products. The Company currently believes that it is likely to experience net losses for the foreseeable future. The Company's gross margins are also impacted by the sales mix of PoPs and modems. Sales of the Company's single-user modems generally have lower margins than the multi-user modems, both of which are lower than margins on the Company's PoPs. The Company anticipates that in the near term, the sales mix of modems will be heavily weighted towards single-user modems. See "Risk Factors--Need to Reduce Cost of Client Modems." LIQUIDITY AND CAPITAL RESOURCES The Company has historically financed its operations primarily through a combination of private debt and equity and equipment lease financing. As of September 30, 1997, the Company had working capital of $3,565,000, including $5,314,000 in cash and cash equivalents, as compared to working capital of $6,944,000 and $6,886,000 in cash and cash equivalents as of December 31, 1996. The decrease in cash and cash equivalents during the first nine months of 1997 was primarily due to support for the growth in accounts receivable and increased operating expenditures. The decrease in working capital during the first nine months of 1997 was due to the Subordinated Notes entered into in September 1997 and net losses incurred. 31 The Company has had significantly negative cash flows from operating activities in each quarterly period to date. Cash used in operating activities during 1994, 1995 and 1996 and for the first nine months of 1997 was $2,642,000, $3,339,000, $8,577,000 and $14,822,000, respectively. Cash used in operating activities during 1994, 1995 and 1996 was primarily the result of net losses. For the first nine months of 1997, cash used in operating activities was the result of operating losses of $10,082,000, the increase in accounts receivable of $5,257,000 as a result of higher net sales made late in the quarter and extended payment terms given to certain customers and the increase in inventories of $1,125,000 to support higher sales volumes. Cash used in investing activities during 1994 and 1995 and for the first nine months of 1997 was $417,000, $608,000 and $434,000, respectively. Cash used in investing activities during 1994 and 1995 was a result of purchases of short term investments and purchases of property and equipment. During the first nine months of 1997, cash used in investing activities resulted principally from purchases of property and equipment. Cash provided by investing activities during 1996 was $143,000 and was primarily due to proceeds from short-term investments offset in part by purchases of equipment. Aggregate capital expenditures for property and equipment, primarily for computers, furniture, fixtures and engineering test equipment, during 1994, 1995 and 1996 and the first nine months of 1997 were $218,000, $295,000, $321,000 and $400,000, respectively. The Company has funded and expects to continue to fund a substantial portion of its property and equipment expenditures from a variety of sources including direct vendor leasing programs and third party commercial leasing arrangements. As of September 30, 1997, the Company has no material commitments for capital expenditures but expects capital expenditures for the next twelve months to be between $1.0 million to $1.5 million. Cash provided by financing activities during 1994, 1995 and 1996 and the first nine months of 1997 was $3,255,000, $5,583,000, $12,457,000 and $13,684,000, respectively. During 1994 and 1996, cash provided by investing activities resulted principally from net proceeds from the issuance of convertible debentures, notes payable, and the sale of Preferred Stock. Cash provided by financing activities during 1995 resulted principally from net proceeds from the sale of Preferred Stock. During the first nine months of 1997, cash provided by financing activities resulted primarily from net proceeds from the sale of Preferred Stock, the $5.5 Million Debenture and the sale of $6.9 million of Subordinated Notes. The Company's principal source of liquidity at September 30, 1997 was cash and cash equivalents of $5,314,000. In October 1997, the Company also entered into a commitment for a $4.0 million Credit Facility. The Credit Facility, which expires in October 1998, will bear interest at the prime rate and will be collateralized by substantially all of the Company's assets. To date, the Company has no borrowings outstanding under the Credit Facility. The Company believes that the net proceeds of this offering, available bank borrowings, existing cash balances and funds generated from operations, if any, will provide the Company with sufficient funds to repay the Subordinated Notes and to finance its operations for at least the next 12 months. However, the Company may require additional funds to support its working capital requirements or for other purposes, and may seek to raise such additional funds through the sale of public or private equity or debt financing or from other sources. The sale of additional equity or convertible debt securities may result in additional dilution to the Company's stockholders. No assurance can be given that additional financing will be available or that, if available, such financing can be obtained on terms favorable to the Company or its stockholders. See "Risk Factors--Possible Need for Additional Financing." Under the $5.5 Million Debenture, the Company is subject to limitations on the amount of capital expenditures it may incur in any 12 month period and may not declare dividends, retire any subordinated debt other than in accordance with its terms, or distribute its assets to any stockholder so long as the $5.5 Million Debenture remains outstanding. Under the Subordinated Notes, the Company is limited in the amount of capital expenditures it may incur in any 12 month period and in the borrowing of additional funds, and is prevented from, among other things, declaring dividends and distributing assets so long as the Subordinated Notes are outstanding. In addition, under the Credit Facility, the Company may not declare dividends. The $5.5 Million Debenture and the Credit Facility are collateralized by substantially all of the Company's assets. See "Risk Factors--Restrictive Debt Covenants" and Notes 5, 6 and 16 of Notes to Financial Statements. 32 BUSINESS THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY FROM THE RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT MAY CAUSE SUCH A DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN "RISK FACTORS." THE COMPANY Hybrid Networks, Inc. is a broadband access equipment company that designs, develops, manufactures and markets cable and wireless 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 "last mile" connection to the end-user which causes slow response time for those accessing bandwidth-intensive information over the Internet or corporate intranets. The Company's customers consist primarily of cable system operators, broadband wireless system operators, ISPs and other companies that provide broadband networking systems or services to business and residential users. Hybrid's Series 2000 product line consists of secure headend routers, cable or wireless modems and management software for use with either cable TV or wireless transmission facilities. Because the substantial majority of cable and wireless transmission facilities are not capable of two-way transmissions, the Series 2000 has been designed to utilize a variety of return paths, including the public switched telephone network. The Series 2000 system also features a router to provide corporate telecommuters and others in remote locations secure access to their files on the corporate intranet. The Series 2000 is capable of supporting a combination of speeds, media and protocols in a single cable or wireless system, providing system operators with flexible, scalable and upgradeable solutions that allow them to offer cost-effective broadband access to their subscribers. INDUSTRY BACKGROUND GROWTH OF THE INTERNET AND INTRANETS AND DEMAND FOR HIGHER SPEED ACCESS The Internet has become an increasingly important source of information for businesses and consumers. The Internet's importance results from a variety of factors, including increased email usage, the emergence of the World Wide Web and the proliferation of multimedia content, such as graphics, images, video and audio, that can be accessed online. Demand for bandwidth-intensive content, combined with the inherent technical difficulties of delivering large amounts of data over existing copper wire telephone infrastructure, has resulted in slow response times and increasing frustration for many users of the Internet. Demand for higher bandwidth connections to the Internet is continuing to grow as the Internet becomes a more attractive outlet for commercial applications utilizing multimedia content and as the number of Internet users increases. A rapidly growing segment of the Internet user market is the business community. In a 1997 survey conducted by American Management Association International and Tierney & Partners, 27% of businesses surveyed reported moderate to heavy Internet usage. This number is expected to increase to 64% by 1999. Businesses of all sizes, including small offices/home offices ("SOHOs"), are using the Internet and corporate intranets to communicate with co-workers and customers via email, gather information, collaborate with others and provide support. Larger companies are increasingly using the Internet and intranets to provide telecommuters, traveling employees and employees in remote offices with a means of improved communication and remote access to corporate networks. In the 1997 American Internet Users Survey, FIND/SVP estimated that the number of workers telecommuting has grown to 11 million in 1997. Despite this growth, many companies do not provide Internet and intranet access as a business tool for their employees because of concerns regarding speed, cost of broadband access and security of the transmission and databases. The consumer market also constitutes a large segment of potential individual Internet end-users for broadband access providers. According to a report released in November 1996 by Jupiter Communications, there were approximately 14.7 million households with Internet access in the United States in 1996, and 33 this number is expected to increase to 36.0 million by 2000. While the consumer market segment represents a potentially large number of subscribers for an Internet access provider, this market is generally more price-sensitive than the business community. However, an emerging segment of the consumer market is comprised of technologically savvy consumers who desire high speed Internet access and are willing to pay more than the typical residential end-user to obtain these benefits. ACCESS OVER TRADITIONAL TELEPHONE INFRASTRUCTURE Telcos and ISPs have been delivering Internet and intranet access over the existing copper telephone wire infrastructure for many years through symmetrical technologies such as POTS, Integrated Services Digital Network ("ISDN") and "T1". Even though providers of Internet service have been improving the speed and quality of their connections to the Internet, the "last mile" connection to the end-user still predominantly consists of low speed analog transmissions. Improvements in modem chip technology have to date driven the increase in the rate at which data is transmitted over analog POTS copper wire. Currently, most new computers contain pre-installed 28.8 or 33.6 Kbps modems. The new generation of 56 Kbps modems, which was recently introduced, but has not yet been standardized, does not perform consistently at 56 Kbps and remains insufficient for rapid downloading of bandwidth-intensive multimedia content from the Internet. ISDN service, which requires special equipment at both the user's location and the telephone network, can achieve digital transmission at rates up to 128 Kbps over copper wire. However, despite ISDN's introduction in the early 1980s, the complexity of installing ISDN has limited its deployment to date. Historically, telcos have also deployed another digital service known as "T1" which provides data rates of 1.5 Mbps. However, T1 connections can suffer from distance limitations, are dependent on expensive conditioning of the copper wire, carry costly monthly charges for the end-user and generally have been limited to use by businesses. The newest technologies introduced to increase bandwidth over copper wire are grouped by the generic acronym "xDSL" (Digital Subscriber Line). In its various forms, xDSL will be capable of data transmission speeds over copper wire of 1.5 to 9 Mbps (excluding IDSL) downstream and 16 Kbps to 2 Mbps upstream (excluding VDSL, which requires very short loop lengths). The downstream data rate of xDSL is limited by the length of the copper wire (i.e. the distance between a user and the telco central office) and the diameter of the copper wire. xDSL is a point-to-point circuit technology, which currently limits its scalability, and xDSL systems perform poorly on badly degraded copper wire or in a noisy environment (because of crosstalk interference). xDSL is still expensive for telcos to implement, and only limited deployments of xDSL service have been made to date. BROADBAND ACCESS Broadband access technology enables cable system operators and broadband wireless system operators to offer a cost-effective high speed Internet access solution. Broadband access systems can deliver data at up to 30 Mbps through a standard cable or wireless TV channel. Depending on the system design, a subscriber shares access with others and typically receives data at speeds ranging from 1.5 Mbps up to a maximum of 10 Mbps, depending upon the number and activity level of concurrent users. In the last few years, certain cable system operators and broadband wireless system operators have begun conducting limited broadband modem trials, and commercial deployments are currently underway in several markets. Paul Kagan Associates forecast that residential penetration of cable modems will reach 200,000 subscribers in the United States by the end of 1997 and grow at a compounded annual growth rate of 120% to 4.7 million subscribers by the end of 2001. Wired cable systems in the United States pass by approximately 95% of households and approximately 40% of businesses. At the end of 1996, approximately 90% of these cable systems were built primarily utilizing coaxial cable that can deliver only downstream transmission from the cable headend to the end-user. In order for such one-way cable systems to provide broadband Internet access, a separate return path, such as a telephone line, is required to transmit data upstream to the Internet. Upgrading the existing one- 34 way cable infrastructure to hybrid fiber coax ("HFC") to enable two-way data transmission is possible but expensive. Although many large cable system operators have communicated aggressive schedules to upgrade their systems to enable two-way transmission, only 10% of wired cable systems in the United States had been upgraded to two-way by the end of 1996. As a result, the majority of cable networks require an alternative upstream path. The combination of a fast downstream path and a slow upstream path, representing an asymmetric network, conforms to the typical pattern for Internet usage, which involves small amounts of data flowing from the user to the network (e.g., key strokes, mouse clicks and packet acknowledgments) followed by much larger amounts of data being delivered from the network to the user (e.g., web pages with graphics, images, audio and video). Because asymmetric networks enable service providers to optimize frequency usage, these networks are well suited for both telephone and two-way cable configurations. To date, the principal cable modem specifications or standards under development (MCNS, DAVIC and IEEE) are based upon asymmetric systems. Wireless cable system operators, operating in the MDS and MMDS frequencies, historically have served rural and other areas where it is not economical to install coaxial or HFC cable, although there are wireless cable system operators licensed in metropolitan areas. These operators, who are in competition with direct broadcast satellite ("DBS") and cable TV providers, are in search of new revenue streams and have been investigating high speed Internet access as a potential new area for business. Wireless cable systems, which require an unimpeded line of sight from the transmitting antenna to the receiver, usually comprise an omni-directional transmitting antenna placed on top of a tall building or mountain. One advantage of wireless systems is that they are able to reach a higher percentage of businesses than residences because businesses tend to have taller buildings with fewer line of sight obstructions, such as foliage. In addition to providing wireless cable television, wireless system operators are moving towards becoming broadband Internet service providers. Educational institutions with instructional TV fixed service ("ITFS") licenses, low power TV ("LPTV") broadcasters (UHF or VHF frequencies), licensees of the recently auctioned Wireless Communications Services ("WCS") frequencies and future potential licensees of LMDS are evaluating the possibility of using a portion of their spectrum for high speed Internet access. As with wired cable, asymmetric systems are well suited for wireless systems which currently are authorized to transmit digital content only in the downstream direction. As demand for Internet access over cable and broadband wireless systems increases, ISPs are also seeking alternatives for providing broadband access, as well as enhancing their product offerings and additional revenue streams. Traditional ISPs face competition from new high speed service ISPs, such as At Home Corporation. To address this competition, many ISPs are seeking to offer high speed, cost-effective Internet access service to business and residential users through strategic relationships with cable and wireless system operators. Further, businesses are increasingly demanding high speed broadband access in order to facilitate access to their corporate intranets and networks by telecommuters and employees in remote offices. The following table provides a comparison of the minimum time for downloading typical web content over various types of technology currently available (See Note 1).
CABLE POTS ISDN T1 XDSL MODEMS CONTENT FILE SIZE 28.8 KBPS 128 KBPS 1.5 MBPS 1.5-9MBPS 10MBPS - ------------------------------------------------------------------------------------------------------------- Typical Web Page 64 Kbytes 17.8 sec 4.0 sec 0.3 sec 0.1-0.3 sec 0.1 sec Audio Clip 1.0 Mbytes 4.6 min 1.0 min 5.3 sec 0.9-5.3 sec 0.8 sec Video Clip 3.2 Mbytes 14.8 min 3.3 min 17.1 sec 2.8-17.1 sec 2.6 sec Full Screen Video 11.0 Mbytes 50.9 min 11.5 min 58.7 sec 9.8-58.7 sec 8.8 sec
(1) All of the download calculations were determined assuming the entire bandwidth is available for data and does not include overhead. Actual download times will vary. 35 Internet and intranet access services currently provided by telephone companies are generally slow, expensive or not widely available. Further, due to increased competition, cable and wireless system operators are seeking new revenue opportunities provided by broadband Internet access. Currently, ISPs, cable operators and broadband wireless operators possess the basic infrastructure but lack the enabling technology necessary to provide cost-effective broadband access. THE SOLUTION Hybrid provides cost-effective, high speed Internet and intranet access solutions to cable system operators, broadband wireless system operators, ISPs and other businesses. The Company's products remove the bottleneck over the "last mile" connection to the end-user which causes slow response time for those accessing bandwidth-intensive information over the Internet or corporate intranets. Hybrid's Series 2000 product line consists of hardware and software components capable of supporting a combination of speeds, media and protocols in a single cable or wireless system, and interoperates with a range of third party networking products. The Series 2000 system also features a router to provide telecommuters and others in remote locations secure access to their files on corporate intranets. The Series 2000 provides cable and wireless system operators and ISPs with a flexible, scalable, upgradeable solution that allows them to offer cost-effective broadband access to their subscribers. By doing this, the Company's products also allow cable and wireless operators to conserve scarce bandwidth and utilize a variety of data return paths, including the public switched telephone network. The Company's products enable cable system operators to offer Internet access on either one-way or two-way cable systems, thus minimizing the operators' capital investment and time-to-market pressures. The Series 2000 also facilitates the entrance of broadband wireless system operators into the high speed Internet access market. The Series 2000 has been designed to utilize an array of wireless frequencies, ranging from UHF to MMDS frequencies, and to minimize commonly experienced interference problems. STRATEGY The Company's objective is to be a leader in providing broadband access products that are reliable, secure and scalable to cable system operators, broadband wireless system operators, ISPs and other businesses. Key elements of the Company's strategy include: SATISFY BROADBAND ACCESS NEEDS OF GROWING BUSINESS MARKET. The Company's products address the needs of business users that require cost-effective and secure high speed broadband Internet and intranet access in order to obtain bandwidth-intensive multimedia information and to communicate with customers, suppliers, telecommuters and employees in remote locations. The Series 2000 line of products provides secure, high speed access for telecommuters and remote parties and enables multiple users to be linked to one modem, reducing costs for operators and users. The Company will continue its efforts to increase the scalability and performance of its current broadband systems for the growing business market. OFFER FLEXIBLE PRODUCTS FOR CABLE AND WIRELESS SYSTEM OPERATORS. The Company currently provides, and intends to continue to provide, products that operate with existing cable, wireless and telephony networks interchangeably and interoperably, making use of the numerous types of transmission media available to operators. The Series 2000 supports downstream options, including cable and wireless systems, ranging from low power TV ("LPTV") to WCS frequencies. In the upstream direction, the Series 2000 currently supports cable, POTS and router return. The Series 2000 product line enables cable and wireless system operators to offer broadband access service by utilizing their existing cable or wireless infrastructure for the downstream path and the existing telephone network for the upstream path. The Series 2000 allows migration to two-way cable systems utilizing the same Series 2000 headend equipment. Two-way transmission over a wireless system is currently under development. ADDRESS THE NEEDS OF WIRELESS SYSTEM OPERATORS. The Company has focused, and intends to continue to focus, on the needs of wireless system operators to leverage their infrastructure, expand their customer 36 base and enhance their revenues by providing high speed Internet access to businesses and consumers. The Series 2000 has been tested and deployed in wireless cable (MDS, MMDS, ITFS) and low power TV (LPTV) operations and is under evaluation by WCS licensees. The Series 2000 addresses the product requirements of broadband wireless system operators by providing support for business users, utilizing 2 MHz sub-channels that fit into a variety of different sized frequency blocks and providing better resistance to interference. ENHANCE RELATIONSHIP WITH ISPS. The Company seeks to enhance its relationship with ISPs by providing them with the enabling technology to offer a broadband solution. Due to the competitive nature of the traditional ISP marketplace and the emergence of newer, high speed services, many ISPs are seeking a cost-effective solution for providing broadband access. The Series 2000 enables ISPs to offer broadband access services through strategic relationships with either cable or broadband wireless system operators. Because of its flexibility in supporting both cable and wireless transmission, the Series 2000 enhances the partnering potential for an ISP. The Company intends to continue to devote engineering and marketing efforts to support these relationships. LEVERAGE TECHNOLOGICAL ADVANTAGE. The Company's proprietary technology allows it to create high quality, reliable products with an array of features. The Company seeks to leverage its intellectual property position by capitalizing on its proprietary asymmetric networking and media independent technologies, by offering a range of broadband Internet access solutions to customers and, where appropriate, by sharing its technology with other parties. The Company intends to continue to devote significant resources to enhancing its existing proprietary technologies and to developing new products. PRODUCTS, TECHNOLOGY AND SERVICES Hybrid's Series 2000 product line provides cable system operators, broadband wireless system operators, ISPs and other businesses with a cost-effective, high speed Internet and intranet access solution. The Company's products include secure headend routers, cable and wireless modems and management software for use with either cable TV transmission facilities or wireless transmission facilities. The Company's headend products are used by cable system operators, broadband wireless system operators and other customers to transmit and receive data across networks and to manage networks and modems. Hybrid's client modems and routers are used by subscribers of the Company's customers and can be used as single-user devices or in multi-user local area networks ("LANs"). The Company's products incorporate proprietary technology that enables the same system to be deployed in either cable or broadband wireless systems and supports both one-way downstream transmission accompanied by upstream transmission via modem and router return or two-way cable transmission. See "Risk Factors--Dependence on Recently Introduced Products and Products under Development; Rapid Technological Change." 37 The following diagram illustrates a typical deployment of the Company's products for high speed Internet access: HIGH SPEED INTERNET ACCESS [SCHEMATIC DIAGRAM OF A TYPICAL DEPLOYMENT OF THE COMPANY'S PRODUCTS FOR CABLE AND WIRELESS SYSTEMS] 38 PRODUCTS The following table outlines the primary components of the Company's Series 2000: HEADEND EQUIPMENT(1)(2) PRODUCT DESCRIPTION CyberManager 2000 (CMG-2000) Workstation with proprietary Hybrid software that provides subscriber and network management. 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, Telephone Return Performs the functions of an analog (CMU-2000-8T) modem bank and terminal server in a telephone return configuration. Supports up to 64 telephone modems. FSK Demodulator and Terminal Server Upstream receiver and demodulator for (OEX-020-7 and OLP-330) two-way cable configuration.
SINGLE-USER EQUIPMENT(1)(3) CyberCommuter 2000 Secure Router (CSM-2000) Workstation with proprietary Hybrid software that provides subscriber management to the corporate MIS director in a secure telecommuting configuration. Multi-User Modem/Router (CCM-201) Client modem and router that can be used in either cable or wireless systems. Supports up to 20 users. Single-User Modem/Router (N-201) Client modem that can be used in either cable or wireless systems. Supports a single user.
(1) All products are available for use with cable or wireless systems, except for the FSK Demodulator & Terminal Server, which is currently only available for use with cable systems. (2) Headend equipment typically ranges in price from $60,000 to $90,000 for a single system. (3) Modem list prices range from approximately $450 to $900 depending on features. HEADEND EQUIPMENT CYBERMANAGER 2000. The CyberManager 2000 (CMG-2000) is a proprietary subscriber and network management workstation built on a Sun Microsystems Sparc 5. Running proprietary Hybrid software, the CMG-2000 operates as the system administrator interface to the upstream and downstream routers and other third party headend equipment. The CMG-2000 has a 10BaseT interface to connect to a fast Ethernet switch in the headend. Currently, the CMG-2000 supports up to 5,000 subscribers. CYBERMASTER DOWNSTREAM ROUTER. The CyberMaster Downstream Router (CMD-2000) is a rack-mounted, Pentium based, PCI/ISA bus industrial microcomputer. It supports SIF and QAM cards, which are used for downstream routing and for 64QAM downstream modulation. The CMD-2000 has a 100BaseT interface to connect to a fast Ethernet switch within the headend. The CMD-2000 supports up to six independent 10 Mbps downstream channels. Each 10 Mbps channel occupies 2 MHz of either cable or wireless spectrum. CYBERMASTER UPSTREAM ROUTER, TELEPHONE RETURN. The CyberMaster Upstream Router, Telephone Return (CMU-2000-8T) is a rack-mounted, Pentium based, PCI/ISA bus industrial microcomputer. It 39 houses up to 64 analog modems that can handle speeds of up to 33.6 Kbps for the telephone return path. The CMU-2000-8T has a 10/100BaseT interface that connects to a fast Ethernet switch within the headend. A typical installation supports multiple CMU-2000-8Ts. FSK DEMODULATOR AND TERMINAL SERVER. The FSK Demodulator (OEX-020-7) and Terminal Server (OLP-330) includes a rack-mounted FSK upstream demodulator that supports up to seven upstream channels. The demodulator output connects to a terminal server which converts the demodulated data stream into Ethernet packets. A typical installation supports multiple FSK Demodulators and Terminal Servers. END-USER EQUIPMENT CYBERCOMMUTER 2000 SECURE ROUTER. The CyberCommuter 2000 Secure Router (CSM-2000) is a proprietary subscriber management workstation built on a Sun Microsystems Sparc 5 with a special encryption board. This optional component is used to provide secure, high speed telecommuting and remote access to businesses. The CSM-2000 is placed at the location of a corporate MIS director or LAN administrator and provides the ability to administer and manage secure telecommuter access to the corporate intranet. MULTI-USER MODEM/ROUTER. The Multi-User Modem/Router (CCM-201) supports 10 Mbps, 64QAM downstream data transmission on both cable and wireless systems and upstream transmission via analog modem, router or cable return. Each CCM-201 includes routing capability to support up to 20 networked devices (PC, Macintosh or workstation). The CCM-201 has a number of security features including system authentication, user ID and password protection, public and private key management and optional DES encryption. SINGLE-USER MODEM. The Single-User Modem (N-201) supports 10 Mbps, 64QAM downstream data transmission on both cable and wireless systems and upstream transmission via analog modem, router, and cable return. Each N-201 supports one client device which can be a PC, Macintosh or workstation. TECHNOLOGY The Series 2000 product line is an integrated broadband access system. The Series 2000 is media independent, allowing the same system components to be deployed in either cable or wireless systems. It utilizes proprietary asymmetric networking technology that allows for optimal use of available frequencies. The Series 2000 supports both asymmetric two-way transmission on a cable system and asymmetric telephone- or router-return on either a cable or broadband wireless system. The Company is currently developing asymmetric two-way transmission over a broadband wireless system. The Series 2000 provides for downstream transmission over wired cable in the interference prone "rolloff" channels that are unsuitable for video broadcast, preserving scarce channels for the cable system operator. The Company's proprietary sub-channelization technology splits a standard 6 MHz channel into three 2 MHz slices for downstream transmission, providing greater flexibility and minimizing multipath interference in wireless systems. By providing 2 MHz sub-channelization, the Company's products are also positioned to serve the newly auctioned WCS frequencies, which are only 5 MHz wide. The Series 2000 is expandable from an entry-level system supporting up to 5,000 subscribers to serve more than 20,000 subscribers. The modular architecture also accommodates changes to the transport medium, such as upgrades from one-way coaxial cable plant to two-way HFC plant. SERVICES The Company generally performs all consulting, systems engineering, systems integration, installation, training and technical support for its products. Network operations engineers, who combine radio frequency ("RF") 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. The Company's network operations group also works with the customer during site preparation to aid in systems engineering, system integration, installation and acceptance testing to ensure a successful system 40 start-up. Services are provided on a time and materials basis. Each customer is required to enroll, for a fee, at least one person in the Company's 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 the Company's products and cover the installation, operation and maintenance of the Company's headend and client modem products in a network operating environment. The Company typically provides a one-year warranty on its products that includes factory and on-site repair service as needed. Customer support also includes telephone support, maintenance releases and technical bulletins covering all of the Company's software and firmware products that contain application code. The Company intends to extend support after expiration of the warranty period as a purchase option, including on-site field support. CUSTOMERS The Company's customers include cable system operators, broadband wireless system operators, ISPs, resellers and other businesses. The following table sets forth certain customers of the Company who have purchased at least $100,000 of products from the Company since January 1, 1996.
BROADBAND WIRELESS CABLE SYSTEM OPERATORS SYSTEM OPERATORS ISPS RESELLERS AND OTHERS - ---------------------- ------------------------- ----------------------- ------------------------- RCN Corporation CAI Wireless Systems, AT&T and AT&T WorldNet Alcatel Telecom and Jones Intercable, Inc. Inc. DirectNet, Inc. Alcatel Bell N.V. CableNet Corporation CS Wireless Systems, Inc. InterjetNet, Inc. Itochu Corporation Digital Scientific Inc. Internet Ventures, Inc. Lucent Technologies, Inc. People's Choice TV Media City World, Inc. Network Systems Corporation Warp Drive Networks LLC Technologies, Inc. Sioux Valley Rural TV World-wide Wireless, Inc.
To date, a small number of customers has accounted for a substantial portion of the Company's net sales. The Company expects that net sales from the sale of its products to a limited number of customers will continue to account for a high percentage of its net sales in the foreseeable future. The Company expects that its largest customers in future periods could be different from its largest customers in prior periods due to a variety of factors, including customers' deployment schedules and budget considerations. A limited number of cable system operators and broadband wireless system operators account for a majority of capital equipment purchases in their respective markets, and the Company's success will be dependent upon its ability to establish and maintain relationships with these companies. In 1994, Intel Corporation ("Intel"), AT&T Corporation ("AT&T") and Advanced Research Project Agency ("ARPA") accounted for 59.6%, 24.2% and 11.7%, respectively, of the Company's net sales; in 1995, Intel and AT&T accounted for 51.6% and 28.2%, respectively, of the Company's net sales; in 1996, AT&T and Intel accounted for 41.0% and 20.7%, respectively, of the Company's net sales; and in the first nine months of 1997, Internet Ventures, Inc. accounted for 10.2% of the Company's net sales. The Company on occasion has provided customers extended payment, promotional pricing or other terms. For instance, Internet Ventures, Inc., which accounted for 12% of the Company's accounts receivable as of September 30, 1997, has recently been provided extended payment terms. The provision of extended payment terms, or the extension of promotional payment, pricing or other terms could have a material adverse effect on the Company's business, operating results and financial condition. From 1994 to 1996, Intel manufactured certain products based on the Company's design, and jointly marketed the Company's products with its own. While Intel no longer purchases products from the Company, it remains a stockholder of the Company, and maintains certain licensing and manufacturing rights to certain Hybrid products. See "Risk Factors--Inexperience in Emerging Market," "Risk Factors--Dependence on Cable System Operators," "Risk Factors--Dependence on Broadband Wireless System Operators and "Risk Factors--Customer Concentration." 41 The following examples illustrate how customers use Hybrid products to deliver network access: JONES INTERCABLE, INC. Jones Intercable, Inc. ("Jones Intercable"), one of the 10 largest cable television operators in the United States, has purchased the Series 2000 for its high speed Internet access service provided by Jones Internet Channel-TM-. An affiliate of Jones Intercable, Jones Internet Channel is an Internet programming network which offers high-speed connections to the Internet via fiber and coaxial cable. The service features electronic mail, news groups and World Wide Web access, as well as local information on government, schools, restaurants and entertainment, among other topics. Jones Intercable selected Hybrid through a careful evaluation process emphasizing technology, pricing and vendor service and support. Jones was particularly interested in a platform that would provide high-speed Internet access for its customers, regardless of their individual computing hardware and software choice. Jones is purchasing Series 2000 single-user modems and installing them in a telco-return configuration. INTERNET VENTURES, INC. Internet Ventures, Inc. ("IVI") is offering high speed cable Internet and intranet access in partnership with small to medium sized cable operators in selected markets. IVI offers cable operators a way to generate new revenue without having to invest heavily in plant upgrades or equipment. IVI purchases and installs the Series 2000, brings Internet service provider experience, markets the high speed service under its own PeRKInet brand, and gives the cable operator a percentage of the resulting revenue. IVI chose the Series 2000 because it was a third generation product that works with existing cable infrastructure. Many of IVI's cable partners have not upgraded to two-way cable and need a product that supports telephone return. The Series 2000 supports several telephone return options for consumer and business use. IVI's PeRKInet made its commercial debut on Avenue TV Cable in Ventura, California in March 1997. In June 1997, IVI announced it would make the high speed service available in several of Sun Country Cable's 45 systems. WARP DRIVE NETWORKS. Warp Drive Networks ("Warp Drive") launched a commercial wireless Internet access service in the Silicon Valley in June 1997, offering services from ISDN to fractional T3 speeds, using the Company's Series 2000 system on a low power UHF television system. Warp Drive is targeting the business, SOHO and telecommuter markets with service for 128Kbps priced at $150/month. Warp Drive has begun offering service in Seattle over MDS frequencies. Warp Drive plans to open the San Francisco, Portland, Los Angeles and San Diego markets by mid-1998. SALES, MARKETING AND DISTRIBUTION The Company markets and sells its products in the United States through its domestic field sales force and sales support organization. The sales and marketing organizations are comprised of 16 sales and marketing professionals with experience in the cable, telephone and router markets. The Company also sells its products through a network of OEMs, VARs and distributors. The Company's sales and marketing, senior management and technical staff work closely with existing and potential customers to help them develop the market potential of high speed Internet access services and to help them develop relationships with other companies that have the facilities and expertise necessary to deliver Internet access services. Field sales offices are located in San Francisco, Atlanta, Chicago and Tinton Falls, New Jersey. The sale of the Company's products typically involves a significant technical evaluation and commitment of capital and other resources, with the delays frequently associated with customers' internal procedures to approve large capital expenditures and to test and accept new technologies that affect key operations. For these and other reasons, the sales cycle associated with the Company's products is typically lengthy, generally lasting three to nine months, and is subject to a number of significant risks, including customers' budgetary constraints and internal acceptance reviews, that are beyond the Company's control. Because of the lengthy sales cycle and the large size of customers' orders, if orders forecasted for a specific customer for a particular quarter are not realized in that quarter, or any significant customer delays 42 payment or fails to pay, the Company's operating results for that quarter could be materially adversely affected. In addition, the Company's customers include companies in the early stage of development or in need of capital to upgrade or expand their services. Accordingly, in order to address the needs and competitive factors facing the emerging broadband access markets serviced by the cable system operators, broadband wireless system operators and ISPs, the Company on occasion has provided customers extended payment, promotional pricing or other terms which could have a material adverse effect on the Company's business, operating results and financial condition. See "Risk Factors--Fluctuations in Quarterly Operating Results; Absence of Significant Backlog; Continuing Decline of Average Selling Prices," "Risk Factors--Lengthy Sales Cycle," "Risk Factors--Inexperience in Emerging Markets," "Risk Factors-- Dependence on Broadband Wireless System Operators" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." The timing and volume of customer orders are difficult to forecast because cable and wireless companies typically require prompt delivery of products and a substantial majority of the Company's sales are booked and shipped in the same quarter. Accordingly, the Company has a limited backlog of orders. Further, sales are generally made pursuant to standard purchase orders that can be rescheduled, reduced or cancelled with little or no penalty. The Company believes that its backlog at any given time is not a meaningful indicator of future sales. See "Risk Factors--Fluctuations in Operating Results; Absence of Significant Backlog; Continuing Decline of Average Selling Prices." The Company's marketing efforts are targeted at cable system operators, broadband wireless system operators and existing ISPs. The Company devotes considerable time and effort to educating potential customers on the business opportunity of providing high speed Internet and intranet access. It accomplishes this through white papers, prototype customer business models, industry speaking engagements and direct customer presentations. The Company also attempts to facilitate introductions and strategic relationships between ISPs and wireless or cable system operators. These strategic relationships bring together the capabilities needed to offer high speed access service. The Company maintains its industry presence by exhibiting at wireless and cable tradeshows and speaking at conferences and seminars. In order to market and sell the Company's products internationally, the Company is seeking to enter into distribution relationships. Alcatel Standard Electrica S.A. has worldwide nonexclusive distribution rights for the Company's products and is the Company's main distributor in Europe. Itochu is a stockholder in the Company and has nonexclusive worldwide distribution rights for the Company's products. MANUFACTURING The Company's manufacturing strategy is to perform system integration, testing and quality inspection internally and to outsource the manufacturing of the product modules to multiple third parties where it is more cost-effective. The Company's future success will depend, in significant part, on its ability to successfully manufacture its products cost-effectively and in sufficient volumes. The Company maintains a limited in-house manufacturing capability for performing system integration and testing on all headend products and for manufacturing small quantities of modems at its headquarters in Cupertino. The Company's in-house manufacturing capability, however, is largely used for pilot production of new modem designs and sample testing of products received from volume modem manufacturers, as well as for developing the manufacturing process and documentation for new products in preparation for outsourcing. The Company's future success will depend, in significant part, on its ability to obtain high volume manufacturing at low costs. The Company entered into an agreement pursuant to which Sharp has been the exclusive OEM supplier through Itochu of certain of the Company's client modems, including the substantial majority of those utilized in the Series 2000. During the second quarter and a portion of the third quarter of 1997, the Company did not receive the full shipment of modems anticipated from Sharp because of technical delays in product integration. While these problems have since been resolved, there 43 can be no assurance that the Company will not experience similar supply problems in the future at Sharp or any other manufacturer. The Company has had only limited experience manufacturing its products to date, and there can be no assurance that the Company, Sharp or any other manufacturer of the Company's products will be successful in increasing the volume of its manufacturing efforts. The Company may need to procure additional manufacturing facilities and equipment, adopt new inventory controls and procedures, substantially increase its personnel and revise its quality assurance and testing practices. There can be no assurance that any of these efforts will be successful. The Company anticipates the need to reduce the manufacturing costs of its cable modem and will continue to evaluate the use of low cost third party suppliers and manufacturers. See "Risk Factors--Need to Reduce Cost of Client Modems" and "Risk Factors--Limited Manufacturing Experience; Sole Source Manufacturing." Subcontractors supply both standard components and subassemblies manufactured to the Company's specifications. Standard components include the Sun Microsystems Sparc5 workstation and its Sun Operating System (OS); Intel's Ethernet cards and Pentium-based PCI processor cards; and NextLevel Systems' Upconverter. The CyberManager 2000 and CyberCommuter 2000 Secure Router are built on the Sparc5/Sun OS platform by installing the Company's proprietary network subscriber and network management software, HybridWare. The CyberMaster Downstream Router (CMD) and CyberMaster Upstream Router, Telephone Return (CMU) are built on Intel's Pentium-based PCI/ISA-based computer cards installed in standard rack-mounted backplanes from Industrial Computer Source (ICS) that are configured to the Company's specification. The Company's proprietary software, Hybrid OS, is overlaid on a standard Berkeley Systems operating system for the CMD and CMU. The Company is dependent upon certain key suppliers for a number of the components for its products. For example, the Company currently only has one vendor, BroadCom Corporation, for the 64 QAM demodulator semiconductors that are used in the Company's server and client modem products, and in past periods these semiconductors have been in short supply. Recently, BroadCom announced a program whereby certain of its technological and product enhancements may be made available to certain of the Company's competitors before making them available to the Company. This could have the effect of putting the Company at a competitive disadvantage with regard to time to market or cause the Company to have to redesign its products if competitors influence changes in BroadCom's products. Hitachi is the sole supplier of the processors used in certain of the Company's modems. In addition, certain other components for products that the Company has under development are currently only available from a single source. There can be no assurance that delays in key components or product deliveries will not occur in the future due to shortages resulting from a limited number of suppliers, the financial or other difficulties of such suppliers or the possible limitation in component product capacities due to significant worldwide demand for such components. Any significant interruption or delay in the supply of components for the Company's products or significant increase in the price of components due to short supply or otherwise could have a material adverse effect on the Company's ability to manufacture its products and, therefore, could have a material adverse effect on its business, operating results and financial condition. Products as complex as those offered by the Company frequently contain undetected errors, defects or failures, especially when first introduced or when new versions are released. Such errors have occurred in the past in the Company's products, and there can be no assurance that, despite testing by the Company and use by current and potential customers, errors will not be found in the Company's current and future products. The occurrence of such errors, defects or failures could result in product returns and other losses to the Company or its customers. Such occurrence could also result in the loss of or delay in market acceptance of the Company's products, which could have a material adverse effect on the Company's business, operating results and financial condition. The Company's products generally carry a one-year warranty for replacement of parts. Due to the relatively recent introduction of the Series 2000 products, the Company has limited experience with the problems that could arise with this generation of products. The Company's purchase agreements with its customers typically contain provisions designed to limit the Company's exposure to potential product liability claims. It is possible, however, that the limitation of 44 liability provisions contained in the Company's purchase agreements may not be effective as a result of federal, state or local laws or ordinances or unfavorable judicial decisions. Although the Company has not experienced any product liability claims to date, the sale and support of the Company's products may entail the risk of such claims. A successful product liability claim brought against the Company could have a material adverse effect on the Company's business, operating results and financial condition. See "Risk Factors--Risks of Product Defects, Product Returns and Product Liability." RESEARCH AND DEVELOPMENT As of September 30, 1997, the Company's research and development staff consisted of 35 full-time employees. The Company's total research and development expenses for 1994, 1995 and 1996 and the first nine months of 1997 were $1,251,000, $3,862,000, $5,076,000 and $5,170,000, respectively. The Company will continue its efforts to increase the scalability and performance of its current broadband systems, to enhance the systems for broadband wireless system operators and to migrate toward standards compliance. The Company expects to increase scalability by developing an optional relational database that will handle subscriber bases of up to 20,000 per system and new SNMP-based network management capabilities that will allow operators to manage their network centrally. The Company is optimizing its product's radio frequency (RF) tuners for the currently targeted wireless-cable and WCS frequency bands, 2-3 GHz and LPTV (400-800 MHz), and expects to add LMDS products to its offerings. The Company is developing a new two-way product utilizing QPSK modulation in place of the current FSK return product. This QPSK product will utilize standards-compliant chipsets and a cost-effective channel sharing algorithm. It will support both cable and wireless return. In addition, the Company is developing a prototype system targeted for ISP customers consisting of a broadband downstream router that can be installed in existing ISP networks and will interoperate with standard ISP equipment and operational procedures. See "Risk Factors--Competing Technologies and Evolving Industry Standards." To address competitive and pricing pressures, the Company expects that it will have to reduce the cost of manufacturing client modems significantly through design and engineering changes. Such changes may involve redesigning the Company's products to utilize more highly integrated components and more automated manufacturing techniques. There can be no assurance that the Company will be successful in these efforts, that a redesign can be made on a timely basis and without introducing significant errors and product defects or that a redesign will result in sufficient cost reductions to allow the Company to reduce the list price of its client cable modems significantly. See "Risk Factors--Need to Reduce Cost of Client Modems." In addition, from time to time, the Company considers collaborative relationships with other entities to gain access to certain technologies that could enhance the Company's product offerings, broaden the market for the Company's products or accelerate time to market. In connection with such collaborative relationships, the Company may seek to jointly develop products, share its technology with other entities and license technology from such entities. In November 1997, the Company entered into a Warrant Purchase Agreement with Alcatel pursuant to which Alcatel will provide the Company with certain technical information and the parties will use commercially reasonable efforts to define and carry out a development program regarding broadband data modulation technology and to cross-license the technology developed. In connection with entering into the Warrant Purchase Agreement, the Company issued to Alcatel a five-year warrant to purchase 458,295 shares of Common Stock at an exercise price of $10.91 per share. The relationship between the Company and Alcatel is in the early stages, and, accordingly, there can be no assurance that the relationship will result in the development of commercially viable products or that the Company will otherwise significantly benefit from its relationship with Alcatel. The market for 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. As standards evolve in the market, such as the recently announced MCNS 45 specifications, the Company will work toward complying with such standards. There can be no assurance that the Company's engineering and product design efforts will be successful or that the Company will be successful at developing new products in the future. Any failure to release new products or to fix, upgrade or redesign old products on a timely basis could have a material adverse effect on the Company's business, operating results and financial condition. See "Risk Factors--Dependence on Recently Introduced Products and Products under Development; Rapid Technological Change." COMPETITION The market for high speed network connectivity products and services is intensely competitive. The principal competitive factors in this market include product performance and features (including speed of transmission and upstream transmission capabilities), reliability, price, size and stability of operations, breadth of product line, sales and distribution capability, technical support and service, relationships with cable and broadband wireless system operators and ISPs, standards compliance and general industry and economic conditions. Certain of these factors are outside of the Company's control. The existing conditions in the high speed network connectivity 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 the Company's products or render them obsolete. Similarly, the continued emergence or evolution of industry standards or specifications may put the Company at a disadvantage in relation to its competitors. The Company's current and potential competitors include providers of asymmetric cable modems, other types of cable modems and other broadband access products. Most of the Company's 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 the Company. In addition, many of the Company's competitors are in a better position to withstand any significant reduction in capital spending by cable or broadband wireless system operators. Certain of the Company's competitors have established relationships with cable system operators and telcos and, based on these relationships, may have more direct access to the decision-makers of such cable system operators and telcos. In addition, the Company could face potential competition from certain of its suppliers, such as Sharp, if it were to develop or license modems for sale to others. In addition, suppliers such as Cisco Systems, which manufactures routers, and Stanford Telecom, which manufactures QPSK components, could become competitors should they decide to enter the Company's markets directly. There can be no assurance that the Company will be able to compete effectively in its target markets. The principal competitors in the cable modem market include Bay Networks, Motorola, NextLevel Systems and 3Com and its subsidiary U.S. Robotics. Other cable modem competitors include Cisco Systems, Com21, Hayes Microcomputer Products, Phasecom, Scientific-Atlanta, Terayon, Toshiba and Zenith Electronics, as well as a number of smaller, more specialized companies. Certain competitors have entered into partnerships with computer networking companies that may give such competitors greater visibility in this market. Certain of the Company's competitors have already introduced or announced high speed connectivity products that are priced lower than the Company's, and certain other competitors are more focused on and experienced in selling and marketing two-way cable transmission products. There can be no assurance that additional competitors will not introduce new products that will be priced lower, provide superior performance or achieve greater market acceptance than the Company's products. The Company's principal competitors in the wireless modem market, Bay Networks, Harmonic Lightwaves through its proposed acquisition of New Media Communications, Motorola, NextLevel Systems and Stanford Telecommunications, are providing wireless Internet connectivity over wireless cable and LMDS frequencies. To be successful, the Company's Series 2000 products must achieve market acceptance and the Company must respond promptly and effectively to the challenges of new competitive products and tactics, 46 alternate technologies, technological changes and evolving industry standards. The Company must continue to develop products with improved performance over two-way cable transmission facilities and with the ability to perform over two-way wireless transmission facilities. There can be no assurance that the Company will meet these challenges, that it will be able to compete successfully against current or future competitors, or that the competitive pressures faced by the Company will not materially and adversely affect the Company's business, operating results and financial conditions. Further, as a strategic response to changes in the competitive environment, the Company may make certain extended payment, pricing, service, marketing or other promotional decisions or enter into acquisitions or new ventures that could have a material adverse effect on the Company's business, operating results or financial conditions. Cable and broadband wireless system operators face competition from providers of alternative high speed connectivity systems. In the wireless high speed access market, broadband wireless system operators are in competition with satellite TV providers. In telephony networks, xDSL technology enables digitally compressed video signals to be transmitted through existing telephone lines to the home. In the event that any competing architecture or technology were to limit or halt the deployment of coaxial or HFC systems, the Company's business, operating results and financial condition could be materially adversely affected. INTELLECTUAL PROPERTY The Company relies on a combination of patent, trade secret, copyright and trademark laws and contractual restrictions to establish and protect proprietary rights in its products. The Company currently has two patents issued in the United States as well as pending patent applications in the United States, Europe and Japan that relate to its network and modem technology as well as communication processes implemented in those devices. The Company's two issued U.S. patents relate to the Company's basic client cable modem device and methodology and asymmetric system architecture and methodology. The Company initially obtained the U.S. Patent No. 5,347,304 in September 1994, and filed an application for the reissuance of the patent with the U.S. Patent and Trademark Office in November 1994, which was subsequently allowed for reissuance by the U.S. Patent Office on August 19, 1997. In the future, the Company intends to seek further United States and foreign patents on its technology. There can be no assurance that any of these patents will be issued from any of the Company's pending applications or applications in preparation or that any claims allowed will be of sufficient scope or strength, or be issued in sufficient countries where the Company's products can be sold, to provide meaningful protection or any commercial advantage to the Company. Moreover, any patents that have been or may be issued might be challenged. Any such challenge could result in time consuming and costly litigation and result in the Company's 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. The Company has entered into confidentiality and invention assignment agreements with its employees and enters into non-disclosure agreements with certain of its suppliers, distributors and customers in order to limit access to and disclosure of its proprietary information. There can be no assurance that these contractual arrangements or the other steps taken by the Company to protect its intellectual property will prove sufficient to prevent misappropriation of the Company's technology or deter independent third-party development of similar technologies. The laws of certain foreign countries may not protect the Company's products or intellectual property rights to the same extent as do the laws of the United States. In the past, the Company has received, and in the future may receive, notices from third parties claiming that the Company's products or proprietary rights infringe the proprietary rights of third parties. The Company expects that developers of cable and wireless modems will be increasingly subject to infringement claims as the number of products and competitors in the Company's industry segment grows. Any such claim, whether meritorious or not, could be time consuming, result in costly litigation, cause product shipment delays or require the Company to enter into royalty or licensing agreements. Such royalty or licensing agreements might not be available on terms acceptable to the Company or at all, which 47 could have a material adverse effect upon the Company's business, operating results and financial condition. The Company has and in the future may license its patents or proprietary rights for commercial or other reasons to parties who are or may become competitors of the Company. Further the Company may also elect to initiate claims or litigation against third parties for infringement of the Company's patents or proprietary rights or to establish the validity of the Company's patents or proprietary right. The Company has sent notices to certain third parties offering to license the Company's patents for products which may be infringing the Company's patent rights. The Company has not yet determined if it will assert any claims against these parties or others. There can be no assurance that such notifications will not involve potential litigation initiated by the Company or related countersuits by third parties seeking to challenge the Company's patents or asserting infringement by the Company. Such litigation could be time consuming and costly and therefore have a material adverse effect on the Company's business, operating results and financial condition. EMPLOYEES As of September 30, 1997, the Company had 83 full-time employees of whom 35 were primarily engaged in research and development, 25 in operations, 16 in sales and marketing and 7 in administration and finance. None of the Company's employees is represented by a collective bargaining unit with respect to his or her employment with the Company, nor has the Company ever experienced an organized work stoppage. PROPERTIES The Company leases approximately 14,900 square feet of office, research and development and manufacturing space in Cupertino, California. The current lease for the Cupertino facility expires in May 1998 and the Company has an option to extend the lease for three additional years. The Company also subleases approximately 10,200 square feet and 9,200 square feet in Cupertino under sublease agreements expiring in May 1998 and September 1998, respectively. The Company leases approximately 900 square feet of office space in Tinton Falls, New Jersey, and approximately 2,400 square feet of office space in San Francisco, California under leases expiring in September 1998 and March 2002, respectively. The Company believes that its existing facilities are adequate to meet its needs for the immediate future and that future growth can be accommodated by leasing additional or alternative space near its current facilities. LEGAL PROCEEDINGS The Company is not a party to any material legal proceedings. 48 MANAGEMENT EXECUTIVE OFFICERS, KEY EMPLOYEES AND DIRECTORS The following table sets forth certain information regarding the executive officers, directors and key personnel of the Company as of September 30, 1997:
NAME AGE POSITION - --------------------------------------------- ----------- ------------------------------------------------------------ EXECUTIVE OFFICERS Carl S. Ledbetter.......................... 48 President, Chief Executive Officer and Chairman of the Board of Directors Gustavo (Gus) Ezcurra...................... 41 Vice President, Sales William H. Fry............................. 59 Vice President, Operations Dan E. Steimle............................. 49 Vice President, Finance and Administration, Chief Financial Officer and Secretary KEY EMPLOYEES AND OTHER DIRECTORS Frederick Enns............................. 46 Vice President and Chief Technology Officer Vishwas R. (Victor) Godbole................ 51 Vice President, Engineering Ernest P. Quinones......................... 37 Corporate Controller Jane S. Zeletes............................ 42 Vice President, Marketing James R. Flach(1)(2)....................... 50 Director Stephen E. Halprin(2)...................... 59 Director Gary M. Lauder............................. 35 Director Douglas M. Leone(1)........................ 40 Director Howard L. Strachman........................ 53 Director
