-----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, GKvj2ikRLrR8U/ubDpQFEcMubdeb/0zA3rvE+eIVdRXKEmmVnb2ejsbMnCfT4mwf 5Uvze0OGrkApmoDJ1K0i/Q== 0001047469-99-023981.txt : 19990615 0001047469-99-023981.hdr.sgml : 19990615 ACCESSION NUMBER: 0001047469-99-023981 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990614 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HYBRID NETWORKS INC CENTRAL INDEX KEY: 0000900091 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 770250931 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-23289 FILM NUMBER: 99645375 BUSINESS ADDRESS: STREET 1: 6409 GUADALUPE MINES ROAD CITY: SAN JOSE STATE: CA ZIP: 95120 BUSINESS PHONE: 4083236500 MAIL ADDRESS: STREET 1: 6409 GUADALUPE MINES ROAD CITY: SAN JOSE STATE: CA ZIP: 95120 10-Q 1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (MARK ONE) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ___ TO ___ COMMISSION FILE NUMBER: 0-23289 HYBRID NETWORKS, INC. ------------------------------------------------------ (Exact name of registrant as specified in its charter) Delaware 77-0252931 ------------------------- ------------------ (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 6409 Guadalupe Mines Road, San Jose, California 95120 --------------------------------------------------------- (Address of principal executive offices) (408) 323-6500 --------------------------------------------------------------- (Registrant's telephone number, including area code) Not Applicable - -------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /X/ No (Such reports are filed concurrently herewith.) Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: Common shares outstanding at May 28, 1999: 10,517,399 1 HYBRID NETWORKS, INC. INDEX
PART I. FINANCIAL INFORMATION PAGE NO. - --------------------------------------------------------------- -------- ITEM 1. CONDENSED FINANCIAL STATEMENTS Condensed Balance Sheets as of March 31, 1999 and December 31, 1998 (unaudited) 3 Condensed Statements of Operations for the Three Months Ended March 31, 1999 and 1998 (unaudited) 4 Condensed Statements of Cash Flows for the Three Months Ended March 31, 1999 and 1998 (unaudited) 5 Notes to Unaudited Condensed Financial Statements 6 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 11 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 25 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS 26 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 28 SIGNATURES 29
As used in this report on Form 10-Q, unless the context otherwise requires, the terms "we," "us," or, "the Company" and "Hybrid" refer to Hybrid Networks, Inc., a Delaware corporation. 2 PART I. CONDENSED FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS HYBRID NETWORKS, INC. CONDENSED BALANCE SHEETS (Unaudited) (in thousands)
March 31, Dec. 31, 1999 1998 ASSETS ----------- ----------- Current assets: Cash and cash equivalents $ 2,837 $ 3,451 Restricted cash - 515 Accounts receivable, net of allowance for doubtful accounts of $200 in 1999 and 1998 616 1,433 Inventories 3,064 5,224 Prepaid expenses and other current assets 1,212 864 ----------- ----------- Total current assets 7,729 11,487 Property and equipment, net 3,114 3,438 Intangibles and other assets 467 495 ----------- ----------- Total assets $ 11,310 $ 15,420 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current liabilities: Convertible debenture $ 5,500 $ 5,500 Current portion of capital lease obligations 440 465 Accounts payable 1,107 2,063 Accrued liabilities and other 4,477 4,271 ----------- ----------- Total current liabilities 11,524 12,299 Capital lease obligations, less current portion 262 365 Other long-term liabilities 74 54 ----------- ----------- Total liabilities 11,860 12,718 ----------- ----------- Commitments and Contingencies Stockholders' equity (deficit): Convertible preferred stock, $.001 par value: Authorized: 5,000 shares; Issued and outstanding: no shares in 1999 or 1998 - - Common stock, $.001 par value: Authorized: 100,000 shares; Issued and outstanding: 10,470 shares in 1999 and 10,473 shares in 1998 10 10 Additional paid-in capital 66,262 66,261 Accumulated deficit (66,822) (63,569) ----------- ----------- Total stockholders' equity (deficit) (550) 2,702 ----------- ----------- Total liabilities and stockholders' equity (deficit) $ 11,310 $ 15,420 =========== ===========
The accompanying notes are an integral part of these condensed financial statements. 3 HYBRID NETWORKS, INC. CONDENSED STATEMENTS OF OPERATIONS (Unaudited) (in thousands, except per share data)
Three Months Ended March 31, ------------------------ 1999 1998 ----------- ----------- (restated) Net sales $ 4,123 $ 2,706 Cost of sales 4,264 3,338 ----------- ----------- Gross loss (141) (632) ----------- ----------- Operating expenses: Research and development 1,379 2,498 Sales and marketing 618 954 General and administrative 912 928 ----------- ----------- Total operating expenses 2,909 4,380 ----------- ----------- Loss from operations (3,050) (5,012) Interest income and other expenses, net 5 402 Interest expense (208) (224) ----------- ----------- NET LOSS (3,253) (4,834) Other comprehensive loss: Reclassification for gain included in net loss - (92) ----------- ----------- Total comprehensive loss $ (3,253) $ (4,926) =========== =========== Basic and diluted net loss per share $ (0.31) $ (0.47) =========== =========== Shares used in basic and diluted per share calculation 10,470 10,353 =========== ===========
The accompanying notes are an integral part of these condensed financial statements. 4 HYBRID NETWORKS, INC. CONDENSED STATEMENTS OF CASH FLOWS (Unaudited) (in thousands)
Three Months Ended March 31, ------------------------ 1999 1998 ----------- ----------- (restated) Cash flows from operating activities: Net loss $ (3,253) $ (4,834) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 349 791 Provision for doubtful accounts - 50 Provision for excess and obsolete inventory - 17 Change in assets and liabilities: Restricted cash 515 (501) Accounts receivable 817 (734) Inventories 2,160 (1,664) Prepaid expenses and other assets (345) (160) Accounts payable (956) (205) Accrued liabilities and other 226 (176) ----------- ----------- Net cash used in operating activities (487) (7,416) ----------- ----------- Cash flows from investing activities: Purchase of property and equipment - (54) Purchase of short-term investments - (11,772) ----------- ----------- Net cash used in investing activities - (11,826) ----------- ----------- Cash flows from financing activities: Repayment of capital lease obligations (128) (107) Net proceeds from issuance of common stock 1 27 ----------- ----------- Net cash used in financing activities (127) (80) ----------- ----------- Decrease in cash and cash equivalents (614) (19,322) Cash and cash equivalents, beginning of period 3,451 26,158 ----------- ----------- Cash and cash equivalents, end of period $ 2,837 $ 6,836 =========== =========== SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING ACTIVITIES: Property and equipment acquired under capital leases $ - $ (122) SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Interest paid $ 193 $ 189 Income taxes paid 1 1
The accompanying notes are an integral part of these condensed financial statements. 5 HYBRID NETWORKS, INC. NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS BASIS OF PRESENTATION The accompanying condensed financial statements of Hybrid Networks, Inc. (the "Company" or "Hybrid") have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions for Form 10-Q and Article 10 of Regulation S-X. The balance sheet as of March 31, 1999, the statements of operations for the three months ended March 31, 1999 and 1998 and the statements of cash flows for the three month periods ended March 31, 1999 and 1998 are unaudited but include all adjustments (consisting of normal recurring adjustments) which the Company considers necessary for a fair presentation of the financial position at such dates and the operating results and cash flows for those periods. Although the Company believes that the disclosures in these financial statements are adequate to make the information presented not misleading, certain information normally included in financial statements and related footnotes prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. The December 31, 1998 condensed balance sheet data were derived from audited financial statements but do not include all disclosures required by generally accepted accounting principles. The accompanying financial statements should be read in conjunction with the financial statements as contained in the Company's Annual Report on Form 10-K for the year ended December 31, 1998. The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. During the first quarter of 1999 and the years ended December 31,1998, 1997 and 1996, the Company incurred net losses of $3,253,000, $24,625,000, $21,602,000 and $8,515,000, respectively. Additionally, the Company had an accumulated deficit of $66,822,000 as of March 31, 1999 and is highly dependent on its ability to obtain sufficient additional financing in order to fund the current and planned operating levels. Additionally, the Company is subject to a number of lawsuits involving substantial dollar amounts, and is subject to an official investigation by the Securities and Exchange Commission regarding its financial reporting practices. These factors among others raise substantial doubt about the ability of the Company to continue as a going concern for a reasonable period of time. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern. The Company's continuation as a going concern is dependent upon its ability to obtain additional financing to continue its product development and marketing plans and to fund other general operating expenses, achievement of a financially satisfactory resolution to outstanding litigation and the SEC investigation, and ultimately is dependent upon its ability to obtain sufficient customer demand to attain profitable operations. No assurance can be given that the Company will be successful in these efforts. Results for any interim period are not necessarily indicative of results for any other interim period or for the entire year. RESTATEMENT OF FINANCIAL STATEMENTS Subsequent to the filing of its Annual Report on Form 10-K for the year ended December 31, 1997 with the Securities and Exchange Commission, the Company became aware of errors and irregularities that ultimately affected the timing and dollar amount of reported sales from product shipments in 1997 and the first quarter of 1998. The Company undertook and completed extensive procedures related to recognition of product sales in 1997 and the first quarter of 1998. As a result of these findings and other relevant information now known or disclosed, the Company has determined that a significant number and dollar amount of product shipments were improperly reported as sales in the aforementioned periods. The Company has determined that revenue is earned and should be recorded only after any related obligations have been satisfied (i.e. when there are no longer any significant remaining uncertainties related to the earnings process). This revenue recognition policy has been followed for all transactions with customers reflected in these financial statements. Additionally, during 1998 the Company became aware that warrants to purchase common stock issued and outstanding in 1997 had not been properly valued, resulting in an understatement of operating expenses and interest expense. These warrants have now been properly valued and reflected in the financial statements. 6 As a result of the above, the statement of operations for the three months ended March 31, 1998 has been restated as follows:
Three Months Ended March 31, 1998 ------------------------------- Previously Restated Reported ------------ ---------- Net sales $ 2,706 $ 915 Cost of sales 3,338 1,181 ------------ ---------- Gross loss (632) (266) ------------ ---------- Operating expenses: Research and development 2,498 2,042 Sales and marketing 954 977 General and administrative 928 2,017 ------------ ---------- Total operating expenses 4,380 5,036 ------------ ---------- Loss from operations (5,012) (5,302) Interest income and other expenses, net 402 302 Interest expense (224) (224) ------------ ---------- Net loss $ (4,834) $ (5,224) ============ ========== Basic and diluted loss per share $ (0.47) $ (0.51) ============ ========== Shares used in basic and diluted per share calculation 10,353 10,353 ============ ==========
7 COMPUTATION OF BASIC AND DILUTED LOSS PER SHARE Basic earnings per share excludes dilution and is computed by dividing income available to common stockholders by the weighted average number of shares of common stock outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. All such securities or other contracts were anti-dilutive for all periods presented and, therefore, excluded from the computation of earnings per share. INVENTORIES Inventories comprise the following:
March 31, Dec. 31, 1999 1998 ----------- ----------- Raw materials $ 1,305 $ 1,371 Work in progress 325 386 Finished goods 1,434 3,467 ----------- ----------- $ 3,064 $ 5,224 =========== ===========
CONTINGENCIES CLASS ACTION LITIGATION In June 1998, five class action lawsuits were filed in San Mateo County Superior Court, California against the Company, its five directors (one of whom is an officer), two former officers and one former director. The lawsuits were brought on behalf of purchasers of the Company's Common Stock during the class period commencing November 12, 1997 (the date of the Company's initial public offering) and ending June 1, 1998. In July 1998, a sixth class action lawsuit was filed in the same court against the same defendants, although the class period was extended to June 18, 1998. All six lawsuits also named as defendants the underwriters in the Company's initial public offering, but the underwriters have since been dismissed from the cases. The complaints in these lawsuits claim that the Company and the other defendants violated the anti-fraud provisions of the California securities laws, alleging that the financial statements used in connection with the Company's initial public offering and the financial statements issued subsequently during the class period, as well as related statements made on behalf of the Company during the initial public offering and subsequently regarding the Company's past and prospective financial condition and results of operations, were false and misleading. The complaints also allege that the Company and the other defendants made these misrepresentations in order to inflate the price of the Company's Common Stock stock for the initial public offering and during the class period. The Company and the other defendants denied the charges of wrongdoing. 8 In July and August 1998, two class action lawsuits were filed in the U.S. District Court for the Northern District of California. Both of these federal class action lawsuits were brought against the same defendants as the six state court class actions referred to above, except that the second federal class action lawsuit also named as a defendant PricewaterhouseCoopers, LLP (PwC), the Company's former independent accountants. (The underwriters in the Company's initial public offering were named as defendants in the first federal class action lawsuit but were subsequently dismissed.) The class period for the first federal class action lawsuit is from November 12, 1997 to June 1, 1998, and the class period in the second class action lawsuit extends to June 17, 1998. The complaints in both federal class action lawsuits claim that the Company and the other defendants violated the anti-fraud provisions of the federal securities laws, on the basis of allegations that are similar to those made by the plaintiffs in the state class action lawsuits. The Company and the other defendants denied these charges of wrongdoing. In March 1999, the Company and the other parties (other than PwC) to the state class action lawsuits and the federal class action lawsuits reached an agreement in principle to settle the lawsuits. The agreement is subject to the parties' entering into a binding stipulation of settlement and approval by the U.S. District Court for the Northern District of California. Under the agreement in principle, (i) the Company's insurers would pay $8.8 million on the Company's behalf (and on behalf of the other officer and director defendants), (ii) the Company would issue 3.0 million shares of Common Stock to the plaintiffs (the number of shares would be increased proportionately to the extent that there are more than 10.5 million shares of Common Stock outstanding on the date of distribution so that, as of such date, the plaintiffs would hold approximately 22.6% of all of the shares of the Company's Common Stock that are then outstanding), (iii) if the Company is acquired within nine months after March 9, 1999, the date of the agreement in principle, then, in addition to the consideration referred to in (i) and (ii), the Company would pay to the plaintiffs an amount equal to 10% of the consideration received by the Company's stockholders in the acquisition. As a result of the agreement in principle and a related agreement between the Company and its insurers, the Company has paid, and will not be reimbursed by its insurers for, $1.2 million in attorneys fees and other litigation expenses that would otherwise be covered by our insurance, and the Company will not have insurance coverage for the attorneys fees and expenses relating to the settlement that it incurs in the future. As of December 31, 1998, the Company has accrued $1,547,000 for the value of the 3,000,000 shares to be issued in the settlement. SEC INVESTIGATION In October 1998, the Securities and Exchange Commission began a formal investigation of the Company and unidentified individuals with respect to the Company's financial statements and public disclosures. The Company has been producing documents in response to the Securities and Exchange Commission's subpoena and is cooperating with the investigation. A number of current and former officers and employees and outside directors have testified or may testify before the Securities and Exchange Commission's staff. The Company does not believe, based on current information, that this investigation will have a material adverse impact on the Company's financial statements. PATENT LITIGATION In January 1998, the Company brought a lawsuit in the U.S. District Court for the Eastern District of Virginia against Com21, Inc. and Celestica, Inc. in which the Company alleged that the defendants infringed the Company's patents. In response to the Company's lawsuit, Com21 initiated a declaratory judgment action six days later in the U.S. District Court for the Northern District of California to obtain a declaration that the Company's patents are invalid and unenforceable and that in any event Com21 did not infringe them. In February 1998, the action in the Eastern District of Virginia was transferred to the Northern District of California, and the two actions were consolidated. Pre-trial discovery continued in the consolidated action until September 1998 when the parties agreed to stay the proceedings while they attempted to reach a settlement. In January 1999, the Company entered into a settlement agreement with Com21, Inc. and Celestica, Inc. whereby the patent lawsuits were settled. Pursuant to the agreements, the Company 9 granted Com21 and Celestica a nonexclusive license on the Company's patents under which they may be required to pay royalties in the event that they sell certain products in the future, subject to certain contingencies, and the Company granted to Com21 a right of first refusal to purchase the patents in the event that the Company should propose in the future to sell its patents (whether separately or together with the Company's other assets to any third party). The Company has agreed to pay its legal counsel in this action, as a partial contingency fee (in return for such counsel's acceptance of reduced current legal fees), an amount equal to 50% of any royalties that the Company receives from its license with the defendants in the litigation (but not in excess of $3,000,000). To date, the Company has received virtually no royalties from the license. LAWSUIT BY PACIFIC MONOLITHICS In March 1999, Pacific Monolithics, Inc. (which had filed a voluntary petition under Chapter 11 of the U.S. Bankruptcy Code and is suing as debtor-in-possession) filed a lawsuit in Santa Clara County Superior Court, California against the Company, its five directors (one of whom is an officer), a former director (who was subsequently dismissed), a former officer and PwC. The lawsuit concerns an agreement which the Company entered into in March 1998 to acquire Pacific Monolithics through a merger, which acquisition was never consummated. The complaint alleges that the Company induced Pacific Monolithics to enter into the agreement by providing it with financial statements, and by making other representations concerning the Company's financial condition and results of operations, which were false and misleading, and further alleges that the Company wrongfully failed to consummate the acquisition. The complaint claims the defendants committed breach of contract and breach of implied covenant of good faith and fair dealing, as well as fraud and negligent misrepresentation. The complaint seeks compensatory and punitive damages according to proof, plus attorneys' fees and costs. The plaintiff has attempted to initiate discovery, which defendants have opposed on the basis that the plaintiff and the Company had agreed that any disputes would be submitted to arbitration. The defendants have filed a motion to compel arbitration and to stay the court action. The Company does not believe, based on current information (which is only preliminary, since discovery has not commenced in the litigation), that the outcome of this litigation will have a material adverse impact on the Company's financial statements. 