- ------------------------ (1) Member of the Compensation Committee. (2) Member of the Audit Committee. CARL S. LEDBETTER joined the Company in January 1996 as its President and Chief Executive Officer, and in August 1996, he became Chairman of the Board. Prior to joining the Company, he served in various positions at AT&T from April 1993 to January 1996, most recently as President of Consumer Products. From 1991 until April 1993, Mr. Ledbetter was Vice President of Sun Microsystems and General Manager of SunSelect, Sun's PC networking business. He is also a director of Software Spectrum, Inc., a software distributor. Mr. Ledbetter holds a B.S. in Mathematics from University of Redlands, an M.A. in Mathematics from Brandeis University and a Ph.D. in Mathematics from Clark University. GUSTAVO (GUS) EZCURRA joined the Company in September 1996 as its Vice President, Sales. From May 1994 to September 1996, Mr. Ezcurra was Vice President of Worldwide Sales of the Digital Telephone Systems Division of Harris Corporation, a broadcast equipment manufacturer. From November 1988 to May 1994, he was Vice President of Worldwide Sales of the Broadcast Division of Harris Corporation. Mr. Ezcurra holds a B.S. in Economics from the California Polytechnic State University, San Luis Obispo. WILLIAM H. FRY joined the Company in August 1995 as its interim Chief Operating Officer and Acting Vice President, Operations, and in May 1996 he became Vice President, Operations. From July 1994 to July 1995, Mr. Fry was a consultant with Silicon Valley Associates. From 1991 to June 1994, he served as President and CEO of Ion Systems, a manufacturer of semiconductor processing equipment. Mr. Fry holds a B.S. in Industrial Management from LaSalle College. DAN E. STEIMLE joined the Company in July 1997 as its Vice President, Finance and Administration, Chief Financial Officer and Secretary. From January 1994 to June 1997, he served as Vice President and Chief Financial Officer of Advanced Fibre Communications, Inc., a telecommunications equipment manufacturer and from July 1997 to September 1997 he served part time as its Vice President, Business 49 Development. From September 1991 to December 1993, Mr. Steimle served as Senior Vice President, Operations and Chief Financial Officer of The Santa Cruz Operation, Inc., an operating system software company. Mr. Steimle serves as a director of Mitek Systems, Inc., a software development company. Mr. Steimle holds a B.S. in Accounting from Ohio State University and an M.B.A. from the University of Cincinnati. FREDERICK ENNS joined the Company in September 1994 as Senior Architect and has been Vice President and Chief Technology Officer since August 1996. From November 1992 to September 1994, he served as Director of Hardware Engineering of Hughes LAN Systems, a networking equipment manufacturer. Mr. Enns received a B.S. in Physics from the University of California, San Diego, an M.S. in Physics from the University of Washington and an M.S. in Electrical Engineering from Stanford University. VISHWAS R. (VICTOR) GODBOLE joined the Company in May 1997 as its Vice President, Engineering. From June 1992 to April 1997, he worked for Sierra Semiconductor Corporation, a provider of networking and telecommunications components, as Director, Systems Engineering and most recently as Vice President, Strategic Planning and Systems Engineering. Mr. Godbole received a Bachelor of Technology degree in Electrical Engineering from the Indian Institute of Technology, Bombay, India and his M.S. in Electrical Engineering from Oklahoma State University. ERNEST P. QUINONES joined the Company in July 1997 as its Controller and was promoted to Corporate Controller in October 1997. From June 1989 to March 1997, Mr. Quinones served in various positions at Genus, Inc., a semiconductor equipment manufacturer, including Acting Chief Financial Officer until his departure. Mr. Quinones received a B.S. in Accounting from Santa Clara University and is a Certified Public Accountant in California. JANE S. ZELETES joined the Company in March 1997 as its Director, Product Management, and in September 1997 she was promoted to Vice President, Marketing. Prior to joining the Company, she served as Director of Business Management of USWest Wireless. From 1990 to January 1996, Ms. Zeletes served in various positions at AT&T, most recently as Group Manager of Cordless Telephones, a business unit of AT&T's Consumer Products Division. Ms. Zeletes holds a B.A. in English from the University of Minnesota. JAMES R. FLACH has been a director of the Company since May 1995, and he served as acting Chief Executive Officer of the Company from November 1995 to January 1996. Since September 1992, Mr. Flach has been a general partner of Accel Partners, a venture capital firm. Since September 1992, he has also been the President of Flach & Associates, a Management Services firm, and since March 1997, he has been the Chief Executive Officer of Redback Networks, a network products company. From May 1990 to August 1992, Mr. Flach was Vice President of Intel, serving as the General Manager of Intel's Personal Computer Enhancement Division. He holds a B.S. in Physics from Rensselaer Polytechnic Institute and an M.S. in Applied Mathematics from The Rochester Institute of Technology. STEPHEN E. HALPRIN has been a director of the Company since September 1992. He has been a general partner of OSCCO Management Partners, a venture capital firm since 1984 and a general partner of OSCCO Management Partners III since 1989. He currently serves as a director of Landec Corporation, a materials science company. He holds a B.S. in Industrial Management from the Massachusetts Institute of Technology and an M.B.A. from the Stanford University Graduate School of Business. GARY M. LAUDER has been a director of the Company since October 1994. Since 1986 he has been the General Partner of Lauder Partners, a venture capital partnership formed by Mr. Lauder that focuses on advanced technologies for the cable TV marketplace. Since May 1995, Mr. Lauder has been Vice-Chairman of ICTV, Inc., a developer of interactive cable television technology. Mr. Lauder holds a B.A. in International Relations from the University of Pennsylvania, a B.S. in Economics from the Wharton School and an M.B.A. from the Stanford University Graduate School of Business. 50 DOUGLAS M. LEONE has been a director of the Company since May 1995. He has been associated with Sequoia Capital, a venture capital firm, since June 1988 and has been a general partner of that firm since April 1993. He currently serves as a director of Infinity Financial Technology, a client server software company, and International Network Services, a networking services company. Mr. Leone holds a B.S. from Cornell University, an M.S. from Columbia University and an M.S. in Management from the Massachusetts Institute of Technology. HOWARD L. STRACHMAN has been a director of the Company since co-founding the Company in June 1990 and served as its Chief Executive Officer from June 1990 until July 1995. In January 1996 he founded Ultracom Communications, Inc., a developer of advanced modulation products, where he serves as its Chief Executive Officer. Mr. Strachman holds a B.S. in Electrical Engineering and an M.S. in Electro-Physics from the Polytechnic University of New York. Each director will hold office until the next Annual Meeting of Stockholders and until his successor is elected and qualified or until his earlier resignation or removal. Each officer serves at the discretion of the Board of Directors (the "Board"). Upon the closing of the offering, the Company's certificate of incorporation will provide for a classified Board of Directors composed of seven directors. Accordingly, the terms of the office of the Board of Directors will be divided into three classes. Class I will expire at the annual meeting of the stockholders to be held in 1998; Class II will expire at the annual meeting of the stockholders to be held in 1999; and Class III will expire at the annual meeting of the stockholders to be held in 2000. At each annual meeting of the stockholders, beginning with the 1997 annual meeting, the successors to the directors whose terms will then expire will be elected to serve from the time of election and qualification until the third annual meeting following election and until their successors have been duly elected and qualified, or until their earlier resignation or removal, if any. Messrs. Halprin and Leone will be designated as Class I directors; Messrs. Flach and Strachman will be designated as Class II directors; and Messrs. Lauder and Ledbetter will be designated as Class III directors. A seventh director will be nominated as soon as practicable upon the closing of this offering. To the extent that there is an increase in the number of directors, additional directorships resulting therefrom will be distributed among the three classes so that, as nearly as possible, each class will consist of an equal number of directors. BOARD COMMITTEES The Audit Committee of the Board consists of Mr. Flach and Mr. Halprin. The Audit Committee reviews the Company's financial statements and accounting practices, makes recommendations to the Board regarding the selection of independent auditors and reviews the results and scope of the audit and other services provided by the Company's independent auditors. The Compensation Committee of the Board consists of Mr. Flach and Mr. Leone. The Compensation Committee makes recommendations to the Board concerning salaries and incentive compensation for the Company's officers and employees and administers the Company's employee benefit plans. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION None of the members of the Compensation Committee of the Board was, at any time since the formation of the Company, an officer or employee of the Company. No executive officer of the Company serves as a member of the board of directors or compensation committee of any entity that has one or more executive officers serving on the Company's Board or Compensation Committee. DIRECTOR COMPENSATION Directors of the Company do not receive cash compensation for their services as directors but are reimbursed for their reasonable expenses in attending meetings of the Board. In October 1994, Mr. Lauder and Mr. Halpin were granted options to acquire 18,519 and 7,408 shares of Common Stock, respectively, under the 1993 Plan, at an exercise price of $0.27 and $0.54 per share, respectively. 51 In September 1997, the Board adopted the Directors Plan and reserved a total of 100,000 shares of the Company's Common Stock for issuance thereunder. The Company's stockholders approved the Directors Plan in October 1997. Members of the Board who are not employees of the Company, or any parent, subsidiary or affiliate of the Company, are eligible to participate in the Directors Plan. Directors who are representatives of venture capital funds or corporate investors are not eligible to participate in the Directors Plan. Each eligible director who first becomes a member of the Board on or after the public offering ("Effective Date") will initially be granted an option for 15,000 shares (an "Initial Grant") on the later of the Effective Date or the date such director first becomes a director. At each annual meeting of stockholders thereafter, each eligible director will automatically be granted an additional option to purchase 5,000 shares if such director has served continuously as a member of the Board since the date of such director's Initial Grant (or since the Effective Date if such director did not receive an Initial Grant). All options issued under the Directors Plan will vest as to 25% of the shares on each anniversary of the date of grant, provided the optionee continues as a member of the Board or as a consultant to the Company. The exercise price of all options granted under the Directors Plan will be the fair market value of the Common Stock on the date of grant. EXECUTIVE COMPENSATION The following table sets forth all compensation awarded to, earned by or paid for services rendered to the Company in all capacities during the year ended December 31, 1996 by (i) the Company's chief executive officer and (ii) the three other most highly compensated executive officers other than the chief executive officer who were serving as executive officers of the Company during 1996 (collectively, the "Named Executive Officers"). SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION AWARD ANNUAL COMPENSATION ------------- ----------------------------------------------- SECURITIES OTHER ANNUAL UNDERLYING NAME AND PRINCIPAL POSITIONS YEAR SALARY BONUS COMPENSATION OPTIONS(#) - ---------------------------------------------------- --------- ---------- --------- ------------- ------------- Carl S. Ledbetter(1) ............................... 1996 $ 175,000 -- $ 61,299(2) 487,919 President and Chief Executive Officer Eduardo Moura(3) ................................... 1996 133,516 -- -- -- Former Vice President, Network Systems William H. Fry ..................................... 1996 70,000 -- -- 89,816 Vice President, Operations Gustavo Ezcurra(4) ................................. 1996 17,625 $ 32,835(5) -- 77,876 Vice President, Sales
- ------------------------------ (1) From November 21, 1995 through January 15, 1996, James R. Flach, a director of the Company, served as Acting Chief Executive Officer of the Company. In December 1995, Mr. Flach was granted options to acquire 10,702 shares of Common Stock at an exercise price of $1.08 per share for his services. Mr. Ledbetter replaced Mr. Flach as Chief Executive Officer on January 15, 1996. (2) Represents temporary living expenses paid by the Company. (3) Mr. Moura resigned from his position at the Company in November 1996. (4) Mr. Ezcurra joined the Company in September 1996. (5) Represents commissions. The current annual salary rates of the Company's officers are as follows: Mr. Ledbetter--$200,000; Mr. Steimle--$150,000; Mr. Fry--$135,000; and Mr. Ezcurra--$135,000. 52 The following table sets forth further information regarding option grants pursuant to the Company's Executive Officer Plan and the 1993 Incentive Plan during 1996 to each of the Named Executive Officers. In accordance with the rules of the Securities and Exchange Commission, the table sets forth the hypothetical gains or "option spreads" that would exist for the options at the end of their respective five year terms. These gains are based on assumed rates of annual compound stock price appreciation of 5% and 10% from the date the option was granted to the end of the option term. OPTION GRANTS IN 1996
POTENTIAL REALIZABLE VALUE AT ASSUMED NUMBER OF PERCENTAGE OF ANNUAL RATES OF STOCK SECURITIES TOTAL OPTIONS PRICE APPRECIATION UNDERLYING GRANTED TO FOR OPTION TERM(2) OPTIONS EMPLOYEES IN EXERCISE PRICE EXPIRATION --------------------- NAME GRANTED(1) 1996 PER SHARE DATE 5% 10% - ------------------------------------ ----------- --------------- --------------- ----------- --------- ---------- Carl S. Ledbetter................... 353,104 45.2% $ 0.54 01/22/01 $ 52,680 $ 116,410 134,815 17.2 0.54 07/08/01 20,113 44,445 Eduardo Moura(3).................... -- -- -- -- -- -- William H. Fry...................... 1,852 0.2 0.54 02/27/01 276 611 69,445 8.9 0.54 05/29/01 10,361 22,894 18,519 2.4 0.54 07/08/01 2,763 6,105 Gustavo Ezcurra..................... 77,876 10.0 1.08 08/21/01 23,237 51,348
- ------------------------------ (1) Options granted pursuant to the Executive Officer Plan and the 1993 Plan in 1996 generally have been incentive stock options or non-qualified stock options that were granted at fair market value and vest over a four-year period so long as the individual is employed by the Company. Options granted to executive officers generally expire five years from the date of grant. (2) The 5% and 10% assumed annual rates of stock price appreciation are mandated by the rules of the Securities and Exchange Commission and do not represent the Company's estimate or projection of future Common Stock prices. (3) Mr. Moura resigned from the Company in November 1996. The following table sets forth the number of shares acquired upon the exercise of stock options during 1996 and the number of shares covered by both exercisable and unexercisable stock options held by each of the Named Executive Officers as of December 31, 1996. Also reported are values of "in-the-money" options, which represent the positive spread between the respective exercise prices of outstanding stock options and the fair market value of the Company's Common Stock as of December 31, 1996 ($1.08) as determined by the Board. AGGREGATED OPTION EXERCISES IN 1996 AND YEAR-END VALUES
NUMBER OF SECURITIES VALUE OF UNEXERCISED UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS OPTIONS AT YEAR-END AT YEAR-END SHARES ACQUIRED VALUE -------------------------- -------------------------- NAME ON EXERCISE(#) REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE - -------------------------------- --------------- ----------- ----------- ------------- ----------- ------------- Carl S. Ledbetter............... -- -- 97,772 390,147 $ 52,797 $ 210,679 Eduardo Moura................... -- -- -- -- -- -- William H. Fry.................. 4,630 $ 2,500 18,230 69,734 9,844 37,656 Gustavo Ezcurra................. -- -- -- 77,876 -- --
EMPLOYMENT AGREEMENT In January 1996, the Company entered into a two year employment agreement with Mr. Ledbetter in which he agreed to serve as the Company's Chief Executive Officer during that period. The agreement provides for Mr. Ledbetter to receive a base salary of $175,000 per year and to be eligible for up to $75,000 in bonuses during the first year, based on achieving certain milestones, as well as regular employee 53 benefits, relocation costs of up to $97,500 and five year options to purchase up to 353,104 shares of the Company's Common Stock at $0.54 per share, vesting as to 12.5% six months after commencement of employment and 2.0833% per month for 42 months thereafter. The stock option grant provides for accelerated vesting in the event of a "Change of Control Transaction" (as defined in the Executive Officer Plan). The Company is prohibited from terminating Mr. Ledbetter's employment except for "Cause" (as defined in the employment agreement). INCENTIVE BASED COMPENSATION PROGRAM In July 1997, the Company adopted a bonus plan for the Company's officers and certain managers with respect to the three quarters ending December 31, 1997. Under the bonus plan, the Compensation Committee has assigned a target bonus for each participant, expressed as a percentage of the participant's annual salary (10% to 40% for the 12-month period). The extent to which participants receive their target bonuses for any quarter depends upon the Company's net sales and operating income for the quarter as well as the Company's results in a third category which varies from participant to participant. Actual bonuses may be greater or less than the target amount, depending on whether the Company's financial results exceed or fall short of specified goals. Bonus awards under the bonus plan are to be paid 50% in cash and 50% in stock for the two quarters ended June 30, 1997 and September 30, 1997 and entirely in cash for the quarter ended December 31, 1997. For the quarter ended September 30, 1997, the Company made no cash payments and issued no shares pursuant to the bonus plan. EMPLOYEE BENEFIT PLANS In October 1992, the Board adopted the 1992 Stock Issuance Plan (the "1992 Plan"). The 1992 Plan provided for the issuance of restricted stock awards. Under the 1992 Plan, up to 555,556 shares of Common Stock were reserved for issuance. The Company is no longer issuing restricted stock awards under the 1992 Plan. In October 1993, the Board adopted the 1993 Plan, which was amended in April 1995, December 1995 and July 1996. The 1993 Plan provides for the issuance of stock bonus awards and restricted stock awards as well as the grant of both incentive stock options ("ISOs") that qualify under Section 422 of the Internal Revenue Code and nonqualified stock options ("NQSOs"). Under the 1993 Plan, up to 1,186,035 shares of Common Stock were reserved for issuance. In December 1996, the Board adopted the 1996 Plan, which was amended in May 1997. The 1996 Plan provides for the grant of both ISOs and NQSOs. Under the 1996 Plan, up to 407,408 shares of Common Stock were reserved for issuance. As of June 30, 1997, options to purchase 1,010,156 shares of Common Stock were outstanding under the 1993 Plan and options to purchase 151,845 shares of Common Stock were outstanding under the 1996 Plan. In December 1995, the Board adopted the Executive Officer Plan, which was amended in July 1996. The Executive Officer Plan provides for the grant of both ISOs and NQSOs. Under the Executive Officer Plan, 500,000 shares of Common Stock were reserved for issuance, and in July and September 1997, this amount was increased to 770,000. To date, Mr. Ledbetter and Mr. Steimle have been granted options under the Executive Officer Plan to purchase 657,919 and 111,112 shares of Common Stock, respectively. Following the Effective Date, no additional options will be granted under the 1992 Plan, the 1993 Plan, the 1996 Plan or the Executive Officer Plan. The Executive Officer Plan provides that, if the Company enters into a Change of Control Transaction (as defined in the Executive Officer Plan) and a participant's responsibilities and position with the Company are materially diminished, such participant's option shall become exercisable on the date on which such transaction is consummated and shall continue to be exercisable for a period of one year commencing on the date on which such transaction is consummated. 1997 EQUITY INCENTIVE PLAN. In September 1997, the Board adopted the 1997 Incentive Plan. The Company's stockholders approved the 1997 Incentive Plan in October 1997. The 1997 Incentive Plan will become effective upon the Effective Date and will serve as the successor to the 1992 Plan, 1993 Plan, the Executive Officer Plan and the 1996 Plan (the "Prior Plans"). Options granted under the Prior Plans 54 before their termination will remain outstanding in accordance with their terms, but no further options will be granted under the Prior Plans after the Effective Date. The Company has reserved 1,750,000 shares of Common Stock for issuance under the 1997 Incentive Plan. Shares that (i) are issuable upon exercise of an option granted pursuant to the 1997 Incentive Plan but cease to be subject to such option for any reason other than exercise of such option, (ii) are subject to an award granted under the 1997 Incentive Plan but are forfeited or are repurchased by the Company at the original issue price or (iii) are subject to an award granted pursuant to the 1997 Incentive Plan that otherwise terminates without shares being issued, will again be available for grant and issuance in connection with future awards under the 1997 Incentive Plan. Any shares remaining unissued under the Prior Plans on the Effective Date and any shares issuable upon exercise of options granted pursuant to the Prior Plans, that expire or become unexercisable for any reason without having been exercised in full, will no longer be available for distribution under the Prior Plans but will be available for grant and issuance under the 1997 Incentive Plan. In addition, any shares issued under the Prior Plans that are repurchased or forfeited will be available for grant or issuance under the 1997 Incentive Plan. The number of shares reserved for issuance under the 1997 Incentive Plan will be automatically increased each year by an amount equal to 5% of the outstanding shares of the Company as of the first day of the year, unless the Board determines that such increases will not occur for a particular year. The 1997 Incentive Plan provides for the grant of stock options and stock bonuses and the issuance of restricted stock by the Company to its employees, officers, directors, consultants, independent contractors and advisers. No person will be eligible to receive more than 700,000 shares in any calendar year pursuant to grants under the 1997 Incentive Plan, other than new employees of the Company who will be eligible to receive up to a maximum of 1,000,000 shares in the calendar year in which they commence employment with the Company. The 1997 Incentive Plan will be administered by the Compensation Committee of the Board. The 1997 Incentive Plan permits the Compensation Committee to grant options that are either incentive stock options (as defined in Section 422 of the Code) or nonqualified stock options, on terms (including the exercise price, which may not be less than 85% of the fair market value of the Company's Common Stock, and the vesting schedule) determined by the Compensation Committee, subject to certain statutory and other limitations in the 1997 Incentive Plan. In addition to, or in tandem with, other awards under the 1997 Incentive Plan, the Compensation Committee may grant participants restricted stock awards to purchase the Company's Common Stock. The terms of such restricted stock awards may be determined by the Compensation Committee. The Compensation Committee may also grant stock bonus awards of the Company's Common Stock either in addition to, or in tandem with, other awards under the 1997 Incentive Plan, under such terms, conditions and restrictions as the Compensation Committee may determine. Such stock bonuses may be awarded for the satisfaction of performance goals established in advance. The Compensation Committee may only grant restricted stock awards and stock bonus awards for an aggregate of 300,000 shares over the term of the 1997 Incentive Plan. Over the term of the 1997 Incentive Plan, no more than 2,750,000 shares may be issued upon the exercise of incentive stock options. The 1997 Incentive Plan will terminate ten years from the Effective Date, unless terminated earlier in accordance with the provisions of the 1997 Incentive Plan. 1997 EMPLOYEE STOCK PURCHASE PLAN. In September 1997, the Board adopted the Purchase Plan and reserved a total of 225,000 shares of the Company's Common Stock for issuance thereunder. The Company's stockholders approved the Purchase Plan in October 1997. The Purchase Plan will become effective on the first business day on which price quotations for the Company's Common Stock are available on the Nasdaq National Market. The Purchase Plan permits eligible employees to acquire shares of the Company's Common Stock through payroll deductions. The Purchase Plan is intended to qualify as an "employee stock purchase plan" under Section 423 of the Code. Except for the initial offering, each offering under the Purchase Plan will be for a period of 24 months (the "Offering Period") commencing on February 1 and August 1 of each year and ending on January 31 and July 31 of each year. The first Offering Period will begin on the date on which price quotations for the Company's Common Stock are first available on the Nasdaq National Market and will end on July 31, 1999, unless otherwise determined by the 55 Board. Except for the first Offering Period, each Offering Period will consist of four purchase periods, each six months in length ("Purchase Period"). The Compensation Committee has the power to change the duration of Offering Periods or Purchase Periods without stockholder approval, provided that the change is announced at least 15 days prior to the scheduled beginning of the first Offering Period or Purchasing Period to be affected. Eligible employees may select a rate of payroll deduction between 2% and 15% of their compensation, subject to certain limits set forth in the Purchase Plan. The purchase price for the Company's Common Stock purchased under the Purchase Plan is 85% of the lesser of the fair market value of the Company's Common Stock on the first day of the applicable Offering Period or on the last day of the respective Purchase Period. 401(K) PLAN. The Company has adopted the Hybrid Networks, Inc. 401(k) Profit Sharing Plan (the "401(k) Plan") for eligible employees ("Participants"). Participants may contribute up to 15% of their current compensation, up to a statutorily prescribed annual limit, to the 401(k) Plan. Each Participant is fully vested in his or her deferred salary contributions. Participant contributions are held in trust and invested by the 401(k) Plan's trustees. Individual Participants may direct the trustee to invest their accounts in authorized investment alternatives. Pursuant to a Company resolution, the Company may make discretionary contributions to the 401(k) Plan to be allocated among Participants who meet certain service requirements. Discretionary contributions are subject to a five-year vesting schedule. The Company may also make qualified nonelective contributions on behalf of non-highly compensated employees. Each Participant is fully vested in his or her qualified non-elective contributions. The 401(k) Plan is intended to qualify under Section 401(a) of the Internal Revenue Code so that contributions to the 401(k) Plan, and income earned on such contributions, are not taxable to Participants until withdrawn or distributed from the 401(k) Plan. 56 CERTAIN TRANSACTIONS Since January 1, 1994, there has not been, nor is there currently proposed, any transaction or series of similar transactions to which the Company was or is to be a party in which the amount involved exceeds $60,000 and in which any director, executive officer or holder of more than 5% of the Common Stock of the Company had or will have a direct or indirect interest other than (i) compensation arrangements, which are described where required under "Management" and (ii) the transactions described below. In November 1993, the Company entered into an exclusive, royalty-bearing license agreement with Intel Corporation, a 5% stockholder of the Company, with respect to the Company's client technology and entered into a loan and warrant agreement (the "Loan Agreement") with Middlefield Ventures, Inc. ("Middlefield"), an affiliate of Intel, pursuant to which Middlefield loaned $2,000,000 to the Company and the Company issued certain warrants to purchase shares of the Company's capital stock. Middlefield assigned its rights under the Loan Agreement and accompanying note and warrants to Intel. In December 1995, (i) the Company and Intel entered into an Amended and Restated Technology License Agreement (the "Amended License Agreement") pursuant to which, among other things, Intel's exclusive license was converted into a nonexclusive royalty-bearing license and the parties granted certain royalty-free, nonexclusive cross licenses; (ii) in consideration for Intel's transfer of certain technology to the Company pursuant to the Amended License Agreement, the Company issued 262,222 shares of Common Stock to Intel; (iii) Intel converted $1.5 million of prepaid royalties it had paid to the Company into shares of the Company's Series F Preferred Stock convertible into 365,518 shares of Common Stock and one-year warrants to purchase shares of the Company's Series B Preferred Stock convertible into an aggregate of 169,260 shares of Common Stock at an exercise price of $4.73 per share; and (iv) Intel, pursuant to the warrants that the Company had granted under the Loan Agreement, exercised those warrants and purchased from the Company, in consideration for the cancellation of the Company's indebtedness to Middlefield in the amount of $2.0 million plus accrued interest, shares of the Company's Series E Preferred Stock convertible into 487,358 shares of Common Stock. In December 1996, Intel exercised its warrants on a net basis for the Series B Preferred Stock for shares of Series B Preferred Stock convertible into 91,922 shares of Common Stock. In 1994, 1995, 1996 and the first nine months of 1997, Intel purchased products from the Company for approximately $397,800, $325,300, $613,200 and $0, respectively. While Intel no longer purchases products from the Company, it remains a stockholder of the Company and maintains certain licensing and manufacturing rights to certain Hybrid products. In October 1994, the Company sold shares of Series B Preferred Stock convertible into 164,022 shares of Common Stock, at an aggregate purchase price of $775,000, to Gary M. Lauder, a director of the Company. In November 1994, pursuant to the exercise of rights of first refusal, the Company sold shares of Series B Preferred Stock convertible into 26,825 shares of Common Stock at an aggregate purchase price of $126,746 to OSCCO III, L.P. ("OSCCO"), a 5% stockholder of the Company (of which Stephen E. Halprin, a director of the Company, is a partner). In May 1995, the Company sold shares of Series D Preferred Stock convertible into a total of 1,058,202 shares of Common Stock at an aggregate purchase price of $5,000,002 and issued warrants for shares of Series D Preferred Stock convertible into 529,101 shares of Common Stock and shares of Series B Preferred Stock convertible into 76,245 shares of Common Stock at an exercise price of $4.73 per share. This included sales to (i) partnerships associated with Sequoia Capital (the "Sequoia Partnerships"), a 5% stockholder of the Company (of which Douglas M. Leone, a director of the Company, is a partner), of shares convertible into 406,351 shares of Common Stock and one-year warrants to purchase shares of Series D Preferred Stock convertible into 203,176 shares of Common Stock, (ii) partnerships associated with Accel Partners (the "Accel Partnerships"), a 5% stockholder of the Company (of which James R. Flach, a director of the Company, is a partner), of shares convertible into 423,284 shares of Common Stock and one-year warrants to purchase shares of Series D Preferred Stock convertible into 211,643 shares of 57 Common Stock and (iii) AT&T Venture Co., L.P., later renamed Venture Fund I, L.P. ("Venture Fund"), a 5% stockholder of the Company, of shares convertible into 211,640 shares of Common Stock and one-year warrants to purchase shares of Series D Preferred Stock convertible into 105,820 shares of Common Stock. Pursuant to the exercise of rights of first refusal, Mr. Lauder received one-year warrants to purchase shares of Series B Preferred Stock convertible into 63,493 shares of Common Stock and OSCCO received one-year warrants to purchase shares of Series B Preferred Stock convertible into 6,005 shares of Common Stock in May 1995. In June 1995, pursuant to the exercise of rights of first refusal, certain entities purchased additional shares of Series D Preferred Stock convertible into 126,985 shares of Common Stock (for an aggregate purchase price of $600,002) and received one-year warrants to purchase shares of Series D Preferred Stock convertible into 63,493 shares of Common Stock at an exercise price of $4.73 per share. As part of this transaction, OSCCO purchased shares of Series D Preferred Stock convertible into 82,758 shares of Common Stock and a one-year warrant to purchase shares of Series D Preferred convertible into 41,379 shares of Common Stock. In June 1996, the Company obtained a $3.2 million Bridge Loan from Sequoia Partnerships ($1.0 million), the Accel Partnerships ($1.0 million), Venture Fund ($500,000), Gary Lauder ($300,000), OSCCO ($223,886) and two other investors and issued to such lenders convertible promissory notes due in December 1996 (the "Bridge Notes"). The Bridge Notes were secured by security interests in substantially all the Company's assets. In connection with obtaining the bridge loan, the Company also (i) extended from June 1996 to June 2001 the expiration dates of the outstanding warrants held by the Sequoia Partnerships, the Accel Partnerships, Venture Fund, OSCCO and others to purchase shares of Series D Preferred Stock and the outstanding warrants held by Gary Lauder, OSCCO Ventures and another investor to purchase shares of Series B Preferred Stock and (ii) issued to the holders of the Bridge Notes additional five-year warrants to purchase shares of Series D Preferred Stock convertible into an aggregate of 167,038 shares of Common Stock at an exercise price of $4.73 per share, including warrants for shares convertible into 50,742, 52,857, 26,428, 15,857 and 11,834 shares of Common Stock to the Sequoia Partnerships, the Accel Partnerships, Venture Fund, Gary Lauder and OSCCO, respectively. In addition, in consideration for the agreement of certain of the investors in the bridge loan to reduce the preferences of the Series D Preferred Stock, two founders of the Company, Howard L. Strachman and Eduardo J. Moura, sold an aggregate of 210,573 shares of Common Stock, including 199,702 shares to the following entities in the following amounts at a purchase price of $0.54 per share: the Sequoia Partnerships, 72,195 shares; the Accel Partnerships, 75,202 shares; Venture Fund, 37,602 shares; and OSCCO, 14,703 shares. In July 1996, the Company sold shares of Series G Preferred Stock convertible into 974,952 shares of Common Stock at an aggregate purchase price of $10,081,969. Upon the consummation of the Series G Preferred Stock financing, the Bridge Notes were converted into shares of Series G Preferred. The Bridge Notes held by the Sequoia Partnerships, the Accel Partnerships, Venture Fund, Gary Lauder and OSCCO were converted into shares of Series G Preferred Stock convertible into 92,836, 96,705, 48,352, 29,011 and 21,651 shares of Common Stock, respectively. In April 1997, London Pacific Life & Annuity Company ("London Pacific") and the Company entered into a senior secured convertible debenture agreement pursuant to which London Pacific loaned $5.5 million to the Company in exchange for a senior secured convertible debenture due 2002. In connection with the issuance of the $5.5 Million Debenture, the Company paid a fee of $500,000 to London Pacific International Limited, a subsidiary of London Pacific. The loan accrues interest at a rate of 12% per annum, payable quarterly, and its term ends in April 2002, at which time the full principal amount is due. The loan is secured by substantially all of the Company's assets, and the Company is subject to certain restrictive covenants while the $5.5 Million Debenture is outstanding. In August 1997, the $5.5 Million Debenture was transferred to BG Services Limited, an affiliate of London Pacific. The $5.5 Million Debenture is convertible into 513,423 shares of Common Stock, assuming a conversion price of $10.71 per share, at the option of BG Services Limited at any time and will automatically convert into that number of shares if (i) the gross proceeds to the Company from this offering are at least $15.0 million, (ii) the public 58 offering price per share is at least $166.5 million divided by the number of fully diluted shares of capital stock of the Company (as determined pursuant to the terms of the $5.5 Million Debenture) prior to this offering (the "Minimum Price") and (iii) the closing price of the Common Stock after this offering is equal to or greater than the Minimum Price for any 90 consecutive calendar day period after this offering. In 1994, 1995, 1996 and the first nine months of 1997, the Company paid $40,000, $40,000, $26,879 and $0, respectively, to Howard Strachman, a founder of the Company, and $40,000, $40,000, $15,621 and $0, respectively, to Eduardo J. Moura, a founder of the Company, in compensation for services rendered by them during 1992 and 1993. In September 1997, Dan Steimle, the Company's Vice President, Finance and Administration and Chief Financial Officer and Sequoia Partnerships loaned the Company $500,000 and $300,000, respectively, under a demand note exchangeable for Subordinated Notes. In September 1997, the Company entered into an agreement to issue the Subordinated Notes at a face value of $6,882,201 and related warrants to acquire 252,381 shares of Common Stock at a price of $10.91 per share. The following affiliates of the Company participated in the Subordinated Notes and related warrant transaction:
NUMBER OF SHARES SUBORDINATED OF COMMON STOCK NAME NOTES SUBJECT TO WARRANTS - ----------------------------------------------------------- ------------ ------------------- Sequoia Partnerships....................................... $ 300,000 11,001 Accel Partnerships......................................... 250,000 9,167 OSCCO...................................................... 200,000 7,334 Gary Lauder................................................ 100,000 3,667 Dan Steimle................................................ 500,000 18,335(1)
- ------------------------------ (1) One-half of the warrants were issued to Mr. Steimle's wife. During the nine months ended September 30, 1997, Network Systems Technologies, Inc., of which Eduardo Moura is President, Chief Executive Officer and a major stockholder, was a greater than 10% customer of the Company. During that period, Network Systems Technologies, Inc. accounted for net sales of the Company of $578,000. 59 PRINCIPAL AND SELLING STOCKHOLDERS The following table sets forth certain information known to the Company with respect to beneficial ownership of the Company's Common Stock as of September 30, 1997 by (i) each stockholder known by the Company to be the beneficial owner of more than 5% of the Company's Common Stock, (ii) each director of the Company, (iii) each of the Named Executive Officers (as defined in "Management-- Executive Compensation") and (iv) all executive officers and directors as a group.
PERCENTAGE OF SHARES NUMBER OF SHARES BENEFICIALLY OWNED BENEFICIALLY -------------------------------------- NAME OF BENEFICIAL OWNER OWNED(1) BEFORE OFFERING AFTER OFFERING(2) - ---------------------------------------------------------- -------------------- ----------------- ------------------- Intel Corporation(3)...................................... 1,207,020 16.6% 12.1% Strachman Family Revocable Trust(4)....................... 916,710 12.6 9.2 James R. Flach Accel Partners(5)....................................... 879,562 11.6 8.6 Douglas M. Leone Sequoia Capital(6)...................................... 870,691 11.5 8.5 Eduardo J. Moura(7)....................................... 687,532 9.5 6.9 BG Services Limited(8).................................... 513,423 6.6 4.9 OSCCO III, L.P.(9)........................................ 496,405 6.8 4.9 Venture Fund I, L.P.(10).................................. 439,274 5.9 4.3 Gary M. Lauder(11)........................................ 294,569 4.0 2.9 Carl S. Ledbetter(12)..................................... 210,681 2.8 2.1 William H. Fry(13)........................................ 43,431 * * Gustavo Ezcurra(14)....................................... 26,007 * * Stephen E. Halprin(15).................................... 462 * * All executive officers and directors as a group (9 persons)(16)............................................. 3,297,486 39.9% 30.1%
- ------------------------------ * Represents less than 1% of the Company's outstanding Common Stock. (1) Unless otherwise indicated below, the persons and entities named in the table have sole voting and sole investment power with respect to all shares beneficially owned, subject to community property laws where applicable. Shares of Common Stock subject to options or warrants that are currently exercisable or exercisable within 60 days of September 30, 1997 and the $5.5 Million Debenture, which is convertible immediately at the option of the holder, are deemed to be outstanding and to be beneficially owned by the person holding such options, warrants or the $5.5 Million Debenture for the purpose of computing the percentage ownership of such person but are not treated as outstanding for the purpose of computing the percentage ownership of any other person. This table does not include Alcatel, which was granted a warrant to purchase 458,295 shares of Common Stock by the Company in November 1997, which represents 5.9% and 4.4% of the shares beneficially owned before and after the offering, respectively. (2) Assumes that the Underwriters' over-allotment option to purchase up to 405,000 shares from the Company and the Selling Stockholders is not exercised. If the Underwriters' over-allotment option is exercised in full, the total number of shares to be sold by each Selling Stockholder, the number of shares beneficially owned before and after the offering by each Selling Stockholder, and the percentage of shares beneficially owned before and after the offering by each Selling Stockholder, would be as follows:
SHARES BENEFICIALLY OWNED SHARES BENEFICIALLY OWNED PRIOR TO OFFERING AFTER OFFERING ---------------------------- ---------------------------- NUMBER OF SHARES NUMBER OF NAME OF BENEFICIAL OWNER SHARES PERCENTAGE OFFERED SHARES PERCENTAGE - ------------------------------------------ ----------- --------------- ----------- ----------- --------------- MOD Fund.................................. 279,760 3.8% 69,940 209,820 2.1% Kistler Associates........................ 29,630 * 29,630 -- * Susan Harman Niethold..................... 28,573 * 26,492 2,081 * Catherine P. Lego......................... 78,922 1.1 10,000 68,922 * Aubrey K. McClendon....................... 19,341 * 19,341 -- * Howard E. Rachofsky....................... 19,341 * 19,341 -- * Milton M. Shiffman........................ 19,341 * 19,341 -- * TLW Investments, Inc...................... 19,341 * 19,341 -- * ABS Employees' Venture Fund L.P........... 40,717 * 11,387 29,330 *
60
SHARES BENEFICIALLY OWNED SHARES BENEFICIALLY OWNED PRIOR TO OFFERING AFTER OFFERING ---------------------------- ---------------------------- NUMBER OF SHARES NUMBER OF NAME OF BENEFICIAL OWNER SHARES PERCENTAGE OFFERED SHARES PERCENTAGE - ------------------------------------------ ----------- --------------- ----------- ----------- --------------- HBA Partnership........................... 24,075 * 7,500 16,575 * Kim S. Peyser............................. 24,260 * 24,260 -- * Needham Capital Group Inc................. 4,836 * 4,836 -- * Cardiovascular Medical Group of Southern California.............................. 4,836 * 2,835 2,001 * Edward D. Baker........................... 9,704 * 4,703 5,001 * ----------- 268,947
(3) Includes 487,357 shares held by Middlefield Ventures, Inc., an affiliate of Intel. Intel's address is 2200 Mission College Boulevard, Santa Clara, CA 95052. (4) Mr. Strachman, a trustee of the Strachman Family Revocable Trust, was a co-founder of the Company and served as its President and Chief Executive Officer from June 1990 until his resignation in July 1995. He is currently a director of the Company. Mr. Strachman's address is c/o Ultracom Communications, Inc., 21580 Stevens Creek Blvd., Cupertino, CA 95014. (5) Represents ownership by the following entities associated with Accel Partners: 545,193 shares and 250,677 shares subject to warrants held by Accel IV, L.P., 25,594 shares and 11,769 shares subject to warrants held by Accel Investors '95 L.P., 13,095 shares and 6,022 shares subject to warrants held by Ellmore C. Patterson Partners, 11,309 shares and 5,202 shares subject to warrants held by Accel Keiretsu L.P. Also includes 10,701 shares subject to options exercisable within 60 days of September 30, 1997 held by Mr. Flach granted in connection with services performed by Mr. Flach for the Company. Mr. Flach, a director of the Company, is a venture partner of Accel Partners and holds no voting or dispositive power with respect to any of these shares. The address of Mr. Flach and the Accel partnerships is One Palmer Square, Princeton, NJ 08542. (6) Represents 541,621 shares and 250,703 shares subject to warrants held by Sequoia Capital VI, 29,761 shares and 13,776 shares subject to warrants held by Sequoia Technology Partners VI, ("STP VI"), 16,932 shares and 440 shares subject to warrants held by Sequoia XXIV and 6,877 shares and 10,581 shares subject to warrants held by Sequoia 1995. Mr. Leone, a director of the Company, is a general partner of STP VI and of the general partner of Sequoia Capital VI. The address of Mr. Leone and the Sequoia funds is 3000 Sand Hill Road, Menlo Park, CA 94025. (7) Mr. Moura was a co-founder of the Company and served as its Vice President, Network Systems from June 1990 until his resignation in November 1996 and as a director until his resignation in January 1996. Mr. Moura's address is 3509 Mt. Davidson Court, San Jose, CA 95124. (8) Represents shares issuable upon the conversion, at the option of the holder at any time, of $5.5 million in principal amount of the $5.5 Million Debenture. See "Certain Transactions." The address of BG Services Limited is c/o Minden House, 6 Minden Place, St. Helier, Jersey, Channel Islands. (9) Includes 66,553 shares subject to warrants. The address of OSCCO III, L.P. is 3000 Sand Hill Road, 1-290, Menlo Park, CA 94025. (10) Includes 141,680 shares subject to warrants. The address of Venture Fund I, L.P., is 3000 Sand Hill Road, Menlo Park, CA 94025. (11) Includes 83,018 shares subject to warrants and 18,518 shares subject to options exercisable within 60 days of September 30, 1997. Mr. Lauder is a director of the Company. (12) Includes 209,584 shares subject to options exercisable within 60 days of September 30, 1997. Mr. Ledbetter is the President, Chief Executive Officer and Chairman of the Board of Directors of the Company. (13) Includes 38,386 shares subject to options exercisable within 60 days of September 30, 1997. Mr. Fry is Vice President, Operations of the Company. (14) Includes 25,799 shares subject to options exercisable within 60 days of September 30, 1997. Mr. Ezcurra is Vice President, Sales of the Company. (15) Represents shares subject to options exercisable within 60 days of September 30, 1997. Mr. Halprin is a director of the Company. (16) Includes 650,524 shares subject to warrants and 340,487 shares subject to options exercisable within 60 days of September 30, 1997 held by executive officers and directors of the Company. 61 DESCRIPTION OF CAPITAL STOCK Immediately following the closing of this offering, the authorized capital stock of the Company will consist of 100,000,000 shares of Common Stock, $0.001 par value per share, and 5,000,000 shares of Preferred Stock, $0.001 par value per share. As of September 30, 1997, and assuming the conversion of all outstanding Preferred Stock into Common Stock immediately prior to the closing of this offering, there were outstanding 7,273,311 shares of Common Stock held of record by 161 stockholders, warrants to purchase 1,160,558 shares of Common Stock, options to purchase 1,974,242 shares of Common Stock and a $5.5 Million Debenture convertible into 513,423 shares of Common Stock. COMMON STOCK Subject to preferences that may apply to shares of Preferred Stock outstanding at the time, the holders of outstanding shares of Common Stock are entitled to receive dividends out of assets legally available therefor at such times and in such amounts as the Board of Directors may from time to time determine. Each stockholder is entitled to one vote for each share of Common Stock held on all matters submitted to a vote of stockholders. Cumulative voting for the election of directors is not provided for in the Company's Certificate of Incorporation, which means that the holders of a majority of the shares voted can elect all of the directors then standing for election. The Common Stock is not entitled to preemptive rights and is not subject to conversion or redemption. Upon a liquidation, dissolution or winding-up of the Company, the assets legally available for distribution to stockholders are distributable ratably among the holders of the Common Stock and any participating Preferred Stock outstanding at that time after payment of liquidation preferences, if any, on any outstanding Preferred Stock and payment of other claims of creditors. Each outstanding share of Common Stock is, and all shares of Common Stock to be outstanding upon completion of this offering will be, fully paid and nonassessable. PREFERRED STOCK Upon the closing of this offering, all outstanding shares of Preferred Stock (the "Convertible Preferred") will be converted into shares of Common Stock. See Note 9 of Notes to Financial Statements for a description of the Convertible Preferred. The Board of Directors is authorized, subject to limitations prescribed by Delaware law, to provide for the issuance of additional shares of Preferred Stock in one or more series, to establish from time to time the number of shares to be included in each such series, to fix the powers, designations, preferences and rights of the shares of each wholly unissued series and designate any qualifications, limitations or restrictions thereon and to increase or decrease the number of shares of any such series (but not below the number of shares of such series then outstanding) without any further vote or action by the stockholders. The issuance of Preferred Stock with voting or conversion rights could adversely affect the voting power or other rights of the holders of Common Stock and may have the effect of delaying, deferring or preventing a change in control of the Company. The Company has no current plan to issue any shares of Preferred Stock. WARRANTS As of September 30, 1997, the Company had outstanding exercisable warrants to purchase 844,353 shares of Common Stock at $4.73 per share. Warrants to purchase 835,887 and 8,466 of such shares expire in June 2001 and August 2005, respectively. The Company also had outstanding warrants to purchase 63,824 shares at $10.34 per share. Warrants to purchase 58,022 and 5,802 of such shares expire in July 2001 and August 2006, respectively. In addition, warrants to purchase 252,381 shares of Common Stock (assuming that the Subordinated Notes and all accrued interest thereon are repayed in full with the proceeds of this offering) at $10.91 per share expire in September 2002 and a warrant to purchase 2,659 shares of Common Stock at $10.91 per share expires in October 2002. In November 1997, the Company issued to Alcatel a warrant to purchase 458,295 shares of Common Stock at $10.91 per share that expires in November 2002. See "Business--Research and Development." 62 CONVERTIBLE $5.5 MILLION DEBENTURE The Company has outstanding a senior secured convertible debenture due 2002 in the principal amount of $5.5 million to London Pacific. The loan accrues interest at a rate of 12% per annum, payable quarterly and its term ends in April 2002, at which time the full principal amount is due. In August 1997, the $5.5 Million Debenture was transferred to BG Services Limited. The $5.5 Million Debenture is convertible into 513,423 shares of Common Stock, assuming a conversion price of approximately $10.71 per share, at the option of the holder at any time and will automatically convert into that number of shares if (i) the gross proceeds to the Company from this offering are at least $15.0 million, (ii) the public offering price per share is at least equal to the Minimum Price and (iii) the closing price of the Common Stock after this offering is equal to or greater than the Minimum Price for any 90 consecutive calendar day period after this offering or, alternatively, upon the acquisition of the Company for at least $166.5 million in cash or fair market value of freely tradeable securities from the acquiring company. The $5.5 Million Debenture is collateralized by substantially all of the Company's assets, and as long as the $5.5 Million Debenture is outstanding the Company is subject to certain restrictive covenants, including limitations on the amount of capital expenditures it may incur in any 12 month period, and may not declare dividends, retire any subordinated debt other than in accordance with its terms, or distribute its assets to any stockholder. See Note 6 to Notes to Financial Statements. SUBORDINATED NOTES In September 1997, the Company entered into an agreement to issue subordinated notes in the principal amount of approximately $6.9 million. The Subordinated Notes bear interest which must be paid quarterly at the rate of 10% per annum until the earlier of March 30, 1998 or the date on which the principal amount is paid in full, and if such principal amount is not repaid as of March 30, 1998, the Subordinated Notes will bear interest at the rate of 18% per annum beginning after such date. The Subordinated Notes shall become due and payable upon the closing of this offering. The Subordinated Notes contain certain restrictive covenants that limit the amount of capital expenditures the Company may incur in any 12 month period and the borrowing of additional funds and prohibit the Company from, among other things, declaring dividends and distributing assets so long as the Subordinated Notes are oustanding. See Note 5 to Notes to Financial Statements. ANTI-TAKEOVER PROVISIONS DELAWARE LAW Section 203 ("Section 203") of the Delaware General Corporation Law ("DGCL") is applicable to corporate takeovers of Delaware corporations. Subject to certain exceptions set forth therein, Section 203 provides that a corporation shall not engage in any business combination with any "interested stockholder" for a three-year period following the date that such stockholder becomes an interested stockholder unless (a) prior to such date, the board of directors of the corporation approved either the business combination or the transaction which resulted in the stockholder becoming an interested stockholder, (b) upon consummation of the transaction which resulted in the stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced (excluding certain shares) or (c) on or subsequent to such date, the business combination is approved by the board of directors of the corporation and by the affirmative votes of at least two-thirds of the outstanding voting stock which is not owned by the interested stockholder. Except as specified in Section 203, an interested stockholder is generally defined to include any person that is the owner of 15% or more of the outstanding voting stock of the corporation, or is an affiliate or associate of the corporation and was the owner of 15% or more of the outstanding voting stock of the corporation, or is an affiliate or associate of the corporation and was the owner of 15% or more of the outstanding voting stock of the corporation any time within three years immediately prior to the relevant date, and the affiliates and associates of such person. Under certain circumstances, Section 203 makes it more difficult for an interested stockholder to effect various business combinations with a corporation for a three-year period, although the stockholders may, by adopting an amendment to the corporation's certificate of incorporation or bylaws, 63 elect not to be governed by this section, effective 12 months after adoption. The Company's certificate of incorporation and the bylaws do not exclude the Company from the restrictions imposed under Section 203. It is anticipated that the provisions of Section 203 may encourage companies interested in acquiring the Company to negotiate in advance with the Board of Directors of the Company since the stockholder approval requirement would be avoided if a majority of the directors then in office approve either the business combination or the transaction which resulted in the stockholder becoming an interested stockholder. These provisions may have the effect of deterring hostile takeovers or delaying changes in control of the Company, which could depress the market price of the Common Stock and which could deprive the stockholders of opportunities to realize a premium on shares of the Common Stock held by them. CHARTER AND BYLAW PROVISIONS The Company's certificate of incorporation and bylaws contain certain provisions that could discourage potential takeover attempts and make more difficult attempts by stockholders to change management. The certificate of incorporation and the bylaws provide for a classified Board of Directors and permit the Board to create new directorships and to elect new directors to serve for the full term of the class of director in which the new directorship was created. The terms of the directors are staggered to provide for the election of approximately one-third of the Board members each year, with each director serving a three-year term. The Board (or its remaining members, even though less than a quorum) is also empowered to fill vacancies on the Board occurring for any reason for the remainder of the term of the class of directors in which the vacancy occurred. Stockholders may remove a director or the entire Board, and such removal requires the affirmative vote of a majority of the outstanding voting stock. The Company's certificate of incorporation provides that stockholders may not take action by written consent but only at a stockholders' meeting, and that special meetings of the stockholders of the Company may only be called by the Chairman of the Board or a majority of the Board. REGISTRATION RIGHTS Beginning six months after the date of this offering, the holders of 6,257,827 shares of Common Stock, the holders of warrants to purchase 1,148,949 shares of Common Stock and the holders of the $5.5 Million Debenture convertible into 513,423 shares of Common Stock (collectively, the "Registrable Securities") will have certain rights with respect to the registration of those shares under the Securities Act, assuming no exercise of the Underwriters' over-allotment option. In addition, in November 1997 the Company issued to Alcatel a five-year warrant to purchase 458,295 shares of Common Stock, and the shares underlying such warrant are Registrable Securities. If the Company proposes to register any of its shares of Common Stock under the Securities Act other than in connection with a Company employee benefit plan or certain corporate acquisitions, mergers or reorganizations, the holders of the Registrable Securities may require the Company to include all or a portion of their shares in such registration, subject to certain rights of the managing underwriter to limit the number of shares in any such offering. Further, holders of Registrable Securities holding at least 30% of the outstanding shares of Registrable Securities may require the Company to register all or any portion of their Registrable Securities on Form S-3 when such form becomes available to the Company, subject to certain conditions and limitations. The Company may be required to effect up to one such registration per year. In addition holders of a majority of the warrants issued in connection with the Subordinated Notes and the Credit Facility and shares of Common Stock exercisable thereunder may require the Company to register one time all or any portion of the shares issuable upon exercise of such warrants on Form S-3 commencing one year after the offering and, subject to certain limitations, to keep the Registration effective for no less than 180 days. All expenses incurred in connection with such registrations (other than underwriters' discounts and commissions) will be borne by the Company. The registration rights expire six years after the closing of this offering. In addition, no holder of Registrable Securities shall be entitled to registration rights if and so long as such holder can sell the Registrable Securities in compliance with Rule 144 of the Securities Act. TRANSFER AGENT AND REGISTRAR The Transfer Agent and Registrar for the Company's Common Stock is Boston EquiServe. 64 SHARES ELIGIBLE FOR FUTURE SALE Prior to this offering, there has been no market for the Common Stock of the Company and there can be no assurance that a significant public market for the Common Stock, will develop or be sustained after this offering. Future sales of substantial amounts of Common Stock (including shares issued upon exercise of outstanding options and warrants and upon conversion of the $5.5 Million Debenture) in the public market after this offering could adversely affect market prices prevailing from time to time and could impair the Company's ability to raise capital through the sale of its equity or debt securities. As described below, no shares currently outstanding will be available for sale immediately after this offering due to certain contractual restrictions on resale. Sales of substantial amounts of Common Stock of the Company in the public market after the restrictions lapse could adversely affect the prevailing market price and the ability of the Company to raise equity capital in the future. Upon completion of this offering, the Company will have outstanding 9,973,311 shares of Common Stock, assuming no exercise of the Underwriters' over-allotment option, no exercise of outstanding options or warrants and no conversion of the $5.5 Million Debenture. Of these shares, the 2,700,000 shares sold in this offering will be freely tradable without restriction under the Securities Act unless purchased by "affiliates" of the Company as that term is defined in Rule 144 under the Securities Act. The remaining 7,273,311 shares held by existing stockholders (the "Restricted Shares") are subject to lock-up agreements providing that, with certain limited exceptions, the stockholder will not offer, sell, contract to sell, grant an option to purchase, make a short sale or otherwise dispose of or engage in any hedging or other transaction that is designed or reasonably expected to lead to a disposition of any shares of Common Stock or any option or warrant to purchase shares of Common Stock or any securities exchangeable for or convertible into shares of Common Stock for a period of 180 days after the date of this Prospectus without the prior written consent of the representatives of the Underwriters. As a result of these lock-up agreements, notwithstanding possible earlier eligibility for sale under the provisions of Rules 144, 144(k) and 701, none of these shares will be saleable until 181 days after the date of this Prospectus. Beginning 181 days after the date of this Prospectus, the 7,273,311 Restricted Shares will be eligible for sale in the public market, although all but 3,067,038 shares will be subject to certain volume limitations. Holders of warrants for 1,148,949 shares of Common Stock of the Company and the holder of the $5.5 Million Debenture which may be converted at the option of the holder at any time into 513,423 shares of Common Stock, have certain registration rights, but are also subject to 180-day lock-up agreements. In addition, the warrant for 458,295 shares of Common Stock granted to Alcatel in November 1997 has certain registration rights, but the warrant and the shares underlying such warrant are subject to a 180-day lock-up agreement. In general, under Rule 144 as currently in effect, beginning 90 days after the date of this Prospectus, a person (or persons whose shares are aggregated) who has beneficially owned Restricted Shares for at least one year (including the holding period of any prior owner except an affiliate) would be entitled to sell within any three-month period a number of shares that does not exceed the greater of: (i) 1% of the number of shares of Common Stock then outstanding (which will equal approximately 100,000 shares immediately after this offering); or (ii) the average weekly trading volume of the Common Stock during the four calendar weeks preceding the filing of a Form 144 with respect to such sale. Sales under Rule 144 are also subject to certain manner of sale provisions and notice requirements and to the availability of current public information about the Company. Under Rule 144(k), a person who is not deemed to have been an affiliate of the Company at any time during the three months preceding a sale, and who has beneficially owned the shares proposed to be sold for at least two years (including the holding period of any prior owner except an affiliate), is entitled to sell such shares without complying with the manner of sale, public information, volume limitation or notice provisions of Rule 144. Rule 701 permits resales of shares in reliance upon Rule 144 but without compliance with certain restrictions, including the holding period requirement, of Rule 144. Any employee, officer or director of or consultant to the Company who purchased his or her shares pursuant to a written compensatory plan or contract may be entitled to rely on the resale provisions of Rule 701. Rule 701 permits affiliates to sell their 65 Rule 701 shares under Rule 144 without complying with the holding period requirements of Rule 144. Rule 701 further provides that non-affiliates may sell such shares in reliance on Rule 144 without having to comply with the holding period, public information, volume limitation or notice provisions of Rule 144. All holders of Rule 701 shares are required to wait until 90 days after the date of this Prospectus before selling such shares. However, all shares issued pursuant to Rule 701 are subject to lock-up agreements and will only become eligible for sale at the earlier of the expiration of the 180-day lock-up agreements or no sooner than 90 days after the offering upon obtaining the prior written consent of the representatives of the Underwriters. Immediately after this offering, the Company intends to file a registration statement under the Securities Act covering shares of Common Stock subject to outstanding options under the Company's Executive Officer Plan, 1993 Plan and 1996 Plan and reserved for issuance under the 1997 Incentive Plan, the Directors Plan and the Purchase Plan. Based on the number of shares subject to outstanding options at September 30, 1997 and currently reserved for issuance under all such plans, such registration statement would cover approximately 4,020,455 shares. Such registration statement will automatically become effective upon filing. Accordingly, shares registered under such registration statement will, subject to Rule 144 volume limitations applicable to affiliates of the Company, be available for sale in the open market immediately after the 180-day lock-up agreements expire. Also beginning six months after the date of this offering, certain holders of shares of Common Stock and warrants to acquire Common Stock and the holder of the $5.5 Million Debenture will be entitled to certain rights with respect to registration of such shares of Common Stock for offer and sale to the public. See "Description of Capital Stock-- Registration Rights." 66 UNDERWRITING The Underwriters named below (the "Underwriters"), represented by NationsBanc Montgomery Securities, Inc. and UBS Securities LLC (the "Representatives"), have severally agreed, subject to the terms and conditions set forth in the Underwriting Agreement, to purchase from the Company the number of shares of Common Stock indicated below opposite their respective names at the initial public offering price less the underwriting discount set forth on the cover page of this Prospectus. The Underwriting Agreement provides that the obligations of the Underwriters to pay for and accept delivery of the shares of Common Stock are subject to certain conditions precedent, and that the Underwriters are committed to purchase all of such shares, if any are purchased.