10 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THE DISCUSSION IN THIS ITEM SHOULD BE READ IN CONJUNCTION WITH THE CONDENSED FINANCIAL STATEMENTS AND THE NOTES THERETO INCLUDED IN ITEM 1 OF THIS REPORT ON FORM 10-Q. THE DISCUSSION IN THIS ITEM CONTAINS FORWARD-LOOKING STATEMENTS RELATING TO FUTURE EVENTS OR FINANCIAL RESULTS, SUCH AS STATEMENTS INDICATING THAT "WE BELIEVE," "WE EXPECT," "WE ANTICIPATE" OR "WE INTEND" THAT CERTAIN EVENTS MAY OCCUR OR CERTAIN TRENDS MAY CONTINUE. OTHER FORWARD-LOOKING STATEMENTS INCLUDE STATEMENTS ABOUT THE FUTURE DEVELOPMENT OF PRODUCTS OR TECHNOLOGIES, MATTERS RELATING TO OUR PROPRIETARY RIGHTS, YEAR 2000 COMPLIANCE, FACILITIES NEEDS, OUR LIQUIDITY AND CAPITAL NEEDS AND OTHER STATEMENTS ABOUT FUTURE MATTERS. ALL THESE FORWARD-LOOKING STATEMENTS INVOLVE RISKS AND UNCERTAINTIES. YOU SHOULD NOT RELY TOO HEAVILY ON THESE STATEMENTS; ALTHOUGH THEY REFLECT THE GOOD FAITH JUDGMENT OF OUR MANAGEMENT, THEY INVOLVE FUTURE EVENTS THAT MIGHT NOT OCCUR. WE CAN ONLY BASE SUCH STATEMENTS ON FACTS AND FACTORS THAT WE CURRENTLY KNOW. OUR ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE IN THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF VARIOUS FACTORS, INCLUDING THOSE SET FORTH UNDER "RISK FACTORS" AND ELSEWHERE IN THIS REPORT ON FORM 10-Q. OVERVIEW GENERAL We are a broadband access equipment company that designs, develops, manufactures and markets wireless and cable systems that provide high speed access to the Internet and corporate intranets for both businesses and consumers. Our products remove the bottleneck over the local connection to the end-user which causes slow response time for those accessing bandwidth-intensive information. Our Series 2000 product line consists of secure headend routers, wireless and cable modems and management software for use with either wireless transmission or cable TV facilities. We sell our products primarily in the United States. Our customers include broadband wireless system operators, cable system operators, ISPs, resellers and certain distributors and communications equipment resellers. Historically, a small number of customers has accounted for a substantial portion of our net sales, and we expect the trend to continue. As a result, we have experienced, and expect to continue to experience, significant fluctuations in our results of operations on a quarterly and an annual basis. The sales cycle for our products has been lengthy, generally lasting three to nine months, and is subject to a number of significant risks, including customers' budgetary constraints and internal acceptance reviews. Because our sales cycle may be long and uncertain, and because we depend on relatively few customers who place relatively large orders, any delay or loss of an order that is expected to be received in a quarter can have a major effect on our sales and operating results for that quarter. The same is true of any failure of a customer to pay for products on a timely basis. The market for high speed network connectivity products and services is intensely competitive and is characterized by rapid technological change, new product development and product obsolescence, and evolving industry standards. Our ability to develop and offer competitive products 11 on a timely basis that satisfy industry demands, such as for two-way QPSK, or industry standards such as DOCSIS, could have a material effect on our business. In addition, the market for our products has historically experienced significant price erosion over the life of a product, and we have experienced and expect to continue to experience pressure on our unit average selling prices. While we have initiated cost reduction programs to offset pricing pressures on our products, there can be no assurance that we will keep pace with competitive price pressures or improve our gross margins. If we are unable to continue to reduce costs quickly enough, our profitability will be adversely affected. Our profitability is also affected by the sales mix of headends and modems. Our single-user modems generally have lower margins than our multi-user modems, both of which have lower margins than our headend routers. Due to current customer demand, we anticipate that the sales mix of modems will be weighted toward lower-margin single-user modems in the foreseeable future. As a result, our gross margins, and our business, could be adversely affected. Due to our diminishing capital resources (See "Liquidity and Capital Resources"), during the first quarter of 1999 we reduced our expenditures for research and development and sales and marketing. In February 1999, we implemented a reduction in force. As of April 30, 1999, the number of our full-time employees had been reduced to 32, from 87 full-time employees at December 31, 1998 RESTATEMENT OF OUR FINANCIAL STATEMENTS In May and June 1998, we and PwC, our independent auditors, engaged in a review of our financial statements for 1997 and the first quarter of 1998. On June 18, 1998, we announced that PwC had notified us that its audit reports on our 1997 financial statements should no longer be relied upon and that we and they were continuing to review those financial statements. On July 9, 1998, PwC resigned as our independent auditors, stating that it believed our 1997 financial statements should be restated but that, although there had been no disagreements between PwC and us on any matter of our accounting principles, practices, financial statement disclosure or auditing procedure, PwC would not continue as our independent auditors to address the restatement. In August 1998, we retained Arthur Andersen LLP ("AA") as our independent auditors. After extensive work in examining our 1997 financial statements, AA resigned as our independent auditors on November 24, 1998. AA informed us that, in its view, material weaknesses existed in our internal controls of a nature that prevented AA from being able to form an opinion on our conclusions as to the appropriate timing and amount of revenue recognition for the purposes of our 1997 financial statements. AA also stated that, during the course of its work, it had reached the conclusion that it needed to expand significantly the scope of its audit, which it did with our approval and cooperation, and that, while AA did not complete its audit, it concluded that our 1997 financial statements were materially misstated. AA confirmed that there had been no disagreements between AA and us on any matter of our accounting principles and practices, financial statement disclosure or auditing procedure. In December 1998, we engaged Hein + Associates LLP ("Hein") as our independent auditors. During the review of our financial statements in conjunction with Hein (and earlier with PwC and AA), we became aware of errors and irregularities that caused our financial statements for 1997 and the first quarter of 1998 to be misstated, particularly with respect to the timing and amount of our sales in 1997 and the first quarter of 1998. We also concluded that the financial effects of warrants issued by us in 1997 had not been properly reflected in our financial statements. Our financial statements for 1997 and the first quarter of 1998 have been restated to correct these errors. As a result of the restatement, net sales for the first quarter of 1998 was increased from $915,000 to $2,706,000, gross loss was $632,000 rather than a gross loss of $266,000, and net loss was reduced to $4,834,000 from $5,224,000. In June 1999, Hein completed its audit of our 1997 and 1998 financial statements. Those financial statements, and Hein's audit report on them are included in the report on Form 10-K for 1998. 12 Our inability to issue audited financial statements and quarterly reports during the last 12 months has had serious consequences for our business. As a result, the Nasdaq National Market suspended trading in our Common Stock from June 18, 1998 to December 1, 1998, at which time our Common Stock was delisted from the Nasdaq National Market. Primarily due to our announcements regarding the need to restate our financial statements, a number of class action litigations were brought in June, July and August 1998, and the Securities and Exchange Commission initiated a formal investigation in October 1998. We believe these actions hurt our business during the latter part of 1998, made it more difficult for us to attract and retain employees, disrupted our management, sales and marketing, engineering and research and development staffs, contributed to our inability to complete the restatement of our financial statements during 1998 and 1999 and adversely affected the sales of our products and services. RESULTS OF OPERATIONS The following table sets forth the percentage of net sales represented by the items in our statements of operations for the periods indicated:
Three Months Ended March 31, ------------------------ 1999 1998 ------------------------ Net Sales 100.0% 100.0% Cost of sales 103.4% 123.4% ----------- ----------- Gross margin -3.4% -23.4% ----------- ----------- Operating expenses Research and development 33.5% 92.3% Sales and marketing 15.0% 35.2% General and administrative 22.1% 34.3% ----------- ----------- Total operating expenses 70.6% 161.8% ----------- ----------- Loss from operations -74.0% -185.2% Interest income and other expense, net 0.1% 14.9% Interest expense -5.0% -8.3% ----------- ----------- Net loss -78.9% -178.6% =========== ===========
NET SALES. Our net sales increased by 52% to $4,123,000 for the quarter ended March 31, 1999 from $2,706,000 for the quarter ended March 31, 1998. The increase is due to increased shipments to customers and to an increase in average selling prices for modems. For the three months ended March 31, 1999, broadband wireless systems operators, cable system operators and ISPs accounted for 43%, 39% and 18% of net sales, respectively. During the same period in 1998, ISPs accounted for 5% of net sales, broadband wireless system operators accounted for 52% of net sales and cable system operators accounted for 43% of net sales. There were no international sales in the first quarter of 1999 or 1998. The Company had four customers that accounted for 20%, 19%, 17% and 10% of net sales during the first quarter of 1999. The Company had three customers that accounted for 25%, 16% and 11% of net sales during the first quarter of 1998. 13 GROSS MARGIN. Gross margin was a negative 3.4% and a negative 23.4% of net sales for the quarters ended March 31, 1999 and 1998, respectively. The improved gross margin was primarily a result of the aforementioned increase in average selling prices. 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 manufacturability of its existing products. Research and development expenses decreased 45% to $1,379,000 for the quarter ended March 31, 1999 from $2,498,000 for the quarter ended March 31, 1998. Research and development expenses as a percentage of net sales were 33.5% and 92.3% for the first quarters of 1999 and 1998, respectively. Research and development expenses decreased primarily due to reduced employee headcount and related expenses. 