NUMBER OF UNDERWRITERS SHARES - --------------------------------------------------------------------------------- ---------- NationsBanc Montgomery Securities, Inc........................................... UBS Securities LLC............................................................... ---------- Total........................................................................ 2,700,000 ---------- ----------
The Representatives have advised the Company that the Underwriters propose initially to offer the shares of Common Stock to the public on the terms set forth on the cover page of this Prospectus. The Underwriters may allow to selected dealers a concession of not more than $ per share, and the Underwriters may allow, and such dealers may reallow, a concession of not more than $ per share to certain other dealers. After this offering, the price and concessions and reallowances to dealers may be changed by the Representatives. The Common Stock is offered subject to receipt and acceptance by the Underwriters and to certain other conditions, including the right to reject orders in whole or in part. The Company and the Selling Stockholders have granted an option to the Underwriters, exercisable during the 30-day period after the date of this Prospectus, to purchase up to a maximum of 405,000 additional shares of Common Stock to cover over-allotments, if any, at the same price per share as the initial 2,700,000 shares to be purchased by the Underwriters. To the extent the Underwriters exercise this option, each of the Underwriters will be committed, subject to certain conditions, to purchase such additional shares in approximately the same proportion as set forth in the above table. The Underwriters may purchase such shares only to cover over-allotments made in connection with this offering. The Underwriting Agreement provides that the Company and, to the extent the Underwriters' over-allotment option is exercised, the Selling Stockholders will indemnify the several Underwriters against certain liabilities, including civil liabilities under the Securities Act, or will contribute to payments the Underwriters may be required to make in respect thereof. All of the Company's stockholders have agreed that, for a period of 180 days after the date of this Prospectus, they will not, without the prior written consent of NationsBanc Montgomery Securities, Inc., directly or indirectly sell, offer to sell or otherwise dispose of any such shares of Common Stock or any right to acquire such shares. In addition, the Company has agreed that, for a period of 180 days after the date of this Prospectus, it will not, without the prior written consent of NationsBanc Montgomery Securities, Inc., issue, offer, sell, grant options to purchase or otherwise dispose of any of the Company's equity securities or any other securities convertible into or exchangeable for the Common Stock or other equity security, other than the grant of options to purchase Common Stock or the issuance of shares of Common Stock under the Company's stock option and stock purchase plans and the issuance of shares of Common Stock pursuant to the exercise of outstanding options and warrants. 67 Prior to this offering, there has been no public market for the Common Stock. Consequently, the initial public offering price will be determined by negotiations between the Company and the Representatives. Among the factors to be considered in such negotiations will be the history of, and the prospects for, the Company and the industry in which it competes, an assessment of the Company's management, the Company's past and present operations, its past and present financial performance, the prospects for future earnings of the Company, the present state of the Company's development, the general condition of the securities markets at the time of the offering and the market prices of and demand for publicly traded common stock of comparable companies in recent periods. Certain persons participating in this offering may engage in transactions that stabilize, maintain or otherwise affect the price of the Common Stock offered hereby. Such transactions may include stabilizing, the purchase of Common Stock to cover syndicate short positions and the imposition of penalty bids. A stabilizing bid means the placing of any bid or the effecting of any purchase for the purpose of pegging, fixing or maintaining the price of the Common Stock. A syndicate covering transaction means the placing of any bid on behalf of the underwriting syndicate or the effecting of any purchase to reduce a short position created in connection with the offering. A penalty bid means an arrangement that permits the Underwriters to reclaim a selling concession from a syndicate member in connection with the offering when shares of Common Stock sold by the syndicate member are purchased in syndicate covering transactions. Such transactions may stabilize or maintain the market price of the Common Stock at a level above that which otherwise might prevail in the open market and, if commenced, may be discontinued at any time. The Representatives have informed the Company that the Underwriters do not expect to make sales to accounts over which they exercise discretionary authority in excess of 5% of the number of shares of Common Stock offered hereby. LEGAL MATTERS The validity of the issuance of the shares of Common Stock offered hereby will be passed upon for the Company by Fenwick & West LLP, Palo Alto, California. Certain legal matters in connection with this offering will be passed upon for the Underwriters by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo Alto, California. EXPERTS The balance sheets of Hybrid Network, Inc. as of December 31, 1995 and 1996 and September 30, 1997 and the statement of operations, stockholders' equity (deficit) and cash flows for each of the three years in the period ended December 31, 1996 and the nine months ended September 30, 1997 included in this Prospectus and the financial statement schedule for the aforementioned periods included in the registration statement for the offering have been included in reliance on the reports of Coopers & Lybrand L.L.P., independent accountants, given on the authority of said firm as experts in auditing and accounting. 68 ADDITIONAL INFORMATION The Company has filed with the Securities and Exchange Commission (the "Commission") a Registration Statement on Form S-1 under the Securities Act with respect to the shares of Common Stock offered hereby. This Prospectus does not contain all of the information set forth in the Registration Statement and the exhibits and schedules thereto. For further information with respect to the Company and the Common Stock offered hereby, reference is made to the Registration Statement and the exhibits and schedules filed therewith. Statements contained in this Prospectus regarding the contents of any contract or any other document to which reference is made are not necessarily complete, and, in each instance, reference is made to the copy of such contract or other document filed as an exhibit to the Registration Statement, each such statement being qualified in all respects by such reference. A copy of the Registration Statement and the exhibits and schedules thereto may be inspected without charge at the offices of the Commission at Judiciary Plaza, 450 Fifth Street, Washington, D.C. 20549, and copies of all or any part of the Registration Statement may be obtained from the Public Reference Section of the Commission, Washington, D.C. 20549 upon the payment of the fees prescribed by the Commission. The Commission maintains a Web site (http://www.sec.gov) that contains reports, proxy, and information statements and other information regarding registrants, such as the Company, that file electronically with the Commission. Information concerning the registrant is also available for inspection at the offices of the Nasdaq National Market, Reports Section, 1735 K Street, N.W., Washington, D.C. 20006. 69 GLOSSARY OF TERMS ADSL Asymmetric Digital Subscriber Line. Also see Digital Subscriber Line. ANALOG A form of transmission employing a continuous electrical signal (rather than a pulsed or digital system) that varies in frequency and amplitude. ASYMMETRIC A property of a network where digital data conveyed in upstream and downstream paths of the network are transmitted at different speeds and/or under different protocols, or are transferred over different (e.g., heterogeneous) media. BACKBONE A centralized, high-speed network that interconnects smaller, independent networks. BANDWIDTH The amount of data, usually measured in bits per second (bps), that can be sent through a dedicated transmission circuit; the capacity of a telecommunications circuit or network to carry voice, data and video information. BROADBAND WIRELESS SYSTEM OPERATOR A wireless service provider with 2 MHz or more of contiguous bandwidth that can be used to offer high speed Internet access. CENTRAL OFFICE A term commonly used to describe the location of the switching equipment that is used to connect telephone calls. COAXIAL A type of electrical cable in which one conductor is wrapped around another, separated from the inner conductor by an insulating layer. Coaxial cable (coax) is most often used in the home to bring incoming cable TV signals to the television. DAVIC Digital Audio Video Interactive Council. DAVIC is an industry consortium that has defined a set of cable modem interface specifications. DIGITAL The representation of information as discrete values (i.e., 1s and 0s). These digital values can be processed, manipulated, exchanged or stored by electronic systems. DIGITAL SUBSCRIBER LINE See xDSL. 70 ETHERNET A set of media independent LAN transport protocols that offers 10 (Ethernet), 100 (Fast Ethernet) and 1000 (Gigabit Ethernet) megabit per second speeds for data throughput. FSK Frequency Shift Keying. A modulation technique used to transmit digital signals. FREQUENCY The number of identical cycles per second, measured in hertz, of a periodic oscillation wave in radio propagation. HFC Hybrid Fiber/Coaxial cable. A mixed media architecture that some cable TV operators are deploying. HFC networks utilize fiber optic cables for the trunks from the headend to neighborhood nodes and coaxial cables for connecting neighborhood nodes to end-users. ISDN Integrated Services Digital Network. An internationally accepted telephony standard for voice, data and signaling that makes all transmission circuits end-to-end digital and defines a standard out-of-band signaling system. It can give a user up to 64 Kbps of data bandwidth on a telephone line that is also used for voice, or up to 128 Kbps if the voice capability is not used. ISP Internet Service Provider. An entity that provides commercial access to the Internet. ITFS Instructional TV Fixed Service. A set of wireless frequencies beginning at 2.5 GHz that have been allocated by the FCC for educational use. Often bundled with MDS and MMDS channels in a wireless cable system. Kbps Kilobits per second. A transmission rate equal to 1,024 bits per second. LAN Local Area Network. A data communications network (often using Ethernet as its protocol) designed to interconnect personal computers, workstations, file servers and other communications and computing devices within a local environment, generally extending throughout a building or over several buildings within a two-mile radius. LAST MILE A term used to describe the last portion of a WAN that connects the end-user to a network node (such as a telephone central office or cable headend). 71 LMDS Local Multipoint Distribution Service. A set of wireless frequencies starting at 28 GHz that have recently been set aside by the FCC for auction in 1998. LPTV Low Power TV. A group of community TV broadcasters that have been granted licenses by the FCC to broadcast community-oriented low power TV over UHF and VHF frequencies. Some LPTV operators have received experimental licenses from the FCC for providing high speed Internet access. MBPS Megabits per second. A transmission rate equal to 1,000,000 bits per second. MCNS Multimedia Cable Network System. A set of cable modem interface specifications defined by a consortium of cable TV operators and vendors. MDS Multipoint Distribution Service. A set of wireless frequencies starting at 2.1 GHz that are often bundled with MMDS and ITFS in a wireless cable system. MMDS Multichannel Multipoint Distribution Service. Often used as a synonym for "Wireless Cable." MMDS specifically refers to a set of wireless frequencies in the 2.6 GHz range that were originally allocated for analog television rebroadcast. MODEM A device for transmitting and receiving digital information over an analog telephone line. PLAIN OLD TELEPHONE SERVICE (POTS) Basic analog telephone service with no enhanced features (such as call waiting, conference calling or call forwarding), typically available in residences throughout the United States. PoP Point of Presence. A site which houses a collection of telecommunications equipment, usually digital leased lines and multi-protocol routers. Used in this document to refer to the location of the Company's headend equipment. PROTOCOL A formal description of messages to be exchanged and rules to be followed for two or more systems to exchange information. PSTN Public Switched Telephone Network. The combined telephony infrastructure of Inter Exchange Carriers (e.g., AT&T) and Local Exchange Carriers (e.g., RBOCs). Universal telephone service, embodied as the goal of the 1934 Communications Act, is provided by access to the PSTN. 72 QPSK Quadrature Phase Shift Keying. A modulation technique used to transmit digital signals. ROUTER A system including a specialized computer that takes incoming packets and compares their destination addresses to internal routing tables and, depending on network conditions, sends the packets out to the appropriate receiving router. This process may be repeated many times until the packets reach their intended destination. T-1 A digital carrier facility capable of transmitting a digital signal at a rate of 1.544 Mbps. T-3 A digital carrier facility capable of transmitting a digital signal at a rate of 44.746 Mbps. TCP/IP Transport Control Protocol/Internet Protocol. A worldwide public domain standard for connecting computers accepted by many vendors for use over WANs. TERMINAL SERVER A device located at a PoP that connects a bank of telephone modems to a LAN. The terminal server is attached to the router which in turn is attached to the DSU-CSU, which converts a data stream into a format suitable for transmission. UHF Ultra High Frequency. Defines frequencies typically used by broadcast television signals in the 470 to 806 megahertz range, denoted by channels 14-69 on a standard television. VHF Very High Frequency. Defines frequencies typically used by broadcast television signals in the 54 to 216 megahertz range, denoted by channels 2-13 on a standard television. WIRELESS COMMUNICATION SERVICES (WCS) A set of wireless frequencies auctioned by the FCC in April 1997. The frequencies start at 2.3 GHz and come in 5 and 10 MHz blocks. xDSL Digital Subscriber Line. A technology that enables high speed transmission of data over copper wires. There are several implementations of DSL technology, including: ADSL (Asymmetric Digital Subscriber Line); HDSL (High Bit Rate Digital Subscriber Line); IDSL (Integrated Digital Subscriber Line); RDSL (Rate Adaptive Digital Subscriber Line); SDSL (Symmetric Digital Subscriber Line); and VDSL (Very High Bit Rate Digital Subscriber Line). 73 HYBRID NETWORKS, INC. INDEX TO FINANCIAL STATEMENTS
PAGE ----------- Report of Independent Accountants.......................................................................... F-2 Balance Sheets as of December 31, 1995 and 1996 and September 30, 1997..................................... F-3 Statements of Operations for the Years Ended December 31, 1994, 1995 and 1996 and for the Nine Months Ended September 30, 1996 (unaudited) and 1997.................................................................. F-4 Statements for Stockholders' Equity (Deficit) for the Years Ended December 31, 1994, 1995 and 1996 and for the Nine Months Ended September 30, 1997................................................................. F-5 Statements of Cash Flows for the Years Ended December 31, 1994, 1995 and 1996 and for the Nine Months Ended September 30, 1996 (unaudited) and 1997.................................................................. F-6 Notes to Financial Statements.............................................................................. F-7
F-1 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders Hybrid Networks, Inc.: We have audited the accompanying balance sheets of Hybrid Networks, Inc. as of December 31, 1995 and 1996 and September 30, 1997, and the related statements of operations, stockholders' equity (deficit) and cash flows for each of the three years in the period ended December 31, 1996 and for the nine months ended September 30, 1997. 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, 1995 and 1996 and September 30, 1997, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1996 and for the nine months ended September 30, 1997, in conformity with generally accepted accounting principles. COOPERS & LYBRAND L.L.P. San Jose, California October 16, 1997, except for Note 16, for which the date is November 6, 1997. F-2 HYBRID NETWORKS, INC. BALANCE SHEETS (IN THOUSANDS, EXCEPT PER SHARE DATA)
PRO FORMA STOCKHOLDERS' DECEMBER 31, SEPTEMBER 30, DEFICIT -------------------- ------------- (NOTE 15) 1995 1996 1997 SEPTEMBER 30, 1997 --------- --------- ------------- ------------------ ASSETS Current assets: Cash and cash equivalents................................. $ 2,863 $ 6,886 $ 5,314 Short-term investments.................................... 490 -- -- Accounts receivable, net of allowance for doubtful accounts of none in 1995 and 1996 and $675 in 1997...... 287 1,348 5,954 Inventories............................................... 196 943 2,068 Prepaid expenses and other current assets................. 10 125 199 --------- --------- ------------- Total current assets.................................... 3,846 9,302 13,535 Property and equipment, net................................. 707 1,178 1,767 Deferred financing costs.................................... -- -- 490 Other assets................................................ 33 59 398 --------- --------- ------------- Total assets............................................ $ 4,586 $ 10,539 $ 16,190 --------- --------- ------------- --------- --------- ------------- LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current liabilities: Convertible subordinated note payable..................... $ -- $ -- $ 6,632 Accounts payable.......................................... 280 1,424 1,712 Accrued liabilities....................................... 307 712 1,222 Current portion of capital lease obligations.............. 110 222 404 --------- --------- ------------- Total current liabilities............................... 697 2,358 9,970 Convertible debenture....................................... -- -- 5,500 Capital lease obligations, less current portion............. 184 438 723 Other liabilities........................................... 44 34 -- --------- --------- ------------- Total liabilities....................................... 925 2,830 16,193 --------- --------- ------------- Commitments (Note 9) Stockholders' equity (deficit): Convertible preferred stock, $.001 par value: Authorized: 18,000 shares; Issued and outstanding: 8,363 shares in 1995, 12,069 shares in 1996 and 12,563 shares in 1997; no shares pro forma............................................. 8 12 13 (Liquidation value: $27,750 at September 30, 1997) Common stock, $.001 par value: Authorized: 34,000 shares; Issued and outstanding: 2,497 shares in 1995, 2,520 shares in 1996 and 2,620 shares in 1997; 7,273 pro forma shares.......................................... 2 2 2 $ 15 Additional paid-in capital.................................. 12,478 25,037 27,406 27,406 Accumulated deficit......................................... (8,827) (17,342) (27,424) (27,424) --------- --------- ------------- -------- Total stockholders' equity (deficit).................... 3,661 7,709 (3) $ (3) --------- --------- ------------- -------- -------- Total liabilities and stockholders' equity (deficit)........................................... $ 4,586 $ 10,539 $ 16,190 --------- --------- ------------- --------- --------- -------------
The accompanying notes are an integral part of these financial statements. F-3 HYBRID NETWORKS, INC. STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA)
NINE MONTHS ENDED YEAR ENDED DECEMBER 31, SEPTEMBER 30, ------------------------------- ----------------------- 1994 1995 1996 1997 --------- --------- --------- 1996 ---------- ----------- (UNAUDITED) Net sales............................................... $ 668 $ 630 $ 2,962 $ 1,253 $ 9,152 Cost of sales........................................... 1,362 761 3,130 1,602 8,214 --------- --------- --------- ----------- ---------- Gross profit (loss)................................. (694) (131) (168) (349) 938 --------- --------- --------- ----------- ---------- Operating expenses: Research and development.............................. 1,251 3,862 5,076 3,757 5,170 Sales and marketing................................... 348 390 1,786 954 3,138 General and administrative............................ 533 748 1,714 1,196 2,516 --------- --------- --------- ----------- ---------- Total operating expenses............................ 2,132 5,000 8,576 5,907 10,824 --------- --------- --------- ----------- ---------- Loss from operations.............................. (2,826) (5,131) (8,744) (6,256) (9,886) Interest income and other expense, net.................. 30 166 257 146 183 Interest expense........................................ (101) (304) (28) (22) (379) --------- --------- --------- ----------- ---------- Net loss.......................................... $ (2,897) $ (5,269) $ (8,515) $ (6,132) $ (10,082) --------- --------- --------- ----------- ---------- --------- --------- --------- ----------- ---------- Net loss per share...................................... $ (1.01) $ (1.83) $ (2.67) $ (1.92) $ (3.12) --------- --------- --------- ----------- ---------- --------- --------- --------- ----------- ---------- Shares used in per share calculation.................... 2,880 2,877 3,189 3,196 3,229 --------- --------- --------- ----------- ---------- --------- --------- --------- ----------- ---------- Pro forma net loss per share............................ $ (1.24) $ (1.33) --------- ---------- --------- ---------- Pro forma shares used in per share calculation.......... 6,873 7,607 --------- ---------- --------- ----------
The accompanying notes are an integral part of these financial statements. F-4 HYBRID NETWORKS, INC. STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) (IN THOUSANDS)
PREFERRED STOCK COMMON STOCK ADDITIONAL -------------- --------------------- PAID-IN ACCUMULATED SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT TOTAL ------ ------ ------ ------------ ----------- ----------- ------- Balances, January 1, 1994..... 1,547 $ 1 2,250 $ 2 $ 662 $ (661) $ 4 Repurchase of common stock..................... -- -- (74) -- (8) -- (8) Issuance of Series B preferred stock, net of issuance costs of $21..... 552 1 -- -- 943 -- 944 Issuance of Series C preferred stock upon conversion of notes payable, net of issuance costs of $1............... 761 1 -- -- 1,248 -- 1,249 Net loss.................... -- -- -- -- -- (2,897) (2,897) ------ ------ ------ --- ----------- ----------- ------- Balances, December 31, 1994... 2,860 3 2,176 2 2,845 (3,558) (708) Exercise of common stock options................... -- -- 9 -- 3 -- 3 Exercise of stock purchase rights.................... -- -- 44 -- 24 -- 24 Grant of stock bonus awards.................... -- -- 6 -- 3 -- 3 Issuance of common stock for technology license........ -- -- 262 -- 141 -- 141 Issuance of Series B and Series D preferred stock warrants.................. -- -- -- -- 18 -- 18 Issuance of Series D preferred stock, net of issuance costs of $42..... 3,200 3 -- -- 5,555 -- 5,558 Issuance of Series E preferred stock upon conversion of notes payable............. 1,316 1 -- -- 1,999 -- 2,000 Additional paid in capital in connection with accrued interest forgiven from conversion of notes payable to Series E preferred stock........... -- -- -- -- 402 -- 402 Issuance of Series F preferred stock from conversion of prepaid royalties, net of issuance costs of $11.............. 987 1 -- -- 1,488 -- 1,489 Net loss.................... -- -- -- -- -- (5,269) (5,269) ------ ------ ------ --- ----------- ----------- ------- Balances, December 31, 1995... 8,363 8 2,497 2 12,478 (8,827) 3,661 Exercise of common stock options................... -- -- 65 -- 34 -- 34 Repurchase of common stock..................... -- -- (42) -- (9) -- (9) Issuance of Series B preferred stock upon net exercise of warrants...... 248 -- -- -- -- -- -- Issuance of Series G preferred stock for cash and conversion of notes payable, net of issuance costs of $704............. 3,458 4 -- -- 12,534 -- 12,538 Net loss.................... -- -- -- -- -- (8,515) (8,515) ------ ------ ------ --- ----------- ----------- ------- Balances, December 31, 1996... 12,069 12 2,520 2 25,037 (17,342) 7,709 Exercise of common stock options................... -- -- 93 -- 55 -- 55 Repurchase of common stock..................... -- -- (12) -- (7) -- (7) Grant of stock bonus awards.................... -- -- 13 -- 38 -- 38 Issuance of common stock for services rendered......... -- -- 6 -- 34 -- 34 Issuance of Series H preferred stock........... 494 1 -- -- 1,999 -- 2,000 Issuance of warrants in connection with convertible subordinated notes payable............. -- -- -- -- 250 -- 250 Net loss.................... -- -- -- -- -- (10,082) (10,082) ------ ------ ------ --- ----------- ----------- ------- Balances, September 30, 1997........................ 12,563 $13 2,620 $ 2 $27,406 $(27,424) $ (3) ------ ------ ------ --- ----------- ----------- ------- ------ ------ ------ --- ----------- ----------- -------
The accompanying notes are an integral part of these financial statements. F-5 HYBRID NETWORKS, INC. STATEMENTS OF CASH FLOWS (IN THOUSANDS)
NINE MONTHS ENDED YEAR ENDED DECEMBER 31, SEPTEMBER 30, ------------------------------- ---------------------- 1994 1995 1996 1997 --------- --------- --------- 1996 --------- ----------- (UNAUDITED) Cash flows from operating activities: Net loss......................................................... $ (2,897) $ (5,269) $ (8,515) $ (6,132) $ (10,082) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization.................................. 70 162 322 230 530 Provision for doubtful accounts................................ -- -- -- -- 690 Interest converted to Series E preferred stock................. -- 402 -- -- -- Common stock issued for technology license..................... -- 141 -- -- -- Common stock issued for services rendered...................... -- 3 -- -- 72 Change in assets and liabilities: Accounts receivable.......................................... 51 (224) (1,061) 13 (5,257) Inventories.................................................. (50) (81) (747) (247) (1,125) Prepaid expenses and other current assets.................... 5 7 (115) (106) (34) Accounts payable............................................. 78 102 1,144 384 (92) Accrued liabilities and other................................ 101 1,418 395 89 476 --------- --------- --------- ----------- --------- Net cash used in operating activities...................... (2,642) (3,339) (8,577) (5,769) (14,822) --------- --------- --------- ----------- --------- Cash flows from investing activities: Purchase of property and equipment............................... (218) (295) (321) (288) (400) Change in other assets........................................... -- (22) (26) (26) (34) Purchase of short-term investments............................... (199) (490) -- -- -- Proceeds from maturity of short-term investments................. -- 199 490 490 -- --------- --------- --------- ----------- --------- Net cash provided by (used in) investing activities........ (417) (608) 143 176 (434) --------- --------- --------- ----------- --------- Cash flows from financing activities: Repayment of capital lease obligations........................... -- (20) (106) (15) (208) Repayment of notes payable....................................... (25) -- -- -- -- Proceeds from issuance of preferred stock warrants............... -- 18 -- -- -- Proceeds from convertible subordinated note payable.............. -- -- -- -- 6,844 Net proceeds from issuance of convertible debenture.............. 2,344 -- 3,160 3,160 5,000 Net proceeds from issuance of preferred stock.................... 944 5,558 9,378 9,378 2,000 Proceeds from issuance of common stock........................... -- 27 34 24 55 Repurchase of common stock....................................... (8) -- (9) -- (7) --------- --------- --------- ----------- --------- Net cash provided by financing activities.................. 3,255 5,583 12,457 12,547 13,684 --------- --------- --------- ----------- --------- Increase (decrease) in cash and cash equivalents................... 196 1,636 4,023 6,954 (1,572) Cash and cash equivalents, beginning of period..................... 1,031 1,227 2,863 2,863 6,886 --------- --------- --------- ----------- --------- Cash and cash equivalents, end of period........................... $ 1,227 $ 2,863 $ 6,886 $ 9,817 $ 5,314 --------- --------- --------- ----------- --------- --------- --------- --------- ----------- --------- SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING ACTIVITIES: Conversion of notes payable into preferred stock................. $ 1,250 $ 2,000 $ 3,160 $ 3,160 -- Conversion of prepaid royalties to Series F preferred stock...... -- 1,500 -- -- -- Property and equipment acquired under capital leases............. -- 314 472 259 $ 675 Capitalization of finance costs.................................. -- -- -- -- Capitalization of initial public offering costs.................. -- -- -- -- 340 Issuance of warrants in connection with subordinated notes payable........................................................ -- -- -- -- 250 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Interest paid.................................................... $ 5 $ 5 $ 28 $ 18 $ 379
The accompanying notes are an integral part of these financial statements. F-6 HYBRID NETWORKS, INC. NOTES TO FINANCIAL STATEMENTS 1. FORMATION AND BUSINESS OF THE COMPANY The Company is a broadband access equipment company that designs, develops, manufactures and markets cable and wireless 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 "last mile" connection to the end user which causes slow response time for those accessing bandwidth-intensive information over the Internet and corporate intranets. The Company was incorporated in Delaware on June 6, 1990. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CHANGE IN FISCAL YEAR In 1997, the Company changed its fiscal year end from March 31 to December 31, effective January 1, 1992. 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 periods. Actual results could differ from those estimates. FAIR VALUE OF FINANCIAL INSTRUMENTS, BUSINESS RISKS AND CREDIT CONCENTRATION The carrying amounts of certain of the Company's financial instruments including cash and cash equivalents, short-term cash investments, accounts receivable, accounts payable and other accrued liabilities' approximate fair value due to their short maturities. The Company sells its products primarily to communication and networking companies 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 collectibility of accounts receivable and such losses have been within Management's expectations. As of December 31, 1995, four customers represented 35%, 19%, 18% and 18% of accounts receivable, and as of December 31, 1996, two customers represented 51% and 10% of accounts receivable, respectively. As of September 30, 1997, two customers represented 12% and 11% of accounts receivable, respectively. 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 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. CASH AND CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS The Company considers all highly liquid instruments with an original or remaining maturity of three months or less to be cash equivalents. Instruments with a maturity greater than three months at the date of purchase and maturing within one year from the balance sheet date are included in short-term investments. The Company's cash and cash equivalents as of December 31, 1996 and September 30, 1997 are in F-7 HYBRID NETWORKS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) three demand accounts with a major bank. Short-term investments as of December 31, 1995 are classified as available for sale and are carried at cost which approximates fair market value, and consist of a government bond. 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 the related assets of three to five years. Leasehold improvements are amortized over their estimated useful lives or the remaining lease term, whichever is less. DEFERRED FINANCING COSTS Deferred financing costs relate to fees incurred in connection with the issuance of a senior convertible debenture in April 1997 and are amortized over the five year life of the debenture (see Note 6). REVENUE RECOGNITION The Company recognizes revenue and accrues for estimated warranty costs upon shipment of products. Actual warranty costs incurred have not materially differed from those provided. PRODUCT DEVELOPMENT COSTS Costs related to research, design and development of products are charged to research and development expenses as incurred. STOCK-BASED COMPENSATION In October 1995, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation," which is effective for the Company's financial statements for the year ended December 31, 1996. SFAS No. 123 allows companies to either account for stock-based compensation under the new provisions of SFAS No. 123 or under the provisions of Accounting Principles Board Opinion No. 25 (APB 25), "Accounting for Stock Issued to Employees," but requires pro forma disclosure in the footnotes to the financial statements as if the measurement provisions of SFAS No. 123 had been adopted. The Company has continued to account for its stock based compensation in accordance with the provisions of APB 25 and provides the required pro forma disclosures (see Note 10). COMPUTATION OF HISTORICAL NET LOSS PER SHARE AND PRO FORMA NET LOSS PER SHARE Historical net loss per share is computed using the weighted average number of shares of common stock outstanding during the period. Common equivalent shares from stock options and convertible preferred stock are excluded from the computation of net loss per share as their effect is antidilutive, except that, pursuant to the Securities and Exchange Commission Staff Accounting Bulletin No. 83, common and common equivalent shares issued at prices below the public offering price during the 12 months immediately preceding the filing date of an initial public offering have been included in the calculation as if they were outstanding for all periods presented (using the treasury stock method and the anticipated initial public offering price). Pro forma net loss per share assumes that the common shares F-8 HYBRID NETWORKS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) issuable upon conversion of the outstanding convertible preferred stock have been outstanding during such periods. UNAUDITED INTERIM FINANCIAL INFORMATION The accompanying interim statement of operations and cash flow for the nine months ended September 30, 1996 are unaudited but include all adjustments, consisting of only normal recurring adjustments which the Company considers necessary to present fairly, in all material aspects, the results of operations and cash flows for the period ended September 30, 1996. Results for the nine months ended September 30, 1996 are not necessarily indicative of results for an entire year. RECENT ACCOUNTING PRONOUNCEMENTS In February 1997, the FASB issued SFAS No. 128, "Earnings Per Share." SFAS No. 128 specifies the computation and disclosure requirements for earnings per share. SFAS No. 128 supersedes Accounting Principles Board Opinion No. 15 and is effective for financial statements issued for periods ending after December 15, 1997. SFAS No. 128 requires restatement of all prior-period earnings per share data presented after the effective date. SFAS No. 128 will not have a material effect on the Company's earnings per share. In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income." SFAS No. 130 establishes standards for the reporting and display of comprehensive income and its components in a full set of general purpose financial statements. Comprehensive income is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from nonowner sources. The impact of adopting SFAS No. 130, which is effective for the Company in 1998, has not been determined. In June 1997, the FASB issued SFAS No. 131, "Disclosure about Segments of an Enterprise and Related Information." SFAS No. 131 requires publicly-held companies to report financial and other information about key revenue-producing segments of the entity for which such information is available and is utilized by the chief operating decision maker. Specific information to be reported for individual segments includes profit or loss, certain revenue and expense items and total assets. A reconciliation of segment financial information to amounts reported in the financial statements would be provided. SFAS No. 131 is effective for the Company in 1998 and the impact of adoption has not been determined. F-9 HYBRID NETWORKS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 3. INVENTORIES Inventories are comprised of the following (IN THOUSANDS):
DECEMBER 31, SEPTEMBER 30, -------------------- ------------- 1995 1996 1997 --------- --------- ------------- Raw materials............................................ $ 98 $ 526 $ 1,557 Work in progress......................................... 93 267 246 Finished goods........................................... 5 150 265 --------- --------- ------ $ 196 $ 943 $ 2,068 --------- --------- ------ --------- --------- ------
4. PROPERTY AND EQUIPMENT Property and equipment, including furniture and equipment under capital leases, (cost of $314,000, $786,000 and $1,461,000 accumulated amortization of $36,000, $177,000 and $437,000 as of December 31, 1995 and 1996 and September 30, 1997, respectively) consist of the following (IN THOUSANDS):
DECEMBER 31, SEPTEMBER 30, -------------------- ------------- 1995 1996 1997 --------- --------- ------------- Machinery and equipment..................................... $ 755 $ 1,440 $ 2,538 Office furniture and fixtures............................... 91 107 163 Leasehold improvements...................................... 97 189 110 --------- --------- ------------- 943 1,736 2,811 Less accumulated depreciation and amortization.............. (236) (558) (1,044) --------- --------- ------------- $ 707 $ 1,178 $ 1,767 --------- --------- ------------- --------- --------- -------------
5. CONVERTIBLE SUBORDINATED NOTE PAYABLE In September 1997, the Company entered into a Convertible Subordinated Promissory Note Purchase Agreement to issue $6,882,000 of subordinated notes at 10% interest (increasing to 18% after March 30, 1998 under certain circumstances). The principal amount of the notes are payable at the earliest of September 30, 1998 or the effective date of an initial public offering of the Company's common stock. The notes may become due earlier under certain circumstances. At the option of the holders, the outstanding balance of the subordinated notes may be converted to equity capital of the Company. In connection with the Convertible Subordinated Note Purchase Agreement, the Company issued warrants to purchase shares of its common stock at $10.91 per share. The warrants become exercisable at the earliest of 180 days after issuance or the effective date of an initial public stock offering and expire in five years. The amount of warrants to be exercised is based on the length of time the debt remains outstanding. Provided the debt is repaid prior to March 30, 1998, the number of shares exercisable under the warrants is 252,381. However if the debt is repaid at a later date the number of shares exercisable under the warrants can increase to a maximum of 630,932 shares. The amount attributed to the value of the warrants is $250,000 which has been allocated to stockholders' equity and will be amortized to interest expense over the term of the note. The Company must comply with certain restrictive covenants, including non-payment of dividends, as long as the notes are outstanding. F-10 HYBRID NETWORKS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 6. CONVERTIBLE DEBENTURE On April 30, 1997, the Company issued a senior convertible 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. The debenture is convertible, at the option of the holder, at any time, into common stock at $10.71 per share, subject to adjustment. Conversion is automatic if (i) the gross proceeds to the Company from its initial public offering are at least $15.0 million, (ii) the public offering price per share is at least $166,500,000 divided by the number of fully diluted shares of capital stock of the Company (as determined pursuant to the terms of the debenture) prior to this offering and (iii) the closing price of the Common Stock for any 90 consecutive calendar day period after this offering is equal to or greater than $166,500,000 divided by the number of fully diluted shares of capital stock of the Company (as determined pursuant to the terms of the debenture) or, alternatively, upon the acquisition of the Company for at least $166,500,000 in cash or fair market value of freely tradable securities from the acquiring company. The debenture is collateralized by substantially all the Company's assets until October 30, 1997. Subject to certain upgrade adjustments, the Company may not make capital expenditures in excess of $1,500,000, $2,500,000, $5,500,000 and $11,000,000 during the twelve months ending March 31, 1998, 1999, 2000 and 2001, respectively. Additionally, the Company may not declare dividends, retire any subordinated debt other than in accordance with its terms, or distribute its assets to any stockholder as long as the debenture remains outstanding. 7. ACCRUED LIABILITIES Accrued liabilities consist of the following (in thousands):
DECEMBER 31, SEPTEMBER 30, -------------------- ------------- 1995 1996 1997 --------- --------- ------------- Accrued payroll and related accruals........................... $ 244 $ 425 $ 768 Other liabilities.............................................. 63 287 454 --------- --------- ------ $ 307 $ 712 $ 1,222 --------- --------- ------ --------- --------- ------
8. CAPITAL LEASE OBLIGATIONS In August 1996, the Company entered into a financing agreement under which the Company may lease equipment and furniture in an amount not to exceed $1,000,000. As of September 30, 1997, no amount remained available under this lease line, which expired on September 15, 1997. Capital leases at September 30, 1997 expire at various dates through March 2002 and bear interest ranging from 7.6% to 10.8%. F-11 HYBRID NETWORKS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 8. CAPITAL LEASE OBLIGATIONS (CONTINUED) Future minimum lease payments under all capital leases are as follows (in thousands): 1997................................................................ $ 119 1998................................................................ 474 1999................................................................ 407 2000................................................................ 244 2001................................................................ 10 --------- 1,254 Less amount representing interest................................... (127) --------- 1,127 Less current portion................................................ (404) --------- $ 723 --------- ---------
9. COMMITMENTS The Company leases its facilities and equipment under operating leases expiring at various dates from May 1998 through March 2002. Under the terms of two of the facilities leases, the Company is responsible for its share of common area expenses, and has the option to extend two of the facilities leases for additional three year terms at fair market rates. Future minimum lease payments are as follows (IN THOUSANDS): 1997................................................................. $ 118 1998................................................................. 216 1999................................................................. 57 2000................................................................. 55 2001................................................................. 52 Thereafter........................................................... 9 --------- $ 507 --------- ---------
Rent expense for 1994, 1995, 1996 and nine months ended September 30, 1997 was approximately $115,000, $191,000, $263,000, and $341,000 respectively. 10. STOCKHOLDERS' EQUITY (DEFICIT) REVERSE STOCK SPLIT In September 1997, the Company's Board of Directors approved a 1-for-2.7 reverse split of the Company's common stock and a corresponding change in the preferred stock conversion ratios. All common stock and per share amounts in these financial statements have been adjusted retroactively to give effect to the split. In addition, the Company's Board of Directors approved an Amended and Restated Certificate of Incorporation which eliminates the existing convertible preferred stock and changes the number of authorized preferred stock to 5,000,000 shares, $0.001 per value, and increases the shares of common stock authorized to 100,000,000 shares, which Certificate is to be filed following the effectiveness of the initial public offering. F-12 HYBRID NETWORKS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 10. STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED) INITIAL PUBLIC OFFERING In September 1997, the Board of Directors authorized management of the company to file a registration statement with the Securities and Exchange Commission permitting the Company to sell shares of its common stock to the public. CONVERTIBLE PREFERRED STOCK The convertible preferred stock as of December 31, 1996 and September 30, 1997 comprises (IN THOUSANDS, EXCEPT PER SHARE DATA):
NUMBER OF NUMBER OF SHARES SHARES ISSUED AND PROCEEDS LIQUIDATION DIVIDEND AUTHORIZED OUTSTANDING (NET) VALUE PER SHARE ----------- ----------- --------- ----------- ----------- Series A............................................ 1,547 1,547 $ 613 $ 758 $ 0.03 Series B............................................ 1,238 800 944 1,400 0.13 Series C............................................ 762 762 1,249 1,250 0.12 Series D............................................ 5,251 3,200 5,558 5,600 0.13 Series E............................................ 1,316 1,316 2,000 2,000 0.11 Series F............................................ 987 987 1,489 1,500 0.11 Series G............................................ 6,360 3,457 12,538 13,242 0.29 ----------- ----------- --------- ----------- Balances, December 31, 1996......................... 17,461 12,069 24,391 25,750 Series H............................................ 497 494 2,000 2,000 0.32 Undesignated........................................ 42 ----------- ----------- --------- ----------- Balances, September 30, 1997........................ 18,000 12,563 $ 26,391 $ 27,750 ----------- ----------- --------- ----------- ----------- ----------- --------- -----------
The rights, preferences and privileges of the preferred stockholders are as follows: DIVIDENDS The holders of preferred stock are entitled to noncumulative dividends, pari passu, when and as declared by the Board of Directors, at an annual rate as stated above. No cash dividend or other distribution may be made with respect to the common stock during any year unless dividends in the total amount specified for the preferred stock have been paid or declared and set apart. No dividends have been declared through September 30, 1997. LIQUIDATION The holders of preferred stock are entitled to a preference in liquidation, pari passu, to common stockholders of a liquidation amount as indicated in the above table, plus declared but unpaid dividends. Any remaining assets are distributed to the holders of common stock. CONVERSION AND REGISTRATION The preferred stock is convertible, at the option of the holders, at any time, into common stock on a 1-for-2.7 basis after giving effect to a reverse split of the Company's common stock. Conversion is automatic upon the earlier of the consummation of a firm commitment underwritten public offering of the Company's common stock for aggregate proceeds of $15,000,000, with an offering price of not less than 175% of the Series G conversion price per share ($18.10 at September 30, 1997 after giving F-13 HYBRID NETWORKS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 10. STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED) effect to a 1-for-2.7 reverse split), or written consent by a majority of the holders of the then outstanding shares of preferred stock. The holders of Series A, B, D, G and H preferred stock, one of the founders, and two other entities have the right to participate in future issuances of the Company's stock prior to an initial public offering and all holders of preferred stock have certain registration rights. The Company has reserved 4,653,585 shares of common stock for issuance upon conversion of the preferred stock. VOTING Each share of preferred stock is entitled to vote on an "as converted" basis along with common stockholders. As long as 2,000,000 shares, or more than 1,000,000 but less than 2,000,0000 shares of Series D preferred stock are outstanding, the holders of Series D preferred stock, voting separately as a series, have the right to elect two or one of the Company's directors, respectively, but are not entitled to vote for other directors. As long as at least 750,000 shares of Series A preferred stock are outstanding, the holders of Series A preferred stock, voting together as a separate series, have the right to elect one of the Company's directors, but are not entitled to vote for other directors. As long as at least 800,000 shares, in the aggregate, of Series E and F preferred stock are outstanding, the holders of Series E and F preferred stock, voting together as a separate class, have the right to elect one of the Company's directors, but are not entitled to vote for other directors. So long as at least 700,000 shares of Series A preferred stock, 500,000 shares of Series B preferred stock, 250,000 shares of Series C preferred stock, 2,000,000 shares of Series D preferred stock, 600,000 shares of Series E preferred stock, 400,000 shares of Series F preferred stock, 1,500,000 shares of Series G preferred stock or 200,000 shares of Series H preferred stock are outstanding, the Company shall not, without the vote or written consent of the holders of a majority of the preferred stock, (i) merge into or consolidate with another corporation resulting in a transfer of more than 50% of the outstanding stock or ownership of less than 50% of the voting securities of the surviving corporation or (ii) create any other equity security senior to or on a parity with the existing series of preferred stock. WARRANTS The Company has historically issued warrants in connection with its various rounds of financing, equipment lease lines, and transfers of technology. The value of the warrants was assessed using the Black-Scholes Model and determined to be insignificant for financial reporting purposes. In connection with the issuance of Series G preferred stock in July 1996, and the equipment lease line, the Company issued warrants to purchase 156,658 and 15,665 shares of Series G preferred stock, respectively, at $3.83 per share. These warrants are exercisable at any time and expire in July 2001 and August 2006, respectively. The Company has reserved 172,323 shares of Series G preferred stock for issuance upon exercise of these warrants. The Series G preferred stock is convertible, at the option of the holders, at any time, into common stock on a 1-for-2.7 basis after giving effect to a reverse split of the Company's common stock (Note 15). 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 451,000 shares of Series D preferred stock at $1.75 per share. In connection with the issuance of Series D preferred stock May 1995, the Company issued warrants, at $.001 per warrant, to purchase 1,600,001 shares of Series D F-14 HYBRID NETWORKS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 10. STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED) WARRANTS (CONTINUED) preferred stock at $1.75 per share. These warrants are exercisable at any time and expire in June 2001. The Company has reserved 2,051,001 shares of Series D preferred stock for issuance upon exercise of these warrants. The Series D preferred stock is convertible, at the option of the holders, at any time, into common stock on a 1-for-2.7 basis after giving effect to a reverse split of the Company's common stock. During 1996, the Company issued warrants, at $.001 per warrant, to purchase 205,861 shares of Series B preferred stock at $1.75 per share. In connection with the technology transfer discussed in Note 13 and the 1995 equipment lease line, the Company issued warrants to purchase 457,000 and 22,857 shares of Series B preferred stock, respectively, at $1.75 per share. During 1996, the warrant to purchase 457,000 shares was exercised for a net exercise of 248,000 shares. The remaining warrants are exercisable at any time and expire in June 2001 and August 2005, respectively. The Company has reserved 228,718 shares of Series B preferred stock for issuance upon exercise of these warrants. The Series B preferred stock is convertible, at the option of the holders, at any time, into common stock on a 1-for-2.7 basis after giving effect to a reverse split of the Company's common stock. In September 1997 the Company issued warrants to purchase 252,381 shares of common stock in connection with their convertible subordinated note payable. (See Note 5). COMMON STOCK Common stock held by certain employees is subject to stock purchase agreements whereby the Company has the option to repurchase unvested shares upon termination of employment at the initial issuance price. The Company's right to repurchase these shares generally lapses at the rate of 12.5% six months from the date of the agreement and 2.0833% per month thereafter. As of September 30, 1997, no shares of common stock remain subject to the Company's right of repurchase. Thereafter, the Company has the right of first refusal, should any stockholder decide to sell shares. In addition, the Series A, B and D preferred stockholders have the right to participate in a sale by a founder, should a founder decide to sell shares resulting in proceeds greater than $250,000, or $1,000,000 after conversion of the preferred stock. STOCK OPTION PLANS In July and September 1997, the Company increased the shares authorized for the Executive Officer Incentive Plan by an aggregate of 270,000 shares. In September 1997, the Board of Directors approved 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. Also in September 1997, the Board of Directors adopted the 1997 Employee Stock Purchase Plan and 1997 Directors' Stock Option Plan under which 225,000 and 100,000 shares of common stock, respectively, have been reserved for issuance. The Directors' Plan provides for the grant of nonstatutory stock options to non-employee directors of the Company. 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 F-15 HYBRID NETWORKS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 10. STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED) STOCK OPTION PLANS (CONTINUED) 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. 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 July 1996, the Company increased the number of shares reserved under this plan to 500,000 shares. 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 1993. Options, under all of the above plans, may be granted at prices not less than fair market value at the date of grant, as determined by the Board of Directors, in case of incentive options (110% in certain instances), and not less than 85% of fair market value at the date of grant, as determined by the Board of Directors, in case of nonqualified options, restricted stock awards and stock bonus awards (100% in certain instances). Options and stock awards generally vest 12.5% six months from date of grant and 2.0833% per month thereafter; stock options expire three months after termination of employment and five years from date of grant. F-16 HYBRID NETWORKS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 10. STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED) STOCK OPTION PLANS (CONTINUED) Activity under the Plans is set forth below (IN THOUSANDS, EXCEPT PER SHARE DATA):
VALUE OF OPTIONS AND OPTIONS AND WEIGHTED PURCHASE PURCHASE AVERAGE SHARES RIGHTS EXERCISE PRICE RIGHTS EXERCISE AVAILABLE OUTSTANDING PER SHARE OUTSTANDING PRICE ----------- ------------- -------------- ------------- ----------- Balances, January 1, 1994........................ 359 24 -- -- -- Additional shares reserved..................... 185 -- -- -- -- Restricted stock issued........................ (226) -- -- -- -- Options granted................................ (200) 200 $0.27-$0.54 $ 71 $ 0.36 Options canceled............................... 51 (51) 0.27 (14) 0.27 ----------- ----- ------ Balances, December 31, 1994...................... 169 173 0.27-0.54 57 0.33 Additional shares reserved..................... 722 -- -- -- -- Options granted................................ (235) 235 0.54 127 0.54 Purchase rights granted........................ (44) 44 0.54 24 0.54 Purchase rights exercised...................... -- (44) 0.54 (24) 0.54 Stock bonus awards............................. (6) -- 0.54 -- 0.54 Options canceled............................... 90 (90) 0.27-0.54 (35) 0.39 Options exercised.............................. -- (9) 0.27-0.54 (3) 0.33 ----------- ----- ------ Balances, December 31, 1995...................... 696 309 0.27-0.54 146 0.47 Additional shares reserved..................... 741 -- -- -- -- Options granted................................ (1,267) 1,267 0.54-1.08 865 0.68 Stock repurchased.............................. 11 -- 0.54 -- -- Options canceled............................... 32 (32) 0.27-0.54 (14) 0.44 Options exercised.............................. -- (65) 0.54 (35) 0.54 ----------- ----- ------ Balances, December 31, 1996...................... 213 1,479 0.27-1.08 962 0.65 Additional shares reserved..................... 2,409 -- -- -- -- Options granted................................ (801) 801 1.08-11.04 4,658 5.82 Stock bonus awards............................. (13) 13 1.08-5.40 -- 2.97 Stock repurchased.............................. 12 -- 0.58 -- -- Options canceled............................... 226 (226) 0.54-2.16 (199) 0.88 Options exercised.............................. -- (93) 0.27-1.08 (55) 0.59 ----------- ----- ------ Balances, September 30, 1997..................... 2,046 1,974 $0.27-$11.04 $ 5,366 $ 2.72 ----------- ----- ------ ----------- ----- ------
For the years ended December 31, 1995 and 1996 and nine months ended September 30, 1997, the weighted average fair value of options granted was $0.42, $0.81 and $3.44 per share, respectively. F-17 HYBRID NETWORKS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 10. STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED) STOCK OPTION PLANS (CONTINUED) As of September 30, 1997, the stock options outstanding were as follows (IN THOUSANDS, EXCEPT PER SHARE DATA):
OPTIONS OUTSTANDING - -------------------------------------------------------- OPTIONS EXERCISABLE WEIGHTED ---------------------------- AVERAGE WEIGHTED WEIGHTED REMAINING AVERAGE AVERAGE EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE PRICE OUTSTANDING LIFE (YEARS) PRICE EXERCISABLE PRICE - ----------- ------------- --------------- ----------- --------------- ----------- $ 0.27 57 1.78 $ 0.27 50 $ 0.27 0.54 904 3.40 0.54 357 0.54 1.08 294 4.08 1.08 74 1.08 2.16 75 4.48 2.16 10 2.16 2.70 159 4.64 2.70 1 2.70 5.40 201 4.79 5.40 -- 5.40 8.78 114 4.92 8.78 -- 8.78 11.04 170 4.96 11.04 -- 11.04 ----- --- 1,974 $ 2.73 492 $ 0.62 ----- --- ----- ---
As of December 31, 1995 and 1996, options to purchase 125,000 and 294,000 shares were exercisable at an average weighted exercise price of $0.46 and $0.54, respectively. The Company has elected to continue to follow the provisions of APB No. 25, "Accounting for Stock Issued to Employees," for financial reporting purposes and has adopted the disclosure-only provisions of SFAS No. 123 ("SFAS No. 123"). Accordingly, no compensation cost has been recognized for the Company's stock option plans. Had compensation cost for the Company's stock option plans been determined based on the fair value at the grant date for awards in 1995, 1996 and the nine months ended September 30, 1997 consistent with the provisions of SFAS No. 123, the Company's net loss and net loss per share for 1995, 1996, and the nine months ended September 30, 1997 would have been increased to the pro forma amounts indicated below (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS):
YEAR ENDED DECEMBER NINE MONTHS ENDED 31, SEPTEMBER 30, -------------------- ------------------ 1995 1996 1997 --------- --------- ------------------ Net loss--as reported...................................... $ 5,269 $ 8,515 $ 10,082 --------- --------- ------- --------- --------- ------- Net loss--pro forma........................................ $ 5,275 $ 8,548 $ 10,259 --------- --------- ------- --------- --------- ------- Net loss per share--as reported............................ $ (1.83) $ (2.67) $ (3.12) --------- --------- ------- --------- --------- ------- Net loss per share--pro forma.............................. $ (1.83) $ (2.68) $ (3.18) --------- --------- ------- --------- --------- -------
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 No. 123, the fair value of each option is estimated using the following assumptions used for grants during 1995 and 1996 and the nine months ended September 30, F-18 HYBRID NETWORKS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 10. STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED) 1997; dividend yield of 0%, volatility of 0%, risk-free interest rates of 5.18% to 7.68% at the date of grant and an expected term of four years. 11. INCOME TAXES Temporary differences which gave rise to significant portions of deferred tax assets are as follows (IN THOUSANDS):
DECEMBER 31, SEPTEMBER 30, -------------------- ------------- 1995 1996 1997 --------- --------- ------------- Net operating loss carryforwards......................... $ 2,120 $ 4,119 $ 6,557 Capitalized research expenditures........................ 1,501 3,553 4,415 Tax credit carryforwards................................. 221 637 855 Inventory reserves....................................... 67 103 197 Other accrued liabilities................................ 46 104 492 --------- --------- ------------- Total deferred asset................................... 3,955 8,516 12,516 Valuation allowance...................................... (3,955) (8,516) (12,516) --------- --------- ------------- Net deferred asset..................................... $ -- $ -- $ -- --------- --------- ------------- --------- --------- -------------
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. The Company has established a valuation allowance to the extent of its deferred tax assets since it is not certain that a benefit can be realized in the future due to the Company's recurring operating losses. The valuation allowance increased by $1,136,000, $2,345,000, $4,561,000 and $4,000,000 in 1994, 1995, 1996 and for the nine months ended September 30, 1997, respectively. The Company had federal and state net operating loss carryforwards of approximately $28,000,000 and $18,000,000, respectively, as of September 30, 1997 available to offset future regular and alternative minimum taxable income. The Company's net operating loss carryforwards expire in 1997 through 2011, if not utilized.
TAX EXPIRATION REPORTING DATES ---------- ----------- Research and development credit..................................... $ 535,000 2007-2010 State research and development credit............................... $ 320,000 1997-2011
The Company's net operating loss and tax credit carryforwards are subject to a limitation of approximately $5,120,000 upon an ownership change, as defined by tax laws. 12. 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 1994, 1995, 1996 and for the nine months of 1997, the Company made no employer contributions. F-19 HYBRID NETWORKS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 13. RELATED PARTY TRANSACTIONS During 1994, the Company entered into borrowing agreements with two parties. At the time of each borrowing, the Company was required to issue warrants to purchase its preferred stock. In December 1994, one of the lenders applied its outstanding balance of $1,250,000 to the exercise of its warrants. In December 1995, the second lender used its outstanding balance of $2,000,000 to exercise its warrants. Accrued interest on the note was forgiven. However, the Company recorded the related accrued interest of $402,000 as an additional capital contribution related to the issuance of the Series E preferred stock. In connection with these borrowing agreements the Company granted an exclusive royalty bearing license to certain technology to one of the lenders. In December 1995, advance royalties in the amount of $1,500,000 were converted into 986,898 shares of Series F preferred stock at $1.52 per share. At the same time, the above license became nonexclusive, and the Company received a nonexclusive license to certain technology, consideration for which was the issuance of 708,000 shares of the Company's common stock at $.20 per share. The Company had net sales to two stockholders of $578,000 and $288,000, respectively, for the nine months ending September 30, 1997. An executive officer of the Company contributed $500,000 or 7% of the proceeds received from the issuance of the $6,882,000 convertible subordinated note payable as referred to at Note 5. 14. BUSINESS SEGMENT AND MAJOR CUSTOMERS The Company operates in a single industry segment and primarily sells its products to customers in North America. Products sold to customers in other geographic regions are insignificant. Individual customers that comprise 10% or more of the Company's net sales are as follows:
NINE MONTHS ENDED 1994 1995 1996 SEPTEMBER 30, 1997 --------- --------- --------- --------------------- A.............................. 24% 28% 41% 10% B.............................. 60 52 21 -- C.............................. 12 -- -- --
15. PRO FORMA FINANCIAL STATEMENT INFORMATION Upon the closing of the Company's initial public offering, each outstanding share of the Company's Series A, B, C, D, E, F, G and H preferred stock will be converted automatically to common stock based on conversion rates set forth in Note 10. The pro forma effect of the conversion has been presented as a separate column in the Company's balance sheet assuming the conversion had occurred as of September 30, 1997. 16. SUBSEQUENT EVENTS In October 1997, the Company entered into a credit facility agreement with a bank which provides for borrowings up to a maximum of $4,000,000. Borrowings under the line of credit, which expires in October 1998, will bear interest at the prime rate and will be collateralized by substantially all the Company's assets. The agreement contains restrictive covenants including maintenance of certain financial ratios and limitations of quarterly losses. F-20 HYBRID NETWORKS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 16. SUBSEQUENT EVENTS (CONTINUED) In October 1997, the stockholders of the Company approved a 1-for-2.7 reverse split of the Company's common stock and a corresponding change in the preferred stock conversion ratios. 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. F-21 BACK INSIDE COVER [PHOTO OF COMPUTER SCREEN, KEYBOARD AND MODEM] WE MAKE THE INTERNET FLY-TM- - ------------------------------------------- ------------------------------------------- - ------------------------------------------- ------------------------------------------- NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, ANY SELLING STOCKHOLDERS OR ANY OF THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SHARES OF COMMON STOCK TO WHICH IT RELATES OR AN OFFER TO, OR A SOLICITATION OF, ANY PERSON IN ANY JURISDICTION WHERE SUCH AN OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF. ---------------------- TABLE OF CONTENTS ----------------------
PAGE ---- PROSPECTUS SUMMARY........................................................ 3 RISK FACTORS.............................................................. 5 USE OF PROCEEDS........................................................... 21 DIVIDEND POLICY........................................................... 21 CAPITALIZATION............................................................ 22 DILUTION.................................................................. 23 SELECTED FINANCIAL DATA................................................... 24 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.............................................................. 25 BUSINESS.................................................................. 33 MANAGEMENT................................................................ 49 CERTAIN TRANSACTIONS...................................................... 57 PRINCIPAL AND SELLING STOCKHOLDERS........................................ 60 DESCRIPTION OF CAPITAL STOCK.............................................. 62 SHARES ELIGIBLE FOR FUTURE SALE........................................... 65 UNDERWRITING.............................................................. 67 LEGAL MATTERS............................................................. 68 EXPERTS................................................................... 68 ADDITIONAL INFORMATION.................................................... 69 GLOSSARY OF TERMS......................................................... 70 FINANCIAL STATEMENTS...................................................... F-1
---------------------- UNTIL , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK OFFERED HEREBY, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. 2,700,000 SHARES [LOGO] COMMON STOCK ------------ PROSPECTUS ------------ NATIONSBANC MONTGOMERY SECURITIES, INC. UBS SECURITIES , 1997 - ------------------------------------------- ------------------------------------------- - ------------------------------------------- ------------------------------------------- PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The following table sets forth the costs and expenses to be paid by the Company in connection with the sale of the shares of Common Stock being registered hereby. All amounts are estimates except for the Securities and Exchange Commission registration fee, the NASD filing fee and the Nasdaq National Market filing fee. Securities and Exchange Commission registration fee............... $ 13,173 NASD filing fee................................................... 4,847 Nasdaq National Market filing fee................................. 42,320 Accounting fees and expenses...................................... 250,000 Legal fees and expenses........................................... 350,000 Printing and engraving expenses................................... 125,000 Blue sky fees and expenses........................................ 5,000 Transfer agent and registrar fees and expenses.................... 5,000 Miscellaneous..................................................... 54,660 --------- Total......................................................... $ 850,000 --------- ---------
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS. As permitted by Section 145 of the Delaware General Corporation Law, the Registrant's Certificate of Incorporation includes a provision that eliminates the personal liability of its directors to the Registrant or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to the corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the Delaware General Corporation Law or (iv) for any transaction from which the director derived an improper personal benefit. In addition, as permitted by Section 145 of the Delaware General Corporation Law, the Bylaws of the Registrant provide that: (i) the Registrant is required to indemnify its directors to the fullest extent permitted by the Delaware General Corporation Law; (ii) the Registrant may, in its discretion, indemnify other officers, employees and agents as set forth in the Delaware General Corporation Law; (iii) upon receipt of an undertaking to repay such advances if indemnification is determined to be unavailable, the Registrant is required to advance expenses, as incurred, to its directors in connection with defending a civil or criminal action, suit or proceeding (except if the agent is a party to an action, suit or proceeding brought by the corporation and approved by a majority of the Board of Directors which alleges willful misappropriation of corporate assets by such agent, disclosure of confidential information in violation of such agent's fiduciary or contractual obligations to the corporation or any willful and deliberate breach in bad faith of such agent's duty to the corporation or its stockholders; and (iv) the rights conferred in the Bylaws are not exclusive and the Registrant is authorized to enter into indemnification agreements with its directors, officers and employees and agents. The Registrant's policy is to enter into indemnity agreements with each of its directors and executive officers. The indemnity agreements provide that directors and executive officers will be indemnified and held harmless to the fullest possible extent permitted by law including against all expenses (including attorneys' fees), judgments, fines and settlement amounts actually and reasonably incurred by them in any action, suit or proceeding, including any derivative action by or in the right of the Registrant, on account of their services as directors or officers of the Registrant or as directors or officers of any other company or enterprise when they are serving in such capacities at the request of the Registrant. The Registrant will not be obligated pursuant to the agreements to indemnify or advance expenses to an indemnified party with II-1 respect to proceedings or claims (i) initiated by the indemnified party and not by way of defense, except with respect to a proceeding authorized by the Board of Directors and successful proceedings brought to enforce a right to indemnification under the Indemnity Agreement, the charter documents or any other statute or law or otherwise although indemnification may be provided by the Company in specific cases if the Board of Directors finds it appropriate, (ii) for any amounts paid in settlement of a proceeding unless the Registrant consents in advance in writing to such settlement, (iii) on account of any suit in which judgment is rendered against the indemnified party for an accounting of profits made from the purchase or sale by the indemnified party of securities of the Registrant pursuant to the provisions of Section 16(b) of the Securities Exchange Act of 1934 and related laws, (iv) on account of conduct by a director which is finally adjudged to have been in bad faith or conduct that the director did not reasonably believe to be in, or not opposed to, the best interests of the Registrant, (v) on account of any criminal action or proceeding arising out of conduct that the director had reasonable cause to believe was unlawful or (vi) if a final decision by a court having jurisdiction in the matter shall determine that such indemnification is not lawful. The indemnity agreement requires a director or executive officer to reimburse the Registrant for all expenses advanced only to the extent it is ultimately determined that the director or executive officer is not entitled, under Delaware law, the Certificate of Incorporation, the Bylaws, the indemnity agreement or otherwise, to be indemnified for such expenses. The indemnity agreement provides that it is not exclusive of any rights a director or executive officer may have under the Certificate of Incorporation, Bylaws, other agreements, any majority-in-interest vote of the stockholders or vote of disinterested directors, the Delaware law or otherwise. The indemnification provision in the Bylaws, and the indemnity agreements entered into between the Registrant and its directors and executive officers, may be sufficiently broad to permit indemnification of the Registrant's executive officers and directors for liabilities arising under the Securities Act of 1933, as amended (the "Securities Act"). As authorized by the Registrant's Bylaws, the Registrant, with approval by the Board, expects to purchase director and officer liability insurance. See also the undertakings set out in response to Item 17. Reference is made to the following documents filed as exhibits to this Registration Statement regarding relevant indemnification provisions described above and elsewhere herein:
EXHIBIT DOCUMENT NUMBER - ------------------------------------------------------------------------------------ ----------- Underwriting Agreement (draft dated October 21, 1997)............................... 1.01 Registrant's Currently Effective Amended and Restated Certificate of Incorporation..................................................................... 3.01 Form of Registrant's Amended and Restated Certificate of Incorporation effecting stock split....................................................................... 3.02 Form of Registrant's Amended and Restated Certificate of Incorporation to be filed immediately following the offering................................................ 3.03 Registrant's Bylaws................................................................. 3.04 Form of Registrant's Amended and Restated Bylaws to be effective immediately following the offering............................................................ 3.05 Form of Indemnification Agreement................................................... 10.08
II-2 ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES. The following table sets forth information regarding all securities sold by the Registrant since October 1, 1994.
AGGREGATE PURCHASE NUMBER OF PRICE AND FORM OF CLASS OF PURCHASERS DATE OF SALE TITLE OF SECURITIES SECURITIES CONSIDERATION - ----------------------------------- -------------- -------------------------------- ---------- ------------------ Three (3) investors................ 10/94 and Series B Preferred Stock 551,721 $ 965,512(1) 11/94 General Instrument Corporation..... 2/95 Series C Preferred Stock 761,694 1,250,000(2) Eleven (11) investors(3)........... 5/95 and 6/95 Series D Preferred Stock 3,200,002 5,600,004(1) Eleven (11) investors(3)........... 5/95 and 6/95 Warrants to purchase Series D 1,600,001 -- Preferred Stock at $1.75 per share Three (3) investors(3)............. 5/95 Warrants to purchase Series B 205,861 -- Preferred Stock at $1.75 per share Comdisco, Inc...................... 8/95 Warrant to purchase Series B 22,857 -- (4) Preferred Stock at $1.75 per share Intel Corporation.................. 12/95 Series E Preferred Stock 1,315,864 2,000,000(2) Intel Corporation.................. 12/95 Series F Preferred Stock 986,898 1,500,000(5) Intel Corporation.................. 12/95 Common Stock 262,222 141,600(6) Intel Corporation.................. 12/95 Warrants to purchase Series B 457,000 -- (5) Preferred Stock at $1.75 per share Twelve (12) investors(7)........... 6/96 Convertible Secured Promissory $3,160,257 3,160,257(1) Notes face value Twelve (12) investors(7)........... 6/96 Warrants to purchase Series D 451,000 -- Preferred Stock at $1.75 per share Fifty-five (55) investors.......... 7/96 Series G Preferred Stock 3,457,501 13,242,224(8) Alex. Brown & Sons Incorporated.... 7/96 Warrant to purchase Series G 156,658 -- (9) Preferred Stock at $3.83 per share Comdisco, Inc...................... 8/96 Warrant to purchase Series G 15,665 -- (4) Preferred Stock at $3.83 per share Intel Corporation.................. 12/96 Series B Preferred Stock issued 248,187 -- (5) upon exercise of warrant Itochu Corporation................. 2/97 Series H Preferred Stock 493,827 2,000,000(1) London Pacific Life & Annuity Company(11)...................... 4/97 Senior Secured Convertible $5.5 $5,500,000 5,500,000(1)(10) Million Debenture Due 2002 face value Nineteen (19) investors including certain affiliates of the Company.......................... 9/97 Subordinated Notes and Warrants $6,882,201 6,882,201(1) to purchase Common Stock at face value $10.91 per share 252,387 Officers, directors, employees and consultants...................... 10/94-9/97 Exercise of options to purchase 205,518 144,007(13) Common Stock restricted stock awards and stock bonuses (12) Venture Bank Group................. 10/97 Warrant to purchase Common Stock 2,659 -- (14) at $10.91 per share Alcatel............................ 11/97 Warrant to purchase Common Stock 458,295 -- (15) at $10.91 per share
(SEE FOOTNOTES ON FOLLOWING PAGE.) II-3 - ------------------------------ (1) Paid in cash. (2) In consideration for canceled indebtedness of the Registrant. (3) Registrant sold shares of Series D Preferred Stock and warrants to purchase additional shares of Series D Preferred Stock to investors. In addition, two (2) investors of the Series D Preferred Stock and Gary Lauder received warrants to purchase Series B Preferred Stock pursuant to their rights of first refusal. (4) In consideration for leases extended to the Registrant. (5) In consideration for prepaid royalties of $1,500,000 paid to the Registrant. On December 4, 1996, Intel net exercised the warrant and received 248,187 shares of Series B Preferred Stock. (6) In consideration for transfer to Hybrid pursuant to the Amended License Agreement of certain technology rights. (7) Registrant received loans in the amount of $3,160,257 in exchange for the Convertible Secured Promissory Notes, new warrants to purchase Series D Preferred Stock and the extension of expiration dates on existing warrants to purchase Series D Preferred Stock and certain existing warrants to purchase Series B Preferred Stock. (8) In consideration for cash of $10,081,967 and the conversion of the Convertible Secured Promissory Notes with a face value of $3,160,257. (9) In consideration for acting as private placement agent in the sale of the Series G Preferred Stock. (10) In connection with the sale of the $5.5 Million Debenture, London Pacific International Limited received a fee of $500,000 from the Registrant. (11) In August 1997, the $5.5 Million Debenture was transferred to BG Services Limited, an affiliate of London Pacific Life & Annuity Company. (12) With respect to the grant of stock options, exemption from registration under the Securities Act was unnecessary in that none of such transactions involved a "sale" of securities as such term is used in Section 2(3) of the Securities Act. (13) In consideration for cash and services rendered to the Company. (14) In consideration for extending a credit facility to the Registrant in the amount of $4.0 million. (15) In consideration for a certain technology support and development arrangement. The securities acquired by the Registrant's officers, directors, employees and consultants were made in reliance on Rule 701 under the Securities Act. All sales of Preferred Stock, warrants and notes and the sale of the debentures were made in reliance on Section 4(2) of the Securities Act and/or Regulation D promulgated under the Securities Act. The securities were sold to a limited number of people with no general solicitation or advertising. II-4 ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. (a) The following exhibits are filed herewith:
EXHIBIT NUMBER EXHIBIT TITLE - ------ -------------------------------------------------------------------------- 1.01 -- Underwriting Agreement (draft dated October 21, 1997).* 3.01 -- Registrant's currently effective Amended and Restated Certificate of Incorporation.* 3.02 -- Form of Registrant's Amended and Restated Certificate of Incorporation effecting stock split.* 3.03 -- Form of Registrant's Amended and Restated Certificate of Incorporation to be filed immediately following the offering.* 3.04 -- Registrant's Bylaws.* 3.05 -- Form of Registrant's Amended and Restated Bylaws to be effective immediately following the offering.* 4.01 -- Form of Specimen Certificate for Registrant's Common Stock.* 5.01 -- Opinion of Fenwick & West LLP regarding legality of the securities being registered. 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. 10.02 -- Registrant's 1993 Equity Incentive Plan.* 10.03 -- Registrant's 1996 Equity Incentive Plan.* 10.04 -- Registrant's Executive Officer Incentive Plan.* 10.05 -- Registrant's 1997 Equity Incentive Plan.* 10.06 -- Registrant's 1997 Directors Stock Option Plan.* 10.07 -- Registrant's 1997 Employee Stock Purchase Plan.* 10.08 -- Form of Indemnity Agreement entered into by Registrant with each of its directors and executive officers.* 10.09 -- Net Lease Agreement between Devcon/Bubb Road Investors and Registrant dated May 25, 1995.* 10.10 -- Sublease between Norian Corporation and Registrant dated October 24, 1996.* 10.11 -- Employment Agreement between Registrant and Carl S. Ledbetter dated January 15, 1996.* 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 2002 transferred to BG Services Limited.* 10.13 -- Convertible Subordinated Promissory Note Purchase Agreement among Registrant and certain investors dated September 18, 1997, form of Convertible Subordinated Promissory Note and form of Common Stock Purchase Warrant.* 10.14 -- Commitment Letter between Registrant and Venture Banking Group dated September 16, 1997.* 10.15 -- Collaboration Agreement among the Registrant, Sharp Corporation and Itochu Corporation dated November 25, 1996 and Addendum No. 1 thereto dated November 25, 1996.* 10.16 -- Sales and Purchase Agreement between Registrant and Itochu Corporation dated January 10, 1997.**
II-5
EXHIBIT NUMBER EXHIBIT TITLE - ------ -------------------------------------------------------------------------- 10.17 -- Value Added Reseller Agreement between Registrant and Internet Ventures, Inc. dated July 1, 1996.** 10.18 -- Value Added Reseller Agreement between Registrant and Network System Technologies dated November 25, 1996.** 10.19 -- Registrant's Incentive Based Compensation Program.* 10.20 -- Loan and Security Agreement between Venture Banking Group and Registrant dated October 16, 1997, Form of Common Stock Purchase Warrant and Subordination Agreements among the Registrant and certain securityholders of the Registrant dated October 16, 1997.* 10.21 -- Warrant Purchase Agreement by and between Registrant and Alcatel dated as of November 3, 1997. 11.01 -- Statement regarding computation of net (loss) per share.* 23.01 -- Consent of Fenwick & West LLP (included in Exhibit 5.01). 23.02 -- Consent of Coopers & Lybrand L.L.P., independent accountants. 24.01 -- Power of Attorney.* 27.01 -- Financial Data Schedule.*
- ------------------------ * Previously filed. ** Confidential treatment is being sought with respect to certain portions of this agreement. Such portions have been omitted from this filing and have been filed separately with the Securities and Exchange Commission. (b) The following financial statement schedule is included on pages S-1 and S-2: Report on Financial Statement Schedule. Valuation allowance for doubtful accounts. Valuation allowance for deferred tax asset. ITEM 17. UNDERTAKINGS. The undersigned Registrant hereby undertakes to provide to the Underwriters at the closing specified in the Underwriting Agreement certificates in such denominations and registered in such names as required by the Underwriters to permit prompt delivery to each purchaser. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the provisions described under Item 14 above, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. II-6 The undersigned Registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this Registration Statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-7 SIGNATURES Pursuant to the requirements of the Securities Act, the Registrant has duly caused this Amendment to Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Cupertino, State of California, on the 6th day of November, 1997. HYBRID NETWORKS, INC. By: /s/ CARL S. LEDBETTER ----------------------------------------- Carl S. Ledbetter PRESIDENT, CHIEF EXECUTIVE OFFICER AND CHAIRMAN OF THE BOARD OF DIRECTORS Pursuant to the requirements of the Securities Act, this Amendment to Registration Statement has been signed by the following persons in the capacities and on the dates indicated. NAME TITLE DATE - ------------------------------ -------------------------- ------------------- PRINCIPAL EXECUTIVE OFFICER: /s/ CARL S. LEDBETTER President, Chief Executive - ------------------------------ Officer, and Chairman of November 6, 1997 Carl S. Ledbetter the Board of Directors PRINCIPAL FINANCIAL OFFICER AND PRINCIPAL ACCOUNTING OFFICER: Vice President, Finance /s/ DAN E. STEIMLE and Administration, - ------------------------------ Chief Financial Officer November 6, 1997 Dan E. Steimle and Secretary ADDITIONAL DIRECTORS: /s/ JAMES R. FLACH* - ------------------------------ Director November 6, 1997 James R. Flach /s/ STEPHEN E. HALPRIN* - ------------------------------ Director November 6, 1997 Stephen E. Halprin /s/ GARY M. LAUDER* - ------------------------------ Director November 6, 1997 Gary M. Lauder /s/ DOUGLAS M. LEONE* - ------------------------------ Director November 6, 1997 Douglas M. Leone - ------------------------------ Director November 6, 1997 Howard L. Strachman *By: /s/ DAN E. STEIMLE ------------------------- Dan E. Steimle ATTORNEY-IN-FACT II-8 REPORT ON FINANCIAL SCHEDULE Our report on the financial statements is included on page F-2 of this Form S-1. In connection with our audits of such financial statements, we have also audited the related financial statement schedule listed in the index on page S-2 of this Form S-1. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, present fairly, in all material respects, the information required to be included therein. COOPERS & LYBRAND, L.L.P. San Jose, CA October 16, 1997 S-1 HYBRID NETWORKS, INC. SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS (IN THOUSANDS) VALUATION ALLOWANCE FOR DOUBTFUL ACCOUNTS
ADDITIONS BALANCE AT CHARGED TO CHARGED TO BALANCE BEGINNING COSTS AND OTHER AT END OF FOR THE YEAR ENDED: OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD - --------------------------------------------------------- ----------- ----------- ----------- ----------- --------- December 31, 1994........................................ -- -- -- -- -- ----------- ----------- ----------- ----------- --------- ----------- ----------- ----------- ----------- --------- December 31, 1995........................................ -- -- -- -- -- ----------- ----------- ----------- ----------- --------- ----------- ----------- ----------- ----------- --------- December 31, 1996........................................ -- -- -- -- -- ----------- ----------- ----------- ----------- --------- ----------- ----------- ----------- ----------- --------- FOR THE NINE MONTHS ENDED: - --------------------------------------------------------- September 30, 1997....................................... -- $ 690 -- $ 15 $ 675 ----------- ----------- ----------- ----------- --------- ----------- ----------- ----------- ----------- ---------
VALUATION ALLOWANCE FOR DEFERRED TAX ASSET
ADDITIONS BALANCE AT CHARGED TO CHARGED TO BALANCE BEGINNING COSTS AND OTHER AT END OF FOR THE YEAR ENDED: OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD - --------------------------------------------------------- ----------- ----------- ----------- ----------- --------- December 31, 1994........................................ $ 474 $ 1,136 -- -- $ 1,610 ----------- ----------- ----------- ----------- --------- ----------- ----------- ----------- ----------- --------- December 31, 1995........................................ $ 1,610 $ 2,345 -- -- $ 3,955 ----------- ----------- ----------- ----------- --------- ----------- ----------- ----------- ----------- --------- December 31, 1996........................................ $ 3,955 $ 4,561 -- -- $ 8,516 ----------- ----------- ----------- ----------- --------- ----------- ----------- ----------- ----------- --------- FOR THE NINE MONTHS ENDED: - --------------------------------------------------------- September 30, 1997....................................... $ 8,516 $ 4,000 -- -- $ 12,516 ----------- ----------- ----------- ----------- --------- ----------- ----------- ----------- ----------- ---------
S-2 EXHIBIT INDEX
EXHIBIT NUMBER EXHIBIT TITLE - ------ -------------------------------------------------------------------------- 1.01 -- Underwriting Agreement (draft dated October 21, 1997).* 3.01 -- Registrant's currently effective Amended and Restated Certificate of Incorporation.* 3.02 -- Form of Registrant's Amended and Restated Certificate of Incorporation effecting stock split.* 3.03 -- Form of Registrant's Amended and Restated Certificate of Incorporation to be filed immediately following the offering.* 3.04 -- Registrant's Bylaws.* 3.05 -- Form of Registrant's Amended and Restated Bylaws to be effective immediately following the offering.* 4.01 -- Form of Specimen Certificate for Registrant's Common Stock.* 5.01 -- Opinion of Fenwick & West LLP regarding legality of the securities being registered. 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. 10.02 -- Registrant's 1993 Equity Incentive Plan.* 10.03 -- Registrant's 1996 Equity Incentive Plan.* 10.04 -- Registrant's Executive Officer Incentive Plan.* 10.05 -- Registrant's 1997 Equity Incentive Plan.* 10.06 -- Registrant's 1997 Directors Stock Option Plan.* 10.07 -- Registrant's 1997 Employee Stock Purchase Plan.* 10.08 -- Form of Indemnity Agreement entered into by Registrant with each of its directors and executive officers.* 10.09 -- Net Lease Agreement between Devcon/Bubb Road Investors and Registrant dated May 25, 1995.* 10.10 -- Sublease between Norian Corporation and Registrant dated October 24, 1996.* 10.11 -- Employment Agreement between Registrant and Carl S. Ledbetter dated January 15, 1996.* 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 2002 transferred to BG Services Limited.* 10.13 -- Convertible Subordinated Promissory Note Purchase Agreement among Registrant and certain investors dated September 18, 1997, form of Convertible Subordinated Promissory Note and form of Common Stock Purchase Warrant.* 10.14 -- Commitment Letter between Registrant and Venture Banking Group dated September 16, 1997.* 10.15 -- Collaboration Agreement among the Registrant, Sharp Corporation and Itochu Corporation dated November 25, 1996 and Addendum No. 1 thereto dated November 25, 1996.* 10.16 -- Sales and Purchase Agreement between Registrant and Itochu Corporation dated January 10, 1997.** 10.17 -- Value Added Reseller Agreement between Registrant and Internet Ventures, Inc. dated July 1, 1996.** 10.18 -- Value Added Reseller Agreement between Registrant and Network System Technologies dated November 25, 1996.**
EXHIBIT NUMBER EXHIBIT TITLE - ------ -------------------------------------------------------------------------- 10.19 -- Registrant's Incentive Based Compensation Program.* 10.20 -- Loan and Security Agreement between Venture Banking Group and Registrant dated October 16, 1997, Form of Common Stock Purchase Warrant and Subordination Agreements among the Registrant and certain securityholders of the Registrant dated October 16, 1997.* 10.21 -- Warrant Purchase Agreement by and between Registrant and Alcatel dated as of November 3, 1997. 11.01 -- Statement regarding computation of net (loss) per share.* 23.01 -- Consent of Fenwick & West LLP (included in Exhibit 5.01). 23.02 -- Consent of Coopers & Lybrand L.L.P., independent accountants. 24.01 -- Power of Attorney.* 27.01 -- Financial Data Schedule.*
- ------------------------ * Previously filed. ** Confidential treatment is being sought with respect to certain portions of this agreement. Such portions have been omitted from this filing and have been filed separately with the Securities and Exchange Commission. EX-5.1 2 EXHIBIT 5.1 [Fenwick & West Letterhead] EXHIBIT 5.01 November 6, 1997 Hybrid Networks, Inc. 10161 Bubb Road Cupertino, CA 95014 Gentlemen/Ladies: At your request, we have examined the Registration Statement on Form S-1 (File No. 333-36001) (the "REGISTRATION STATEMENT") filed by you with the Securities and Exchange Commission (the "COMMISSION") on September 19, 1997 in connection with the registration under the Securities Act of 1933, as amended, of an aggregate of 3,105,000 shares of your Common Stock (the "STOCK"), 268,947 of which are presently issued and outstanding and will be sold by certain selling stockholders (the "SELLING STOCKHOLDERS"). In rendering this opinion, we have examined the following: (1) the Registration Statement, together with the Exhibits filed as a part thereof; (2) your registration statement on Form 8-A filed with the Commission on or about October 30, 1997; (3) the Prospectus prepared in connection with the Registration Statement; (4) the minutes of meetings and actions by written consent of the stockholders and Board of Directors that are contained in your minute books that are in our possession; and (5) the stock records that you have provided to us (consisting of a list of stockholders issued by you and a list of option and warrant holders respecting your capital stock that was prepared by you and dated as of September 30, 1997). (6) a Management Certificate addressed to us and dated of even date herewith executed by the Company containing certain factual and other representations. (7) The Series A Preferred Stock Purchase Agreement, Series D Preferred Stock Purchase Agreement and the Series G Preferred Stock Purchase Agreement under which the Selling Stockholders acquired the Stock to be sold by them as described in the Registration Statement. Hybrid Networks, Inc. November __, 1997 Page 2 (8) the Custody Agreement, Transmittal Letter and Powers of Attorney signed by the Selling Stockholders in connection with the sale of Stock described in the Registration Statement. In our examination of documents for purposes of this opinion, we have assumed, and express no opinion as to, the genuineness of all signatures on original documents, the authenticity of all documents submitted to us as originals, the conformity to originals of all documents submitted to us as copies, the legal capacity of all natural persons executing the same, the lack of any undisclosed terminations, modifications, waivers or amendments to any documents reviewed by us and the due execution and delivery of all documents where due execution and delivery are prerequisites to the effectiveness thereof. As to matters of fact relevant to this opinion, we have relied solely upon our examination of the documents referred to above and have assumed the current accuracy and completeness of the information included in the documents referred to above. We have made no independent investigation or other attempt to verify the accuracy of any of such information or to determine the existence or non-existence of any other factual matters; HOWEVER, we are not aware of any facts that would lead us to believe that the opinion expressed herein is not accurate. Based upon the foregoing, it is our opinion that the up to 268,947 shares of Stock to be sold by the Selling Stockholders pursuant to the Registration Statement are validly issued, fully paid and nonassessable and that the up to 2,836,053 shares of Stock to be issued and sold by you, when issued and sold in accordance in the manner referred to in the relevant Prospectus associated with the Registration Statement, will be validly issued, fully paid and nonassessable. We consent to the use of this opinion as an exhibit to the Registration Statement and further consent to all references to us, if any, in the Registration Statement, the Prospectus constituting a part thereof and any amendments thereto. This opinion speaks only as of its date and is intended solely for the your use as an exhibit to the Registration Statement for the purpose of the above sale of the Stock and is not to be relied upon for any other purpose. Very truly yours, /S/ FENWICK & WEST LLP EX-10.1 3 EXHIBIT 10.01 HYBRID NETWORKS, INC. AMENDMENT TO AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT The Amended and Restated Investor Rights Agreement dated as of September 18, 1997 among Hybrid Networks, Inc. (the "COMPANY") and certain holders of securities of the Company, as amended by the amendment dated as of October 16, 1997 (the "ORIGINAL AGREEMENT"), is hereby amended by this amendment (this "AMENDMENT") dated as of November 6, 1997 among the Company, Alcatel SEL AG ("ALCATEL"), and the holders of a majority of the Registrable Securities outstanding immediately prior to this Amendment. Except as provided otherwise herein, the terms used in this Amendment that are defined in the Original Agreement have the same meanings as those terms have in the Original Agreement. 1. The Original Agreement is hereby amended as follows: (a) Alcatel will have the same registration rights (including, without limitation, the right to transfer or assign such registration rights) under the Original Agreement as amended by this Amendment (the "AGREEMENT"), with respect to the shares of Common Stock of the Company issued or issuable upon exercise of the warrant issued by the Company to Alcatel pursuant to that certain Warrant Purchase Agreement between the Company and Alcatel dated November 3, 1997 (the "ALCATEL WARRANTS"), as the Note Warrant Investors have with respect to the shares of Common Stock that are issued or issuable upon exercise of the Note Warrants. (b) The definition of "Registrable Securities" in Section 1.1(b) of the Original Agreement is amended to include (i) shares of Common Stock of the Company issuable or issued upon exercise of any Alcatel Warrants and (ii) any Common Stock of the Company issued as (or issuable upon conversion or exercise of any warrant, right or other security which is issued as) a dividend or other distribution with respect to, or in exchange for or in replacement of, any Alcatel Warrants or Common Stock described in (i). (c) Alcatel will have, with respect to Alcatel Warrants or shares of Common Stock of the Company that have been issued upon exercise of any Alcatel Warrants, the same right as any Note/Warrant Holder has to participate in the one demand shelf-registration provided for in Section 1.10(b) of the Original Agreement (including, without limitation, the same right to transfer or assign such right to participate). (d) As signatory of this Amendment, Alcatel will be bound by the provisions of Section 1.12 of the Original Agreement (Market Stand-Off Agreement). (e) The Company shall deliver financial statements to Alcatel as provided in Sections 2.1 and 2.2 of the Original Agreement. 2. Except as amended as provided in Section 1 above, the Original Agreement continues in full force and effect. 3. This Amendment may be executed in two or more counterparts, each of which will be deemed an original but, all of which together will constitute one and the same instrument. SIGNATURE PAGE DATED AS OF NOVEMBER 6, 1997 TO THE HYBRID NETWORKS, INC. CONSENT, WAIVER AND AMENDMENT REGARDING AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT - ------------------------------------------------------------------------------ TUDOR BVI FUTURES, LTD. By: Tudor Investment Corporation, Investment Adviser By: --------------------------------- Robert P. Forlenza, Vice President Address: c/o Tudor Global Trading, Inc. 40 Rowes Wharf Boston, MA 02110 Facsimile No.: c/o Bingham, Dana & Gould LLP (617) 951-8736 Attn: Victor J. Paci, Esq. TUDOR ARBITRAGE PARTNERS, L.P. By: Tudor Global Trading, Inc., General Partner By: ------------------------------------- Robert P. Forlenza, Vice President Address and facsimile no. same as immediately above RAPTOR GLOBAL FUND, LTD. By: Tudor Investment Corporation, Investment Adviser By: --------------------------------------- Robert P. Forlenza, Vice President Address and facsimile no. same as immediately above RAPTOR GLOBAL FUND, L.P. By: Tudor Investment Corporation, General Partner By: --------------------------------------- Robert P. Forlenza, Vice President Address and facsimile no. same as immediately above SIGNATURE PAGE DATED AS OF NOVEMBER 6, 1997 TO THE HYBRID NETWORKS, INC. CONSENT, WAIVER AND AMENDMENT REGARDING AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT - ------------------------------------------------------------------------------ ALEX. BROWN & SONS INCORPORATED By: --------------------------------- Thomas R. Hitchner, Principal Address: 135 E. Baltimore Street Baltimore, MD 21202 Facsimile Number: (410) 234-3788 SIGNATURE PAGE DATED AS OF NOVEMBER 6, 1997 TO THE HYBRID NETWORKS, INC. CONSENT, WAIVER AND AMENDMENT REGARDING AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT - ------------------------------------------------------------------------------ J.F. SHEA CO., INC., By: --------------------------------- Edmund Shea, Jr. Address: 655 Brea Canyon Road P. O. Box 489 Walnut, CA 91789-0489 Facsimile Number: (909) 869-0840 SIGNATURE PAGE DATED AS OF NOVEMBER 6, 1997 TO THE HYBRID NETWORKS, INC. CONSENT, WAIVER AND AMENDMENT REGARDING AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT - ------------------------------------------------------------------------------ OSCCO III, L.P. By: --------------------------------- Stephen E. Halprin Address: 3000 Sand Hill Road Building 1, Suite 290 Menlo Park, CA 94025 Facsimile Number: (650) 854-9010 SIGNATURE PAGE DATED AS OF NOVEMBER 6, 1997 TO THE HYBRID NETWORKS, INC. CONSENT, WAIVER AND AMENDMENT REGARDING AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT - ------------------------------------------------------------------------------ ---------------------------- Gary M. Lauder Address: 88 Mercedes Lane Atherton, CA 94027 Facsimile Number: (650) 323-2171 SIGNATURE PAGE DATED AS OF NOVEMBER 6, 1997 TO THE HYBRID NETWORKS, INC. CONSENT, WAIVER AND AMENDMENT REGARDING AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT - ------------------------------------------------------------------------------ AT&T VENTURE COMPANY, L.P. By: AT&T Venture Partners, Its: General Partner By: ---------------------------- Its: ---------------------------- Address: 3000 Sand Hill Road Building 4, Suite 235 Menlo Park, CA 94025 Facsimile Number: (415) 854-4923 SIGNATURE PAGE DATED AS OF NOVEMBER 6, 1997 TO THE HYBRID NETWORKS, INC. CONSENT, WAIVER AND AMENDMENT REGARDING AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT - ------------------------------------------------------------------------------ SEQUOIA CAPITAL VI By: ---------------------------------- Its: ---------------------------------- Address: 3000 Sand Hill Road, Building 4, Suite 280 Menlo Park, CA 94025 Facsimile Number: (415) 854-2977 SEQUOIA TECHNOLOGY PARTNERS VI By: ---------------------------------- Its: ---------------------------------- Address: 3000 Sand Hill Road, Building 4, Suite 280 Menlo Park, CA 94025 Facsimile Number: (415) 854-2977 SEQUOIA XXIV By: ---------------------------------- Its: ---------------------------------- Address: 3000 Sand Hill Road, Building 4, Suite 280 Menlo Park, CA 94025 Facsimile Number: (415) 854-2977 SIGNATURE PAGE DATED AS OF NOVEMBER 6, 1997 TO THE HYBRID NETWORKS, INC. CONSENT, WAIVER AND AMENDMENT REGARDING AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT - ------------------------------------------------------------------------------ ACCEL IV L.P. ACCEL KEIRETSU L.P. By: Accel IV Associates L.P. By: Accel Partners & Co.,Inc. Its: General Partner Its: General Partner By: By: ------------------------------ ------------------------------- Its: Its: ----------------------------- ----------------------------- Address: One Palmer Square Address: One Palmer Square Princeton, NJ 08542 Princeton, NJ 08542 Facsimile Number: (609) 683-0384 Facsimile Number: (609) 683-0384 ACCEL INVESTORS '95 L.P. ELLMORE C. PATTERSON PARTNERS By: By: ------------------------------ ------------------------------- Its: Its: ----------------------------- ----------------------------- Address: One Palmer Square Address: One Palmer Square Princeton, NJ 08542 Princeton, NJ 08542 Facsimile Number: (609) 683-0384 Facsimile Number: (609) 683-0384 SIGNATURE PAGE DATED AS OF NOVEMBER 6, 1997 TO THE HYBRID NETWORKS, INC. CONSENT, WAIVER AND AMENDMENT REGARDING AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT - ------------------------------------------------------------------------------ INTEL CORPORATION By: ------------------------------- Its: ------------------------------- Address: 2200 Mission College Blvd. Santa Clara, CA 95052-8119 Facsimile Number: (408) 765-6038 SIGNATURE PAGE DATED AS OF NOVEMBER 6, 1997 TO THE HYBRID NETWORKS, INC. CONSENT, WAIVER AND AMENDMENT REGARDING AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT - ------------------------------------------------------------------------------ ITOCHU Corporation By: ------------------------------- Its: ------------------------------- Address: 5-1, Kita-Aoyama 2-chome Minato-KU, Tokyo 107-77 Japan Facsimile Number: 011-81-3-3497-3131 SIGNATURE PAGE DATED AS OF NOVEMBER 6, 1997 TO THE HYBRID NETWORKS, INC. CONSENT, WAIVER AND AMENDMENT REGARDING AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT - ------------------------------------------------------------------------------ BG SERVICES LIMITED By: ------------------------------- Its: ------------------------------- Address: c/o Minden House 6 Minden Place St. Helier Jersey, Channel Islands Attention: Ron Green Facsimile Number: (0) 1534-607799 SIGNATURE PAGE DATED AS OF NOVEMBER 6, 1997 TO THE HYBRID NETWORKS, INC. CONSENT, WAIVER AND AMENDMENT REGARDING AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT - ------------------------------------------------------------------------------ ---------------------------------- Daniel E. Steimle Address: P. O. Box 928 Occidental, CA 95465 Facsimile No.: (408) 725-0990 SIGNATURE PAGE DATED AS OF NOVEMBER 6, 1997 TO THE HYBRID NETWORKS, INC. CONSENT, WAIVER AND AMENDMENT REGARDING AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT - ------------------------------------------------------------------------------ VENTURE BANKING GROUP, a division of Cupertino National Bank By: ------------------------------- Its: ------------------------------- Address: Three Palo Alto Square, Suite 150 Palo Alto, CA 94306 Attention: Jon Krogstad Facsimile Number: (650) 843-6969 EX-10.16 4 EXHIBIT 10.16 [Confidential Treatment Requested] SALES AND PURCHASE AGREEMENT This Sales and Purchase Agreement (the "Agreement") is made and entered into effective as of the 10th day of January, 1997 (the "Effective Date") by and between Hybrid Networks, Inc., a Delaware corporation, having its principal place of business at 10161 Bubb Road, Cupertino, California 95014-4167, U.S.A. ("Hybrid"), and Itochu Corporation, a Japanese corporation, having its principal place of business at 5-1, Kita-Aoyama 2-chome, Minato-ku, Tokyo 107-77, Japan ("Itochu"), with reference to the following facts and recitals: WHEREAS, Hybrid and Itochu have entered into that certain Collaboration Agreement on the 25th day of November, 1996 (the "Collaboration Agreement"), among themselves and Sharp Corporation, a Japanese corporation, having its principal place of business at 22-22 Nagaike-Cho, Abeno-ku, Osaka 545, Japan ("Sharp") concerning the cable modems referred to therein as the "New Cable Modems" and referred to herein as the "Cable Modems"; the Cable Modems are the products designated by Hybrid as Models Nos. N-201, N-201S, N-202, N-202S, N-201B, and N-201SB (Sharp reference Nos. A1Ci2010H, A1Ci201SH, A1Ci2020H, A1Ci202SH, A1Ci2010B, and A1Ci201SB respectively), which are more specifically described in Annex A hereto, and the specifications of which are set forth in Annex B hereto; WHEREAS, Hybrid wishes to purchase a certain number of Cable Modems manufactured by Sharp as described in Section 2 of the Collaboration Agreement; WHEREAS, Itochu wishes to act as the exporter to Hybrid as foreseen in the Collaboration Agreement; WHEREAS, this Agreement constitutes the OEM supply agreement provided for in the Collaboration Agreement and sets forth the obligations of the parties with respect thereto; WHEREAS, Hybrid and Itochu (collectively, the "Parties" and each individually, the "Party") wish to set the terms and conditions covering the sales and purchase of the Cable Modems. NOW, THEREFORE, in consideration of the foregoing premises and the mutual covenants herein contained and for other good and valuable consideration, the adequacy and receipt of which are hereby acknowledged, the Parties hereby agree as follows: 1. Terms for Purchase of Cable Modems 1.1.1 Minimum Initial Purchase Order: The initial purchase order (the "Minimum 1 [**Confidential Treatment has been requested with respect to certain portions of this exhibit. Confidential portions have been omitted from the public filing and filed separately with the Securities and Exchange Commission]. Initial Purchase Order") to be issued by Hybrid to Itochu shall be for a minimum of [**] mass production units of Cable Modems manufactured by Sharp, subject to the terms and conditions set forth herein. The Minimum Initial Purchase Order shall include a detailed breakdown of models for the initial [**] units to be delivered in April , 1997 (delivery terms being based on FOB Japan), subject to the completion in time of the design and software for the Cable Modems by Hybrid and by Sharp, with the remaining [**] units to be delivered over a period of one year, but no later than the end of March , 1998. The Minimum Initial Purchase Order shall be irrevocable and non-cancelable. The scheduling of shipment releases for the [**] units shall be in accordance with Section 1.2 below. The price for the units to be delivered pursuant to the Minimum Initial Purchase Order shall be determined in accordance with Section 1.3 below. The Cable Modem warranty shall be in accordance with Section 1.4 below. Production tooling costs shall be amortized in accordance with Section 1.5 below. 