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 decreased 35% to $618,000 for the quarter ended March 31, 1999 from $954,000 for the quarter ended March 31, 1998. Sales and marketing expenses as a percentage of net sales were 15.0% and 35.2% for the first quarters of 1999 and 1998, respectively. Sales and marketing expenses decreased primarily due to reduced employee headcount and related expenses and refocus of the business to wireless products. GENERAL AND ADMINISTRATIVE. General and administrative expenses consist primarily of executive personnel salaries, provision for doubtful accounts, travel expenses, legal fees and costs of outside services. General and administrative expenses decreased 2% to $912,000 for the quarter ended March 31, 1999 from $928,000 for the quarter ended March 31, 1998. General and administrative expenses as a percentage of net sales were 22.1% and 34.3% for the first quarters of 1999 and 1998, respectively. The general and administrative expenses remained relatively constant as we were working on getting our financial statements audited and settling the class action litigation. INTEREST INCOME (EXPENSE) AND OTHER EXPENSE, NET. We incurred net interest expense of $203,000 and earned net interest income of $178,000 during the three months ended March 31, 1999 and 1998, respectively. In 1998, we earned $402,000 in interest income against $5,000 in 1999 due to reduced average cash balances. LIQUIDITY AND CAPITAL RESOURCES We have historically financed our operations primarily through a combination of debt, equity and equipment lease financing. Despite our initial public offering in November 1997 and other debt and equity financing during 1997 in which we raised $42,507,000 in net proceeds, by March 31, 1999, our cash and cash equivalents had been reduced to $2,837,000 (from $27,148,000 as of December 31, 1997 and $3,451,000 as of December 31, 1998), our working capital was negative $3,795,000 and we were (and continue to be) in default under the terms of the $5.5 million debenture. Net cash used in operating activities was $487,000 and $7,416,000 during the first quarters of 1999 and 1998, respectively. The net cash used in operating activities in the first quarter of 1999 was primarily due to our net loss of $3,253,000, partially offset by a reduction in inventories of $2,160,000, a decrease in other net current assets related to operating activities, and non-cash charges. Net cash used in operations in the first quarter of 1998 was primarily the result of our net loss of $4,834,000 and an increase of $3,440,000 in net current assets related to operating activities, partially offset by non-cash charges of $858,000. There were substantially no investing activities during the first quarter of 1999. Net cash used in investing activities was $11,826,000 in the first quarter of 1998, primarily as a result of the purchases of short-term investments of $11,772,000. We have funded a substantial portion of our property and equipment expenditures from direct vendor leasing programs and third party 14 commercial lease arrangements. At March 31, 1999, we had no material commitments for capital expenditures. Net cash used by financing activities of $127,000 and $80,000 in the first quarters of 1999 and 1998, respectively, was primarily the result of repayment of capital lease obligations, partially offset by net proceeds from issuance of common stock, in each of these periods. At March 31, 1999, our only source of liquidity consisted of cash and cash equivalents of $2,837,000. We had no available line of credit or other source of borrowings or financing. As indicated above, we were (and are) not in compliance with certain of the terms of the $5.5 Million Debenture and, as a result, the holder of the debenture has the right to declare a default under the debenture at any time. Our obligations under the $5.5 Million Debenture are collateralized by a security interest in substantially all our assets. We will need to raise additional capital promptly in order to offset our expected future operating losses. To fund our operations during 1999 and continue as a going concern, we are seeking to raise additional capital through debt or equity financing, but there is no assurance that we will be able to do so. If we do obtain additional financing, it may be on terms that would be unfavorable to us and may hurt our ability to raise further capital in the future. SEASONALITY AND INFLATION The Company does not believe that its business is seasonal or that it is impacted by inflation. RISK FACTORS AN INVESTMENT IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD CAREFULLY CONSIDER THE RISKS DESCRIBED BELOW AND THE OTHER INFORMATION IN THIS REPORT ON FORM 10-Q BEFORE INVESTING IN OUR COMMON STOCK. THE RISKS DESCRIBED BELOW ARE NOT THE ONLY ONES WE FACE. ADDITIONAL RISKS THAT WE ARE AWARE OF OR THAT WE CURRENTLY BELIEVE ARE IMMATERIAL MAY BECOME IMPORTANT FACTORS THAT AFFECT OUR BUSINESS. IF ANY OF THE FOLLOWING RISKS OCCUR, OR IF OTHERS OCCUR, OUR BUSINESS, OPERATING RESULTS AND FINANCIAL CONDITION COULD BE SERIOUSLY HARMED. WE WILL NEED ADDITIONAL CAPITAL SOON TO CONTINUE IN BUSINESS. Although we raised over $35 million in net proceeds from our initial public offering in November 1997, our capital resources are now largely depleted. We are not in compliance with certain terms of the $5.5 Million Debenture, and, as a result, the holder of the debenture may declare a default under the debenture at any time. We currently do not have the capital resources to make such payment. Should we fail to make payment on demand, the debenture holder may elect, subject to certain restrictions and limitations, to exercise its security interest in all our assets, which may involve the seizure and sale of our assets. We will nonetheless need to raise additional capital in order to continue in operation. Our ability to raise additional capital has been limited by a number of factors, including (i) our noncompliance with certain terms of the $5.5 Million Debenture, (ii) our not having audited financial statements for 1997 or 1998 or quarterly reports for the second and third quarter of 1999 and the first quarter of 1999, (iii) our Common Stock being delisted from the Nasdaq National Market and not traded on any other public market (except for a small number of sales on the Pink Sheets which have occurred without our consent), (iv) the state and federal class action litigation and the Securities and Exchange Commission investigation that are pending against us (although we have agreed in principle to settle the class action litigation, that agreement is not yet final), (v) uncertainty which the foregoing has caused regarding our financial condition and results of operations, (vi) the adverse effect which the foregoing has had on sales to our customers, (vii) the disruption in our management and our employees caused by the foregoing, including the substantial reduction in force we implemented in February 1999, (viii) our history of heavy losses and (ix) the other risk factors referred to herein. We can give no assurance that, within a short period of time, we will be able to raise the additional capital we need or that any financing we may be able to obtain will not be on terms that are detrimental to our business and our ability to raise additional capital. 15 IT IS NOT CLEAR THAT WE WILL BE ABLE TO RECOVER FROM THE ADVERSE EFFECTS OF HAVING TO RESTATE OUR FINANCIAL STATEMENTS. The adverse effects of having to restate our financial statements have been severe, and there can be no assurance that we will not suffer additional adverse consequences in the future. The restatement and related issues have resulted in the resignation of two successive audit firms that were hired by us, in our continuing for 12 months as a public company without having audited financial statements, in the multiple class action lawsuits, the Securities and Exchange Commission and the Pacific Monolithics litigation referred to in Item 3 "Legal Proceedings" above and in the other adverse consequences referred to in the preceding paragraph. We do not know whether additional litigation will arise in the future, or whether other adverse developments will result, from the difficulties we have encountered in connection with our financial statements. OUR LIMITED OPERATING HISTORY AND HEAVY LOSSES MAKE OUR BUSINESS DIFFICULT TO EVALUATE. We were organized in 1990 and have had operating losses each year since then. Our accumulated deficit was $66,822,000 as of March 31, 1999 and $63,569,000 as of December 31, 1998. The revenue and profit potential of our business is unproven. The market for our products has only recently begun to develop, is rapidly changing, has an increasing number of competing technologies and competitors, and many of the competitors are significantly larger than we are. We have had negative gross margins in the past and the price pressures on sales of our products continues. We expect to incur losses for the foreseeable future. WE FACE LITIGATION RISKS. As indicated in Item 1 "Legal Proceedings," there are a number of lawsuits pending against us. The principal lawsuits are the class action lawsuits referred to therein. Although we have reached an agreement in principle to settle these lawsuits, the agreement is subject to the parties' entering into a binding stipulation of settlement, which has not yet occurred, and upon the subsequent approval of the settlement by the court in a hearing at which any persons opposing the settlement will have an opportunity to be heard. If the settlement is not consummated, we could be subjected to lengthy, expensive and potentially damaging class action litigation. It is difficult for us to evaluate what the outcome of the Securities and Exchange Commission investigation (referred to in Item 1 "Legal Proceedings") will be. Responding to the investigation has been, and probably will be, expensive and time-consuming for us. We do not know whether the results of the investigation will be damaging for us. The Pacific Monolithics litigation referred to in Item 1 "Legal Proceedings" is in its early stages and is difficult for us to evaluate at this point. It is possible that we may be exposed to further litigation in the future, particularly in light of the restatement of our financial statements, and the adverse developments that have occurred partly as a result of the restatement (see the two risk factors immediately above). In addition, litigation may be necessary in the future to enforce our intellectual property rights or to determine the validity and scope of our patents or of the proprietary rights of others. Such litigation might result in substantial costs and diversion of resources and management attention. Furthermore, our business activities may infringe upon the proprietary rights of others, and in the past third parties have claimed, and may in the future claim, infringement by our software or products. Any such claims, with or without merit, could result in significant litigation costs and diversion of management attention, and could require us to enter into royalty and license agreements that may be disadvantageous to us or suffer other harm to our business. If litigation is successful against us, it could result in invalidation of our proprietary rights and liability for damages, which could have a harmful effect on our business. We initiated one patent infringement litigation to enforce our patent rights, and it resulted in a settlement in which we granted licenses to the defendants containing terms that are in some respects favorable to them, including a right of first refusal to purchase our patents that we granted to one defendant (Com21, Inc.) in the event that we propose in the future to sell our patents (whether 16 we separately or together with our other assets) to any third party. (See Item 1 "Legal Proceedings.") Nonetheless, we may find it necessary to institute further infringement litigation in the future, or whether third parties will bring litigation against us challenging our patents. RECENT REDUCTIONS IN OUR EXPENDITURES AND IN THE NUMBER OF OUR EMPLOYEES COULD HURT OUR BUSINESS. Commencing in the latter part of 1998 and continuing through the first quarter of 1999, we began to reduce our expenditures on research and development and on other aspects of our business. We also began to reduce the number of our employees. During the first quarter of 1999 we implemented a reduction in force that reduced the number of full-time employees to 32, as compared to 87 full-time employees at December 31, 1998. We used consultants heavily to supplement our workforce and as of April 30, 1999 we had 14 consultants in various areas. While we believe these reductions were necessary to conserve our remaining capital resources, they have limited and delayed the enhancement of our products and our development of new products, and our sales and marketing efforts have been adversely affected. These limitations on our activities, (together with the other factors referred to above and elsewhere herein), have hurt us competitively and may continue to harm our business in the future. We do not know whether we will be successful in obtaining sufficient capital resources to expand our business in the future. MARKET PRESSURE TO REDUCE PRICES MAY HURT OUR BUSINESS. The market has historically demanded increasingly lower prices for our products, and we expect downward pressure on the prices of our products to continue. The list prices for our Series 2000 client modems currently range from approximately $320 to $480, depending upon features and volume. Customers wishing to purchase client modems generally must also purchase an Ethernet adapter for their computer. These prices make our products relatively expensive for the consumer electronics and the small office or home office markets. Market acceptance of our products, and our future success, will depend in significant part on reductions in the unit cost of our client modems. In a number of instances, the prices of our competitors' products are lower than ours. Our ability to reduce our prices has been limited by a number of factors, including our reliance on a single manufacturer of our modems and on single-sources for certain of the components of our products. One of the principal objectives of our research and development efforts has been to reduce the cost of our products through design and engineering changes, although, as indicated above, we have recently had to reduce the scope of our research and development efforts due to lack of capital resources. We have no assurance that we will be able to redesign our products to achieve substantial cost reductions or that we will otherwise be able to reduce our manufacturing and other costs, or that any reductions in cost will be sufficient to improve our gross margins, which have historically been negative. We expect that the market price pressure to reduce the prices on our products will continue to exert downward pressure on our gross margins. Our gross margins are also affected by the sales mix of our headends and modems. Our single-user modems generally have lower margins than our multi-user modems, both of which have lower margins than our headends. We anticipate that, due to customer demand, the sales mix of our products will continue to be weighted toward lower-margin single-user modems. WE RELY ON A SINGLE MANUFACTURER FOR OUR MODEMS AND ON SINGLE-SOURCE COMPONENTS. Our Series 2000 client modems are manufactured by Sharp Corporation through an agreement we have had since early 1997 with Sharp and its distributor, Itochu Corporation. We have not developed an alternative manufacturing source. Our inability to develop alternative manufacturing sources has adversely affected our ability to reduce the manufacturing costs of our modems despite competitive pressures that have caused us to reduce our selling prices. We expect downward pressure on the prices of our products to continue. In order for us to compete effectively in the sale of 17 modems, we will need to reduce our prices, and the underlying costs, of our modems. As long as Sharp is the only manufacturing source of our modems, our ability to reduce the manufacturing costs of our modems may be limited. We are dependent upon certain key suppliers for a number of the components for our 64QAM products. For example, we have only one vendor, BroadCom Corporation, for the 64QAM demodulator semiconductors that are used in our client modem products, and in past periods these semiconductors have been in short supply. In 1997, BroadCom announced a program whereby certain of its technological and product enhancements may be made available to certain of our competitors before making them available to us, thereby giving us a competitive disadvantage. Hitachi is the sole supplier of the processors used in certain of our modems. Stanford Telecom, which is a competitor for at least one of our broadband wireless products, is currently the sole supplier for certain components used in our products and has indicated that they might stop supplying these components to us, although it has not yet done so. There can be no assurance that these and other single-source components will continue to be available to us, or that deliveries of them to us will not be interrupted or delayed (due to shortages or other factors). Having single-source components also makes it more difficult for us to reduce our cost for these components and makes us vulnerable to price increases by the component manufacturer. Any significant interruption or delay in the supply of components for our products or any increase in the costs for components, or our inability to reduce component costs, could hurt our business. WE ARE IN AN INTENSELY COMPETITIVE MARKET, AND WE COMPETE WITH MUCH LARGER COMPANIES. Our market is intensely competitive, and we expect even more competition in the future. The principal competitive factors in this market include: - - product performance and features including both downstream and upstream transmission capabilities, - - reliability and stability of operation, - - breadth of product line, - - sales and distribution capability, - - technical support and service, - - relationships with cable and broadband wireless system operators and ISPs, - - meeting standards compliance and - - general industry and economic conditions. While we believe our products and services are competitive with or superior to those of our competitors, we have been hampered by a lack of resources, by disruptions resulting from management and personnel changes, by uncertainties caused by our financial reporting difficulties referred to at the beginning of this report, and by our competitors having established relationships with principal cable companies, wireless operators, and ISPs, including @Home. Although our products have been particularly well received in the broadband wireless market, financial difficulties among our wireless customers have limited our sales to and collections from these customers until recently. In addition, conditions in our market could change rapidly and significantly as a result of technological changes, and the development and market acceptance of alternative technologies could decrease the demand for our products or render them obsolete. Similarly, the continued emergence or evolution of industry standards or specifications may put us at a disadvantage in relation to its competitors. There can be no assurance that we will be able to compete successfully in the future. In general, our competitors are producers of asymmetric cable modems and other types of cable modems and other broadband access products. Most of our competitors are substantially larger and have greater financial, technical, marketing, distribution, customer support and other resources, as well as greater name recognition and access to customers, than we have. Many of our competitors 18 are in a better position to withstand any significant reduction in capital spending by cable or broadband wireless system operators. CABLE MODEM COMPETITORS. Our competitors in the cable modem market include Cisco Systems, Com21, Terayon, Nortel Networks, Motorola, General Instrument and 3Com and its subsidiary U.S. Robotics. Other cable modem competitors include Phasecom, Scientific-Atlanta, Toshiba and Zenith Electronics, as well as a number of smaller, more specialized companies. Certain competitors have established relationships in the cable industry and with @Home, which is the ISP for a number of major cable operators, and have more experience than we have in selling two-way cable transmission products. Some of these competitors have entered into partnerships with computer networking companies and with @Home that may give such competitors greater visibility in this market. A number of competitors have already introduced or announced high speed connectivity products that are priced lower than ours, and certain other competitors are more focused on and experienced in selling and marketing two-way cable transmission products. Certain of our competitors have established relationships with cable system operators and telephone companies ("telcos"), and ISPs, including @Home, and, based on these relationships, may have more direct access to the decision-makers of such cable system operators and telcos. In addition, we could face potential competition from certain of our suppliers, such as Sharp, if it were to launch or license competitive modems for sale to others. The adoption of the DOCSIS cable standard by large cable operators has adversely affected our ability to sell to cable customers, particularly new customers. Further, our products are not compatible with headend equipment and modems of other suppliers of broadband Internet access products, including DOCSIS products, and, as a result, potential customers who wish to purchase broadband Internet access products from multiple suppliers may be reluctant to purchase our products. WIRELESS CABLE COMPETITORS. Our principal competitors in the wireless broadband wireless market include Nortel Networks (which is active in Canada), Cisco Systems (which has proprietary products under development due to its acquisition of Clarity Wireless, Inc.), COM21 (which is attempting to adapt its proprietary cable systems for wireless), Phasecom and other vendors that may be attracted by recent investments by MCI Worldcom and Sprint in wireless operations. Stanford Telecommunications (which manufactures QPSK products) is providing wireless Internet connectivity over LMDS frequencies and has added telephone service, which is potentially attractive to new operators. Stanford