1.1.2 Further Purchase Orders: Purchase orders beyond the Minimum Initial Purchase Order described in Section 1.1.1 shall be irrevocable and non- cancelable, and shall be separately discussed and agreed to between Hybrid and Itochu, and shall be based on the terms and conditions of this Agreement. 1.2 Production Quantities and Schedules: Subject to the provisions of this Section 1.2, the schedule for shipment release quantities for [**] units covered by the Minimum Initial Purchase Order and for all units to be ordered and shipped thereafter shall be determined by Hybrid, as set forth in written forecasts that Hybrid will provide to Itochu by the 25th day of each month, and confirmed by Itochu, covering the number of units by model that Hybrid expects to purchase hereunder during the six-month period commencing with the month immediately following the month in which such forecast is given. With respect to each such forecast; (a) The amounts set forth for the period covered by the first three months of the forecast will constitute firm shipment release orders by Hybrid for such Cable Modems; Itochu shall cause Sharp to manufacture such Cable Modems in accordance herewith and deliver them to Itochu, and Itochu shall ship such Cable Modems on or before the last day of the applicable month; (b) The amounts set forth for the period covered by the last three months of the forecast will not constitute firm shipment release orders. The shipment of the amounts forecasted for those months may be rescheduled by Hybrid with Itochu's consent which will not be unreasonably withheld, except that; (i) Hybrid will pay Itochu on or before the last day of the fourth month of period covered by the such forecast for all components purchased by Sharp and required for Sharp's manufacture of the Cable Modems listed in such forecast for such month. 2 (ii) Hybrid will pay Itochu on or before the last day of the fifth month of period covered by the such forecast for all DES chips purchased by Sharp and required for Sharp's manufacture of the Cable Modems listed in such forecast for such month. (c) For example, the forecast issued by Hybrid on March 25, 1997 will constitute Hybrid's and Itochu's firm commitment for the complete Cable Modems listed for shipment at the end of April, May, and June, 1997, will constitute Hybrid's firm commitment with respect to component procurement for the Cable Modems listed for shipment at the end of July, 1997, and will constitute Hybrid's firm commitment with respect to DES chip procurement for the Cable Modems listed for shipment at the end of August 1997. Notwithstanding the foregoing, the production schedule shall be determined in a way that, to the extent practicable, assures Sharp a constant allocation of monthly production quantity, the capacity of which is set at [**] units per month at present. It is also understood that the components procurement lead-time for Sharp is four (4) months for the DES chip and three (3) months for the remaining items. The lead-time of the manufactured Cable Modems on an ex-Japan basis is one month additional to the components lead-time. Notwithstanding the foregoing, no orders will be shipped in February or March 1997, the number of units ordered in January 1997 (in the Minimum Initial Purchase Order) for shipment in April will not exceed [**] and Itochu will ship all those units by the end of April 1997 and will ship by the end of May 1997 all units that Hybrid orders in February 1997 (provided that the number ordered in February 1997 for shipment in May 1997 does not exceed the number estimated for May 1997 in the January 1997 forecast.) 1.3 Cable Modem Purchase Price: The Cable Modem purchase price (the "Purchase Price") per unit on the basis of Delivered, Duty Paid, to Hybrid's designated warehouse in California, U.S.A., for the initial [**] Minimum Initial Purchase Order shall be as follows, on the basis of the Specifications as of the Effective Date as described in Section 2.1 hereof: - ------------------------------------------------------------------------------ Model Sharp Ref. (A) Shipment 9704-9707 (B) Shipment 9708-onwards - ------------------------------------------------------------------------------ N-201 AlCi2010H US$ [**] US$ [**] - ------------------------------------------------------------------------------ N-201S A1Ci201SH US$ [**] US$ [**] - ------------------------------------------------------------------------------ N-202 A1Ci2020H US$ [**] US$ [**] - ------------------------------------------------------------------------------ N-202S A1Ci202SH US$ [**] US$ [**] - ------------------------------------------------------------------------------ The above prices are based on transport between Japan and the U.S. West Coast by sea shipment. In case the transport by air is required, the additional cost will be added to the above prices. - ------------------------------------------------------------------------------ The prices in the column (A) apply to Cable Modems, whose shipment schedule is fixed during a period from April '97 through July '97 on the basis of ex-Japan. - ------------------------------------------------------------------------------ 3 - ------------------------------------------------------------------------------ The prices in the column (B) apply to Cable Modems, whose shipment schedule is fixed during a period from August '97 through March '98 on the basis of ex- Japan. - ------------------------------------------------------------------------------ Itochu represents to Hybrid that Itochu and Sharp shall continue to seek ways to reduce the cost of manufacturing the Cable Modems and shall reduce the Purchase Price for the Cable Modems hereunder as and when such cost reductions are achieved. Itochu undertakes to report to Hybrid by the end of each calendar quarter the specific actions that Sharp or Itochu has taken or proposes to take to reduce the cost of the Cable Modems and the amounts of such reductions, and Hybrid and Itochu agree to negotiate in good faith the reduction in Purchase Price as a result thereof. 1.4 Cable Modem Warranty: The warranty of the Cable Modems shall be governed by the Warranty Agreement concluded among Hybrid, Sharp, and Itochu, and whose copy is attached to this Agreement as Annex G. 1.5 Tooling Costs: The tooling costs for the Cable Modem as identified as of the Effective Date for the production capacity as required by the Minimum Initial Purchase Order of [**] units are US$ [**]. These tooling costs shall be straight-line amortized over the quantity of [**] units and are included in the Purchase Price of the Cable Modems. Upon amortization of these tooling costs, the tooling will become the property of Hybrid. Any un-amortized tooling costs shall be due and payable by Hybrid, should the total production and shipment quantity not reach the [**] units by the end of the term of this Agreement, as specified in Section 8.1 hereof. The tooling cost amount of US$ [**] is calculated on the basis of the monthly production capacity of [**] units. When a higher capacity is required to fulfill the eventual demand of Hybrid, additional tooling cost will be required. Itochu will provide Hybrid with detailed information as to such cost, and such cost will be amortized in a similar manner to that described above. Should there arise additional tooling costs which are not identified as of the Effective Date, due to such further development as a new version or a new model of the Cable Modem, such tooling costs and their authorization method shall be agreed separately but within the framework of this Agreement among the Parties. 2. Specifications of Cable Modems 2.1 Cable Modem Specifications: The specifications of the Cable Modem ("Specifications") as agreed among Hybrid, Sharp and Itochu provided for in Section 2.2 will 4 be described in Annex B which will be attached hereto in accordance with Section 2.2. Itochu shall cause Sharp to manufacture Cable Modem in compliance with the Specifications in Annex B attached hereto. Any modifications thereto shall be subject to the agreement among all Parties as described in Section 2.2 hereof. 2.2 Hybrid Deliverables: As soon as reasonably practicable after June 30, 1997, Hybrid shall deliver to Itochu the Specifications in such specificity as required for the designing and manufacturing of Cable Modem to the reasonable satisfaction to Itochu. The Specifications shall be subject to change from time to time as Hybrid modifies the design of the Cable Modem, provided however, that the revised Specifications shall be mutually agreed upon with consequential modifications in the price, delivery, and other commercial terms, with such approval not to be unreasonably withheld. With each material release of revised Specifications, Hybrid shall deliver to Itochu copies of the revised Specifications pertaining to the design and manufacture of the Cable Modem. The Specifications shall be considered as Hybrid's "Confidential Information" subject to the provisions of Section 10 below. 3. Currency / Delivery / Taxes / Payment 3.1 U.S. Dollars: All payments required to be made hereunder shall be made in U.S. Dollar Currency. 3.2 Delivery: The delivery shall be deemed to be executed on the basis of FOB Japan according to the INCOTERMS 1993 and the updated versions thereof, and the title and risk of the Cable Modem shall pass from Itochu to Hybrid at the point of the delivery on the condition that the payment for the Cable Modem will have been fully made by the time of the delivery. In case the physical delivery on the basis of FOB Japan precedes the full payment to Itochu by Hybrid of the Cable Modem, the title to the Cable Modem shall be retained by Itochu until such time that the payment is made in full by Hybrid to Itochu. 3.3 Purchase and Sale of Cable Modems: The purchase price includes all duties, customs and similar charges and fees, at the tariff as of the Effective Date of this Agreement, and are exclusive of all sales, use, excise and similar taxes imposed by any state or local governmental authority within the United States. Hybrid shall pay all such excluded and applicable taxes in the U.S., including but not limited to sales, value added, or other taxes applicable to the purchase and sale of the Cable Modems. In the event that the rate of import duties, customs and similar charges and fees for importing the Cable Modems into the United States is increased after the Effective Date, or another or additional similar such tax or duty is imposed after the Effective Date, and if the amount of any such increase or new tax exceeds one percent (1%) of the purchase price, an adjustment shall be made to the purchase price to reflect the actual direct amount of such increase or other or additional tax or duty, upon thirty (30) days 5 written notice to Hybrid. The current duties, customs and similar such taxes are set forth in Annex C attached hereto. 3.4 Payment: Hybrid shall pay the Purchase Price provided for hereunder for the Cable Modems that have been manufactured by Sharp and shipped by Itochu in accordance with this Agreement. The payment by Hybrid to Itochu shall be made by an irrevocable letter of credit (the "Letter of Credit") payable at sight as provided below. The Letter of Credit shall be issued by a first class bank acceptable to Itochu, in form and substance acceptable to Itochu, and, for any purchase order by Hybrid hereunder, shall be established in favor of Itochu at or before the beginning of one (1) week prior to the ex-Japan scheduled shipment as described in the purchase order. The Purchase Price for Cable Modems covered by purchase orders which Hybrid has placed with Itochu shall become due and payable on the relevant shipment date set forth in each such purchase order. The validity of the Letter of Credit shall fully cover the agreed ex-Japan shipment schedule and any reschedule, and the validity period for presentation of the documents to a bank in Japan shall be fifteen (15) days from the date of each shipment. The Letter of Credit shall be negotiable at a bank in Japan, upon presentation by Itochu of at sight draft covering 100% of the purchase price for the Cable Modems sold and shipped pursuant to the relevant purchase order, with three (3) copies of commercial invoice, three (3) copies of packing list, and two-thirds (2/3) set of clean "On Board" Multimodal Transport Bills of Lading. Partial shipments shall be allowed, and transshipments shall be allowed. Itochu will negotiate in good faith any other payment method that Hybrid might reasonably propose in the future, provided that payment to Itochu is adequately secured thereby. 4. Manufacturing 4.1 Quality Standards: Itochu shall ensure that the Cable Modems manufactured by Sharp meets at a minimum, the established quality standards of Sharp and the quality standards set forth in Annex D hereto. Itochu shall cause Sharp to produce working samples of Cable Modems for initial testing by Sharp and Hybrid and based upon the conclusions of such tests, to produce new samples for field tests. These Cable Modems will be accepted or rejected according to criteria to be developed by Hybrid and Sharp jointly. The Parties assume for the purposes of this Agreement that the sample Cable Modems will be finally accepted by Hybrid and Sharp before the end of March , 1997. In order to confirm that the given Cable Modems so manufactured hereunder meet the quality standards pursuant hereto, Itochu shall cause Hybrid to be given access, with a reasonable prior written notice to Itochu, to inspect the manufacturing facilities where such units of Cable Modems are produced, at any time during normal business hours; provided that (i) Hybrid shall undertake and cause its employees or representatives who have access to the manufacturing facilities to undertake and be bound by the confidentiality obligations as per Section 10 of this Agreement and the Non-Disclosure Agreement in place between Hybrid and Sharp, whose copy is shown in Annex E attached 6 hereto, and (ii) such inspection shall not disturb or otherwise jeopardize the development and/or production schedule of Cable Modems nor of other products of Sharp. The representatives shall have the right to select at random for examination one or more assemblies, subassemblies and/or components of each Cable Modem from different production batches. In addition to the foregoing, the Cable Modems manufactured by Sharp hereunder will be subject to inspection and acceptance or rejection by Hybrid under such other procedures as Hybrid may reasonably request and which are agreed by Sharp and Itochu. Such agreement will not be unreasonably withheld, and will specify the relevant lot(s) of production to which such other inspection procedures will apply.. Hybrid shall be entitled to reject the delivery of any Cable Modems which do not conform to the quality standards, by providing Itochu with a written report containing reason(s) for rejection, whereupon Itochu shall, at its own expense, furnish sufficient proof to Hybrid that such units have been brought into compliance herewith. 4.2 Packaging: Itochu shall cause the Cable Modems purchased by Hybrid hereunder to be shipped in appropriate packaging reasonably approved by Hybrid. Such packaging may accommodate ten or a few tens of Cable Modem units with AC adapters (i.e. separate packages for individual units will not be required.) 4.3 Third Party Cable Modems: Itochu represents to Hybrid that neither Itochu nor Sharp will manufacture or have manufactured client cable modems that incorporate or are based on any proprietary information of a technological or other nature of Hybrid provided to Itochu or Sharp in connection with this Agreement, the Collaboration Agreement or the Joint Development Agreement between Hybrid and Sharp pursuant to which the Cable Modems are developed. Hybrid acknowledges that Sharp or its subsidiaries may manufacture client cable modems for third parties. Itochu represents to Hybrid that such manufacture for third parties will not incorporate or be based upon any such Hybrid proprietary information and will be performed in a way that the confidentiality as described in section 10 of this Agreement is strictly maintained. 5. Marking Itochu shall cause Sharp to place on the Cable Modems to be sold by Itochu to Hybrid hereunder the name "Hybrid" or other Hybrid specified marks. All Cable Modems to be sold hereunder shall also include a marking as to the country of origin and such other labeling that Hybrid may reasonably request. Itochu shall submit to Hybrid, for Hybrid's approval and prior to use of such notice or marks, drafts of labels showing such notice and marks. Such approval shall not be unreasonably withheld. If applicable as determined by Hybrid, Itochu agrees to affix to the exterior or the interior of each Cable Modem and the package containing such Cable Modem a legible notice reading "Licensed by Hybrid Networks, Inc. under one or more of the following Patents," followed by a list of applicable patent numbers taken from the list of Hybrid's patents or as may otherwise be instructed by Hybrid. 7 6. Disclaimer 6.1 Hybrid expressly disclaims all warranties, express or implied, including but not limited to the implied warranties of merchantability, fitness for a particular purpose, regarding the Cable Modem specifications, the Cable Modem technology, and the Cable Modem system. 6.2 Except for the Cable Modem warranty described in Section 1.4 above, Itochu shall not be responsible to Hybrid for any other warranties, express or implied, including but not limited to the implied warranties of merchantability, fitness for a particular purpose, regarding the Cable Modem, the Cable Modem design, and the Cable Modem design documentation. 7. Limitation of Liability In no event shall either Party be liable to the other for special, indirect, incidental or consequential damages (including without limitation, loss of profits), regardless of whether such liability arises in contract, tort, strict liability in tort, breach of warranty, indemnification or otherwise, even if such Party was or should have been aware or advised of the possibility thereof. 8. Term and Termination 8.1 Term: The term of this Agreement shall commence upon the Effective Date and, unless otherwise terminated in accordance with Section 8.2, shall continue in full force until December 31, 1999. 8.2 Termination: Either Party shall have the right to forthwith terminate the Agreement and individual sales and purchase contract by giving the other party a written notice of termination in the event of any of the followings: (a) The other Party breaches any of the provisions hereof (such Party being hereinafter referred to as the "Breaching Party") and fails to rectify such breach within thirty (30) days after receipt of a written notice to that effect. (b) The other Party becomes insolvent or takes bankruptcy or other similar proceedings, voluntarily or involuntarily, or makes an assignment for the benefit of creditors or makes a composition with its creditors or passes a resolution for its dissolution or liquidation. In the event of occurrence of any of the events stipulated in subparagraph (a) or (b) of the above on the part of Hybrid, then upon written notice from Itochu to Hybrid, any outstanding 8 balance of the contract price and overdue interest, if any, payable to Itochu shall become immediately due and payable without presentation, demand or additional notice to Hybrid. The right to terminate the Agreement and an individual contract under this section shall not preclude the terminating Party from seeking recovery of damages suffered by such Party due to the breach of the Agreement by the other Party. 8.3 Hybrid's Remedies on Termination: Without limiting any other remedies available to Hybrid, including the right to direct damages proven, in the event of any termination of this Agreement by Hybrid by reason of a material breach by Itochu, unless otherwise notified by Hybrid in writing, Itochu shall immediately return to Hybrid all of Hybrid's Confidential Information (defined in Section 10) provided by Hybrid, including any copies or updates thereof. 8.4 Itochu's Remedies on Termination: Without limiting any other remedies available to Itochu, including the right to direct damages proven, in the event of termination of this Agreement by Itochu by reason of a material breach by Hybrid, unless otherwise notified by Itochu in writing, Hybrid shall immediately return to Itochu all of Itochu's Confidential Information (defined in Section 10) provided by Itochu, including any copies or updates thereof. 9. Export Compliance 9.1 The Parties shall comply with all applicable U.S. and Japanese export laws and regulations, including but not limited to the U.S. Export Administration Regulations ("EAR"), and the Japanese Export Control Law, as such laws and regulations may be amended from time to time. Each Party hereby gives its assurance to the other Party that it will not export or re-export or otherwise disclose, directly or indirectly, the Cable Modem technology, technical documentation or design documentation, or any other "technical data" received from the other Party, nor allow the direct product thereof to be shipped directly or indirectly to Cuba, Iran, Iraq, Libya, North Korea, Sudan, or Syria or such other country the U.S. department of Commerce or the Japanese Ministry of International Trade and Industry shall designate from time to time as proscribed destinations. Each Party hereby acknowledges that the Cable Modem technology is subject to the EAR and Export Control Law, that Each Party's duty to provide the other Party the Cable Modems or the technical documentation pertaining to the Cable Modem technology shall be expressly conditioned upon the availability of appropriate export licenses if any are required from the U.S. Department of Commerce or the Japanese Ministry of International Trade and Industry. 9 9.2 Itochu will be responsible for seeking UL/TUV/BSI safety approval and FCC approval (Part 15/68), and Hybrid will pay $56,400.00 to Itochu for obtaining such approval. 9.3 If at any time during the term of this Agreement, any approval with respect to this Agreement, or the performance, registration or recording thereof, shall be required by the government or any subdivision of the government of Japan or the countries or areas where the Cable Modem is manufactured, to make this Agreement effective or to comply with any exchange control or other legal requirement, Itochu, at its expense, shall take all further actions and execute all documents necessary or appropriate for the fulfillment of such requirements and shall promptly provide Hybrid with written evidence of such compliance. 10. Confidentiality Each Party acknowledges that the provisions of this Agreement constitute confidential or proprietary information of the other Party (collectively hereinafter referred to as "Confidential Information"). All Confidential Information disclosed by a Party (the "Disclosing Party") is also protected hereunder as Confidential Information provided that: (1) If in writing or other tangible form, the information is conspicuously labeled by the Disclosing Party as proprietary, confidential, company private or some marking similar in nature at the time of delivery; and (2) If oral, the information shall be identified by the Disclosing Party as proprietary and confidential within fifteen (15) business days of its disclosure, by a writing or other tangible form which identifies such oral communication as Confidential Information. The Party who receives Confidential Information (the "Receiving Party") shall not duplicate, use or disclose to any third party, including but not limited to any independent contractor, consultant, or supplier, any Confidential Information (except as permitted under any applicable license agreement or in the Joint Development Agreement). If either Party desires to hire a contractor or consultant to perform any services relating to the Cable Modems, such contractor or consultant shall enter into a confidentiality agreement containing terms equivalent to those of this Section. The Receiving Party who receives Confidential Information shall adopt reasonable precautions to protect such Confidential Information and to prevent its dissemination to unauthorized persons or entities. It is expressly acknowledged that Hybrid and Sharp already have entered into a Non-Disclosure Agreement and that the Joint Development Agreement provides for the treatment of confidential information provided by either Hybrid or Sharp pursuant to the development of the Cable Modems. 10 The Receiving Party's obligation under this Section shall not apply to any information which the Receiving Party can demonstrate: (a) is wholly and independently developed by the Receiving Party without the use of or access to any Confidential Information; or (b) is or has become generally available to the public without breach of this Agreement by the Receiving Party; or (c) is rightfully received from a third party free of restriction, as evidenced by documentation in the Receiving Party's possession; or is not treated as confidential by the Disclosing Party. 11. Arbitration 11.1 Good Faith Resolution: Prior to requesting that any claim or controversy be arbitrated, the Parties shall attempt to resolve between themselves any dispute, controversy, or difference concerning the meaning, application, performance, breach of this Agreement. If such negotiations have not reached final settlement within thirty (30) days, either Party may pursue arbitration as provided for below. 11.2 Arbitration: Any controversy, claim or dispute in respect of the construction of the Agreement, or arising out of, or relating in any manner to the provisions of the Agreement or the breach thereof, shall be finally settled by arbitration under the Rules of the American Arbitration Association. The language of any arbitration will be English, and any such arbitration shall be held in San Francisco, California, and shall be governed by the laws of the State of California, U.S.A. A court reporter shall record any arbitration proceeding, and such reporter's record shall be the official transcript of the proceeding. The award and decision resulting from the arbitration shall be conclusive, non-appealable, and binding on the Parties and their respective successors and permitted assignees. 12. Relationship of the Parties The relationship of the Parties under this Agreement shall be and at all times remains one of independent contractors. Neither Hybrid nor Itochu shall have any authority to bind the other in any respect, and neither Hybrid nor Itochu shall act as, or be considered as, an agent of the other. Neither Party nor any agent, employee, officer, representative or independent contractor of or retained by either Party shall become or be deemed an employee, partner, joint venture or 11 agent of or with the other Party by reason of this Agreement. 13. Licenses As provided in the Collaboration Agreement, licenses shall be granted by Hybrid to Sharp for the Hybrid technology and by Sharp to Hybrid for any Sharp technology incorporated in the Cable Modems pursuant to the Joint Development Agreement between Hybrid and Sharp under which the Cable Modems were developed. 14. General Provisions 14.1 Force Majeure: Delay and/or failure in performance, other than the obligation to pay money, shall not be deemed a breach of this Agreement when such failure or delay is caused by or due to causes beyond reasonable control of Hybrid or Itochu, including but not limited to; fire, flood, accidents, strikes, explosions, acts of God and acts of local, state and/or federal/national governments (including without limitation failure to obtain or delays in obtaining the approvals referred to in Section 9) or acts of war. Should a delay occur, the Party claiming force majeure shall notify the other, in writing, specifying the nature and possible duration of the delay. Any such delays shall not be deemed a breach of or failure to perform this Agreement or any part thereof and the date on which a Party's obligations hereunder are due to be fulfilled shall be extended for a period equal to the time lost as result of such delays. 14.2 Assignment: This Agreement, and the rights and obligations under this Agreement, shall not be transferred, assigned or encumbered, in whole or in part, by either of the Parties without the prior written consent of the other, which consent shall not be unreasonably withheld. Subject to the restrictions against assignment set forth in this Section 14.2, this Agreement shall inure to the benefit of, and shall be binding upon, the successors and assigns of each of the Parties. 14.3 Severability: The illegality, unenforceability or invalidity of any one or more covenants, phrases, clauses, sentences or paragraphs of this Agreement, shall not affect the remaining portions of this Agreement, or any part thereof; and in case of any such illegality, unenforceability or invalidity, this Agreement shall be construed as if such illegal, unenforceable or invalid covenants, phrases, clauses, sentences or paragraphs, had not been inserted. 14.4 Headings: The headings and titles of the paragraphs of this Agreement are inserted solely for convenience of reference and are not a part of and are not intended to govern, limit or aid in the construction of any term or provision hereof. 12 14.5 Counterparts: This Agreement may be executed in any number of identical counterparts, each of which shall be deemed to be an original, and all of which together shall be deemed to be one and the same instrument when each Party has signed one such counterpart. 14.6 Entire Agreement: This Agreement constitutes the entire agreement between the Parties and supersedes all prior agreements and understandings, oral and written, between the Parties hereto with respect to the subject matter hereof and the transactions contemplated hereby. No modification, variation or amendment of this Agreement shall be effective without the written consent of all of the Parties to this Agreement at the time of such modification, variation or amendment. 14.7 Notice: All notices, requests, demands and other communications required or permitted to be given under this Agreement shall be in writing and shall be sent to the Party to whom the notice is to be given, by telex, e-mail, or facsimile, and confirmed by first class mail, postage prepaid, and properly addressed as follows (in which case such notice shall be deemed to have been duly given on the day the notice is first received by the Party): Hybrid Networks, Inc. Itochu Corporation 10161 Bubb Road 5-1, Kita-Aoyama 2-chome Cupertino, CA 95014-4167 Minato-ku, Tokyo 107-77 U.S.A. Japan Attn: Carl Ledbetter Attn: Yoshio Takeda Chief Executive Officer General Manager, TOKKX Telecommunication Systems Dept. Tel. No.: +1.408.725.3250 Tel. No. +81.3.3497.3069 Fax. No.: +1.408.725.2439 Fax. No.: +81.3.3497.3131 e-mail: carll@hybrid.com e-mail: yoshio.takeda@tokjk.itochu.co.jp 14.8 Waiver: Failure by either Party hereto to enforce at any time any term or condition under this Agreement shall not be a waiver of that Party's right thereafter to enforce each and every term and condition of this Agreement. 14.9 Necessary Acts: Each Party to this Agreement agrees to perform any further acts and to execute and deliver any further documents that may be reasonably necessary to carry out the provisions of this Agreement and the transactions contemplated thereby. 13 14.10 Survivability: The terms and conditions contained herein that by their sense and context are intended to survive the termination or expiration of this Agreement (specifically, without limitation, Sections 1.4 Cable Modem Warranty, 6. Disclaimer, 7. Limitation of Liability, 8.3 Hybrid's Remedies on Termination or 8.4 Itochu's Remedies on Termination as applicable, 9. Export Compliance, 10. Confidentiality, 11. Arbitration, 12. Relationships of the Parties, and 14. General Provisions) shall so survive the termination or expiration of this Agreement. 14.11 Publicity and Disclosure: All notices to third parties and all other publicity concerning the transactions contemplated by this Agreement shall be jointly planned and coordinated by and between the Parties hereto. 14.12 Limitation on Actions: No action, regardless of form, arising out of or relating to this Agreement, may be brought by either Party more than two (2) years after the cause of action has accrued. A cause of action shall be considered to have accrued when the injured Party discovers, or in the exercise of due diligence should have discovered, a default or breach of this Agreement. IN WITNESS WHEREOF, the Parties have caused this Agreement to be duly executed as of the date first above written. Hybrid Networks, Inc. Itochu Corporation By: By: - ---------------------------------- ------------------------------ Print: Carl S. Ledbetter Print: ---------------------------- --------------------------- Title: Chairman, President & CEO Title: ---------------------------- --------------------------- 14 - --------------------------------------------------------------------------- Annex A List of Models - Cable Modems - --------------------------------------------------------------------------- Annex B Technical Specifications of Cable Modems - --------------------------------------------------------------------------- Annex C Current Duties, Customs and Similar Taxes - --------------------------------------------------------------------------- Annex D Quality Standards Agreement (Hybrid/Sharp/Itochu) - --------------------------------------------------------------------------- Annex E Non-Disclosure Agreement (Hybrid/Sharp) - --------------------------------------------------------------------------- Annex F Agreement on Proprietary Rights Warranty and Indemnification (Hybrid/Sharp/Itochu) - --------------------------------------------------------------------------- Annex G Agreement on Products Warranty (Hybrid/Sharp/Itochu) - --------------------------------------------------------------------------- 15 ANNEX A LIST OF MODELS - CABLE MODEMS N201: SH3 processor based, modem with a 2MHz, 64 QAM downstream; and RS232 interface for an external telephone modem return N201S: SH3 processor based, modem with a 2MHz, 64 QAM downstream; RS232 interface for an external telephone return; and downstream DES encryption N202X: SH3 processor based, modem with a 2MHz, 64 QAM downstream; and internal V.32 telephone modem ready N202XS: SH3 processor based, modem with a 2MHz, 64 QAM downstream; internal V.32 telephone modem ready; and downstream DES encryption N201E: SH3 processor based, multi-user modem with a 2MHz, 64 QAM downstream; RS232 interface for an external telephone modem return; enhanced memory; diplexor tuner and QPSK transmitter circuit interface N201ES: SH3 processor based, multi-user modem with a 2MHz, 64 QAM downstream; RS232 interface for an external telephone modem return; enhanced memory; diplexor tuner and QPSK transmitter circuit interface and downstream DES encryption N202E: SH3 processor based, modem with a 2MHz, 64 QAM downstream; internal V.32 telephone modem; enhanced memory; diplexor tuner; QPSK transmitter circuit interface N202ES: SH3 processor based, multi-user modem with a 2MHz, 64 QAM downstream; internal V.32 telephone modem; return; enhanced memory; diplexor tuner; QPSK transmitter circuit interface and downstream DES encryption N231: SH3 processor based, multi-user modem with a 2MHz, 64 QAM downstream; internal QPSK cable return; and RS232 interface for an external telephone modem return N231S SH3 processor based, multi-user modem with a 2MHz, 64 QAM downstream; internal QPSK cable return; RS232 interface for an external telephone modem return; and downstream DES encryption Final 6/13/97 ANNEX B - ------------------------------------------------------------------------------- PREPARED BY: DATE: SPEC NO. EU-97203 Rev1.6 -------------------------- SHARP FILE NO. /s/ K. Olund 11 June 1997 -------------------------- - -------------------------- ISSUE 11 JUNE 1997 CHECKED BY: DATE: ELECTRONIC COMPONENTS -------------------------- GROUP PAGE 9 /s/ J. Wada 11 June 1997 SHARP CORPORATION -------------------------- - ------------------------ REPRESENTATIVE DIVISION APPROVED BY: DATE: /X/ ELECTRONIC COMPONENTS DIV. / / OPTICAL DEVICE DIV. / / PHOTO VOLTAICS DIV. SPECIFICATION /s/ J. Wada 11 June 1997 - ------------------------------------------------------------------------------- [** Confidential Treatment has been requested with respect to certain handwritten portions on this page. Confidential portions have been omitted from the public filing and filed separately with the Securities and Exchange Commission.] ------------------------------- DEVICE SPECIFICATION FOR Cable modem N-201(A1CI2010H) Model No. N-202X(A1CI202XH) ------------------------------- / / CUSTOMER'S APPROVAL DATE 6/13/97 ------------------------------------- BY /s/ Frederick Enns ------------------------------------- Frederick Enns Hybrid Networks ------------------------------------- / / CUSTOMER'S APPROVAL PRESENTED BY DATE 6/13/97 /s/ Katsuhiro Miichi ------------------------------------- ---------------------------- BY /s/ Ken Matsushima KATSUHIRO MIICHI ------------------------------------- ENGINEERING DEPARTMENT 2 ELECTRONIC COMPONENTS DIVISION ELECTRONIC COMPONENTS (ELECOM) GROUP Ken Matsushima Itochu Corp. - ------------------------------------------------------------------------------- SHARP CONFIDENTIAL AND PROPRIETARY [The next 59 pages, comprising the remainder of this Annex B have been omitted as the Company is seeking confidential treatment for such information. Confidential portions have been filed separately with the Securities and Exchange Commission].** ANNEX C DUTIES AND CUSTOMS' FEES AND TAXES 1. Import Duty Non-DES Version Cable Modem 3.3% (Heading or code no. of Non DES Version Cable Modem in HARMONIZED TARIFF SCHEDULE of the United States (1997) IS 8517.50.1000) DES Version Cable Modem Unknown (Heading or code no. Of DES Version Cable Modem in HARMONIZED TARIFF SCHEDULE of the United States 91997) is to be advised later) 2. Harbor Maintenance Fee 0.125% 3. Merchandise Processing Fee 0.21% ANNEX D - ------------------------------------------------------------------------------- PREPARED BY: Date: Spec No. QBMN018 Aug. 06, 1997 -------------------------- SHARP File No. /s/ H. Kamimura -------------------------- - -------------------------- Issued: August 06, 1997 APPROVED BY: Date: ELECTRONIC -------------------------- Aug. 06, 1997 COMPONENTS GROUP Page: 1/4 /s/ H. Nazaki SHARP CORPORATION -------------------------- - -------------------------- Applicable Division / / Electronic Components Div. SPECIFICATION / / Photovoltaics Div. / / Opti-electronic Device Div. - ------------------------------------------------------------------------------- --------------------------------------- OUTGOING INSPECTION STANDARDS FOR CABLE MODEM Model No.: N-201/N-202X --------------------------------------- / / CUSTOMER'S APPROVAL DATE 8/12/97 ---------------------------- BY /s/ Robert Leng PRESENTED ---------------------------- BY /s/ T. Inokuchi ------------------------------------------ -------------------------- / / CUSTOMER'S APPROVAL T. Inokuchi, General Manager Electronic Components Div. DATE 8/12/97 Elecom Group --------------------------- Sharp Corporation BY /s/ Ken Matsushima --------------------------- Ken Matsushima Itochu Corp. - ------------------------------------------------------------------------------- 2 [The next 16 pages, comprising the remainder of this Annex D have been omitted as the Company is seeking confidential treatment for such information. Confidential portions have been filed separately with the Securities and Exchange Commission].** ANNEX E NON-DISCLOSURE AGREEMENT This Agreement made and entered into this 10th day of July, 1996 ("Effective Date"), by and between SHARP CORPORATION, a Japanese corporation, having its principal place of business at 22-22, Nagaike-cho, Abeno-ku, Osaka, Japan (hereinafter called "Sharp") and Hybrid Networks, Inc., an American corporation, having its principal place of business at 10161 Bubb Road, Cupertino, California 95014-4167 (hereinafter called "Hybrid Networks"). WITNESSETH: WHEREAS, Sharp and Hybrid Networks both have as their purpose an interest in exploring a possible business relationship and in order for the parties to explore this relationship, it may be necessary for the parties to disclose certain of their proprietary and other information to each other, which information each of the parties regards as confidential. This confidential information relates to Cable Data Modem. NOW, THEREFORE, the parties hereto agree as follows: 1. (a) All of the confidential information (hereinafter "Confidential Information"), including, without limitation, all information relating to business plans, financial or technical matters, trade secrets, designs, know-how, inventions, operations and any other information received or acquired by one party ("Receiving Party") from the other ("Disclosing Party") in the course of exploring the possible business relationship shall be in written form and marked "Confidential," with the name of the Disclosing Party and the date of disclosure. If the Confidential Information is initially disclosed orally, it shall be reduced to written form by the Disclosing Party (including the date of the oral disclosure and name of the Disclosing Party) and presented or mailed to the Receiving Party within fifteen (15) days of the first oral disclosure. (b) The Confidential Information shall remain the property of the Disclosing Party. (c) All information disclosed which is not marked "Confidential," or not reduced to written form and marked "Confidential" if initially disclosed orally shall be considered to be non-confidential and shall not be subject to the obligations imposed by this Agreement. All Confidential Information disclosed under this Agreement shall be limited to the subject matter mentioned in the Recital. The existence and terms of this Agreement shall be treated as Confidential Information. 1 2. The Receiving Party shall: (a) hold the Confidential Information in confidence and not disclose it to third parties, except in the limited cases referred to in paragraph "6"; and (b) not use the Confidential Information for any purpose other than exploring or examining the possibility of a business relationship between the parties. 3. Either party hereto shall have the right, at any time, to terminate in writing and discussions and exchange of information in connection with the exploration of the possibilities of a business relationship between the parties without any further obligations or liabilities to the other party, other than the obligations of confidentiality hereunder, or any right or obligation relating to the Confidential Information hereunder. 4.(i) The obligations of the above paragraph "2" shall not apply to any information which: (a) is available to the public through no breach of this Agreement by the Receiving Party; or (b) was in the possession of the Receiving Party prior to receipt from the Disclosing Party; or (c) is received independently from a third party who is free to disclose such information to the Receiving Party; or (d) is subsequently independently developed by the Receiving Party; or (e) has been or is made public by the Disclosing Party, such as by commercial use or sale or by publications or patents, or otherwise; or (f) is approved for release by written consent of the Disclosing Party. (ii) Disclosure of Confidential Information shall not be precluded if such disclosure is pursuant to the requirement or request of a governmental agency or by operation of law. Provided, however, the Receiving Party shall promptly give a written notice to the Disclosing party so that the Disclosing Party may seek an appropriate protective order. 5. All Confidential Information delivered to and/or in the possession of the Receiving Party shall be returned or delivered to the Disclosing Party, with all copies made thereof, in whatever form, if the Disclosing Party so requests. 6. The Receiving Party agrees that the Confidential Information shall be disclosed to only those people within its respective organizations or its agents, consultants, representatives or advisors who have a need to know the information 2 and who are obligated under terms no less restrictive than those imposed by this Agreement on the Receiving Party. 7. Each party shall have the right to refuse to accept any information under this Agreement, and nothing herein shall obligate either party to disclose to the other party any particular information. Further, each party acknowledges that no contract or agreement providing for a business relationship, of any nature, shall be deemed to exist unless and until a final definitive agreement has been executed and delivered. 8. If any official approval is required by a government authority or disclose the Confidential Information hereunder, such disclosure is subject to that approval. Both parties shall comply in all respects with applicable laws, regulations and court orders, including but not limited to laws and regulations on export control, in both parties' countries and other applicable countries. 9. Disclosure of any information under this Agreement, or otherwise, shall not be construed as granting, directly or by implication, any license under or interest of any kind in any patent, patent application, copyright or other intellectual property rights. 10. The Disclosing Party represents and warrants that it has the right to disclose the information disclosed under the terms of this Agreement and that disclosure of this information does not conflict with the terms of any agreement between the Disclosing Party and a third party. 11. The parties hereto shall not be obligated to compensate each other for the disclosure and/or use pursuant to the terms of this Agreement of any information exchanged in connection with this Agreement or the discussions between the parties. 12. This Agreement supersedes all prior agreements, understandings, representations and statements, whether oral or written, between the parties relating to the disclosure of the Confidential Information. The terms of this Agreement may not be changed except by subsequent written agreement duly signed by an officer of each of the parties. 13. Subject to Paragraph "4" hereof, the obligation of the Receiving Party provided in Paragraph "2" hereof shall continue for three (3) years from the date of each receipt of the Confidential Information, even after termination of this Agreement according to paragraph "3" hereof. 14. This Agreement shall be governed, construed and interpreted in accordance with the laws of Japan. 15. The Receiving Party acknowledges that remedies of damages may be inadequate to protect against breach of this Agreement and the Receiving Party agrees in 3 advance to the granting of injunctive or other equitable relief to the Disclosing Party in addition to any other remedy which may be available to the Disclosing Party. 16. The Disclosing Party does not make any representation or warranty, except as may be specifically provided in writing, as to the accuracy or completeness of the Confidential Information, or as to its utility or suitability for any purpose of the Receiving Party and the Disclosing Party expressly disclaims any right of the Receiving Party to rely thereon, or any liability to the Receiving Party resulting from the use of the Confidential Information. IN WITNESS WHEREOF, the parties by their duly authorized representatives have executed this Agreement as of the Effective Date first set forth above. HYBRID NETWORKS, INC. SHARP CORPORATION By: /s/ Carl S. Ledbetter By: /s/ Akira Mitarai ---------------------------- ----------------------------- Typed Name: Carl S. Ledbetter Typed Name: Akira Mitarai -------------------- -------------------- Title: President & CFO Title: Corporate Director ------------------------- ------------------------- Date: 10 July, 1996 Date: 10 July 1996 ------------------------- ------------------------- 4 Annex F AGREEMENT ON PROPRIETARY RIGHTS AND INDEMNIFICATION THIS AGREEMENT (the "Agreement") is made and entered into effective as of the 10th day of January, 1997 (the "Effective Date") by and among Hybrid Networks, Inc., a Delaware corporation, having its principal place of business at 10161 Bubb Road, Cupertino, California 95014-4167, U.S.A. ("Hybrid"), Sharp Corporation, a Japanese corporation, having its principal place of business at 22-22 Nagaike-Cho, Abeno-ku, Osaka 545, Japan ("Sharp"), and Itochu Corporation, a Japanese corporation, having its principal place of business at 5-1, Kita-Aoyama 2-chome, Minato-ku, Tokyo 107-77, Japan ("Itochu"), (hereinafter referred to collectively as "Parties" and each individually as "Party") with reference to the following facts and recitals: RECITALS WHEREAS, Hybrid, Sharp, and Itochu have entered into Collaboration Agreement on the 25th day of November, 1996 Collaboration Agreement" concerning the collaboration among the Parties on the Cable Modem defined in the Collaboration Agreement, including but not limited to development, manufacturing, licensing, sales and marketing, and have entered into or are entering into development, purchase and sales and licensing agreements pursuant thereto, WHEREAS, the Parties hereby recognize that the Cable Modem is of a highly technical nature based on advanced technologies as developed by the individual or collective efforts of the Parties and third parties, WHEREAS, the Parties wish to clarify the position of each Party concerning the proprietary nature of the technologies so involved in the Cable Modem, NOW, THEREFORE, in consideration of the foregoing premises and the mutual covenants herein contained and for other good and valuable consideration, adequacy and receipt of which are hereby acknowledged, the Parties hereby agree as follows: 1. Hybrid Proprietary Rights Warranty: Hybrid hereby warrants to Sharp and Itochu that, to its knowledge as of the date of the Effective Date, there is no substantial or unavoidable claim, legal action or other proceeding pending or threatened against Hybrid raised by any third party, alleging that the Cable Modem technology or Cable Modem specification provided by Hybrid, which is the subject of the Collaboration Agreement infringes or will infringe any third party's patent(s), copyright(s) or any other intellectual property right(s). Hybrid's sole and exclusive obligation to indemnify and defend as a result of any infringement, claim or 1 Annex F proceeding shall be set forth in Section 2. 