Telecom is the sole supplier for certain components used in our products and has indicated that they might stop shipping these components to us. Our products have been more widely accepted in the broadband wireless market than in the cable market partly because the adoption of the DOCSIS standard has not had a significant effect on wireless customers. We believe that products meeting the present DOCSIS standard will not perform well over wireless. This belief is based on the performance of the adaptive equalizer in the modem in the presence of multiple signals, the power required from the transceiver in the return path and the probable disruption of the TDMA return path in the presence of noise or multi-path propagation. However, there can be no assurance that improvements in integrated circuit technology, transceiver output power levels or changes in the DOCSIS TDMA protocol will not allow systems developed for cable to perform effectively over wireless. One of the DOCSIS compliant vendors might also modify the DOCSIS equipment to a proprietary non-standard form to work over wireless. OTHER COMPETITION. Broadband wireless and cable 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. Market acceptance of xDSL, or other wired technologies such as ISDN, or satellite technologies, such as DBS, could decrease the demand for our products. Recently, several companies, including Compaq, Intel, Microsoft, 3Com, Alcatel, Lucent, several RBOCs, MCI and others announced the formation of a group focused on accelerating the pace of ADSL service. Further, if any competing architecture or technology were to limit or halt the deployment of coaxial or HFC systems, our business could be materially adversely affected. 19 To be successful, we must respond promptly and effectively to the challenges of new competitive products and tactics, alternate technologies, technological changes and evolving industry standards. We must continue to develop products with improved performance over two-way wireless transmission facilities. There can be no assurance that we will meet these challenges. EVOLVING INDUSTRY STANDARDS, COMPETING TECHNOLOGIES AND TECHNOLOGICAL CHANGES MAY HURT OUR BUSINESS. Our products are not in compliance with the DOCSIS standard that has been adopted by a number of large cable operators, and this has adversely affected our ability to sell to cable customers, particularly new customers. Further, our products are not compatible with headend equipment and modems of other suppliers of broadband Internet access products, including DOCSIS products, and, as a result, potential customers who wish to purchase broadband Internet access products from multiple suppliers may be reluctant to purchase our products. Our products are not in compliance with the DAVIC specifications that are supported in Europe. The emergence of these standards has hurt our business, and the adoption of other industry standards in the future could have a further adverse effect. There are a number of competing technologies for providing high speed internet access. Alternative high speed connectivity technologies include wired technologies such as xDSL and ISDN. As indicated in "Competition" above, several large companies have announced the formation of a group to accelerate the pace of ADSL service. To the extent that customers view these or other alternative technologies as providing faster access or greater reliability or cost-effectiveness, sales of our products would be adversely affected. The market for high speed Internet access products is characterized by rapidly changing technologies and short product life cycles. The rapid development of new competing technologies increases the risk that the competitiveness of our products could be adversely affected. Future advances in technology may not be beneficial to, or compatible with, our business and products, and we might not be able to respond to the advances, or our response might not be timely or cost-effective. Market acceptance of new technologies and our failure to develop and introduce new products and enhancements to keep pace with technological developments could hurt our business. OUR MARKET IS NEW AND DEVELOPING, AND WE MUST DEPEND UPON CABLE AND WIRELESS OPERATORS. The market for broadband Internet access products has only recently begun to develop and is characterized by an increasing number of market entrants and competing technologies. Our success will depend primarily on our ability to sell our cable and wireless modem systems to cable system operators and broadband system operators and on their sales of our client modems to end-users. In selling to cable system operators, we face a number of difficulties. Our products are not in compliance with the DOCSIS standard that has been adopted by a number of large cable operators and which is preferred by @Home, which has adversely affected our sales. Also, our products are not compatible with the headend equipment or modems of other suppliers. Many cable system operators and their customers may be reluctant to adopt and commit to a technology such as ours which has not gained wide acceptance among their industry peers. Certain of our competitors have already established relationships in the cable market and with @Home, further limiting our ability to sell products to penetrate the market. The cable industry has undergone evolution and reorganization, which has adversely affected certain of our customer relationships. Moreover, the extent to which (and the manner in which) cable system operators will commit to providing broadband Internet access remains uncertain. 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. Cable service operators have little experience in providing Internet networks or launching, marketing and supporting Internet services, and providing such services will involve 20 substantial capital expenditures. To the extent that cable service operators elect to provide Internet access, there is no assurance that they will choose to do so through our cable modem systems. We have become increasingly dependent on sales to broadband wireless system operators and distributors. Our net sales to customers in the broadband wireless industry increased from $2.4 million in 1997 to $4.7 million in 1998. The adoption of the DOCSIS standard, which has adversely affected our sales to cable system operators, has not had a significant effect on wireless customers. We believe that products meeting the present DOCSIS standard will not perform well over wireless, but this could change in the future as a result of modifications in the DOCSIS TDMA protocol, improvements in technology or other developments. 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. The weak financial condition of many wireless customers has adversely affected our sales to these customers and their ability to pay for the products we have shipped to them. 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 and the installation of an antenna at the customer premises. 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. We estimate that there were only approximately 1.0 million wireless video cable customers in the United States as of March 1998. In addition, current technical and legislative restrictions have limited the number of analog channels that wireless cable companies can offer in the most commonly used frequency bands 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 digital TV and/or Internet access to create new revenue streams. To the extent that such operators choose to invest in digital TV, such decisions will limit the amount of capital available for investment in deploying other services, such as Internet access. To the extent wireless operators choose to provide Internet access, there is no assurance that they will not select technologies other than our high speed modem system to do so (such as Internet plus telephony, or new equipment standards such as DOCSIS with which our products are not compatible). Moreover, 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. While many broadband wireless system operators are currently utilizing telephone return for upstream data transmission, we believe that wireless operators will demand two-way wireless transmission as more of these entities obtain licenses for additional frequencies under the new FCC two-way authorization for MMDS frequencies released in September 1998. Currently, we are attempting to refine our products so as to satisfy the two-way transmission needs of broadband wireless system operators, and our customers have six headend installations in place to do this. But, there can be no assurance that we or our customers will be successful in our efforts to make this a commercially viable alternative to two-way cable. The failure of our products to gain market acceptance would hurt our business. WE DEPEND UPON A SMALL NUMBER OF CUSTOMERS. A small number of customers has accounted for a large portion of our net sales, and we expect this trend to continue. Our headend equipment and modems do not operate with other companies' headend equipment or modems, and, as a result, we are typically the sole source provider to our customers. In the first quarter of 1999, RCN Corporation, PCTV-Speedchoice, Bay Area Cable and Knology holdings accounted for 20%, 19%, 17% and 10% of our net sales, respectively. In 1998, RCN Corporation and Knology Holdings, Inc. accounted for 25% and 13% of our net sales, respectively. In 1997, RCN Corporation and Jones Intercable accounted for 13% and 12% of our net sales, respectively. The fact that our customer base is highly concentrated increases our risk of loss as a result of the loss of any of our principal customers. In 1998, Jones Intercable was sold to Comcast and ceased purchasing our products, which adversely affected our business. There is no assurance that RCN, Knology or our other principal customers will continue as our customers. The loss of either of these customers or any of our other principal customers would hurt our business. 