2. Hybrid Indemnification: If Hybrid breaches its proprietary rights warranty set forth in Section 1 above, and if any such claim, suit or proceeding arising therefrom is brought against Sharp or Itochu, then upon request by Sharp or Itochu, Hybrid shall, at its expense, select counsel of Hybrid's choice and settle or defend any such claim, suit or proceeding arising therefrom and pay all damages, settlements (provided that such settlements are agreed to by Hybrid) and costs awarded therein to a third party against Sharp, Itochu and their subcontractors. In addition, if Hybrid desires to attempt to reduce its liability hereunder, Hybrid may (i) substitute a comparable non-infringing Cable Modem technology or Cable Modem specification, (ii) modify the Cable Modem technology or Cable Modem specification to make it non-infringing, or (iii) obtain a right for Sharp and Itochu to continue the use of the Cable Modem technology or Cable Modem specification to develop, manufacture, license, sell or market the Cable Modem, all at the expense of Hybrid. Notwithstanding the above, the said indemnification shall not apply to claims resulting from modifications to the Cable Modem technology or Cable Modem specification by any Party other than Hybrid or to combinations with other products not supplied by Hybrid or to specifications provided by Sharp or Itochu. The foregoing sets forth Hybrid's entire indemnification obligation. 3. Sharp Proprietary Rights Warranty: Sharp hereby warrants to Hybrid and Itochu that, to its knowledge as of the date of the Effective Date, there is no substantial or unavoidable claim, legal action or other proceeding pending or threatened against or affecting Sharp raised by any third party, alleging that the Cable Modem technology or Cable Modem specification provided by Sharp, which is the subject of the Collaboration Agreement infringes or will infringe any third party's patent(s), copyright(s) or any other intellectual property right(s). Sharp's sole and exclusive obligation to indemnify and defend as a result of any infringement, claim or proceeding shall be set forth in Section 4. 4. Sharp Indemnification: If Sharp breaches its proprietary rights warranty set forth in Section 3 above, and if any such claim, suit or proceeding arising therefrom is brought against Hybrid or Itochu, then upon request by Hybrid or Itochu, Sharp shall, at its expense, select counsel of Sharp's choice and settle or defend any such claim, suit or proceeding arising therefrom and pay all damages, settlements (provided that such settlements are agreed to by Hybrid) and costs awarded therein to a third party against Hybrid, Itochu and their subcontractors. In addition, if Sharp desires to attempt to reduce its liability hereunder, Sharp may (i) substitute a comparable non-infringing Cable Modem technology or Cable Modem specification, (ii) modify the Cable Modem technology or Cable Modem specification to make it non-infringing, or (iii) obtain a right for Hybrid and Itochu to continue the use of the Cable Modem technology or Cable Modem specification to develop, manufacture, license, sell or market the Cable Modem, all at the expense of Sharp. Notwithstanding the above, the said indemnification shall not apply to claims resulting from modifications to the Cable Modem technology or Cable Modem specification by any Party other than Sharp or to combinations 2 Annex F with other products not supplied by Sharp or to specifications provided by Hybrid or Itochu. The foregoing sets forth Sharp's entire indemnification obligation. 5. Disclaimer All Parties expressly disclaim all warranties except for that provided herein, express or implied, including but not limited to the implied warranties of merchantability, fitness for a particular purpose, regarding the Cable Modem specification, the Cable Modem technology, and the Cable Modem system, which are the subject of the Collaboration Agreement. IN WITNESS WHEREOF, the Parties have caused this Agreement to be duly executed as of the date first above written. Hybrid Networks Inc. Sharp Corporation By: By: -------------------------------- ------------------------------ Print: Carl S. Ledbetter Print: ---------------------------- ------------------------ Title: Chairman, President & CEO Title: ---------------------------- -------------------------- Itochu Corporation By: ------------------------------- Print: ---------------------------- Title: ---------------------------- 3 Annex G WARRANTY AGREEMENT This Warranty Agreement (the "Agreement") is made and entered into effective as of the 10th day of January, 1997 (the "Effective Date") by and between Hybrid Networks, Inc., a Delaware corporation having its principal place of business at 10161 Bubb Road, Cupertino, California 95014-4167, U.S.A. ("Hybrid"), Sharp Corporation, a Japanese corporation, having its principal place of business at 22-22 Nagaike-cho, Abeno-ku, Osaka 545, Japan ("Sharp"), and Itochu Corporation, a Japanese corporation, having its principal place of business at 5-1, Kita-Aoyama 2-chome, Minato-ku, Tokyo 107-77, Japan ("Itochu"), hereinafter referred to as "Parties" collectively and as "Party" individually, with reference to the following facts and recitals: RECITALS: WHEREAS, Hybrid and Itochu have entered into that certain Sales and Purchase Agreement on the 10th day of January, 1997 (the "HybIto S&P Agreement") concerning the sales and purchase of the cable modems, and WHEREAS, Sharp and Itochu have entered into that certain Sales and Purchase Agreement on the _____ day of ________, 1997 (the "SharpIto S&P Agreement") concerning the sales and purchase of the cable modems, WHEREAS, the Parties wish to set the terms and conditions covering the warranty of the cable modems whose supply is defined in the two agreements, HybIto S&P Agreement and SharpIto S&P Agreement, NOW, THEREFORE, in consideration of the foregoing premises and the mutual covenants herein contained and for other good and valuable consideration, the adequacy and receipt of which are hereby acknowledged, the Parties hereby agree as follows: 1. Scope of Application This Agreement covers the warranty as provided by Sharp on the cable modems which are supplied under the SharpIto S&P Agreement and/or the HybIto S&P Agreement; more specifically the cable modems with Hybrid's denominations (Sharp's denominations) of N-201 (A1Ci2010H), N-201S (A1Ci201SH), N-202 (A1Ci2020H), N-202S (A1Ci202SH), N-201B (A1Ci2010B), and N-201SB (A1Ci201SB), hereinafter referred to as "Product" individually and "Products" collectively. When cable modems of different denominations than above enter into the scope of the SharpIto S&P Agreement and HybIto S&P Agreement, such cable modems will also be covered by this Agreement. 2. Quality Standards, Testing and Inspection Methods 2.1 The quality standards of the Products, as well as the testing and inspection methods shall be governed by the related documents as separately agreed among the Parties to this Agreement, namely "Device Specification for Cable Modem Model No. N-201 (A1CI2010H) / N-202X (A1CI202XH)" and "Outgoing Inspection Standards for Cable Modem Model No. N-201 / N-202X" (hereinafter, "Quality Standards" and "Testing and Inspection Methods" respectively, each of which may be subject to 1 revisions and additions based on agreements among the Parties to this Agreement). 2.2 Sharp's obligations to Hybrid under this agreement are independent and are not affected by the terms (or performance) of any agreement between Itochu and Sharp. 3. Delivery 3.1. Sharp warrants to Itochu, and Itochu warrants to Hybrid, that the Products satisfy the requirements of the Quality Standards, which may be subject to revisions and additions based on agreements among the Parties to this Agreement. 3.2. The delivery is deemed to be done on the basis of ex-godown Itochu's warehouse between Sharp and Itochu, and on the basis of FOB Japan between Hybrid and Itochu, at each of which points the title and risk of the Products are deemed to have passed from Sharp to Itochu and from Itochu to Hybrid respectively. Nevertheless, Hybrid and Itochu individually reserve the right to reject the delivery of the Products in case they fail the Quality Standards by the incoming inspection performed according to the Testing and Inspection Methods. Such rejection must be informed by Hybrid to Itochu within 45 days of the FOB Japan delivery, and by Itochu to Sharp within 60 days of the ex-godown delivery. The Products so rejected shall be repaired or replaced by Sharp upon notification of failure by Hybrid or Itochu. Upon such rejection, Sharp reserves the right to contest the rejection judgment by Hybrid, in which case the Parties to this Agreement shall enter without unreasonable delay into consultation as to the settlement of such rejection. 4. After-Sales Service 4.1. The After-Sales Service of the Products shall be performed by Hybrid under its responsibility and cost, except for the cases as provided hereafter in Sections 6 and 7 of this Agreement. 4.2. When Hybrid and/or Itochu requires the documentation for the preparation of Service Manuals and/or the Spare Parts List, Sharp shall comply with such request to the best of its ability. The content as well as the sharing of the cost of such documentation shall be agreed separately among the Parties. 5. Supply of Service Parts 5.1. As regards the Service Parts which are procured originally by Sharp for the manufacturing of the Products, they will be delivered (FOB Japan) to Hybrid from Sharp and Itochu at cost within hundred (100) days upon receipt of such Service Parts Order by Sharp. Such order of Service Parts shall consist of the integer multiples of the Order-Unit Quantity as described in Annex 1 of this Agreement, and the price of each Service Part shall be based on the Service Parts List, as provided by Sharp to Itochu and by Itochu to Hybrid. 5.2. The period of last time buy of the Service Parts shall be for a period of one (1) year after the last delivery of the Products as regards the supply of individual parts, and shall be on or before the last delivery of the corresponding Product. However, the Service Parts in the form of Printed Circuit Board Assembly shall be ordered latest by the time of the purchase order for the last delivery lot of the corresponding Product, and shall cover the total 2 quantity as required to cover the lifetime of the corresponding Product. In case Sharp experiences difficulty in further supply of any of the Service Parts earlier than the period as stated above, Sharp shall notify the other Parties of such eventuality giving them a period of at least three (3) months to consider the last bulk order of such Service Parts, which order shall be duly respected by Sharp. 6. Warranty Period 6.1. For a period within sixteen (16) months of the manufacturing of the Product, which date shall be identified by the serial number or other methods attached to the Product by Sharp, if the Product fails in quality and performance due to defects attributable to Sharp, Hybrid shall repair such Product and Sharp shall refund Hybrid the cost of the repair work and of the Service Parts consumed in such repair. The refund of the Service Parts shall cover the electrical and mechanical parts, but shall exclude the Printed Circuit Board Assembly, except for the cases in which the Printed Circuit Board itself is defective by manufacture. For the purpose of executing this clause, the cost of the repair work is fixed and agreed as US$50.00 for each case of repair, and the cost of the Service Parts consumed shall be based on the Service Parts List as provided by Sharp and Itochu to Hybrid. 6.2. In case Hybrid requires the refund by Sharp, Hybrid shall inform Itochu and Sharp without unreasonable delay the details of the failure and repair. Sharp reserves the right, upon review of such details of the failure and repair, to contest such requirement for refund, in which case the Parties to this Agreement shall enter without unreasonable delay into consultation as to the attribution of the defects and as to the settlement of the refund. 6.3. This section for the execution of the Warranty by Sharp shall be reviewed by the Parties to this Agreement as to its actual application rules within six (6) months of the Effective Date of this Agreement. 7. Epidemic Failure 7.1. In case epidemic failure takes place in the market due to defects clearly attributable to Sharp, Hybrid shall inform Itochu and Sharp without unreasonable delay of such facts, and Sharp shall repair or replace the affected Products at its own cost. Such repair cost shall include the transportation cost between Hybrid and Sharp. In the event of the epidemic failure, all Parties agree to discuss to establish the economic and reasonable countermeasures for the prompt resolving of the situation. 7.2. Epidemic Failure shall be defined by the following criteria. a. That the failure is within three (3) years of the manufacturing of the Product. b. That the symptom of the failures is the same and is due to the defect of the same part or material, and the ratio of the failures satisfies the following criterion: (Aggregate Failed Quantity per Year) / (Aggregate Hybrid's Sales Quantity per Year) GREATER THAN 2% 3 c. Aggregate sales quantity per year should be more than 10,000 units. 8. General Provisions Other terms and conditions including the effective period of this Agreement shall be governed by the HybIto S&P Agreement and the SharpIto S&P Agreement. Hybrid Networks Inc. Sharp Corporation Itochu Corporation - ------------------------- ------------------------ ------------------------ By: Carl S. Ledbetter By: By: Title: Chairman, President & Title: Chief Executive Officer 4 EX-10.17 5 EXHIBIT 10.17 [Confidential Treatment Requested] VALUE ADDED RESELLER AGREEMENT THIS AGREEMENT ("Agreement") is made this 1st day of July, 1996 by and between HYBRID NETWORKS, INC. ("Hybrid") having its principal place of business at 10161 Bubb Road, Cupertino, CA 95014 and Internet Ventures ("VAR") having its principal place of business at 10850 Wilshire Blvd #1010, Los Angeles, CA 90029. RECITALS WHEREAS, Hybrid is engaged in the design and manufacture of certain computer networking systems and software ("Products"), and desires to appoint VAR as its value added reseller for such Products within the territory hereinafter specified; and WHEREAS, VAR is experienced in system design, sale, installation and maintenance of products compatible with Hybrid's Products, and desires to serve as Hybrid's value added reseller within the territory hereinafter specified; NOW THEREFORE, in consideration of the mutual agreements and covenants herein contained, the parties, intending to be legally bound, agree as follows: 1. APPOINTMENT AS VAR Hybrid hereby appoints VAR, and VAR hereby accepts appointment as a Hybrid value added reseller to sell, install, maintain, carry inventory and provide system design and site certification services for the Products, such appointment to be fully subject to the terms and conditions hereinafter provided. Notwithstanding anything contained herein to the contrary, Hybrid maintains the right to sell Products directly or through third parties to end-users in the territory described in Paragraph 5 of this Agreement without any compensation due VAR. 2. TERM OF AGREEMENT This Agreement shall come into force on the date first written above ("Effective Date") and shall remain valid for orders placed during the period of 12 months beginning on the Effective Date ("Ordering Period") for delivery during the period of 14 months beginning on the Effective Date ("Delivery Period"). 3. GRANT OF DISCOUNTS The prices for any Products ordered from Hybrid by VAR shall be discounted according to the schedule of prices as shown on Appendix A. 4. ORDERING [**Confidential Treatment has been requested with respect to certain portions of this exhibit. Confidential portions have been omitted from the public filing and filed separately with the Securities and Exchange Commission]. Orders placed by VAR, in writing, for Products will be accepted by Hybrid provided that: a) VAR complies with all of the provisions of this Agreement; b) the order is received and accepted by Hybrid during the Ordering Period for delivery during the Delivery Period; c) the order contains an express reference to this Agreement; d) the value of any single order is no less than $5,000.00; and e) the order specifies the Products ordered, purchase price(s), exact "ship- to" and "bill-to" address and requested delivery schedule. 5. TERRITORY VAR is hereby granted authority to sell, install, maintain, carry inventory and provide system design and site certification services for Hybrid products in the following territory: North America 6. WARRANTY 6.1 Hybrid warrants all Products will be free from defects of material and workmanship for a period of ninety (90) days under normal operating conditions, from the date of delivery to VAR's customer, or for a period of one hundred eighty (180) days from date of shipment by Hybrid, whichever comes first. Should a Product fail within this warranty period, Hybrid will repair or replace, at its discretion, the defective Product when it is returned to Hybrid, shipping prepaid. Replacement Products may be refurbished or contain refurbished materials. Proof of date of delivery of the returned Product is required. This warranty will apply to all repaired or replaced Products for ninety (90) days following delivery of the Product to VAR's customer or its representative. This warranty does not apply if, in Hybrid's judgment, the Product failure was caused by abuse or misuse by the VAR or customer, accidental or otherwise. Repair or modification by anyone other than Hybrid or an approved agent is expressly prohibited and will result in voiding this warranty. The maximum liability of Hybrid is limited to the purchase price of the Product covered by the warranty. EXCEPT FOR THE EXPRESS WARRANTY STATED HEREIN, HYBRID DISCLAIMS ALL WARRANTIES OF PRODUCTS FURNISHED HEREUNDER, INCLUDING, WITHOUT LIMITATION, ALL IMPLIED WARRANTIES OR MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE. 2 6.2 VAR shall have no right or authority, express or implied, directly or indirectly, to alter, enlarge or limit the representations or guarantees beyond those expressly contained in Paragraph 5.1. In the event that VAR makes unauthorized representations or guarantees beyond those contained in Paragraph 5.1 in connection with the sale, distribution, or handling of the Products, VAR shall hold harmless and indemnify Hybrid for any expenses, claims, damages or liability of any nature whatsoever arising from or related to such unauthorized representations or guarantees, including without limitation, attorney's fees. 7. REPRESENTATIONS AND WARRANTIES OF VAR 7.1 VAR warrants and represents that: a) it is a Value Added Reseller; b) it is an experienced user of computer networking equipment and software and will not require any significant assistance from Hybrid in the incorporation of Products supplied by Hybrid; and c) it will rely largely on its own skill and expertise in selection of Products suitable for its purposes. 7.2 In a manner satisfactory to Hybrid and at VAR's sole expense, VAR agrees to: a) employ a competent and aggressive sales and technical support organization; b) maintain adequate manpower and facilities to assure prompt handling of inquiries, orders and shipments of Products; c) carry an adequate inventory in order to assure timely "off-the-shelf" delivery; d) assist VARs with system design and site certification; e) sell, install and secure acceptance of Hybrid's Products; f) keep Hybrid informed as to problems encountered and resolutions and to communicate promptly to Hybrid any and all modifications, design changes or improvements of the Products suggested by any customer, or any employees or agent of customer, and VAR further agrees that Hybrid shall be and remain the exclusive owner of such information; and g) submit a monthly sales forecast of Products covering the next three months by the third week of each month. 8. TERMS AND CONDITIONS OF SALE Terms of payment will be Net 30 days from date of invoice. All amounts are payable to Hybrid Networks, Inc. at the address set forth on the invoice. Delivery will be F.O.B. point of shipment. Shipments will be made to the place or places specified on VAR's orders. VAR has a period of thirty (30) days following date of shipment or ten (10) days after receipt of Product, whichever is earlier, within which to notify Hybrid in writing of any discrepancies in the shipment. 3 If VAR fails to satisfy Hybrid on payment arrangements, Hybrid may refuse to accept an order or may allow VAR to make other arrangements satisfactory to Hybrid prior to shipment. 9. PROPRIETARY INFORMATION; NONDISCLOSURE VAR acknowledges that, in the course of selling the Products and performing its duties under this Agreement, it may obtain information relating to the Products and to Hybrid which is of a confidential and proprietary nature ("Proprietary Information"). Such Proprietary Information may include, but is not limited to, trade secrets, know-how, invention techniques, processes, programs, schematics, software source documents, data, customer lists, financial information, and sales and marketing plans. VAR shall at all times, both during the term of this Agreement and for a period of at least three (3) years after its termination, keep in trust and confidence all such Proprietary Information, and shall not use such Proprietary Information other than in the course of its duties under this Agreement, nor shall VAR disclose any of such Proprietary Information without Hybrid's written consent. VAR further agrees to immediately return to Hybrid all Proprietary Information (including copies thereof) in VAR's possession, custody, or control upon termination of this Agreement at any time and for any reason. 10. TERMINATION 10.1 This Agreement will automatically terminate 1 year from the date first written above. It may be sooner canceled as herein set forth and it may be renewed or extended in writing by mutual agreement. Hybrid neither represents nor implies its intention to grant such renewals or extensions. 10.2 Either party may terminate this Agreement immediately if the other party becomes insolvent or if there is instituted by or against the other party any proceedings in bankruptcy or if the other party shall make an assignment for the benefit of creditors. 10.3 Either party may terminate this Agreement upon the breach of any material warranty or representation or the default or non-performance by the other party of its material obligations under this Agreement or any other agreements or instruments executed and delivered in connection with this Agreement, if such breach, default or non-performance continues uncured for a period of thirty (30) days after the other party's receipt of written notice thereof from the other party giving such notice. 10.4 Upon termination of this Agreement pursuant to Paragraph 9.2 and Paragraph 9.3, all invoices submitted to VAR in respect of orders shall immediately become due for payment and all outstanding orders for Products shall automatically terminate insofar as they relate to Products not delivered as of the date of termination. 11. MISCELLANEOUS 11.1 ROLE OF PARTIES; INDEPENDENT CONTRACTORS: Hybrid and VAR are and at all times shall be and remain independent contractors as to each other, and at no time shall either be deemed to 4 be the agent of the other and no joint ventures, partnership, agency or other relationship shall be created or implied hereby or herefrom. Except as is expressly set forth herein, each party shall bear full and sole responsibility for its own expenses, liabilities, costs of operation, and the like. 11.2 ASSIGNMENT: This Agreement may not be assigned or transferred by VAR without Hybrid's prior written consent, executed by an authorized official of Hybrid. 11.3 BINDING EFFECT: Subject to subparagraph 11.2 above, this Agreement shall be binding upon and shall insure to the benefits of the parties, their successors and assigns. 11.4 FORCE MAJEURE: Notwithstanding anything contained in this Agreement to the contrary, neither party shall be liable to the other for failure to perform any obligation under this Agreement (nor shall any charge or payments be made in respect thereof) if prevented from doing so by reason of acts of God, strikes, labor unrest, embargoes, civil commotion, rationing or other governmental orders or requirements, acts of civil or military authorities, or other contingencies if and to the extent such cause is beyond the reasonable control of such party and all requirements as to notice, another performance required hereunder within a specified period, shall be automatically extended to accommodate the period of any such cause which shall interfere with such performance. 11.5 DISCLAIMER AND LIMITATION OF LIABILITY: In no event will Hybrid be liable for special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits arising out of or in connection with the contract between VAR and VAR's customer. Hybrid's liability for damage to property shall be limited to physical damage directly caused by the sole negligence of Hybrid and in no event shall exceed the value of the order between Hybrid and VAR. 11.6 NOTICES: Any notice required to be given by either party to the other party shall be in writing and shall be deemed given if personally delivered, if sent by facsimile (with receipt acknowledged) to the facsimile number the other party set forth below or if mailed postage prepaid, to: 5 If to HYBRID: If to VAR 10161 Bubb Road _________________________ Cupertino, CA 95014 _________________________ ATTN.: Craig Stein ATTN.: __________________ Fax no. 408/725-2439 Fax no. _________________ or such other address as the party to which the notice is sent shall have provided to the other party by written notice in accordance with this Section 11.6. 11.7 ANNOUNCEMENTS: No announcement to the press or to any third party of the transactions contemplated herein or to the provisions of this Agreement shall be made by either party unless the same shall be approved in advance in writing by both VAR and Hybrid. 11.8 SEVERABILITY OF PROVISIONS: If any provision of this Agreement is held invalid, the remainder of this Agreement shall not be affected thereby. 11.9 ENTIRE AGREEMENT: This Agreement states the entire agreement as of this date between VAR and Hybrid with respect to the subject matter hereof and supersedes all pre-existing oral, letter or other agreements or commitments with respect hereto. This Agreement may be modified only by agreement in writing executed by both parties hereto. 11.10 COUNTERPARTS: This Agreement shall be executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument and shall be effective when each of the parties hereto shall have duly executed this Agreement. 11.11 GOVERNING LAW: This Agreement shall be governed by, and construed and enforced in accordance with, applicable federal law and the laws of the State of California. IN WITNESS WHEREOF the parties hereto have executed this Agreement as of the day and year first above written: INTERNET VENTURES HYBRID NETWORKS, INC. By: /s/ DONALD JACKSON ________________________________ _____________________________________ Robert E. Zimmerman Its: ________________________________ Vice President, Marketing & Sales 6 APPENDIX A HYBRID PRICE LIST
PRODUCT LIST PRICE VAR PRICES ------- ---------- ---------- BASIC TIER 2 TIER 3 Model 111 RLA 995 [ ** ] Tier 2: firm orders of 2,500 units [ ** ] Tier 3: firm orders of 5,000 units [ ** ] Series 1000 Point of Presence 38,500 [ ** ] SPARC 2 workstation w/monitor HSB 210 S-bus card HEM 1110 encoder modulator Hybridware-TM- software 7" rack w/power strip Ethernet hub and transceiver 10 port terminal server C6M modulator System integration Series 2000 Point of Presence 41,500 [ ** ] SPARC 5 workstation w/monitor HSB 210 S-bus card HEM 2004 encoder modulator Hybridware-TM- software 7" rack w/power strip Ethernet hub and transceiver 10 port terminal server C6M modulator System integration Additional RF Channel 5,995 [ ** ] HSB 210 S-bus card HEM 2004 encoder modulator C6M modulator System integration 7" rack w/power strip 1,052 [ ** ] Ethernet hub and transceiver 742 [ ** ] 10 port terminal server 2,691 [ ** ] 20 port terminal server 3,284 [ ** ] 30 port terminal server 3,985 [ ** ] C6M modulator 2,173 [ ** ]
7 [**Confidential Treatment has been requested with respect to certain portions of this exhibit. Confidential portions have been omitted from the public filing and filed separately with the Securities and Exchange Commission]. [HYBRID LETTERHEAD] ADDENDUM TO VAR AGREEMENT Between Internet Ventures and Hybrid Networks The VAR agreement, dated July 1, 1996 is in force for 90 days beginning July 1, 1996. The balance of the 12 month term is contingent upon entering into a first installation of at least 100 users. HYBRID NETWORKS, INC. /s/ Robert E. Zimmerman - ---------------------------------------- Vice President, Marketing & Sales EX-10.18 6 EXHIBIT 10.18 [Confidential Treatment Requested] VALUE ADDED RESELLER AGREEMENT THIS AGREEMENT ("Agreement") is made this 25th day of November, 1996 by and between HYBRID NETWORKS, INC., ("Hybrid") having its principal place of business at 10161 Bubb Road, Cupertino, CA 95014 and Network System Technologies ("VAR") having its principal place of business at 3509 Mt. Davidson Ct., San Jose, CA 95124. RECITALS WHEREAS, Hybrid is engaged in the design and manufacture of certain computer networking systems and software ("Products"), and desires to appoint VAR as its value added reseller for such Products within the territory hereinafter specified; and WHEREAS, VAR is experienced in system design, sale, installation and maintenance of products compatible with Hybrid's Products, and desires to serve as Hybrid's value added reseller within the territory hereinafter specified; NOW THEREFORE, in consideration of the premises and mutual promises, undertakings, covenants and conditions herein set forth, the parties hereby agree as follows: 1. APPOINTMENT AS VAR Hybrid hereby appoints VAR, and VAR hereby accepts appointment as Hybrid's non-exclusive, worldwide value added reseller to sell, install, maintain, carry inventory and provide system design and site certification services for the Products, such appointment to be fully subject to the terms and conditions hereinafter provided. Notwithstanding anything contained herein to the contrary, Hybrid maintains the right to sell Products directly or through third parties to end-users in the territory described in Paragraph 5 of this Agreement without any compensation due VAR. 2. TERM OF AGREEMENT This Agreement shall come into force on the date first written above ("Effective Date") and shall remain valid for orders placed during the period of 12 months beginning on the Effective Date ("Ordering Period") for delivery during the period of 14 months beginning on the Effective Date ("Delivery Period"). 3. GRANT OF DISCOUNTS The prices for any Products ordered from Hybrid by VAR shall be discounted by [**]% from Hybrid's list prices as shown on Appendix A. 4. ORDERING [**Confidential Treatment has been requested with respect to certain portions of this exhibit. Confidential portions have been omitted from the public filing and filed separately with the Securities and Exchange Commission]. Orders placed by VAR for Products will be accepted by Hybrid provided that: a) VAR complies with all of the provisions of this Agreement; b) the order is received and accepted by Hybrid during the Ordering Period for delivery during the Delivery Period; c) the order contains an express reference to this Agreement; d) the value of any single order is no less than $5,000.00; and e) the order specifies the Products ordered, purchase price(s), exact "ship-to" and "bill-to" address and requested delivery schedule. 5. WARRANTY 5.1 Hybrid warrants all Products will be free from defects of material and workmanship for a period of ninety (90) days under normal operating conditions, from the date of delivery to VAR's customer, or for a period of one hundred eighty (180) days from date of shipment by Hybrid, whichever comes first. Should a product fail within this warranty period, Hybrid will repair or replace, at its discretion, the defective Product when it is returned to Hybrid, shipping prepaid. Replacement Products may be refurbished or contain refurbished materials. Proof of date of delivery of the returned Product is required. This warranty will apply to all repaired or replaced Products for ninety (90) days following delivery of the Product to VAR's customer or its representative. This warranty does not apply if, in Hybrid's judgment, the Product failure was caused by abuse or misuse by the VAR or customer, accidental or otherwise. Repair or modification by anyone other than Hybrid or an approved agent is expressly prohibited and will result in voiding this warranty. The maximum liability of Hybrid is limited to the purchase price of the Product covered by the warranty. EXCEPT FOR THE EXPRESS WARRANTY STATED HEREIN, HYBRID DISCLAIMS ALL WARRANTIES OF PRODUCTS FURNISHED HEREUNDER, INCLUDING, WITHOUT LIMITATION, ALL IMPLIED WARRANTIES OR MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE. 2 5.2 VAR shall have no right or authority, express or implied, directly or indirectly, to alter, enlarge or limit the representations or guarantees beyond those expressly contained in Paragraph 5.1. In the event that VAR makes unauthorized representations or guarantees beyond those contained in Paragraph 5.1 in connection with the sale, distribution, or handling of the Products, VAR shall hold harmless and indemnify Hybrid for any expenses, claims, damages or liability of any nature whatsoever arising from or related to such unauthorized representations or guarantees, including without limitation, attorney's fees. 6. REPRESENTATIONS AND WARRANTIES OF VAR 6.1 VAR warrants and represents that: a) it is a Value Added Reseller; b) it is an experienced user of computer networking equipment and software and will not require any significant assistance from Hybrid in the incorporation of Products supplied by Hybrid; and, c) it will rely largely on its own skill and expertise in selection of Products suitable for its purposes. 6.2 In a manner satisfactory to Hybrid and at VAR's sole expense, VAR agrees to: a) employ a competent and aggressive sales and technical support organization; b) maintain adequate manpower and facilities to assure prompt handling of inquiries, orders and shipments of Products; c) carry an adequate inventory in order to assure timely "off-the-shelf" delivery; d) assist customers with system design and site certification; e) sell, install and secure acceptance of Hybrid's Products; f) keep Hybrid informed as to problems encountered and resolutions and to communicate promptly to Hybrid any and all modifications, design changes or improvements of the Products suggested by any customer, or any employees or agent of VAR, and VAR further agrees that Hybrid shall be and remain the exclusive owner of such information; and g) submit a monthly sales forecast of Products covering the next three months by the third week of each month. 6.3 VAR agrees to act and perform with reasonable efforts in the best interest of Hybrid and at no time do, cause or permit to be done, published or said, any information, act or thing which is or may be detrimental to the best interests or business reputation of Hybrid. 3 7. TERMS AND CONDITIONS OF SALE Terms of payment will be Net 30 days from date of shipment. All amounts are payable to Hybrid Networks, Inc. at the address set forth on the invoice. Delivery will be F.O.B. point of shipment. Shipments will be made to the place or places specified on VAR's orders. VAR has a period of thirty (30) days following date of shipment or ten (10) days after receipt of Product, whichever is earlier, within which to notify Hybrid in writing of any discrepancies in the shipment. If VAR fails to satisfy Hybrid on payment arrangements, Hybrid may refuse to accept an order or may allow VAR to make other arrangements satisfactory to Hybrid prior to shipment. 8. PROPRIETARY INFORMATION; NONDISCLOSURE VAR acknowledges that, in the course of selling the Products and performing its duties under this Agreement, it may obtain information relating to the Products and to Hybrid which is of a confidential and proprietary nature ("Proprietary Information"). Such Proprietary Information may include, but is not limited to, trade secrets, know-how, invention techniques, processes, programs, schematics, software source documents, data, VAR lists, financial information, and sales and marketing plans. VAR shall at all times, both during the term of this Agreement and for a period of at least three (3) years after its termination, keep in trust and confidence all such Proprietary Information, and shall not use such Proprietary Information other than in the course of its duties under this Agreement, nor shall VAR disclose any of such Proprietary Information without Hybrid's written consent. VAR further agrees to immediately return to Hybrid all Proprietary Information (including copies thereof) in VAR's possession, custody, or control upon termination of this Agreement at any time and for any reason. 9. TERMINATION 9.1 This Agreement will automatically terminate 1 year from the date first written above. It may be sooner canceled as herein set forth and it may be renewed or extended in writing by mutual agreement. Hybrid neither represents nor implies its intention to grant such renewals or extensions. 9.2 Either party may terminate this Agreement immediately if the other party becomes insolvent or if there is instituted by or against the other party any proceedings in bankruptcy or if the other party shall make an assignment for the benefit of creditors. 9.3 Either party may terminate this Agreement upon the breach of any material warranty or representation or the default or non-performance by the other party of its material obligations under this Agreement or any other agreements or instruments executed and delivered in connection with this Agreement, if such breach, default or non-performance continues uncured for a period of thirty (30) days after the other party's receipt of written notice thereof from the other party giving such notice. 4 9.4 Upon termination of this Agreement pursuant to Paragraph 9.2 and Paragraph 9.3, all invoices submitted to VAR in respect of orders shall immediately become due for payment and all outstanding orders for Products shall automatically terminate insofar as they relate to Products not delivered as of the date of termination. 10. MISCELLANEOUS 10.1 ROLE OF PARTIES; INDEPENDENT CONTRACTORS: Hybrid and VAR are and at all times shall be and remain independent contractors as to each other. and at no time shall either be deemed to be the agent of the other and no joint ventures, partnership, agency or other relationship shall be created or implied hereby or herefrom. Except as is expressly set forth herein, each party shall bear full and sole responsibility for its own expenses, liabilities, costs of operation, and the like. 10.2 ASSIGNMENT: This Agreement may not be assigned or transferred by VAR without Hybrid's prior written consent, executed by an authorized official of Hybrid. 10.3 BINDING EFFECT: Subject to subparagraph 10.2 above, this Agreement shall be binding upon and shall insure to the benefits of the parties, their successors and assigns. 10.4 FORCE MAJEURE: Notwithstanding anything contained in this Agreement to the contrary, neither party shall be liable to the other for failure to perform any obligation under this Agreement (nor shall any charge or payments be made in respect thereof) if prevented from doing so by reason of acts of God, strikes, labor unrest, embargoes, civil commotion, rationing or other governmental orders or requirements, acts of civil or military authorities, or other contingencies if and to the extent such cause is beyond the reasonable control of such party and all requirements as to notice, another performance required hereunder within a specified period, shall be automatically extended to accommodate the period of any such cause which shall interfere with such performance. 10.5 DISCLAIMER AND LIMITATION OF LIABILITY: In no event will Hybrid be liable for special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits arising out of or in connection with the contract between VAR and VAR's customer. Hybrid's liability for damage to property shall be limited to physical damage directly caused by the sole negligence of Hybrid and in no event shall exceed the value of the order between Hybrid and VAR. 10.6 NOTICES: Any notice required to be given by either party to the other party shall be in writing and shall be deemed given if personally delivered, if sent by facsimile (with receipt acknowledged) to the facsimile number the other party set forth below or if mailed postage prepaid, to: 5 If to HYBRID: If to Network System Technologies: 10161 Bubb Road 3509 Mt. Davidson Ct. Cupertino, CA 95014 San Jose, CA 95124 ATTN.: Craig Stein ATTN.: Ed Moura Fax no. 408/725-2439 Fax no.: (408) 371-2991 or such other address as the party to which the notice is sent shall have provided to the other party by written notice in accordance with this Section 10.6. 10.7 ANNOUNCEMENTS: No announcement to the press or to any third party of the transactions contemplated herein or to the provisions of this Agreement shall be made by either party unless the same shall be approved in advance in writing by both VAR and Hybrid. 10.8 SEVERABILITY OF PROVISIONS: If any provision of this Agreement is held invalid, the remainder of this Agreement shall not be affected thereby. 10.9 ENTIRE AGREEMENT: This Agreement states the entire agreement as of this date between VAR and Hybrid with respect to the subject matter hereof and supersedes all pre-existing oral, letter or other agreements or commitments with respect hereto. This Agreement may be modified only by agreement in writing executed by both parties hereto. 10.10 COUNTERPARTS: This Agreement shall be executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument and shall be effective when each of the parties hereto shall have duly executed this Agreement. 10.11 GOVERNING LAW: This Agreement shall be governed by, and construed and enforced in accordance with, applicable federal law and the laws of the State of California. IN WITNESS WHEREOF the parties hereto have executed this Agreement as of the day and year first above written: ED MOURA HYBRID NETWORKS, INC. By: /s/ Ed Moura /s/ Carl Ledbetter 12/3/96 -------------------------------- ---------------------------------- Carl Ledbetter Its: President and CEO President ------------------------------ Date: November 25, 1996 ------------------------------ 6 APPENDIX A HYBRID'S PRICE LIST SEE ATTACHED PRICE SHEETS Form A Series 2000 Entry Level - Wireless Dow, Telephone Return
Product Configuration Price Code Component Min Max (US$) Discount HYBRID POP EQUIPMENT ELS-2101 CyberManager 2000 Entry Level System Package 1 1 35,710 [**] (includes: Sparc 5 workstation & monitor, HSB-210, HEM 2004. HybridWare + SW for 300 Subscribers and System Integration ELS-2100 Additional RF Channel (4VSB) Package (includes: HSB-210, HEM 2004, OCM-160 & System Integration 0 As Required 5,995 [**] SPARE AND SPECIAL ITEMS HSB-210 Secure Encryption Card (SBUS) 1 1 895 [**] HEM-2004 Encoder/Modulator (4-VSB) NOTE 1 1 per 6 MHz 3,200 [**] HEM-2004-B Encoder-Baseband (4-VSB) NOTE 1 1 per 6 MHz 2,600 [**] HEM-2004-I Modulator-IF (4-VSB) NOTE 1 1 per 6 MHz 3,400 [**] COMMERCIAL POP EQUIPMENT ALSO AVAILABLE FROM HYBRID (TYPICAL PRICES, NO DISCOUNTS, PRICES MAY CHANGE WITHOUT NOTICE) OEH-024 Ethernet Hub (Allied telesys 3024 TR 24-port) 1 1 360 [**] OCM-160 C6M Modulator/Upconverter (USA Spec) 1 NOTE 2 2,140 [**] OCM-260 C6U Modulator/Upconverter (USA and International) 1 NOTE 2 2,950 [**] OLP-110 Terminal Server (Portmaster) 10 Port 2,340 [**] OLP-120 Terminal Server (Portmaster) 20 Port 2,856 [**] OLP-130 Terminal Server (Portmaster) 30 Port 3,465 [**] ORK-719 7-foot, 19-inch rack 1 940 [**] HYBRID CLIENT CABLE MODEMS RLA-111 CCM (4-VSB) (flat Package) NOTE 3 995 [**] CCM-201 Client Cable Modem As required 995 [**] CCM-201-S Client Cable Modem, encryption support (DES) As required 1,095 [**] COMMERCIAL CABLE MODEM ACCESSORIES (TYPICAL PRICES, NO DISCOUNTS, PRICES MAY CHANGE WITHOUT NOTICE) OTM-001 V.34 14.4 or 28.8 Phone Modem (typ. US Robotics) As required 125 [**] OEH-005 Ethernet Hub (5-port support for five computers) As required 80 [**] (price varies depending on port requirements OAD-001 Antenna/Downconverter (PMI) As required 120 [**] HYBRID TECHNICAL SUPPORT AND TRAINING TRN-201 4 Day Installation & Operations Training Pgrm 6,000 [**] System Integration
PRICES ONLY VALID FOR ORDERS PLACED BEFORE DECEMBER 1, 1997 Notes: 1. For local transmitter use HEM 2004. For remote transmitter, a HEM 2004-B and HEM-2004-1 pair with an STL microwave link is used. 2. One C6M is required per downstream carrier frequency; one C6U is required per 2 downstream carrier frequencies. 3. For existing systems: additions and maintenance (A&M) only. Per agreed upon discount schedule: LESS THAN 1000 [**]% discount 1000-3000 [**]% discount 3000-10000 [**]% discount [**Confidential Treatment has been requested with respect to certain portions of this exhibit. Confidential portions have been omitted from the public filing and filed separately with the Securities and Exchange Commission]. Form B Series 2000 - Cable Down, Telephone and Router Return
Product Configuration Price Code Component Min Max (US$) Discount HYBRID POP EQUIPMENT CMG-2000 CyberManager 2000 with HybridWare + SW for 500 1 1 25,000 [**] Subscribers SWP-0500 Subscriber Software Package for 500 add. Subs. NOTE 1 As Required 5,000 [**] SWP-2500 Software Package for 2,500 Subscribers As Required 25,000 [**] CMD-2000 CM Downstream Router with HybridWare + SW 1 As Required 18,170 [**] SEC-010 Secure Encryption Card (DES) TBD 895 [**] SQC-200-3 SIF (QAM) Card, 3-channel (each 10 Mbps) 1 2 per CMD 4,150 [**] QMC-200-3 84 QAM Modulator Card, 3-channel (each 10 Mbps) 1 2 per CMD 4,820 [**] CMU-2000-8T CM Upstream Router with HybridWare + SW 1 As Required 18,285 [**] TDC-001-8 Phone Demodulator Card, 8 lines per card (USA spec) 1 8 per CMU 3,095 [**] COMMERCIAL POP EQUIPMENT ALSO AVAILABLE FROM HYBRID (TYPICAL PRICES, NO DISCOUNTS, PRICES MAY CHANGE WITHOUT NOTICE) OFS-200 Fast Ethernet Switch (Cisco Catalyst 2800) 1 8,700 [**] OCM-160 C6M Modulator/Upconverter (USA Spec) 1 NOTE 2 2,140 [**] OCM-260 C6U Modulator/Upconverter (USA and International) 1 NOTE 2 2,950 [**] ORK-719 7-foot, 19-inch rack 1 940 [**] SPARE PARTS LAC-010 10/100 BaseT LAN Interface Card 690 [**] HYBRID CLIENT CABLE MODEMS CCM-201 Client Cable Modem As required 795 [**] CCM-201-S Client Cable Modem, encryption support (DES) As required 895 [**] COMMERCIAL CABLE MODEM ACCESSORIES (TYPICAL PRICES, NO DISCOUNTS, PRICES MAY CHANGE WITHOUT NOTICE) OTM-001 V.34 14.4 or 28.8 Phone Modem (typ. US Robotics) As required 125 [**] OEH-005 Ethernet Hub (5-port support for five computers) As required 80 [**] (price varies depending on port requirements HYBRID TECHNICAL SUPPORT AND TRAINING TRN-201 4 Day Installation & Operations Training Pgrm 6,000 [**] System Integration
PRICES ONLY VALID FOR ORDERS PLACED BEFORE DECEMBER 1, 1997 Notes: 1. Price as listed when purchased with the CMG-2000. 2. One C6M is required per downstream carrier frequency; one C6U is required per 2 downstream carrier frequencies. Per agreed upon discount schedule: LESS THAN 1000 [**]% discount 1000-3000 [**]% discount 3000-10000 [**]% discount [**Confidential Treatment has been requested with respect to certain portions of this exhibit. Confidential portions have been omitted from the public filing and filed separately with the Securities and Exchange Commission]. Form C Series 2000 - Cable Down, Cable Return
Product Configuration Price Code Component Min Max (US$) Discount HYBRID POP EQUIPMENT CMG-2000 CyberManager 2000 with HybridWare + SW for 500 1 1 25,000 [**] Subscribers SWP-0500 Subscriber Software Package for 500 add. Subs. NOTE 1 As Required 5,000 [**] SWP-2500 Software Package for 2,500 Subscribers As Required 25,000 [**] CMD-2000 CM Downstream Router with HybridWare + SW 1 As Required 18,170 [**] SEC-010 Secure Encryption Card (DES) TBD 895 [**] SQC-200-3 SIF (QAM) Card, 3-channel (each 10 Mbps) 1 2 per CMD 4,150 [**] QMC-200-3 84 QAM Modulator Card, 3-channel (each 10 Mbps) 1 2 per CMD 4,820 [**] CMU-2000-14C CM Upstream Router with HybridWare + SW 1 As Required 18,860 [**] VDC-010-2 4-VSB Demodulator Card, 2 channels per card 1 14 per CMU 2,595 [**] VBU-010-x Hybrid Block Upconverter 1 NOTE 2 3,200 [**] COMMERCIAL POP EQUIPMENT ALSO AVAILABLE FROM HYBRID (TYPICAL PRICES, NO DISCOUNTS, PRICES MAY CHANGE WITHOUT NOTICE) OFS-200 Fast Ethernet Switch (Cisco Catalyst 2800) 1 8,700 [**] OCM-160 C6M Modulator/Upconverter (USA Spec) 1 NOTE 3 2,140 [**] OCM-260 C6U Modulator/Upconverter (USA and International) 1 NOTE 3 2,950 [**] OCS-016 16-way Splitter 1 1 per CMU Pending [**] ODF-280 Diplex Filter 1 Pending [**] ORK-719 7-foot, 19-inch rack 1 940 [**] SPARE PARTS LAC-010 10/100 BaseT LAN Interface Card 690 [**] HYBRID CLIENT CABLE MODEMS CCM-211 Client Cable Modem As required 795 [**] CCM-211-S Client Cable Modem, encryption support (DES) As required 895 [**] COMMERCIAL CABLE MODEM ACCESSORIES (TYPICAL PRICES, NO DISCOUNTS, PRICES MAY CHANGE WITHOUT NOTICE) OTM-001 V.34 14.4 or 28.8 Phone Modem (typ. US Robotics) As required 125 [**] OEH-005 Ethernet Hub (5-port support for five computers) As required 80 [**] (price varies depending on port requirements HYBRID TECHNICAL SUPPORT AND TRAINING TRN-211 5 Day Installation & Operations Training Pgrm 7,500 [**] System Integration
PRICES ONLY VALID FOR ORDERS PLACED BEFORE DECEMBER 1, 1997 1. Price as listed when purchased with the CMG-2000. 2. One Hybrid Block Upconverter is required per block group of upstream frequencies. 3. One C6M is required per downstream carrier frequency; one C6U is required per 2 downstream carrier frequencies. Per agreed upon discount schedule: LESS THAN 1000 [**]% discount 1000-3000 [**]% discount 3000-10000 [**]% discount [**Confidential Treatment has been requested with respect to certain portions of this exhibit. Confidential portions have been omitted from the public filing and filed separately with the Securities and Exchange Commission]. > Form D Series 2000 - Wireless Down, Telephone or Router Return
Product Configuration Price Code Component Min Max (US$) Discount HYBRID POP EQUIPMENT CMG-2000 CyberManager 2000 with HybridWare + SW for 500 1 1 25,000 [**] Subscribers SWP-0500 Subscriber Software Package for 500 add. Subs. NOTE 1 As Required 5,000 [**] SWP-2500 Software Package for 2,500 Subscribers As Required 25,000 [**] CMD-2000 CM Downstream Router with HybridWare + SW 1 As Required 18,170 [**] SVC-010 Secure Encryption Card (DES) 1 2 per CMD 4,150 [**] HEM-2004 Encoder/Modulator (4-VSB) NOTE 2 1 per 5 MHz 3,200 [**] HEM-2004-B Encoder-Baseband (4-VSB) NOTE 2 1 per 6 MHz 2,600 [**] HEM-2004-1 Modulator-IF (4-VSB) NOTE 2 1 per 8 MHz 3,400 [**] CMU-2000-8T CM Upstream Router with HybridWare + SW 1 As Required 18,285 [**] TDC-001-8 Phone Demodulator Card, 8 lines per card (USA spec) 1 8 per CMU 3,095 [**] COMMERCIAL POP EQUIPMENT ALSO AVAILABLE FROM HYBRID (TYPICAL PRICES, NO DISCOUNTS, PRICES MAY CHANGE WITHOUT NOTICE) OFS-200 Fast Ethernet Switch (Cisco Catalyst 2800) 1 8,700 [**] OCM-160 C6M Modulator/Upconverter (USA Spec) 1 NOTE 3 2,140 [**] OCM-280 C6U Modulator/Upconverter (USA and International) 1 NOTE 3 2,950 [**] ORK-719 7-foot, 19-inch rack 1 940 [**] SPARE PARTS LAC-010 10/100 BaseT LAN Interface Card NOTE 1 1 per 6 MHz 690 [**] HYBRID CLIENT CABLE MODEMS CCM-101 Client Cable Modem As required 995 [**] CCM-101-S Client Cable Mode, encryption support (DES) As required 1,095 [**] CCM-161 CCM (4-VSB), Series 1000 compatible As required 995 [**] CCM-161-S CCM (4-VSB), Series 1000 compatible and encryption As required 1,095 [**] support (DES) COMMERCIAL CABLE MODEM ACCESSORIES (TYPICAL PRICES, NO DISCOUNTS, PRICES MAY CHANGE WITHOUT NOTICE) OTM-001 V.34 14.4 or 28.8 Phone Modem (typ. US Robotics) As required 125 [**] OEH-005 Ethernet Hub (5-port support for five computers) As required 80 [**] (price varies depending on port requirements OAD-001 Antenna/Downconverter (PMI) As required -- [**] HYBRID TECHNICAL SUPPORT AND TRAINING TRN-201 4 Day Installation & Operations Training Pgrm 6,000 [**] System Integration
PRICES ONLY VALID FOR ORDERS PLACED BEFORE DECEMBER 1, 1997 Notes: 1. Price as listed when purchased with the CMG-2000. 2. For local transmitter use HEM-2004. For remote transmitter, a HEM-2004-B & HEM-2004-1 pair with an STL microwave link is used. 3. One C8M is required per 6MHz channel: one C8U is required per two 6 MHz channels. Per agreed upon discount schedule: LESS THAN 1000 [**]% discount 1000-3000 [**]% discount 3000-10000 [**]% discount [**Confidential Treatment has been requested with respect to certain portions of this exhibit. Confidential portions have been omitted from the public filing and filed separately with the Securities and Exchange Commission]. EX-10.21 7 EXHIBIT 10.21 Exhibit 10.21 - ------------------------------------------------------------------------------- WARRANT PURCHASE AGREEMENT BY AND BETWEEN HYBRID NETWORKS, INC. AND ALCATEL SEL AG Dated as of November 3, 1997 - ------------------------------------------------------------------------------- TABLE OF CONTENTS ARTICLE 1 ISSUANCE OF WARRANT. . . . . . . . . . . . . . . . . . . . . . . . 1 Section 1.1 Obligation to Issue Warrant . . . . . . . . . . . . . . . . 1 Section 1.2 Technical Support Agreement . . . . . . . . . . . . . . . . 2 Section 1.3 No Trademark License. . . . . . . . . . . . . . . . . . . . 6 Section 1.4 Registration Rights . . . . . . . . . . . . . . . . . . . . 6 ARTICLE II REPRESENTATIONS AND WARRANTIES OF THE COMPANY . . . . . . . . . . 7 Section 2.1 Organization, Good Standing and Qualification . . . . . . . 7 Section 2.2 Due Authorization, Execution and Delivery . . . . . . . . . 7 Section 2.3 Validation Issuance of Warrant. . . . . . . . . . . . . . . 7 Section 2.4 Registration Rights . . . . . . . . . . . . . . . . . . . . 7 Section 2.5 Consents, No Conflict . . . . . . . . . . . . . . . . . . . 8 Section 2.6 Brokers . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Section 2.7 Disclosure. . . . . . . . . . . . . . . . . . . . . . . . . 8 ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE PURCHASER. . . . . . . . . 8 Section 3.1 Organization and Authority of the Purchaser . . . . . . . . 8 Section 3.2 Due Authorization, Execution and Delivery . . . . . . . . . 8 Section 3.3 Consents; No Conflict . . . . . . . . . . . . . . . . . . . 9 Section 3.4 Brokers . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Section 3.5 Disclosure . . . . . . . . . . . . . . . . . . . . . . . . 9 ARTICLE IV INDEMNIFICATION . . . . . . . . . . . . . . . . . . . . . . . . . 9 Section 4.1 Indemnification by the Company. . . . . . . . . . . . . . . 9 Section 4.2 Indemnification by the Purchaser. . . . . . . . . . . . . . 10 Section 4.3 Limitation. . . . . . . . . . . . . . . . . . . . . . . . . 10 ARTICLE V MISCELLANEOUS. . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Section 5.1 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Section 5.2 Fees and Expenses . . . . . . . . . . . . . . . . . . . . . 11 Section 5.3 Public Announcements . . . . . . . . . . . . . . . . . . . 11 Section 5.4 Entire Agreement . . . . . . . . . . . . . . . . . . . . . 11 Section 5.5 Waiver. . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Section 5.6 Amendment . . . . . . . . . . . . . . . . . . . . . . . . . 12 Section 5.7 Benefits and Binding Effect . . . . . . . . . . . . . . . . 12 Section 5.8 Captions. . . . . . . . . . . . . . . . . . . . . . . . . . 12 Section 5.9 Exhibits. . . . . . . . . . . . . . . . . . . . . . . . . . 12 Section 5.10 Governing Law. . . . . . . . . . . . . . . . . . . . . . . 12 Section 5.11 Counterparts . . . . . . . . . . . . . . . . . . . . . . . 12 Section 5.12 Severability . . . . . . . . . . . . . . . . . . . . . . . 12 Section 5.13 No Third Party Beneficiary . . . . . . . . . . . . . . . . 12 Section 5.14 Termination for Material Default . . . . . . . . . . . . . 12 Section 5.15 Termination for Change in Control. . . . . . . . . . . . . 13 WARRANT PURCHASE AGREEMENT THIS WARRANT PURCHASE AGREEMENT (the "AGREEMENT") is made as of November 3, 1997, by and between HYBRID NETWORKS, INC., a Delaware corporation (the "COMPANY"), and ALCATEL SEL AG, a corporation incorporated and existing under the laws of Germany (the "PURCHASER"). W I T N E S S E T H: WHEREAS, the Company is a broadband access equipment company that designs, develops, manufactures and markets cable and wireless systems which provide high speed access to the Internet and corporate intranets for both businesses and consumers; and WHEREAS, the Purchaser and its affiliates are engaged in the business of manufacturing and selling telecommunications equipment; and WHEREAS, in exchange for certain technical support to be provided to the Company, the Purchaser desires to acquire from the Company a warrant to purchase shares of the common stock of the Company on the terms and conditions set forth in this Agreement; and WHEREAS, the Company desires to issue such warrant to the Purchaser on the terms and conditions set forth in this Agreement. NOW, THEREFORE, in consideration of the mutual promises, covenants, representations and warranties contained herein and of the mutual benefits to be derived herefrom, and intending to be legally bound, the parties hereto agree as follows: ARTICLE I ISSUANCE OF WARRANT Section 1.1 OBLIGATION TO ISSUE WARRANT. In exchange for the technical support and license provided by the Purchaser pursuant to Section 1.2 below, the Company shall issue to the Purchaser on the Issuance Date (as defined below in this Section 1.1) a Warrant in the form of EXHIBIT A hereto (the "WARRANT") evidencing the right of the Purchaser to purchase 458,295 shares of the common stock of the Company, par value US $.001 per share (the "COMMON STOCK"), at an exercise price of US $10.91 per share, for a period of five (5) years from the Issuance Date. If the Company should take any corporate action prior to the issuance of the Warrant (other than the 1 for 2.7 reverse stock split of the Common Stock of the Company described in the Form S-1 Registration Statement of the Company currently on file with the Securities and Exchange Commission (the "REVERSE STOCK SPLIT")) that would have the effect of causing, under the terms of the Warrant, an adjustment to the number of shares which the Purchaser would have the right to purchase upon exercise of the Warrant, and to the exercise price per share of the Warrant, if the Warrant had been issued on the date of this -1- Agreement, then such number of shares and such exercise price in the Warrant when issued shall be adjusted as if the Warrant had been issued on such date. The Company shall use all commercially reasonable efforts to obtain (a) the consent by the holders of a majority of the outstanding principal amount of the Company's Convertible Subordinated Promissory Notes due 1998 (the "Notes") to the issuance of the Warrant by the Company as provided herein, as required under the terms of the Convertible Subordinated Promissory Note Purchase Agreement dated September 18, 1997 among the Company and the purchasers of the Notes and (b) the consent of the holders of a majority of the Registrable Securities outstanding (i) to the Registration Rights Amendment (defined in Section 1.4 below) and (ii) to the waiver by such holders, with respect to the Warrant, of the rights provided for in Section 2.3 of the Registration Rights Agreement (defined in Section 1.4 below) (collectively, the consents and waiver referred to in (a) and (b) above are referred to herein as the "REQUIRED CONSENTS"). The Company shall furnish copies of all Required Consents to the Purchaser immediately upon its receipt thereof. The Company shall issue the Warrant to the Purchaser on the date the Required Consents are obtained by the Company (the "ISSUANCE DATE"); provided that, if such Required Consents are not obtained within fifteen (15) days from the date hereof, this Agreement and all rights and obligations of the parties hereunder shall automatically terminate. The Company shall issue and deliver the Warrant to the Purchaser free and clear of all liens and encumbrances and duly executed by the appropriate officers of the Company. Section 1.2 TECHNICAL SUPPORT AND LICENSE. (a) In exchange for the Warrant, the Purchaser agrees to provide, or to cause its affiliates to provide, to the Company, commencing on the Issuance Date, the technical support described in EXHIBIT B hereto. The Company and the Purchaser agree that the value of the foregoing technical support and licenses to be provided below in Section 1.2(b)(i) and (ii) to the Company will be approximately US $1,000,000.00. The Company and the Purchaser agree to use commercially reasonable efforts to prepare as promptly as practical, and in any event shall prepare within sixty (60) days after the Issuance Date, a work schedule and plan for the Development provided for in EXHIBIT B hereto (the earlier of the date on which such work schedule and plan are prepared and the date on which such sixty (60) day period expires is referred to herein as the "DEVELOPMENT COMMENCEMENT DATE"). The parties acknowledge that, except for the items described in Parts (a) and (b) of the Section of EXHIBIT B entitled "CDMA", the form and extent of the technical support that will be provided by the Purchaser in the areas of CDMA and IP Telephony have not been agreed upon. The parties agree to use commercially reasonable efforts to agree, prior to the Development Commencement Date, upon the form and extent of the technical support that the Purchaser will provide in the areas of CDMA and IP Telephony described in EXHIBIT B. Notwithstanding any other term of this Agreement to the contrary, the Purchaser shall have no obligation to provide any technical support to the Company pursuant to this Agreement after the expiration of one (1) year following the Development Commencement Date. -2- (b) LICENSES (i) DEVELOPMENT LICENSE. Each party agrees not to assert any right under such party's Background Patents, Separate Foreground Patents, Background Proprietary Information, Separate Foreground Proprietary Information, Background Copyrights, Separate Foreground Copyrights, Background Works of Authorship or Separate Foreground Works of Authorship against the other party for any activity solely confined to the Development. (ii) COMMERCIAL LICENSES. (A) Each party grants to the other party and its affiliates under the granting party's Delivered Works of Authorship, Separate Foreground Proprietary Information, Separate Foreground Patents, Separate Foreground Copyrights and Separate Foreground Works of Authorship a non-transferrable, world-wide, fully paid up, non-exclusive license to make, have made, manufacture, reproduce, market, distribute (itself or through resellers or subdistributors), use, sell and allow end users to use any Products itself or on its behalf. No such license shall include the right to grant sublicenses (other than for the manufacture of a Product by a third party solely on behalf of the person receiving such license). (B) The Purchaser grants to the Company and its affiliates (collectively, the "COMPANY LICENSEES") under Purchaser's Necessary Background Patents, Purchaser's Background Proprietary Information, Purchaser's Background Copyrights, and Purchaser's Background Works of Authorship a non-transferrable, world-wide, fully paid up, non-exclusive license to make, have made, manufacture, reproduce, market, distribute (itself or through resellers or subdistributors), use, sell and allow end users to use any Company Licensee Products themselves or on their sole behalf. No such license shall include the right to grant sublicenses (other than for the manufacture of a Product by a third party solely on behalf of any Company Licensee) or the right to receive any license for Purchaser's Background Patents other than Purchaser's Necessary Background Patents. (C) The Company grants to the Purchaser and its affiliates (collectively, the "PURCHASER LICENSEES") under the Company's Necessary Background Patents a non-transferrable, world-wide, fully paid up, non-exclusive license to make, have made, manufacture, reproduce, market, distribute (itself or through resellers or subdistributors), use, sell and allow end users to use any Purchaser Licensee Products themselves or on their sole behalf. No such license shall include the right to grant sublicenses (other than for the manufacture of a Product by a third party solely on behalf of any Purchaser Licensee) or the right to receive any license for the Company's Background Patents other than the Company's Necessary Background Patents. -3- (iii) OWNERSHIP OF SEPARATE INTELLECTUAL PROPERTY. (A) Each party and its affiliates shall retain ownership of its right, title and interest in and to the Background Proprietary Information, the Background Patents, the Background Copyrights, the Background Works of Authorship, the Separate Foreground Proprietary Information, the Separate Foreground Patents, the Separate Foreground Copyrights and the Separate Foreground Works of Authorship of such party and its affiliates. (B) Provided, however, all Foreground Patents, Foreground Copyrights and Foreground Proprietary Information relating to CDMA Products and IP Telephony Products shall be considered the Separate Foreground Patents, Separate Foreground Copyrights and Separate Foreground Proprietary Information of Purchaser irrespective of whether they would otherwise be considered the Separate or Joint Foreground Patents, Separate or Joint Foreground Copyrights or Separate or Joint Foreground Proprietary Information of the Company. In connection with their discussions pursuant to Section 1.2(a) of this Agreement regarding the areas of CDMA and IP Telephony, the parties will consider alternate ownership arrangements for the foregoing Foreground Patents, Foreground Copyrights and Foreground Proprietary Information relating to CDMA Products and IP Telephony Products and will implement any such alternate ownership arrangements which are agreed upon. (iv) ENFORCEMENT AND CONTROL OF LICENSING. Consistent with Section 1.2(b)(iii) above, each party and its affiliates shall retain their rights to (A) enforce their rights in the Background Proprietary Information, the Background Patents, the Background Copyrights, the Background Works of Authorship, the Separate Foreground Proprietary Information, the Separate Foreground Patents the Separate Foreground Copyrights and the Separate Foreground Works of Authorship of such party and its affiliates against infringers or alleged infringers thereof and retain all recoveries in connection therewith, and (B) grant licenses and/or sublicenses with respect to the Background Proprietary Information, the Background Patents, the Background Copyrights, the Background Works of Authorship, the Separate Foreground Proprietary Information, the Separate Foreground Patents, the Separate Foreground Copyrights and the Separate Foreground Works of Authorship of such party and its affiliates in a manner consistent with the other provisions of this Agreement. -4- (v) CONFIDENTIALITY. (A) Each party shall, and shall cause its affiliates to, keep in confidence the Proprietary Information in the Background Proprietary Information, Background Works of Authorship (to the extent unpublished by the author), Separate Foreground Proprietary Information and Separate Foreground Works of Authorship (to the extent unpublished by author) of the other party which is disclosed to the receiving party under this Agreement. No disclosure to an affiliate of either party of any of the foregoing items for the purposes set forth in this Agreement shall be a violation of this Section 1.2(b)(v)(A). To be afforded such protection, the party seeking the protection of this provision agrees to disclose such Proprietary Information initially in written form conspicuously marked as "confidential," "proprietary" or equivalent terms. (B) The Company agrees that, notwithstanding anything to the contrary contained in this Agreement, the Purchaser and its affiliates may use the "Residuals" (as defined below) for the benefit of the Purchaser and its affiliates for any purposes, provided that this Section 1.2(b)(v)(B), by itself, will not be deemed to grant to the Purchaser or its affiliates any rights or licenses under any patent, copyright or mask work owned or licensed by the Company nor will this Section 1.2(b)(v)(B) operate to waive the obligations of confidentiality under Section 1.2(b)(v)(A) herein. "RESIDUALS" means that information in intangible form which may be retained in the memories of those employees of the Purchaser or its affiliates who have had rightful access to the Company's confidential information and/or technology disclosed by the Company in the course of the Development. Such employees of the Purchaser or its affiliates may not memorize the Company's confidential information or technology for the sole purpose of circumventing the confidentiality obligations hereunder. (c) RIGHTS REGARDING JOINT INTELLECTUAL PROPERTY. The terms of Section 1.2(c) do not apply to those Joint Foreground Patents, Joint Foreground Copyrights or Joint Foreground Proprietary Information which are to be considered the Separate Foreground Patents, Separate Foreground Copyrights and Separate Foreground Proprietary Information of Purchaser, pursuant to Section 1.2(b)(iii)(B) above. (i) JOINT PROPRIETARY INFORMATION AND JOINT COPYRIGHTS. Irrespective of the ownership of Joint Foreground Proprietary Information, Joint Foreground Copyrights and Joint Foreground Works of Authorship, each party and its affiliates shall have the unrestricted Right to Use for itself and for its affiliates, for any purpose, such Joint Foreground Proprietary Information, Joint Foreground Copyrights and Joint Foreground Works of Authorship and the unrestricted right to grant nonexclusive license or sublicenses, for any purpose, with respect to such Joint Foreground Proprietary Information, Joint Foreground Copyrights, and Joint Foreground Works of Authorship without any obligation of accounting by one joint owner to the other. -5- (ii) JOINT PATENTS. The parties shall specify on a case-by-case basis the details of the first and further filings on patent applications with respect to any Subject Inventions relating to a Product which would constitute Joint Foreground Patents as well as of the maintenance of such applications and any Joint Foreground Patents granted thereon. Each party and its affiliates shall have the following rights in respect of any application filed with respect to any Joint Foreground Patent (without compensation to the other party for having such rights), and irrespective of the ownership of such patent application or patent: (A) the unrestricted Right to Practice and to have practiced, for itself and its affiliates, for any purpose; and (B) if and as long as such party shares in an agreed upon form in the cost of obtaining and maintaining such patent application or patent, the unrestricted right to grant nonexclusive licenses or sublicenses, for any purpose and for the full term of such patent; and (C) if and to the extent such party does not share in an agreed upon form in the cost referred to under (B) above, the right to grant non-exclusive sublicenses to know-how licensees of its affiliates, provided that such sublicenses are limited in scope to products designed by that party, or any of its affiliates, and made by the know-how licensees using the know-how obtained under such know-how licenses. (d) If any Background Patents (other than Necessary Background Patents) owned by a party and/or its affiliates are reasonably required by the other party for such other party's exploitation of the licenses granted above in Section 1.2(b)(i) and (ii), then the parties agree to use commercially reasonable efforts to reach agreement on the terms and conditions under which the party or its affiliates owning such Background Patents will license to the other party or its affiliates on a non-exclusive basis the right to use such patents to the extent reasonably necessary for such exploitation. (e) DEFINITIONS. EXHIBIT D contains defined terms referred to in this Section 1.2. Section 1.3 NO TRADEMARK LICENSE. This Agreement in no way creates of conveys a license or permission of any kind for either party (or its affiliates) to use the trademarks or corporate logo of the other party (or its affiliates) and expressly prohibits the unauthorized use by either party (or its affiliates) of such trademarks and corporate logo. Section 1.4 REGISTRATION RIGHTS. On the Issuance Date, the Company and the Purchaser shall execute and deliver an Amendment, in the form of EXHIBIT C hereto (the "REGISTRATION RIGHTS AMENDMENT"), to that certain Amended and Restated Investor Rights Agreement among the Company and several investors in the Company dated September 18, 1997, as amended (the "REGISTRATION RIGHTS AGREEMENT") pursuant to which the Purchaser will be added as a party thereto. -6- ARTICLE II REPRESENTATIONS AND WARRANTIES OF THE COMPANY The Company hereby represents and warrants to the Purchaser, as of the date hereof and as of the Issuance Date, that: Section 2.1 ORGANIZATION, GOOD STANDING AND QUALIFICATION. The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of its incorporation and has all requisite corporate power and authority to carry on its business as now conducted and as proposed to be conducted by it, to own the assets owned by it and to lease the assets held by it under lease. The Company is duly qualified to transact business and is in good standing in each jurisdiction where the character of the assets it owns, leases or operates, or the conduct of its business, requires such qualification, other than in any jurisdiction where the failure to so qualify would not have a material adverse effect on its business. The Company has the corporate power and authority to enter into and perform its obligations under this Agreement, the Registration Rights Amendment and the Warrant. The Company has no subsidiaries. The Reverse Stock Split became effective on October 21, 1997. Section 2.2 DUE AUTHORIZATION, EXECUTION AND DELIVERY. The execution, delivery and performance of this Agreement, the Registration Rights Amendment and the Warrant by the Company and the consummation by the Company of the transactions contemplated hereby and thereby have been duly authorized by all necessary corporate action on the part of the Company. This Agreement has been, and the Warrant and the Registration Rights Amendment when issued and entered into by the Company will be, duly executed and delivered by the Company. This Agreement constitutes, and the Warrant and the Registration Rights Amendment will, when executed and delivered by the Company, constitute, the legal, valid and binding obligations of the Company enforceable against the Company in accordance with their respective terms, except that such enforcement (i) may be limited by bankruptcy, insolvency, moratorium or similar laws affecting creditors' rights generally, and (ii) is subject to the availability or equitable remedies, as determined in the discretion of the court before which such a proceeding may be brought. Section 2.3 VALID ISSUANCE OF WARRANT. The Common Stock issuable upon exercise of the Warrant has been duly and validly reserved by the Company. The Common Stock issuable upon exercise of the Warrant has been duly authorized and, when issued in compliance with the terms of the Warrant, will be duly and validly issued, fully paid and nonassessable, free and clear of any preemptive right or other right to acquire and free and clear of all liens and encumbrances. The Warrant and the Common Stock issuable upon the exercise of the Warrant will be issued to the Purchaser by the Company hereunder or thereunder in compliance with all applicable federal and state securities laws. Section 2.4 REGISTRATION RIGHTS. Except as provided in the Registration Rights Agreement, the Company has not granted any registration rights to any person which are currently outstanding, or agreed to grant any such rights to any person subsequently to the date, hereof. -7- Section 2.5 CONSENTS, NO CONFLICT. Except for the Required Consents, the Company is not required to obtain the consent, authorization or approval of any person, or any license, consent or approval from any governmental authority, as a condition to the consummation of the transactions contemplated by this Agreement by the Company. The execution and delivery of this Agreement, the Warrant and the Registration Rights Amendment by the Company and the consummation by the Company of the transactions contemplated hereby and thereby will not conflict with, result in the termination of, contravene or constitute a default under, or be an event which with the giving of notice or passage of time or both will become a default under, or give to others any rights of termination or cancellation of, or accelerate the performance required by or maturity of, or result in the creation of any material lien or loss of any rights with respect to the Company pursuant to any of the terms, conditions or provisions of or under, any applicable law, the certificate of incorporation or bylaws of the Company, or any contract or agreement to which the Company is a party or which is otherwise binding upon the Company or to which the assets of the Company are subject. Section 2.6 BROKERS. No broker or other representative has acted on behalf of the Company in connection with the transactions contemplated hereby in such a manner as to give rise to any valid claim by any person against the Purchaser for a finder's fee, brokerage commission or similar payment. Section 2.7 DISCLOSURE. The representations and warranties of the Company contained in this Agreement do not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statement herein, in the light of the circumstances under which they were made, not misleading. ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE PURCHASER The Purchaser hereby represents and warrants to the Company, as of the date hereof and as of the Issuance Date, that: Section 3.1 ORGANIZATION AND AUTHORITY OF THE PURCHASER. The Purchaser is a corporation duly organized, validity existing and in good standing under the laws of Germany. The Purchaser has full corporate power and authority to enter into and perform its obligations under this Agreement and the Registration Rights Amendment. Section 3.2 DUE AUTHORIZATION, EXECUTION AND DELIVERY. The execution, delivery and performance of this Agreement by the Purchaser and the consummation by the Purchaser of the transactions contemplated hereby have been duly authorized by all necessary corporate action on the part of the Purchaser. This Agreement has been, and the Registration Rights Amendment when entered into by the Purchaser will be, duly executed and delivered by the Purchaser. This Agreement constitutes, and the Registration Rights Amendment will, when executed and delivered by the Purchaser, constitute, the legal, valid and binding obligations of the Purchaser enforceable against the Purchaser in accordance with their respective terms, except that such enforcement (i) may be limited by bankruptcy, insolvency, moratorium or -8- similar laws affecting creditors' rights generally, and (ii) is subject to the availability of equitable remedies, as determined in the discretion of the court before which such a proceeding may be brought. Section 3.3 CONSENTS: NO CONFLICT. The Purchaser is not required to obtain the consent, authorization or approval of any person, or any license, consent or approval from any governmental authority, as a condition to the consummation of the transactions contemplated by this Agreement by the Purchaser. The execution and delivery of this Agreement and the Registration Rights Amendment by the Purchaser and the consummation by the Purchaser of the transactions contemplated hereby and thereby will not conflict with, result in the termination of, contravene or constitute a default under, or be an event which with the giving of notice or passage of time or both will become a default under, or give to others any rights of termination or cancellation of, or accelerate the performance required by or maturity of, or result in the creation of any material lien or loss of any rights with respect to the Purchaser pursuant to any of the terms, conditions or provisions of or under, any applicable law, the certificate of incorporation or bylaws (or other organizational documents) of the Purchaser, or any contract or agreement to which the Purchaser is a party or which is otherwise binding upon the Purchaser or to which the assets of the Purchaser are subject. Section 3.4 BROKERS. No broker or other representative has acted on behalf of the Purchaser in connection with the transactions contemplated hereby in such manner as to give rise to any valid claim by any person against the Company for a finder's fee, brokerage commission or similar payment. Section 3.5 DISCLOSURE. The representations and warranties of the Purchaser contained in this Agreement do not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements herein, in light of the circumstances under which they were made, not misleading. ARTICLE IV INDEMNIFICATION Section 4.1 INDEMNIFICATION BY THE COMPANY. The Company shall indemnify and hold harmless the Purchaser from and against any and all damages, fines, costs, fees, penalties, deficiencies, losses, amounts paid in settlement and expenses (including without limitation interest, court costs, fees of attorneys, accountants and other experts or other expenses of litigation or other proceedings or of any claim, default or assessment)("Losses") suffered or incurred by the Purchaser after the date hereof as a result of or arising out of: (a) the falsity or incorrectness of or breach of any representation or warranty of the Company in this Agreement; or (b) the failure by the Company to perform any covenant or agreement of the Company under this Agreement. -9- Section 4.2 INDEMNIFICATION BY THE PURCHASER. The Purchaser shall indemnify and hold harmless the Company from and against any and all Losses suffered or incurred by the Company after the date hereof as a result of or arising out of: (a) the falsity or incorrectness of or breach of any representation or warranty of the Purchaser in this Agreement; or (b) the failure by the Purchaser to perform any covenant or agreement of Purchaser under this Agreement Section 4.3 LIMITATION. ALL INFORMATION PROVIDED BY EITHER PARTY TO THE OTHER PURSUANT TO SECTION 1.2 IS ON AN "AS IS" BASIS WITHOUT ANY WARRANTY OF MERCHANTABILITY OR FITNESS FOR ANY PURPOSE, OR THAT, EXCEPT AS EXPRESSLY PROVIDED BELOW, IT MAY BE USED WITHOUT LICENSE UNDER ANY INTELLECTUAL PROPERTY RIGHTS OF ANY THIRD PARTY. MORE EXPLICITLY, NEITHER PARTY MAKES ANY WARRANTY THAT THE INFORMATION SO PROVIDED MAY BE USED TO SUCCESSFULLY MANUFACTURE OR SELL OR OPERATE ANY PRODUCT. Each party hereby warrants to the other party that the warranting party has sufficient rights to grant to the other party the license and other rights granted by the warranting party hereunder and that the exercise of those rights as provided herein by such other party will not infringe the Copyright of a third party, violate an obligation of confidentiality owed to a third party by the warranting party or be subject to any valid claim of misappropriation of a trade secret. ARTICLE V MISCELLANEOUS Section 5.1 NOTICES. All notices, requests and other communications hereunder shall be in writing and will be deemed to have been duly given (i) when personally delivered, (ii) when sent by telefax to a party at the number listed below for such party, (iii) three (3) business days after the day on which the same has been delivered prepaid to an international courier service or (iv) ten (10) business days after the deposit in the mail, registered or certified, return receipt requested, postage prepaid, in each case addressed to the party to whom such notice is to be given at the following address for such party: If to Purchaser: Alcatel SEC AG Lorenzstrasse 10 D-7000 Stuttgart 40 GERMANY Attn: General Manager Telefax No. 011-49-711-821-1534 -10- With copies to: Alcatel Alsthom 33, rue Emeriau 75015 Paris FRANCE Attn: General Counsel Telefax No. 011-331-40585159 Alcatel SEL AG Lorenzstrasse 10 D-7000 Stuttgart 40 GERMANY Attn: General Counsel Telefax No. 011-49-711-821-1534 If to the Company: Hybrid Networks, Inc. 10161 Bubb Road Cupertino, CA 95014-4167 Attn: Chief Executive Officer Telefax No.: (408) 725-0990 With copies to: Fenwick & West LLP Two Palo Alto Square Palo Alto, CA 94306 Attn: Edwin N. Lowe Telefax No.: (650) 494-1417 Either party from time to time may change its address, telefax number or other information for the purpose of notices to that party by giving notice specifying such change to the other party hereto. Section 5.2 FEES AND EXPENSES. The Company and the Purchaser shall each bear its own expenses in connection with the negotiation and preparation of this Agreement, all documents and instruments contemplated hereby, and the consummation of the transactions contemplated hereby, including without limitation the fees and expenses of their respective counsel, accountants, investment bankers and consultants. Section 5.3 PUBLIC ANNOUNCEMENTS. Except as otherwise required by law, neither the Company nor the Purchaser shall issue any press release or make any other public announcement with respect to the transactions contemplated hereby without the approval of the other party. In the event such press release or other public announcement is required by law, the party obligated to issue such press release or to make such announcement shall, prior thereto, furnish a draft thereof to the other party and receive the input of the other party thereon. Section 5.4 ENTIRE AGREEMENT. This Agreement supersedes all prior discussions and agreements between the parties with respect to the subject matter hereof and contains the sole and entire agreement between the parties hereto with respect to the subject matter hereof. -11- Section 5.5 WAIVER. Any term or condition of this Agreement may be waived at any time by the party that is entitled to the benefit thereof, but no such waiver shall be effective unless set forth in a written instrument duly executed by or on behalf of the party waiving such term or condition. No waiver by either party of any term or condition of this Agreement, in any one or more instances, shall be deemed to be or construed as a waiver of the same or any other term or condition of this Agreement on any future occasion. Section 5.6 AMENDMENT. This Amendment may be amended, supplemented or modified only by a written instrument duly executed by or on behalf of each party hereto. Section 5.7 BENEFITS AND BINDING EFFECT. Neither this Agreement nor any right, interest or obligation hereunder may be assigned by either party hereto without the prior written consent of the other party hereto and any attempt to do so will be void, provided that the Purchaser may assign any or all rights or obligations of the Purchaser hereunder to any affiliate of the Purchaser. Subject to the preceding sentence, this Agreement is binding upon, inures to the benefit of and is enforceable by the parties hereto and their respective successors and assigns. Section 5.8 CAPTIONS. The captions used in this Agreement have been inserted for convenience of reference only and do not define or limit the provisions hereof. Section 5.9 EXHIBITS. All exhibits referred to in this Agreement and any other attachments to this Agreement are hereby incorporated by reference into this Agreement and are hereby made a part of this Agreement as if set out in full herein. Section 5.10 GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the Laws of the State of Delaware applicable to a contract executed and performed in such State, without giving effect to the conflicts of laws principles thereof. Section 5.11 COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together will constitute one and the same instrument. Section 5.12 SEVERABILITY. Any provision of this Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. Section 5.13 NO THIRD PARTY BENEFICIARY. Except as expressly provided herein, this Agreement shall not confer any rights or remedies upon any person other than the parties hereto and their respective successors and permitted assigns. Section 5.14 TERMINATION FOR MATERIAL DEFAULT. Either party may terminate Section 1.2 and EXHIBIT D of this Agreement in the event of a material default by the other party, provided that: -12- (a) The non-defaulting party gives the defaulting party at least thirty (30) days prior written notice of the alleged material default and of the non-defaulting party's intention to terminate; and (b) For events of material default that are capable of being remedied within the thirty (30) day period specified in subsection (a) above, the defaulting party has not remedied the alleged material default within said period. For the purpose of this Section 5.14, "MATERIAL DEFAULT" shall mean (i) party's insolvency or initiation of bankruptcy or receivership proceedings, (ii) a party's breach of any material obligation of such party under Section 1.2 of this Agreement, as determined by a court of competent jurisdiction, or (iii) the execution by a party of an assignment for the benefit of creditors or any other transfer or assignment of a similar nature. Section 5.15 TERMINATION FOR CHANGE IN CONTROL. Upon the occurrence of a Change of Control of either party (the "AFFECTED PARTY"), the other party (the "UNAFFECTED PARTY") shall have the right to terminate Section 1.2 and EXHIBIT D of this Agreement by providing written notice thereof to the Affected Party, at any time prior to the expiration of sixty (60) days following the receipt by the Unaffected Party of written notice of such Change of Control from the Affected Party, if: (a) such Change in Control of the Affected Party is accomplished, directly or indirectly, by a competitor of the Unaffected Party or any of its affiliates, or (b) such Change in Control is not accomplished in the manner provided in Section 5.15(a) and the Unaffected Party does not consent thereto within a period of thirty (30) days thereafter which consent will not be unreasonably withheld. The Affected Party shall provide written notice to the Unaffected Party of the occurrence of a Change of Control of the Affected Party immediately thereafter. For purposes of this Section 5.15: "CHANGE IN CONTROL" means the occurrence of any of the following events: (a) any person or two or more persons acting in concert shall acquire beneficial ownership, directly or indirectly, of, or shall have acquired by contract or otherwise, or shall have entered into a contract or arrangement that, upon consummation, will result in its or their acquisition of, control over, Voting Stock of a party (or other securities convertible in such Voting Stock) representing 50% or more of the combined voting power of all Voting Stock of such party, (b) Continuing Directors shall cease for any reason to constitute a majority of the directors of a party then in office, or (c) any person or two or more persons acting in concert shall acquire substantially all of the assets of a party by purchase, merger, consolidation or otherwise. As used in this Section 5.15, "beneficial ownership" shall have the meaning provided in Rule 13d-3 of the Securities and Exchange Commission under the Securities Exchange Act of 1934. "CONTINUING DIRECTORS" means individuals who are directors of a party on the date hereof (together with any new director whose election by such party's board of directors or -13- whose nomination for election by such party's shareholders was approved by a vote of at least a majority of the directors then still in office who either were directors on the date hereof or whose election or nomination for election was previously so approved). "VOTING STOCK" means, with respect to a party, capital stock issued by such party the holders of which are ordinarily, in the absence of contingencies, entitled to vote for the election of directors (or persons performing similar functions) of such party, even though the right to so vote has been suspended by the happening of such a contingency. -14- IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the date first above written. COMPANY: HYBRID NETWORKS, INC., a Delaware corporation By: -------------------------------- Name: ------------------------------ Title: ----------------------------- PURCHASER: ALCATEL SEL AG, a German corporation By: -------------------------------- Name: ------------------------------ Title: ----------------------------- By: -------------------------------- Name: ------------------------------ Title: ----------------------------- -15- LIST OF EXHIBITS Exhibit A Form of Warrant Exhibit B Terms and Conditions Regarding Technology Support Exhibit C Form of Amendment to Amended and Restated Investor Rights Agreement Exhibit D Definitions for Section 1.2 -16- EXHIBIT A NEITHER THIS WARRANT NOR THE SHARES ISSUABLE UPON EXERCISE OF THIS WARRANT HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND NEITHER THIS WARRANT NOR THE SHARES ISSUABLE UPON EXERCISE OF THIS WARRANT CAN BE SOLD OR TRANSFERRED UNLESS SUCH SALE OR OTHER TRANSFER HAS BEEN REGISTERED UNDER SUCH ACT AND UNDER THE APPLICABLE STATE SECURITIES LAWS OR, IN THE OPINION OF COUNSEL SATISFACTORY TO THE CORPORATION, BOTH AS TO THE IDENTITY OF THE COUNSEL AND AS TO THE FORM AND SUBSTANCE OF THE OPINION, IS EXEMPT FROM THE REGISTRATION REQUIREMENTS OF SUCH ACT AND LAWS. No. A-1 Dated: _________, 1997 HYBRID NETWORKS, INC. COMMON STOCK PURCHASE WARRANT THIS IS TO CERTIFY THAT, for value received, Alcatel SEL AG, a German corporation ("ALCATEL"), and its registered successors and permitted assigns are entitled, subject to the terms and conditions set forth below, to purchase from Hybrid Networks, Inc., a Delaware corporation (the "CORPORATION"), at any time and from time to time after 9:00 A.M., Cupertino, California time, on the Initial Exercise Date (as defined in Section 1 below) and prior to 5:00 P.M., Cupertino, California time, on the Expiration Date (as defined in Section 1 below), any or all of the Warrant Shares (as defined in Section 1 below), at a purchase price per share equal to the Exercise Price (as defined in Section 1 below). The number and character of the Warrant Shares and the Exercise Price are subject to adjustment as provided herein. All dollar amounts set forth herein refer to United States dollars. This Common Stock Purchase Warrant (this "WARRANT") is being issued in connection with the Warrant Purchase Agreement between the Corporation and Alcatel. SECTION 1. DEFINITIONS. As used in this Warrant, the following terms shall have the respective meanings set forth below or elsewhere in this Warrant as referred to below: "ADDITIONAL STOCK" shall have the meaning set forth in Section 4.3(f). "ALCATEL" shall have the meaning set forth in the first paragraph hereof. "COMMON STOCK" shall mean shares of the Common Stock of the Corporation, $.001 par value per share (as such par value may be amended from time to time). "CONVERSION FRACTION" shall have the meaning set forth in Section 2.3. "CORPORATION" shall have the meaning set forth in the first paragraph of this Warrant. A-1 "DERIVATIVE SECURITY" shall have the meaning set forth in Section 4.3(e). "EFFECTIVE PRICE" shall have the meaning set forth in Section 4.3(a). "EXERCISE DATE" shall have the meaning set forth in Section 2.4 hereof. "EXERCISE PRICE" shall mean, as of the Initial Exercise Date and at any time thereafter, the Initial Exercise Price, as adjusted from time to time pursuant to the terms of this Warrant. "EXPIRATION DATE" shall mean ____________, 2002.* "FAIR MARKET VALUE" of a Warrant Share shall mean (i) in the case of the exercise of this Warrant, in whole or in part, after the consummation of an Initial Public Offering, the average of the last reported sale price per share of Stock on the Nasdaq-NMS or any national securities exchange in which such Stock is quoted or listed, as the case may be, for the three trading days immediately preceding the Exercise Date, or (ii) in the case of the exercise of this Warrant, in whole or in part, before the consummation of an Initial Public Offering, the fair market value of a share of Stock, as determined in good faith by the Board of Directors of the Corporation. "HOLDER" shall mean, as applicable, (i) Alcatel, (ii) any successor of Alcatel or (iii) any Person to whom this Warrant or any portion thereof shall have been transferred in accordance with the provisions of Section 9 hereof. "INITIAL EXERCISE DATE" shall mean the earlier to occur of (i) 180 days after the Issue Date, or (ii) the date of consummation of an Initial Public Offering; PROVIDED, HOWEVER, that, in the event of any sale or transfer, in a single transaction or a series of related transactions, of all or substantially all of the Corporation's assets, or the merger, consolidation, reorganization or dissolution of the Corporation, or the sale, in a single transaction or a series of related transactions, of a majority of the Corporation's voting capital stock (whether newly issued or from treasury, or previously issued and then outstanding, or any combination thereof) (any of such events, a "DISPOSAL EVENT") occurring at any time prior to the earlier of (A) 180 days after the Issue Date or (B) the date of consummation of an Initial Public Offering, then the Initial Exercise Date shall be deemed to be the date that is five business days prior to the earliest to occur of any such Disposal Event.** "INITIAL EXERCISE PRICE" shall mean $10.91 per share *** (subject to appropriate adjustment as provided in this Warrant). "INITIAL PUBLIC OFFERING" shall mean the closing of an underwritten public offering pursuant to an effective registration statement filed with the Securities and Exchange Commission under the Securities Act covering the offer and sale of shares of Common Stock or any other class of capital stock of the Corporation. - -------------------- * Five years from the Issue Date. ** If this Warrant is issued after the Initial Public Offering, the Initial Exercise Date will be the Issue Date. *** This price reflects the Corporation's 1 for 2.7 reverse stock split which has become effective. A-2 "INVESTOR RIGHTS AGREEMENT" shall mean that certain Hybrid Networks, Inc. Amended and Restated Investor Rights Agreement, dated as of September 18, 1997, by and among the Corporation and certain holders of the Corporation's securities, as amended pursuant to an amendment dated as of October 16, 1997 and entered into by the Corporation, the Venture Banking Group, a division of Cupertino National Bank, and holders of a majority of the Registrable Securities outstanding (as defined in the Investor Rights Agreement) and as amended pursuant to the subsequent amendment with respect to this Warrant entered into by the Corporation, Alcatel and the holders of a majority of the Registrable Securities outstanding (as defined in the Investor Rights Agreement), and as further amended from time to time in accordance with the terms thereof. "ISSUE DATE" shall mean ______________, 1997.* "PERSON" shall mean an individual, partnership, corporation, limited liability company, business trust, joint stock company, trust, unincorporated association, joint venture, governmental authority or other entity of whatever nature. "REGISTRABLE SECURITIES" shall have the meaning ascribed to it in the Investor Rights Agreement. "SECURITIES ACT" shall mean the Securities Act of 1933, as amended. "STOCK" shall mean (i) Common Stock, and/or (ii) to the extent that the Holder is entitled to receive, or receives, upon exercise of this Warrant any other capital stock of the Corporation (other than Common Stock), or of any other Person or any other securities of the Corporation or of any other Person, in lieu of or in addition to Common Stock (whether as a result of any reclassification of Common Stock or any other Stock or reorganization, reclassification, merger, consolidation or sale of substantially all the assets of the Corporation or otherwise), such other capital stock or securities. "SUBJECT SHARES" shall have the meaning set forth in Section 2.3. "WARRANT" shall have the meaning set forth in the second paragraph of this Warrant. "WARRANT SHARES" shall mean the shares of Common Stock, as adjusted as provided in this Warrant, that are issuable upon the exercise of this Warrant. SECTION 2. EXERCISE OF WARRANT. SECTION 2.1 NUMBER OF WARRANT SHARES ISSUABLE UPON EXERCISE. Subject to adjustment as provided herein, the maximum number of Warrant Shares issuable upon exercise of this Warrant shall be 458,295.** - -------------------- * The Issue Date will be the date on which this Warrant is issued pursuant to the Warrant Purchase Agreement. ** Reflects the Corporation's 1 for 2.7 reverse stock split which has become effective. A-3 SECTION 2.2 METHOD OF EXERCISE. Subject to and upon all of the terms and conditions set forth in this Warrant, the Holder may exercise this Warrant, in whole or in part with respect to any Warrant Shares as to which this Warrant is then currently exercisable, at any time and from time to time during the period commencing on the Initial Exercise Date and ending on the Expiration Date, by presentation and surrender of this Warrant to the Corporation at its principal office (or such other office or agency as the Corporation may designate by notice in writing to the Holder in accordance with Section 10.4), together with (a) a properly completed and duly executed subscription form, in the form attached hereto, which subscription form shall specify the number of Warrant Shares for which this Warrant is then being exercised, and (b) payment of the aggregate Exercise Price payable hereunder in respect of the number of Warrant Shares for which this Warrant is then being exercised. Payment of such aggregate Exercise Price shall be made either (i) in cash or by money order, certified or bank cashier's check or wire transfer (in each case in lawful currency of the United States of America), or (ii) by conversion of this Warrant as provided in Section 2.3. SECTION 2.3 CONVERSION OF WARRANT. (a) The Holder shall have the right to convert this Warrant, in whole or in part with respect to any Warrant Shares as to which this Warrant is currently exercisable, at any time and from time to time during the period commencing on the Initial Exercise Date and ending on the Expiration Date, by the presentation and surrender of this Warrant to the Corporation at its principal office (or such other office or agency as the Corporation may designate by notice in writing to the Holder in accordance with Section 10.4), together with a properly completed and duly executed conversion form, in the form attached hereto, which conversion form shall specify the number of Warrant Shares as to which this Warrant is being converted (the "SUBJECT SHARES"). Upon exercise of this conversion right, the Holder hereof shall be entitled to receive that number of Warrant Shares equal to the quotient obtained by dividing [ (A - B) (X) ] by (A), where: A = the Fair Market Value of one Warrant Share on the date of conversion of this Warrant. B = the Exercise Price for one Warrant Share under this Warrant. X = the number of Subject Shares as to which this Warrant is being converted. If the above calculation results in a negative number, then no shares of Warrant Stock shall be issued or issuable upon conversion of this Warrant. (b) Upon conversion of this Warrant in accordance with this Section 2.3, the Holder shall be entitled to receive a certificate for the number of Warrant Shares acquired by the Holder as determined in accordance with the foregoing, and a new Warrant in substantially identical form and dated as of such conversion for the purchase of that number of Warrant Shares equal to the difference, if any, between (i) the number of Warrant Shares subject to issuance upon exercise of this Warrant immediately before such conversion and (ii) the number of Subject Shares as to which the Holder exercised its conversion right pursuant to this Section 2.3. No fractional shares may be issued upon any conversion of this Warrant. If any conversion would result in a fractional share (the "CONVERSION FRACTION"), then, at Holder's election either (A) the number of shares issued upon the conversion will be rounded down to the last whole share; or A-4 (B) the Holder will pay in cash an amount equal to the Exercise Price times a fraction equal to 1 less the Conversion Fraction, in which event the number of shares issued upon the conversion (plus the cash payment) will be rounded up to the nearest whole share. For example, if the Fair Market Value is $25.00 and the Exercise Price is $10.91, then, upon exercise of the conversion right under this Section 2.3 with respect to 1,000 Subject Shares, the Holder would receive, at the Holder's election, either (1) 563 Warrant Shares without making any cash payment or (2) 564 Warrant Shares if the Holder elected to pay $4.36 in cash (40% of the Exercise Price for the extra share) and would receive a new Warrant for the number of Warrant Shares subject to issuance upon exercise of this Warrant immediately before such conversion less 1,000. SECTION 2.4 EFFECTIVENESS OF EXERCISE; OWNERSHIP. Each exercise of this Warrant by the Holder shall be deemed to have been effected immediately prior to the close of business on the date upon which all of the requirements of Sections 2.1 and 2.2 hereof with respect to such exercise shall have been complied within in full (each such date, an "EXERCISE DATE"). On the applicable Exercise Date with respect to any exercise of this Warrant by the Holder, the Corporation shall be deemed to have issued to the Holder, and the Holder shall be deemed to have become the holder of record and legal owner of, the number of Warrant Shares being purchased upon such exercise of this Warrant, notwithstanding that the stock transfer books of the Corporation shall then be closed or that certificates representing such number of Warrant Shares being purchased shall not then be actually delivered to the Holder. SECTION 2.5 DELIVERY OF STOCK CERTIFICATES ON EXERCISE. As soon as practicable after the exercise of this Warrant, and in any event within ten days thereafter, the Corporation, at its expense, will cause to be issued in the name of and delivered to the Holder, or as the Holder may direct (subject in all cases, to the provisions of Section 9 hereof), a certificate of certificates for the number of Warrant Shares purchased by the Holder on such exercise. SECTION 2.6 SHARES TO BE FULLY PAID AND NONASSESSABLE. All Warrant Shares issued upon the exercise of this Warrant shall be validly issued, fully paid and nonassessable, free of all liens, taxes, charges and other encumbrances or restrictions on sale (other than those set forth herein), and free and clear of all preemptive rights. SECTION 2.7 FRACTIONAL SHARES. This Warrant may be exercised only for whole Warrant Shares. No fractional Warrant Shares or scrip representing fractional Warrant Shares shall be issued upon the exercise of this Warrant. SECTION 2.8 ISSUANCE OF NEW WARRANTS; CORPORATION ACKNOWLEDGMENT. Upon any partial exercise of this Warrant, the Corporation, at its expense, will forthwith issue and deliver to the Holder a new warrant or warrants of like tenor, registered in the name of the Holder, exercisable, in the aggregate and subject to the limitations provided for in this Warrant, for the then balance of the Warrant Shares with respect to which this Warrant has not been exercised. Moreover, the Corporation shall, at the time of any exercise of this Warrant, upon the request of the Holder, acknowledge in writing its continuing obligation to afford to the Holder any rights to which the Holder shall continue to be entitled after such exercise in accordance with the provisions of this Warrant; PROVIDED, HOWEVER, that if the Holder shall fail to make any such request, such failure shall not affect the continuing obligation of the Corporation to afford to the Holder any such rights. A-5 SECTION 2.9 PAYMENT OF TAXES. The Corporation shall pay any transfer tax which may be payable in respect of any issuance of certificates (if applicable) representing any Warrant Shares purchased upon exercise or conversion of this Warrant. The Corporation shall not be required to pay any tax or other charge imposed in connection with any transfer involved in the issue of any certificate for Warrant Shares, or any new or replacement shares in any name other than that of the Holder of this Warrant, and in such case the Company shall not be required to issue or deliver any stock certificate security or Warrant until such tax or other charge has been paid, or it has been established to the Company's satisfaction that no tax or other charge is due. SECTION 2.10 EXPIRATION. This Warrant and the Holder's rights hereunder, to the extent not previously exercised or converted, shall expire as of 5:00 P.M., California time, on the Expiration Date. SECTION 3. REGISTRATION RIGHTS. The Holder of this Warrant shall have the benefit of the rights available to the parties to the Investor Rights Agreement to cause the Corporation to register any and all Warrant Shares under the Securities Act and under any blue sky or securities laws of any jurisdiction within the United States, at the time and in the manner specified in the Investor Rights Agreement, as provided in the amendment to that agreement entered into by Alcatel, the Company and the holders of majority of the Registrable Securities outstanding (as defined in the Investor Rights Agreement), and any and all Warrant Shares shall be deemed to be Registrable Securities for all purposes of and as provided in the Investor Rights Agreement. SECTION 4. ADJUSTMENTS. The number and character of Warrant Shares issuable upon exercise or conversion of this Warrant (or any shares of Stock or other assets at the time receivable or issuable upon exercise or conversion of this Warrant) and the Exercise Price therefor, are subject to adjustment upon occurrence of the following events: SECTION 4.1 ADJUSTMENT FOR STOCK SPLITS, STOCK DIVIDENDS, RECAPITALIZATIONS, ETC. The Exercise Price of this Warrant and the number of Warrant Shares issuable upon exercise or conversion of this Warrant (or any shares of Stock or other assets at the time issuable upon exercise of this Warrant) shall each be proportionally adjusted to reflect any stock dividends stock splits, reverse stock splits, combinations of shares, reclassifications, recapitalizations or other similar events altering the number of outstanding shares of Common Stock (or such other Stock or other assets). SECTION 4.2 ADJUSTMENT FOR CAPITAL REORGANIZATION, CONSOLIDATION, MERGER, SALE OR CONVERSION. If any reorganization of the capital stock of the Corporation, or any consolidation or merger of the Corporation with or into another entity, or the sale of all or substantially all of the Corporation's assets to another entity shall be effected in such a way that holders of Common Stock will be entitled to receive stock, securities or assets with respect to or in exchange for their Common Stock, then, in each such case, the Holder, upon the exercise or conversion of this Warrant, at any time after the consummation of such capital reorganization, consolidation, merger or sale, shall receive, in lieu of the stock or other securities and property receivable upon the exercise or conversion, as applicable, of this Warrant prior to such consummation, the Stock or other assets to which the Holder would have been entitled upon such consummation if the Holder had exercised or converted, as applicable, this Warrant immediately prior thereto, all subject to further adjustment as provided in this Section 4; and in each such case, the terms of A-6 this Warrant shall be applicable to the shares of Stock or other assets receivable upon the exercise or conversion, as applicable, of this Warrant after such consummation. SECTION 4.3 ADJUSTMENT FOR ISSUANCE FOR ADDITIONAL STOCK. The Exercise Price of this Warrant and the number of Warrant Shares issuable upon exercise or conversion of this Warrant shall be further subject to adjustment from time to time as follows: (a) Upon each issuance by the Corporation of any Additional Stock (as defined below), after the Issue Date and before the consummation by the Company of an Initial Public Offering, for a consideration per share less than the Exercise Price in effect immediately prior to the issuance of such Additional Stock (except as provided in Section 4.1 above), (i) the Exercise Price in effect immediately prior to each such issuance shall forthwith (except as otherwise provided in this Section 4.3) be adjusted to the Effective Price (as defined below) at which the Additional Stock is issued, and (ii) the number of Warrant Shares issuable upon exercise or conversion of this Warrant shall forthwith be adjusted by dividing the number of Warrant Shares into which this Warrant is exercisable immediately before the adjustment provided for herein by a fraction the numerator of which shall be the Effective Price and the denominator of which shall be the Exercise Price immediately before the adjustment provided for herein. The "EFFECTIVE PRICE" for any issuance of Additional Stock shall mean the lesser of $10.91 or the quotient determined by dividing the total number of shares of Additional Stock issued (or deemed issued pursuant to Section 4.3(e)) by the Corporation in such issuance into the aggregate amount of consideration received by the Corporation therefor, as provided in this Section 4.3. (b) No adjustment of the Exercise Price shall be made in an amount less than one cent per share, provided that any adjustments which are not required to be made by reason of this sentence shall be carried forward and shall be either taken into account in any subsequent adjustment made prior to three years from the date of the event giving rise to the adjustment being carried forward, or shall be made at the end of three years from the date of the event giving rise to the adjustment being carried forward. Except to the limited extent provided for in Section 4.3(e)(3) and 4.3(e)(4) below, no adjustment of the Exercise Price pursuant to this Section 4.3(a) shall have the effect of increasing the Exercise Price above the Exercise Price in effect immediately prior to such adjustment. (c) In the case of the issuance of Common Stock for cash, the consideration shall be deemed to be the amount of cash paid therefor before deducting any reasonable discounts, commissions or other expenses allowed, paid or incurred by the Corporation for any underwriting or otherwise in connection with the issuance and sale thereof. (d) In the case of the issuance of the Common Stock for a consideration in whole or in part other than cash, the consideration other than cash shall be deemed to be the fair value thereof as determined by the Board of Directors irrespective of any accounting treatment. (e) In the case of the issuance (whether before, on or after the Issue Date) of options to purchase or rights to subscribe for Common Stock, securities that are by their terms convertible into or exchangeable for Common Stock or options to purchase or rights to subscribe for such convertible or exchangeable securities, the following provisions shall apply for all purposes of this Section 4.3. A-7 (1) The aggregate maximum number of shares of Common Stock deliverable upon exercise (assuming the satisfaction of any conditions to exercisability, including without limitation, the passage of time, but without taking into account potential antidilution adjustments) of such options to purchase or rights to subscribe for Common Stock shall be deemed to have been issued at the time such options or rights were issued and for a consideration equal to the consideration (determined in the manner provided in Sections 4.3(c) and 4.3(d), except as provided in subsection 4.3(e)(5)), if any, received by the Corporation upon the issuance of such options or rights plus the minimum exercise price provided in such options or rights (without taking into account potential antidilution adjustments) for the Common Stock covered thereby. (2) The aggregate maximum number of shares of Common Stock deliverable upon conversion of or in exchange for any such convertible or exchangeable securities (assuming the satisfaction of any conditions to convertibility or exchangeability, including without limitation, the passage of time, but without taking into account potential antidilution adjustments) or upon the exercise of options to purchase or rights to subscribe for such convertible or exchangeable securities and subsequent conversion or exchange thereof shall be deemed to have been issued at the time such securities were issued or such options or rights were issued and for a consideration equal to the consideration, if any, received by the Corporation for any such securities and related options or rights (excluding any cash received on account of accrued interest or accrued dividends), plus the minimum additional consideration, if any, to be received by the Corporation (without taking into account potential antidilution adjustments) upon the conversion or exchange of such securities or the exercise of any related options or rights (the consideration in each case to be determined in the manner provided in Section 4.3(c) and 4.3(d), except as provided in subsection 4.3(e)(5)). (3) In the event of any change in the number of shares of Common Stock deliverable or in the consideration payable to the Corporation upon exercise of such options or rights or upon conversion of or in exchange for such convertible or exchangeable securities, including, but not limited to, a change resulting from the antidilution provisions thereof, the Exercise Price, to the extent in any way affected by or computed using such options, rights or securities, shall be recomputed to reflect such change, but no further adjustment shall be made for the actual issuance of Common Stock or any payment of such consideration upon the exercise of any such options or rights or the conversion or change of such securities. (4) Upon the expiration of any such options or rights, the termination of any such rights to convert or exchange or the expiration of any options or rights related to such convertible or exchangeable securities, the Exercise Price, to the extent in any way affected by or computed using such options, rights or securities or options or rights related to such securities, shall be recomputed to reflect the issuance of only the number of shares of Common Stock (and convertible or exchangeable securities which remain in effect) actually issued upon the exercise of such options or rights, upon the conversion or exchange of such securities or upon the exercise of the options or rights related to such securities; provided that no such recomputation shall have the effect of increasing or decreasing the Exercise Price to an amount other than the amount that would have existed on the recomputation date had the unexercised options or rights never been issued. A-8 (5) In determining the amount of consideration received by the Corporation for or upon the issuance of any Additional Stock or other securities for the purposes of this Section 4.3, the value of any options to purchase or rights to subscribe for Common Stock, securities that are by their terms convertible onto or exchangeable for Common Stock or options to purchase or rights to subscribe for such convertible or exchangeable securities (each a "DERIVATIVE SECURITY") issued by the Corporation shall be deemed to be zero (so that the issuance itself of any such Derivative Security shall not be deemed to increase or decrease the consideration otherwise received by the Corporation under this Section 4.3, inasmuch as the rights under such Derivative Security shall be deemed to have been exercised immediately upon the issuance of such Derivative Security (as contemplated by Sections 4.3(e)(1) and 4.3(e)(2)). (f) "ADDITIONAL STOCK" shall mean any shares of Common Stock issued (or deemed to have been issued pursuant to Section 4.3(e)) by the Corporation after the Issue Date other than (1) Common Stock issued pursuant to a transaction described in Section 4.1 or 4.2 hereof: (2) An aggregate of up to 250,000 shares of, and/or options or rights to acquire shares of, Common Stock, issuable or issued to employees of the Corporation pursuant to an existing stock option plan or restricted stock plan of the Corporation; as provided in Section 4.3(e), the term "Additional Stock" shall not include any shares of capital stock that are issued upon the exercise of any options, warrants or rights excluded from the definition of Additional Stock pursuant to this Section (2); (3) Shares of Common Stock issued or issuable (i) upon exercise or conversion of this Warrant, any options, warrants, convertible securities or other securities of the Corporation outstanding as of the Issue Date or (ii) upon conversion of shares of any series of Preferred Stock issued as of the Issue Date. (g) No fractional shares shall be issued upon conversion of this Warrant or any portion thereof, and the number of Warrant Shares issuable as a result of any adjustment provided for in this Section 4.3 shall be rounded to the nearest whole share. SECTION 5. OFFICER'S CERTIFICATE AS TO ADJUSTMENTS. In each case of any adjustment or readjustment in the number and kind of Warrant Shares (or other Stock or assets), issuable hereunder from time to time, or in the Exercise Price, the Corporation, at its expense, will promptly cause an officer of the Corporation to compute such adjustment or readjustment in accordance with the terms of this Warrant and prepare a certificate setting forth such adjustment or readjustment and showing the facts upon which such adjustment or readjustment is based. The Corporation will forthwith send a copy of each such certificate to the Holder in accordance with Section 10.4 below. SECTION 6. NOTICES OF RECORD DATE, ETC. In the event of (a) any taking by the Corporation of a record of the holders of Stock for the purpose of determining the holders thereof who are entitled to receive any shares of Stock as a dividend or other distribution or pursuant to a stock split, or A-9 (b) any reorganization of the Corporation, or any sale or transfer, in a single transaction or a series of related transactions, of all or substantially all the assets of the Corporation to, or the consolidation or merger of the Corporation with or into, any other Person, or (c) any voluntary or involuntary dissolution, liquidation or winding-up of the Corporation, or (d) any sale, in a single transaction or a series of related transactions, of a majority of the Corporation's voting stock (whether newly issued, or from treasury, previously issued and then outstanding, or any combination thereof), then and in each such event the Corporation will mail or cause to be mailed to the Holder a notice specifying (i) the date on which any such record is to be taken for the purpose of such dividend, distribution or stock split, and stating the amount and character of such dividend, distribution or stock split, or (ii) the date on which any such reorganization, transfer, consolidation, merger, dissolution, liquidation or winding-up is to take place, and the time, if any is to be fixed, as of which the holders of record of any one or more classes of Stock shall be entitled to exchange their shares of Stock for securities or other property deliverable on such reorganization, transfer, consolidation, merger, dissolution, liquidation or winding-up or (iii) the date on which any such sale of a majority of the Corporation's voting stock is to take place and the material terms thereof, as the case may be. Such notice shall be mailed at least 15 days prior to the date specified in such notice on which any such action is to be taken. SECTION 7. EXCHANGE OF WARRANT. Subject to the provisions of Section 9 hereof (if and to the extent applicable), this Warrant shall be exchangeable, upon the surrender hereof by the Holder at the principal office of the Corporation, for new warrants of like tenor, each registered in the name of the Holder or in the name of such other Persons as they may direct, subject to Sections 9 and 10.5 (upon payment by the Holder of any applicable transfer taxes). Each of such new warrants shall be exercisable for such number of Warrant Shares as the Holder shall direct, PROVIDED that all of such new warrants shall represent, in the aggregate, the right to purchase the same number of Warrant Shares and cash, securities or other property, if any, which may be purchased by the Holder upon exercise of this Warrant at the time of its surrender. SECTION 8. REPLACEMENT OF WARRANT. On receipt of evidence reasonably satisfactory to the Corporation of the loss, theft, destruction or mutilation of this Warrant and, in the case of any such loss, theft or destruction of this Warrant, on delivery of an indemnity agreement or security reasonably satisfactory in form and amount to the Corporation or, in the case of any such mutilation, on surrender and cancellation of this Warrant, the Corporation at its expense will execute and deliver, in lieu thereof, a new warrant of like tenor. SECTION 9. TRANSFER PROVISIONS, ETC. By accepting this Warrant, Holder makes the representations set forth in 9.1, 9.2, 9.3 and 9.4 below and agrees to the restrictions set forth in 9.5, 9.6, 9.7 and 9.8 below, and, by exercising or converting this Warrant in whole or in part, the Holder agrees that Holder will then represent and will be deemed to represent that such representations are true and complete as of the date of such exercise or conversion. A-10 SECTION 9.1 PURCHASE ENTIRELY FOR OWN ACCOUNT. This Warrant is, and any Warrant Shares received by the Holder upon exercise or conversion of this Warrant will be, acquired for investment for Holder's own account, not as a nominee or agent, and not with a view to the resale or distribution of any part thereof, and the Holder has no present intention of selling, granting any participation in, or otherwise distributing any such securities. The Holder does not have any contract, undertaking, agreement or arrangement with any person to sell, transfer or grant participations to such person or to any third person, with respect to any of such securities. SECTION 9.2 INVESTMENT EXPERIENCE. The Holder is an investor in securities of companies in the development stage and acknowledges that the Holder is able to fend for itself, can bear the economic risk of the Holder's investment and has such knowledge and experience in financial or business matters that the Holder is capable of evaluating the merits and risks of the investment in this Warrant and the Warrant Shares. SECTION 9.3 ACCREDITED INVESTOR. The Holder is an "accredited investor" within the meaning of Rule 501 of Regulation D under the Securities Act, as presently in effect. SECTION 9.4 RESTRICTED SECURITIES. The Holder understands that this Warrant and the Warrant Shares are characterized as restricted securities under the federal securities laws and applicable state securities laws inasmuch as such securities are being (or will be) acquired from the Corporation in a transaction not involving a public offering and that under such laws and applicable regulations such securities may be resold without registration under the Securities Act, only in certain limited circumstances. SECTION 9.5 TRANSFER RESTRICTIONS. Without in any way limiting the representations set forth above, the Holder agrees not to make any transfer of all or any portion of this Warrant or the Warrant Shares unless and until (a) such transfer is registered under the Securities Act and all applicable state securities laws, or (ii) Holder shall have notified the Corporation of the proposed transfer and shall have furnished the Corporation with a detailed statement of the circumstances surrounding the proposed transfer, and, if the Corporation requests, Holder shall have furnished the Corporation with an opinion of counsel, reasonably satisfactory to the Corporation, that such transfer will not require registration of such shares under the Securities Act and applicable state securities laws. SECTION 9.6 LEGENDS. (a) Each certificate representing any Warrant Shares issued upon exercise of this Warrant shall bear the legend set forth below, or a legend substantially equivalent thereto: "THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR THE SECURITIES LAWS OF ANY STATE AND MAY NOT BE OFFERED, SOLD, TRANSFERRED, ASSIGNED, PLEDGED, HYPOTHECATED OR DISPOSED OF UNLESS THEY ARE SO REGISTERED OR UNLESS, IN THE OPINION OF COUNSEL SATISFACTORY TO THE CORPORATION, BOTH AS TO THE IDENTITY OF COUNSEL AND AS TO THE FORM AND SUBSTANCE OF SUCH OPINION, AN EXEMPTION FROM SUCH REGISTRATION IS AVAILABLE." A-11 (b) Each certificate representing any shares of Stock issued from time to time upon exercise of this Warrant shall also bear any legend required under any applicable state securities or blue sky laws. (c) The Corporation may issue appropriate "stop transfer" instructions and may take such other steps as it may deem appropriate to cause the restrictions referred to in this Section 9 to be complied with. SECTION 9.7 SURVIVAL. The obligations of the Holder (and/or of any transferee of this Warrant or any Warrant Shares issued from time to time upon exercise of this Warrant) under this Section 9 shall, with respect to any Warrant Shares issued from time to time upon exercise of this Warrant, survive the exercise, expiration or other termination, or transfer, of this Warrant indefinitely. SECTION 9.8 MECHANICS OF TRANSFER. Subject to the terms and conditions of this Warrant and subject to compliance with all applicable securities laws, any transfer of all or any portion of this Warrant, or of any interest therein, that is otherwise in compliance with applicable law shall be effected by surrendering this Warrant to the Corporation at its principal office, together with (i) a duly executed form of assignment, in the form attached hereto, (ii) payment of all applicable transfer taxes, if any. In the event of any such transfer of this Warrant, in whole, the Corporation shall issue a new warrant of like tenor to the transferee, representing the right to purchase the same number of Warrant Shares, and cash, securities or other property, if any, which were purchasable by the Holder upon exercise of this Warrant at the time of its transfer. In the event of any such transfer of any portion of this Warrant, (i) the Corporation shall issue a new warrant of like tenor to the transferee, representing the right to purchase the same number of Warrant Shares, and cash, securities or other property, if any, which were purchasable by the Holder upon exercise of the transferred portion of this Warrant at the time of such transfer, and (ii) the Corporation shall issue a new warrant of like tenor to the Holder, representing the right to purchase the number of Warrant Shares, and cash, securities or other property, if any, purchasable by the Holder upon exercise of the portion of this Warrant not transferred to such transferee. Until this Warrant or any portion thereof is transferred on the books of the Corporation, the Corporation may treat the Holder as the absolute holder of this Warrant and all right, title and interest therein for all purposes, notwithstanding any notice to the contrary. Notwithstanding the foregoing, neither this Warrant nor any rights hereunder may be transferred unless such transfer complies with all applicable securities laws and the provisions of this Section 9. SECTION 10. GENERAL. SECTION 10.1 AUTHORIZED SHARES; RESERVATION OF SHARES FOR ISSUANCE. At all times while this Warrant is outstanding, the Corporation shall maintain its corporate authority to issue, and shall have authorized and reserved for issuance upon exercise of this Warrant, such number of shares of Common Stock as shall be sufficient to perform its obligations under this Warrant (after giving effect to any and all adjustments to the number and kind of Warrant Shares purchasable upon exercise of this Warrant). SECTION 10.2 NO IMPAIRMENT. The Corporation will not, by amendment of its Certificate of Incorporation or through any reorganization, transfer of assets, consolidation, A-12 merger, dissolution, issuance or sale of securities, sale or other transfer of any of its assets or properties, or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Warrant, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such action as may be necessary or appropriate in order to protect the rights of the Holder hereunder against impairment. Without limiting the generality of the foregoing, the Corporation (a) will not increase the par value of any shares of Stock receivable upon the exercise of this Warrant above the amount payable therefor on such exercise, and (b) will take all action that may be necessary or appropriate in order that the Corporation may validly and legally issue fully paid and nonassessable shares of Stock on the exercise of this Warrant. SECTION 10.3 NO RIGHTS AS STOCKHOLDER. The Holder shall not be entitled to vote or to receive dividends or to be deemed the holder of Stock that may at any time be issuable upon exercise of this Warrant for any purpose whatsoever, nor shall anything contained herein be construed to confer upon the Holder any of the rights of a stockholder of the Corporation or any right to vote for the election of directors or upon any matter submitted to stockholders at any meeting thereof, or to give or withhold consent to any corporate action (whether upon any recapitalization, issuance or reclassification of stock, change of par value or change of stock to no par value, consolidation, merger or conveyance or otherwise), or to receive notice of meetings (except to the extent otherwise provided in this Warrant), or to receive dividends or subscription rights, until the Holder shall have become the holder of record and legal owner of Warrant Shares in accordance with the provisions of Section 2.4 hereof. SECTION 10.4 NOTICES. All notices, demands, requests, certificates or other communications under this Warrant shall be in writing and shall be either mailed by first class mail, postage prepaid, in which case such notice, demand, request, certificate or other communication shall be deemed to have been given three business days after the date on which it is first deposited in the mails, or hand delivered or sent by facsimile transmission, by tested or otherwise authenticated telex or cable or by private expedited courier for overnight delivery with signature required, in each such case, such notice, demand, request, certificate or other communication being deemed to have been given upon delivery or receipt, as the case may be: (i) if to the Corporation, at 10161 Bubb Road, Cupertino, California 95014 Attention: Chief Financial Officer, or at such other address as the Corporation may have furnished in writing to the Holder; and (ii) if to the Holder, at the Holder's address appearing in the books maintained by the Corporation. SECTION 10.5 ASSIGNMENT. Notwithstanding anything contained herein to the contrary, this Warrant and all rights hereunder are assignable or transferable (subject to the legend set forth in the heading on the first page hereof), in whole or in part, by Alcatel to affiliates of Alcatel. SECTION 10.6 AMENDMENT AND WAIVER. No failure or delay of the Holder in exercising any power or right hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such right or power, or any abandonment or discontinuance of steps to enforce such a right or power, preclude any other or further exercise thereof or the exercise of any other right or power. The rights and remedies of the Holder are cumulative and not exclusive of A-13 any rights or remedies which it would otherwise have. The provisions of this Warrant may be amended, modified or waived with (and only with) the written consent of the Corporation and the Holder. SECTION 10.7 GOVERNING LAW. This Warrant shall be governed by, and construed and enforced in accordance with, the laws of California. SECTION 10.8 COVENANTS TO BIND SUCCESSOR AND ASSIGNS. All covenants, stipulations, promises and agreements in this Warrant contained by or on behalf of the Corporation shall bind its successors and assigns, whether so expressed or not. SECTION 10.9 SEVERABILITY. In case any one or more of the provisions contained in this Warrant shall be invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein shall not in any way be affected or impaired thereby. The parties shall endeavor in good faith negotiations to replace the invalid, illegal or unenforceable provisions with valid provisions the economic effect of which comes as close as possible to that of the invalid, illegal or unenforceable provisions. SECTION 10.10 CONSTRUCTION. The definitions of this Warrant shall apply equally to both the singular and the plural forms of the terms defined. Wherever the context may require, any pronoun shall include the corresponding masculine, feminine and neuter forms. The section and paragraph headings used herein are for convenience of reference only, are not part of this Warrant and are not to affect the construction of or be taken into consideration in interpreting this Warrant. SECTION 10.11 REMEDIES. The Holder and the Corporation, in addition to being entitled to exercise all rights granted by law, including recovery of damages, will each be entitled to specific performance of its rights under this Warrant. The Holder and the Corporation each agrees that monetary damages would not be adequate compensation for any loss incurred by reason of a breach by it of the provisions of this Warrant and hereby agrees to waive the defense in any action for specific performance that a remedy at law would be adequate. In any action or proceeding brought to enforce any provision of this Warrant or where any provision hereof is invalidly asserted as a defense, the successful party to such action or proceeding shall be entitled to recover reasonable attorneys' fees in addition to any other available remedy. [rest of page intentionally left blank] A-14 IN WITNESS WHEREOF, the Corporation has caused this Warrant to be executed in its corporate name by one of its officers thereunto duly authorized, all as of the day and year first above written. HYBRID NETWORKS, INC. By: --------------------------- Carl S. Ledbetter Chief Executive Officer A-15 FORM OF SUBSCRIPTION (To be executed upon exercise of Warrant) To: HYBRID NETWORKS, INC. The undersigned hereby irrevocably elects to exercise the right of purchase represented by the attached Warrant for, and to purchase thereunder, ________ shares of Common Stock, $.001 par value per share ("COMMON STOCK"), of Hybrid Networks, Inc., a Delaware corporation, and tenders herewith payment of $________, representing the aggregate purchase price for such shares based on the price per share provided for in such Warrant. The undersigned hereby confirms that the representations set forth in Section 9 of the Warrant are true and complete with respect to the undersigned as of the date hereof. Please issue a certificate or certificates for such shares of Common Stock in the following name or names and denominations and deliver such certificate or certificates to the person or persons listed below at their respective addresses set forth below: If said number of shares of Common Stock shall not be all the shares of Common Stock issuable upon exercise of the attached Warrant, a new Warrant is to be issued in the name of the undersigned for the balance remaining of such shares of Common Stock less any fraction of a share of Common Stock paid in cash. Dated: _____________, 19__ ----------------------------------- (Name of Holder) By: -------------------------------- Its: -------------------------------- Address: --------------------------- NOTE: The above signature should correspond exactly with the name on the face of the attached Warrant. NOTICE OF CONVERSION To: Hybrid Networks, Inc. (1) The undersigned hereby elects to convert that portion of the attached Warrant representing the right to purchase __________ shares of Common Stock of Hybrid Networks, Inc. into such number of shares of Common Stock of Hybrid Networks, Inc. as is determined pursuant to Section 2.3 of such Warrant, which conversion shall be effected pursuant to the terms of such Warrant. (2) The undersigned represents that the aforesaid shares are being acquired for the account of the undersigned for investment and not with a view to, or for resale in connection with, the distribution thereof and that the undersigned has no present intention of distributing or reselling such shares, except in compliance with applicable federal and state securities laws. The undersigned hereby confirms that the representations set forth in Section 9 of the Warrant are true and complete with respect to the undersigned as of the date hereof. (3) The undersigned accepts such shares subject to the terms relating to registration rights under the Investor Rights Agreement (as defined in the Warrant). - ----------------------------- (Date) ----------------------------------- (Name of Holder) By: -------------------------------- Its: -------------------------------- Address: --------------------------- Note: The above signature should correspond exactly with the name on the face of the attached Warrant. FORM OF ASSIGNMENT For value received, ____________________________ hereby sells, assigns and transfers unto _____________________________ (the "TRANSFEREE") the attached Warrant [__% of the attached Warrant], together with all right, title and interest therein, and does hereby irrevocably constitute and appoint ____________________________ attorney to transfer said Warrant [said percentage of said Warrant] on the books of Hybrid Networks, Inc., a Delaware corporation, with full power of substitution in the premises. The Transferee, by signing below, hereby confirms that the representations set forth in Section 9 of the Warrant are true and complete with respect to the Transferee as of the date hereof, and that the Transferee agrees to be bound by the restrictions of Section 9 of the Warrant. If not all of the attached Warrant is to be so transferred, a new Warrant is to be issued in the name of the undersigned for the balance of said Warrant. Dated: _____________, 19__ ----------------------------------- (Name of the Holder) By: -------------------------------- Its: -------------------------------- NOTE: The above signature should correspond exactly with the name on the face of the attached Warrant. AGREED TO AND ACCEPTED - ------------------------------------- Name of Transferee BY: - ------------------------------------- ITS: - ------------------------------------- ADDRESS: - ------------------------------------- - ------------------------------------- EXHIBIT B QPSK Purchaser and/or its affiliates own and have developed a significant amount of practical knowledge and experience in the characterization and implementation of a QPSK upstream modulation technology in European hybrid fiber coax plant. Company requires this knowledge in order to finalize its QPSK product offering. In that context, Purchaser agrees to provide (or to cause its appropriate affiliates to provide) Company systems and network documentation pertaining to the implementation of QPSK in a typical cable TV network. In this connection, Purchaser will provide to Company a network engineering manual and 12 months of engineering consulting. The engineering consulting will in part consist of inputs to the quality assurance test plan and the alpha and beta test plans. The manual will be delivered no later than 1/1/98 and the engineering consultancy will commence as soon as practical. SNMP Company and Purchaser require an HP Open View network management product for implementation in joint customer networks. Purchaser will provide modules in the Purchaser product that would have the Company data capability implemented into the same network management system (which modules Purchaser and/or its affiliates own and have developed). Interfaces required for this joint management system will be jointly agreed upon by an Alcatel/Company technical team that will be established as soon as practical. The interface to be agreed upon will be based on SNMP traps and the HP Open View System. Purchaser will provide 12 man months of development effort for this team. AS to the QPSK and SNMP areas referred to above, it is the purpose of the referred-to technical assistance to allow Company to employ Purchaser's disclosed preexisting know-how in Purchaser's Access Division and the new technical results of the collaboration between them in the course of that assistance in the Company's products (as they may evolve or are modified) in the field of internet access via CATV and in the field of wireless internet access systems. Purchaser would be allowed to benefit from the use of the new developments as well for its products. CDMA Whereas Purchaser and Company agree that a next generation physical layer for cable return, such as CDMA, may reduce the cost of conditioning the cable plant compared to QPSK, and whereas Purchaser and/or its affiliates have begun to research a new CDMA upstream modulation technology, Purchaser agrees to share: B-1 a) detail of the cost justification for CDMA technology. b) the preliminary design information available for a CDMA return channel (Purchaser and/or its affiliates have been developing such information). IP TELEPHONY Whereas both companies agree that IP telephony is an evolving technology and that the Company's patented intellectual property portfolio lends itself well to the development of a telephony over IP product. Purchaser and Company agree to explore the opportunity to work together in the development, refinement and exploitation of IP telephony over broadband networks. B-2 EXHIBIT C HYBRID NETWORKS, INC. AMENDMENT TO AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT The Amended and Restated Investor Rights Agreement dated as of September 18, 1997 among Hybrid Networks, Inc. (the "COMPANY") and certain holders of securities of the Company, as amended by the amendment dated as of October 16, 1997 (the "ORIGINAL AGREEMENT"), is hereby amended by this amendment (this "AMENDMENT") dated as of November 6, 1997 among the Company, Alcatel SEL AG ("ALCATEL"), and the holders of a majority of the Registrable Securities outstanding immediately prior to this Amendment. Except as provided otherwise herein, the terms used in this Amendment that are defined in the Original Agreement have the same meanings as those terms have in the Original Agreement. 1. The Original Agreement is hereby amended as follows: (a) Alcatel will have the same registration rights (including, without limitation, the right to transfer or assign such registration rights) under the Original Agreement as amended by this Amendment (the "AGREEMENT"), with respect to the shares of Common Stock of the Company issued or issuable upon exercise of the warrant issued by the Company to Alcatel pursuant to that certain Warrant Purchase Agreement between the Company and Alcatel dated November 3, 1997 (the "ALCATEL WARRANTS"), as the Note Warrant Investors have with respect to the shares of Common Stock that are issued or issuable upon exercise of the Note Warrants. (b) The definition of "Registrable Securities" in Section 1.1(b) of the Original Agreement is amended to include (i) shares of Common Stock of the Company issuable or issued upon exercise of any Alcatel Warrants and (ii) any Common Stock of the Company issued as (or issuable upon conversion or exercise of any warrant, right or other security which is issued as) a dividend or other distribution with respect to, or in exchange for or in replacement of, any Alcatel Warrants or Common Stock described in (i). (c) Alcatel will have, with respect to Alcatel Warrants or shares of Common Stock of the Company that have been issued upon exercise of any Alcatel Warrants, the same right as any Note/Warrant Holder has to participate in the one demand shelf-registration provided for in Section 1.10(b) of the Original Agreement (including, without limitation, the same right to transfer or assign such right to participate). (d) As signatory of this Amendment, Alcatel will be bound by the provisions of Section 1.12 of the Original Agreement (Market Stand-Off Agreement). (e) The Company shall deliver financial statements to Alcatel as provided in Sections 2.1 and 2.2 of the Original Agreement. 2. Except as amended as provided in Section 1 above, the Original Agreement continues in full force and effect. 3. This Amendment may be executed in two or more counterparts, each of which will be deemed an original but, all of which together will constitute one and the same instrument. C-1 SIGNATURE PAGE DATED AS OF NOVEMBER 6, 1997 TO THE HYBRID NETWORKS, INC. CONSENT, WAIVER AND AMENDMENT REGARDING AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT - ------------------------------------------------------------------------------ TUDOR BVI FUTURES, LTD. By: Tudor Investment Corporation, Investment Adviser By: --------------------------------- Robert P. Forlenza, Vice President Address: c/o Tudor Global Trading, Inc. 40 Rowes Wharf Boston, MA 02110 Facsimile No.: c/o Bingham, Dana & Gould LLP (617) 951-8736 Attn: Victor J. Paci, Esq. TUDOR ARBITRAGE PARTNERS, L.P. By: Tudor Global Trading, Inc., General Partner By: ------------------------------------- Robert P. Forlenza, Vice President Address and facsimile no. same as immediately above RAPTOR GLOBAL FUND, LTD. By: Tudor Investment Corporation, Investment Adviser By: --------------------------------------- Robert P. Forlenza, Vice President Address and facsimile no. same as immediately above RAPTOR GLOBAL FUND, L.P. By: Tudor Investment Corporation, General Partner By: --------------------------------------- Robert P. Forlenza, Vice President Address and facsimile no. same as immediately above C-2 SIGNATURE PAGE DATED AS OF NOVEMBER 6, 1997 TO THE HYBRID NETWORKS, INC. CONSENT, WAIVER AND AMENDMENT REGARDING AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT - ------------------------------------------------------------------------------ ALEX. BROWN & SONS INCORPORATED By: --------------------------------- Thomas R. Hitchner, Principal Address: 135 E. Baltimore Street Baltimore, MD 21202 Facsimile Number: (410) 234-3788 C-3 SIGNATURE PAGE DATED AS OF NOVEMBER 6, 1997 TO THE HYBRID NETWORKS, INC. CONSENT, WAIVER AND AMENDMENT REGARDING AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT - ------------------------------------------------------------------------------ J.F. SHEA CO., INC., By: --------------------------------- Edmund Shea, Jr. Address: 655 Brea Canyon Road P. O. Box 489 Walnut, CA 91789-0489 Facsimile Number: (909) 869-0840 C-4 SIGNATURE PAGE DATED AS OF NOVEMBER 6, 1997 TO THE HYBRID NETWORKS, INC. CONSENT, WAIVER AND AMENDMENT REGARDING AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT - ------------------------------------------------------------------------------ OSCCO III, L.P. By: --------------------------------- Stephen E. Halprin Address: 3000 Sand Hill Road Building 1, Suite 290 Menlo Park, CA 94025 Facsimile Number: (650) 854-9010 C-5 SIGNATURE PAGE DATED AS OF NOVEMBER 6, 1997 TO THE HYBRID NETWORKS, INC. CONSENT, WAIVER AND AMENDMENT REGARDING AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT - ------------------------------------------------------------------------------ ---------------------------- Gary M. Lauder Address: 88 Mercedes Lane Atherton, CA 94027 Facsimile Number: (650) 323-2171 C-6 SIGNATURE PAGE DATED AS OF NOVEMBER 6, 1997 TO THE HYBRID NETWORKS, INC. CONSENT, WAIVER AND AMENDMENT REGARDING AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT - ------------------------------------------------------------------------------ AT&T VENTURE COMPANY, L.P. By: AT&T Venture Partners, Its: General Partner By: ---------------------------- Its: ---------------------------- Address: 3000 Sand Hill Road Building 4, Suite 235 Menlo Park, CA 94025 Facsimile Number: (415) 854-4923 C-7 SIGNATURE PAGE DATED AS OF NOVEMBER 6, 1997 TO THE HYBRID NETWORKS, INC. CONSENT, WAIVER AND AMENDMENT REGARDING AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT - ------------------------------------------------------------------------------ SEQUOIA CAPITAL VI By: ---------------------------------- Its: ---------------------------------- Address: 3000 Sand Hill Road, Building 4, Suite 280 Menlo Park, CA 94025 Facsimile Number: (415) 854-2977 SEQUOIA TECHNOLOGY PARTNERS VI By: ---------------------------------- Its: ---------------------------------- Address: 3000 Sand Hill Road, Building 4, Suite 280 Menlo Park, CA 94025 Facsimile Number: (415) 854-2977 SEQUOIA XXIV By: ---------------------------------- Its: ---------------------------------- Address: 3000 Sand Hill Road, Building 4, Suite 280 Menlo Park, CA 94025 Facsimile Number: (415) 854-2977 C-8 SIGNATURE PAGE DATED AS OF NOVEMBER 6, 1997 TO THE HYBRID NETWORKS, INC. CONSENT, WAIVER AND AMENDMENT REGARDING AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT - ------------------------------------------------------------------------------ ACCEL IV L.P. ACCEL KEIRETSU L.P. By: Accel IV Associates L.P. By: Accel Partners & Co.,Inc. Its: General Partner Its: General Partner By: By: ------------------------------ ------------------------------- Its: Its: ----------------------------- ----------------------------- Address: One Palmer Square Address: One Palmer Square Princeton, NJ 08542 Princeton, NJ 08542 Facsimile Number: (609) 683-0384 Facsimile Number: (609) 683-0384 ACCEL INVESTORS '95 L.P. ELLMORE C. PATTERSON PARTNERS By: By: ------------------------------ ------------------------------- Its: Its: ----------------------------- ----------------------------- Address: One Palmer Square Address: One Palmer Square Princeton, NJ 08542 Princeton, NJ 08542 Facsimile Number: (609) 683-0384 Facsimile Number: (609) 683-0384 C-9 SIGNATURE PAGE DATED AS OF NOVEMBER 6, 1997 TO THE HYBRID NETWORKS, INC. CONSENT, WAIVER AND AMENDMENT REGARDING AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT - ------------------------------------------------------------------------------ INTEL CORPORATION By: ------------------------------- Its: ------------------------------- Address: 2200 Mission College Blvd. Santa Clara, CA 95052-8119 Facsimile Number: (408) 765-6038 C-10 SIGNATURE PAGE DATED AS OF NOVEMBER 6, 1997 TO THE HYBRID NETWORKS, INC. CONSENT, WAIVER AND AMENDMENT REGARDING AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT - ------------------------------------------------------------------------------ ITOCHU Corporation By: ------------------------------- Its: ------------------------------- Address: 5-1, Kita-Aoyama 2-chome Minato-KU, Tokyo 107-77 Japan Facsimile Number: 011-81-3-3497-3131 C-11 SIGNATURE PAGE DATED AS OF NOVEMBER 6, 1997 TO THE HYBRID NETWORKS, INC. CONSENT, WAIVER AND AMENDMENT REGARDING AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT - ------------------------------------------------------------------------------ BG SERVICES LIMITED By: ------------------------------- Its: ------------------------------- Address: c/o Minden House 6 Minden Place St. Helier Jersey, Channel Islands Attention: Ron Green Facsimile Number: (0) 1534-607799 C-12 SIGNATURE PAGE DATED AS OF NOVEMBER 6, 1997 TO THE HYBRID NETWORKS, INC. CONSENT, WAIVER AND AMENDMENT REGARDING AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT - ------------------------------------------------------------------------------ ---------------------------------- Daniel E. Steimle Address: P. O. Box 928 Occidental, CA 95465 Facsimile No.: (408) 725-0990 C-13 SIGNATURE PAGE DATED AS OF NOVEMBER 6, 1997 TO THE HYBRID NETWORKS, INC. CONSENT, WAIVER AND AMENDMENT REGARDING AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT - ------------------------------------------------------------------------------ VENTURE BANKING GROUP, a division of Cupertino National Bank By: ------------------------------- Its: ------------------------------- Address: Three Palo Alto Square, Suite 150 Palo Alto, CA 94306 Attention: Jon Krogstad Facsimile Number: (650) 843-6969 C-14 EXHIBIT D As used in Section 1.2 of this Agreement, the following terms have the meanings indicated below, provided that the definition of "affiliate" shall apply for all purposes of this Agreement: "AFFILIATE" (i) when referring to an affiliate of the Purchaser, shall mean Alcatel Alsthom, S.A. and any company, corporation or other entity more than 50% of whose voting securities are controlled, directly or indirectly, by Alcatel Alsthom, S.A., and (ii) when referring to an affiliate of the Company, shall mean any company, corporation or other entity more that 50% of whose voting securities are controlled, directly or indirectly, by the Company. "BACKGROUND COPYRIGHTS" shall mean (i) in the case of Purchaser, all Copyrights in the possession of Purchaser's Access Division which would be infringed by the Use of a Foreground Work of Authorship, Delivered Work of Authorship or Foreground Copyright, such as the copyright in an underlying work with respect to its derivative work, and which are disclosed to the Company pursuant to the technical support referred to in EXHIBIT B, and (ii) in the case of the Company, all Copyrights which would be infringed by the Use of a Foreground Work of Authorship, Delivered Work of Authorship or Foreground Copyright, such as the copyright in an underlying work with respect to its derivative work, and which are disclosed to the Purchaser pursuant to the technical support referred to in EXHIBIT B. "BACKGROUND PATENTS" shall mean all Patents which are not Foreground Patents. "BACKGROUND PROPRIETARY INFORMATION" shall mean (i) in the case of Purchaser, all Proprietary Information in the possession of Purchaser's Access Division and which Purchaser has a right to disclose and license without payment to a third party which is not Foreground Proprietary Information, and which is transferred to Company pursuant to the technical support referred to in EXHIBIT B, and (ii) in the case of the Company, all Proprietary Information which the Company has a right to disclose and license without payment to a third party which is not Foreground Proprietary Information, and which is transferred to Purchaser pursuant to the technical support referred to in EXHIBIT B. "BACKGROUND WORKS OF AUTHORSHIP" shall mean (i) in the case of Purchaser, all Works of Authorship in the possession of Purchaser's Access Division and which Purchaser has a right to disclose and license without payment to a third party which are not Foreground Works of Authorship and which are disclosed to the Company pursuant to the technical support referred to in EXHIBIT B, and (ii) in the case of the Company, all Works of Authorship which the Company has a right to disclose and license without payment to a third party which are not Foreground Works of Authorship and which are disclosed to Purchaser pursuant to the technical support referred to in EXHIBIT B. "COPYRIGHT" shall mean, with respect to a Work of Authorship, in the case of the United States, the rights relating to such Product under Title 17 of the United States Code, as amended, and, in the case of other countries, rights relating to such Work of Authorship under similar forms of protection. D-1 "DELIVERED WORK OF AUTHORSHIP" shall mean a Work of Authorship, other than a Foreground Work of Authorship, delivered by one party to the other party pursuant to the Development; provided, however, that in the case of the Purchaser such Delivered Work of Authorship shall be limited to those in the possession of the Purchaser's Access Division. "DEVELOPMENT" shall mean that activity that is carried out by either party, either independently or together with its affiliates, or jointly by both parties, under this Agreement in the course of the technical support hereunder and identified in EXHIBIT B. "FOREGROUND COPYRIGHT" shall mean a Copyright of any Foreground Work of Authorship. "FOREGROUND PATENTS" shall mean all Patents based on Subject Inventions. "FOREGROUND PROPRIETARY INFORMATION" shall mean all Proprietary Information which is generated in the course of the Development. "FOREGROUND WORK OF AUTHORSHIP" shall mean any Work of Authorship first fixed in whole or in part in a tangible medium of expression in the course of the Development. "INFORMATION" shall mean all data and information, including, without limitation, data and information of a technical nature including writings, drawings, sound recordings, computer programs, pictorial representations and graphs, and works of authorship protectable under copyright or similar forms of protection and also including inventions whether or not patentable. "INVENTION" shall mean any invention, discovery, improvement or innovation, of more than a trifling or routine nature, whether or not patentable. "JOINT FOREGROUND COPYRIGHTS" shall mean any Copyright on a Joint Foreground Work of Authorship. "JOINT FOREGROUND PATENTS" shall mean the Foreground Patents covering Subject Inventions jointly made or conceived by one or more employees of a party or its affiliates and one or more employees of the other party or its affiliates. "JOINT FOREGROUND PROPRIETARY INFORMATION" shall mean the Foreground Proprietary Information generated in direct collaborative participation between one or more employees of one party or its affiliates and one or more employees of the other party or its affiliates in the course of the Development. "JOINT FOREGROUND WORK OF AUTHORSHIP" shall mean any Foreground Work of Authorship considered jointly authored by the parties under Title 17 of the United States Code, as amended. D-2 "NECESSARY BACKGROUND PATENTS" shall mean (i) in the case of the Purchaser, the Purchaser's Background Patents whose claims would be infringed by the Practice of the Purchaser's Foreground Patents or the Use (except modification) of the Purchaser's Foreground Copyrights, Foreground Proprietary Information, Foreground Works of Authorship, Background Proprietary Information or Delivered Works of Authorship, and (ii) in the case of the Company, the Company's Background Patents whose claims would be infringed by the Practice of the Company's Foreground Patents or the Use (except modification) of the Company's Foreground Copyrights, Foreground Proprietary Information, Foreground Works of Authorship or Delivered Works of Authorship or by the Practice of those of Company's Separate or Joint Foreground Patents which become the Separate Foreground Patents of Purchaser by operation of Section 1.2(b)(iii)(B) or by the Use (except modification) of those of Company's Separate and Joint Foreground Copyrights or Separate or Joint Foreground Proprietary Information which become the Purchaser's Separate Foreground Copyrights or Separate Foreground Proprietary Information by operation of Section 1.2(b)(iii)(B). "PATENT" shall mean a patent for an invention or a similar form of statutory protection such as a utility model or registered design. "PRACTICE" shall mean to make, have made, import, sell or offer to sell any items or carry out any method that is within the scope of a Patent. "PRODUCT" shall mean a product of either party or its affiliates which may incorporate Purchaser's Background Proprietary Information or either party's Delivered Works of Authorship, Foreground Works of Authorship, Subject Inventions or Foreground Proprietary Information, a Product may be a QPSK Product, a SNMP Product, a CDMA Product or an IP Telephony Product. "PROPRIETARY INFORMATION" shall mean information owned or controlled by a party and not available without restrictions to third parties. "RIGHT TO USE" shall mean the right of a party to do or have done on its behalf the following: to copy, duplicate, reproduce and otherwise use and, with respect to a copyrighted Work of Authorship, to perform any act which the owner of any Copyright therein may prohibit under Title 17 of the United States Code, as amended, and similar laws of other jurisdictions, and including, with respect to any Product, the right to incorporate Foreground Proprietary Information or Background Proprietary Information into such Product and to manufacture and sell the same. "SEPARATE FOREGROUND COPYRIGHTS" shall mean the Foreground Copyrights which are not Joint Foreground Copyrights. "SEPARATE FOREGROUND PATENTS" shall mean the Foreground Patents which are not Joint Foreground Patents. "SEPARATE FOREGROUND PROPRIETARY INFORMATION" shall mean the Foreground Proprietary Information which is not Joint Foreground Proprietary Information. D-3 "SEPARATE FOREGROUND WORKS OF AUTHORSHIP" shall mean the Foreground Works of Authorship which are not Joint Foreground Works of Authorship. "SUBJECT INVENTIONS" shall mean Inventions first conceived in the course of the Development. "USE" shall mean the exercise of any Right to Use. "WORK OF AUTHORSHIP" shall mean any work, including derivative works fixed in a more-than-transitory form, perceivable either directly or indirectly with the aid of a machine or device and includes, but is not limited to, those works protectable under copyright or similar forms of protection. D-4 EX-23.2 8 EXHIBIT 23.2 EXHIBIT 23.02 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the inclusion in this registration statement on Form S-1 (File No. 333-36001) of our report dated October 16, 1997, except for Note 16, for which the date is November 6, 1997, on our audits of the financial statements and financial statement schedules of Hybrid Networks, Inc. We also consent to the references to our firm under the captions "Experts" and "Selected Financial Data." Coopers & Lybrand L.L.P. San Jose, California November 6, 1997 -----END PRIVACY-ENHANCED MESSAGE-----