21 THE SALES CYCLE FOR OUR PRODUCTS IS LENGTHY AND UNCERTAIN AND OUR OPERATING RESULTS FLUCTUATE WIDELY. The sale of our products typically involves a great deal of time and expense. Customers usually want to engage in significant technical evaluation before making a purchase commitment. There are often delays associated with customers' internal procedures to complete the evaluation and to approve the large capital expenditures that are typically involved in purchasing our products. The sales cycle for our products has been lengthy, generally lasting three to nine months, and is subject to a number of significant risks, including customers' budgetary constraints and internal acceptance reviews. Because our sales cycle may be long and uncertain, and because we depend on a relatively few customers who place relatively large orders, any delay or loss of an order that is expected to be received in a quarter can have a major effect on our sales and operating results for that quarter. The same is true of any failure of a customer to pay for products on a timely basis. These factors, together with the other factors referred to in this "Risk Factors" section, tend to cause our operating results to vary substantially from quarter to quarter. These fluctuations have adversely affected the prices of our Common Stock in the past and may adversely affect such prices in the future. WE DEPEND ON KEY PERSONNEL. Our success depends in significant part upon the continued services of our key technical, sales and management personnel. Any officer or employee can terminate his or her relationship with us at any time. Our future success will also depend on our ability to attract, train, retain and motivate highly qualified technical, marketing, sales and management personnel. Competition for such personnel is intense, and there can be no assurance that we will be able to attract and retain key personnel. The loss of the services of one or more of our key personnel or our failure to attract additional qualified personnel could have a material adverse effect on our business, operating results and financial condition. We carry a $1.5 million key-person life insurance policy on Mr. Ledbetter, our Chief Executive Officer. WE MAY BE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY. We rely on a combination of patent, trade secret, copyrights and trademark laws and contractual restrictions to establish and protect our intellectual property rights. We cannot assure you that our patents will cover all the aspects of our technology that require patent protection or that our patents will not be challenged or invalidated, or that the claims allowed in our patents will be of sufficient scope or strength to provide meaningful protection or commercial advantage to us. We have initiated one patent infringement lawsuit to enforce our patent rights, and it resulted in a settlement in which we granted licenses to the defendants containing certain terms that are in some respects favorable for them, including a right of first refusal to purchase our patents that we granted to one defendant (Com21, Inc.) in the event that in the future we propose to sell our patents (separately or together with our other assets) to any third party (See Item 1 "Legal Proceedings."). We do not know whether we will bring litigation in the future in an effort to assert our patent rights, or whether other companies will bring litigation challenging our patents. Any such litigation could be time consuming and costly for us and could result in our patents being held invalid or unenforceable. 22 Furthermore, even if the patents are upheld or are not challenged, third parties might be able to develop other technologies or products without infringing any such patents. We have entered into confidentiality and invention assignment agreements with our employees, and we enter into non-disclosure agreements with certain of our suppliers, distributors and customers, in order to limit access to and disclosure of our proprietary information. There can be no assurance that these contractual arrangements or the other steps we take to protect our intellectual property will prove sufficient to prevent misappropriation of our technology or deter independent third-party development of similar technologies. The laws of certain foreign countries may not protect our products or intellectual property rights to the same extent as do the laws of the United States. We have in the past, received, and may in the future receive, notices from third parties claiming that our products, software or asserted proprietary rights infringe the proprietary rights of third parties. We expect that developers of wireless and cable modems will be increasingly subject to infringement claims as the number of products and competitors in our market grows. While we are not currently subject to any such claim, any future claim, with or without merit, could be time consuming, result in costly litigation, cause product shipment delays or require us to enter into royalty or licensing agreements. Such royalty or licensing agreements might not be available on terms acceptable to us or at all. In the future, we may also file lawsuits to enforce our intellectual property rights, to protect our trade secrets or to determine the validity and scope of the proprietary rights of others. Such litigation, whether successful or not, could result in substantial costs and diversion of resources. As indicated above we were engaged during 1998 in an infringement lawsuit that we brought against two third parties. In 1999, in order to stop the diversion of resources caused by the litigation, we entered into a settlement pursuant to which the defendants obtained licenses to our products on terms that in certain respects were favorable to the defendants. (See "Patents" above and Item 1 "Legal Proceedings" below.) Nonetheless, we may find it necessary to institute further infringement litigation in the future. DEFECTS IN OUR PRODUCTS COULD CAUSE PRODUCT RETURNS AND PRODUCT LIABILITY. Products as complex as those offered by us frequently contain undetected errors, defects or failures, especially when first introduced or when new versions are released. In the past, such errors have occurred in our products and there can be no assurance that errors will not be found in our current and future products. The occurrence of such errors, defects or failures could result in product returns and other losses. They could also result in the loss of or delay in market acceptance of our products. GOVERNMENT REGULATION MAY ADVERSELY AFFECT OUR BUSINESS. We are subject to varying degrees of governmental, federal, state and local regulation. For instance, the jurisdiction of the FCC extends to high speed Internet access products such as ours. The FCC has promulgated regulations that, among other things, set installation and equipment standards for communications systems. Further, regulation of our customers may adversely affect our business. VOLATILITY OF OUR STOCK PRICE. Our Common Stock has been delisted from the Nasdaq National Market and has not traded on Nasdaq since mid-June 1998. Until the filing of this report, there has not been current information regarding our business and financial condition for over one year, and our previous financial statements have been restated. As a result, it is difficult to estimate based on current information what the price for our Common Stock will be if and when our stock is actively traded on a public market. In addition, the market price of our Common Stock has fluctuated in the past and is likely to fluctuate in the future. 23 INTERNATIONAL SALES COULD INVOLVE GREATER RISKS. To date, sales of our products outside of the United States have represented an insignificant portion of our net sales. To the extent that we sell our products internationally, such sales will be subject to a number of risks, including longer payment cycles, export and import restrictions, foreign regulatory requirements, greater difficulty in accounts receivable collection, potentially adverse tax consequences, currency fluctuations and political and economic instability. RISKS RELATED TO THE YEAR 2000 ISSUE. BACKGROUND. The "Year 2000 Issue" refers generally to the problems that some software, including firmware embedded in the Company's products, may have in determining the correct century for the year. For example, software with date-sensitive functions that is not Year 2000 compliant may not be able to distinguish whether "00" means 1900 or 2000, which may result in failures or the creation of erroneous results. OUR READINESS PLAN. We have developed a Year 2000 readiness plan for the current versions of our products. The plan includes development of corporate awareness, assessment, implementation (including remediation, upgrading and replacement of certain product versions), validation testing and contingency planning. We continue to respond to customer concerns about prior versions of our products on a case-by-case basis because we believe most products that could be affected have been withdrawn from service. We have largely completed our plan, except for contingency planning, with respect to the current versions of all of our products in an effort to assure that they are Year 2000 compliant. As a result of our readiness plan, substantially all of the current versions of each of our products currently offered for sale are Year 2000 compliant (with the exception of final quality assurance and customer network testing), when configured and used in accordance with the related documentation, and provided that the underlying operating system of the host machine and any other software used with or in the host machine or our products are also Year 2000 compliant. In some cases, our products require an upgrade which is either sold as a complete substitute or as a kit for in-service systems to be Year 2000 Compliant. We consider our products to be Year 2000 compliant if they have the ability to: (i) correctly handle date information needed for the December 31, 1999 to January 1, 2000 date change; (ii) function according to the product documentation provided for this date change without changes in operation resulting from the advent of a new century, assuming correct configuration; (iii) where appropriate, respond to two-digit date input in a way that resolves the ambiguity as to century in a disclosed, defined, and predetermined manner; and (iv) recognize year 2000 as a leap year. RISKS. Despite our testing and testing by our current customers, and any assurances from developers of products incorporated into our products, our products may contain undetected errors or defects associated with Year 2000 date functions. Also, certain prior versions of our products are not fully Year 2000 compliant and may remain in service. Known or unknown errors or defects in our products could result in delay or loss of revenue, diversion of development resources, damage to our reputation, or increased service and warranty costs, any of which could materially adversely affect our business. We do not currently have any information concerning the Year 2000 compliance status of our customers. If our customers suspend or defer investments in system enhancements or new products to address Year 2000 compliance problems, our business could be materially adversely affected. Some commentators have predicted significant litigation regarding Year 2000 compliance issues. Because this type of litigation lacks precedent, it is uncertain whether or to what extent we may be affected by it. We have an ongoing program in an effort to prevent any adverse effects caused by the Year 2000 Issue with regard to our mission critical internal information systems (including the third-party software for our management information systems, networks and desktop applications, and our 24 hardware telecommunications technology). We expect to complete this program before the end of 1999. COSTS. We have funded our Year 2000 efforts from operating cash. While we do not expect such costs to be material, additional costs will be incurred related to Year 2000 programs for administrative personnel to manage our readiness plans, technical support for our product engineering and customer satisfaction. Although we are not currently aware of any material operational issues or costs associated with preparing our internal information systems for the Year 2000, we may experience material unanticipated problems and costs caused by undetected errors or defects in the technology used in our information systems. We can give no assurance that other material problems and costs will not arise in connection with Year 2000 compliance or that these problems and costs will not adversely affect our business. CONTINGENCY PLANNING. We have not developed a comprehensive contingency plan to address situations that may result if we are unable to achieve Year 2000 readiness of our critical operations. The cost of developing and implementing such a plan may itself be material. We are also subject to external forces that might generally affect industry and commerce, such as utility or transportation company Year 2000 compliance failures and related service interruptions. Were we to experience an unanticipated Year 2000 interruption, business operations could be seriously impaired for an indefinite period of time until remedial efforts could be achieved. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Not applicable. 25 PART II. OTHER INFORMATION II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS CLASS ACTION LITIGATION In June 1998, five class action lawsuits were filed in San Mateo County Superior Court, California against us, our five directors (one of whom is an officer), two former officers and one former director. The lawsuits were brought on behalf of purchasers of our Common Stock during the class period commencing November 12, 1997 (the date of our initial public offering) and ending June 1, 1998. In July 1998, a sixth class action lawsuit was filed in the same court against the same defendants, although the class period was extended to June 18, 1998. All six lawsuits also named as defendants the underwriters in our initial public offering, but the underwriters have since been dismissed from the cases. The complaints in these lawsuits claim that we and the other defendants violated the anti-fraud provisions of the California securities laws, alleging that the financial statements we used in connection with our initial public offering and the financial statements we issued subsequently during the class period, as well as related statements made on our behalf during the initial public offering and subsequently regarding our past and prospective financial condition and results of operations, were false and misleading. The complaints also allege that we and the other defendants caused these misrepresentations to be made in order to inflate the price of our stock for the initial public offering and during the class period. We and the other defendants denied the charges of wrongdoing. In March 1999, the parties entered into an agreement in principle to settle these lawsuits, as indicated below. In July and August 1998, two class action lawsuits were filed in the U.S. District Court for the Northern District of California. Both of these federal class action lawsuits were brought against the same defendants as the six state court class actions referred to above, except that the second federal class action lawsuit also named as a defendant PwC, our former independent auditors. (The underwriters in our initial public offering were named as defendants in the first federal class action lawsuit but were subsequently dismissed.) The class period for the first federal class action lawsuit is from November 12, 1997 to June 1, 1998, and the class period in the second class action lawsuit extends to June 17, 1998. The complaints in both federal class action lawsuits claim that we and the other defendants violated the anti-fraud provisions of the federal securities laws, on the basis of allegations that are similar to those made by the plaintiffs in the state class action lawsuits. We and the other defendants denied these charges of wrongdoing. We believe that the state and federal class action lawsuits hurt our business during the latter part of 1998, made it more difficult for us to attract and retain employees, disrupted our management, sales and marketing, engineering and research and development staffs, contributed to our inability during the year to complete the restatement of our financial statements and adversely affected the sales of our products and services. In March 1999, we and the other parties to the state class action lawsuits and the federal class action lawsuits (other than PwC) reached an agreement in principle to settle the lawsuits. The agreement is subject to the parties' entering into a binding stipulation of settlement and approval by the U.S. District Court for the Northern District of California. Under the agreement in principle, (i) our insurers would pay $8.8 million on our behalf (and on behalf of the other officer and director defendants), (ii) we would issue 3.0 million shares of our Common Stock to the plaintiffs (the number of shares would be increased proportionately to the extent that there are more than 10.5 million shares of our Common Stock outstanding on the date of distribution so that, as of such date, the plaintiffs would hold approximately 22.6% of all of the shares of our Common Stock that are then outstanding), (iii) if we are acquired within nine months after March 9, 1999, the date of the 26 agreement in principle, then, in addition to the consideration referred to in (i) and (ii), we would pay to the plaintiffs an amount equal to 10% of the consideration received by our stockholders in the acquisition. As a result of the agreement in principle and a related agreement between us and our insurers, we have paid, and will not be reimbursed by our insurers for, $1.2 million in attorney's fees and other litigation expenses that would otherwise be covered by our insurance, and we will not have insurance coverage for the attorney's fees and expenses relating to the settlement that we incur in the future. SEC INVESTIGATION In October 1998, the Securities and Exchange Commission began a formal investigation of us and unidentified individuals with respect to our financial statements and public disclosures. We have been producing documents in response to the Securities and Exchange Commission's subpoena and are cooperating with the investigation. A number of current and former officers and employees and outside directors have testified or may testify before the Securities and Exchange Commission's staff. PATENT LITIGATION In January 1998, we brought a lawsuit in the U.S. District Court for the Eastern District of Virginia against Com21, Inc. and Celestica, Inc. in which we alleged that the defendants infringed our patents. In response to our lawsuit, Com21 initiated a declaratory judgment action six days later in the U.S. District Court for the Northern District of California to obtain a declaration that our patents are invalid and unenforceable and that in any event Com21 did not infringe them. In February 1998, the action in the Eastern District of Virginia was transferred to the Northern District of California, and the two actions were consolidated. Pre-trial discovery continued in the consolidated action until September 1998 when the parties agreed to stay the proceedings while they attempted to reach a settlement. In January 1999, the parties entered into a settlement agreement and the actions were dismissed. Pursuant to the settlement, we granted Com21 and Celestica a nonexclusive license on our patents under which they may be required to pay royalties in the event that they sell certain products in the future, subject to certain contingencies, and we granted Com21 a right of first refusal to purchase our patents in the event that we propose in the future to sell our patents (whether separately or together with our other assets) to any third party. We have agreed to pay our legal counsel in this action, as a partial contingency fee (in return for such counsel's acceptance of reduced current legal fees), an amount equal to 50% of any royalties that we receive from our license with the defendants in the litigation (but not in excess of $3,000,000). To date, we have received virtually no royalties from the license. LAWSUIT FILED BY PACIFIC MONOLITHICS In March 1999, Pacific Monolithics, Inc. (which had filed a voluntary petition under Chapter 11 of the U.S. Bankruptcy Code and is suing as debtor-in-possession) filed a lawsuit in Santa Clara County Superior Court, California against us, our five directors (one of whom is an officer), a former director (who was subsequently dismissed), a former officer and PwC. The lawsuit concerns an agreement which we entered into in March 1998 to acquire Pacific Monolithics through a merger, which acquisition was never consummated. The complaint alleges that we induced Pacific Monolithics to enter into the agreement by providing it with our financial statements, and by making other representations concerning our financial condition and results of operations, which were false and misleading, and further alleges that we wrongfully failed to consummate the acquisition. The complaint claims the defendants committed breach of contract and breach of the implied covenant of good faith and fair dealing, as well as fraud and negligent misrepresentation. The complaint seeks compensatory and punitive damages according to proof, plus attorneys' fees and costs. The plaintiff has attempted to initiate discovery, which defendants have opposed on the basis that the plaintiff and the Company had agreed that any disputes would be submitted to arbitration. The defendants have filed a motion to compel arbitration and to stay the court action. The Company does not believe, based on current information (which is only preliminary, since discovery has not commenced in the litigation), that the outcome of this litigation will have a material adverse impact on the Company's financial statements. 27 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits The following exhibits are filed as part of this report:
Exhibit No. Description of Exhibit ----------- ---------------------- 10.24 Registrant's 1999 Officer Stock Option Plan. (1) 10.28 Registrant's 1999 Stock option Plan. 10.29 Modification of Retention Bonus Agreements dated January 6, 1999 between the Registrant and (a) William M. Daniher, (b) Thara M. Edson, (c) Vishwas Godbole and (d) Jane Zeletes. (1) 10.30 Separation Agreement and General Release between the Registrant and William M. Daniher dated March 17, 1999. (1) 27.01 Financial Data Schedule. 27.02 Restated Financial Data Schedule for the First Quarter of 1998
- ---------------- (1) Represents a mangement contract or compensatory plan or arrangement. (b) Reports on Form 8-K No reports on Form 8-K were filed during the first quarter of 1999. 28 HYBRID NETWORKS, INC. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Date: June __, 1999 HYBRID NETWORKS, INC. /s/ Carl S. Ledbetter ---------------------------------- Carl S. Ledbetter Chief Executive Officer /s/ Judson W. Goldsmith ---------------------------------- Judson W. Goldsmith President and Chief Financial Officer (Principal Financial Officer) 29 EX-10.24 2 EXHIBIT 10.24 HYBRID NETWORKS, INC. 1999 OFFICER STOCK OPTION PLAN As Adopted January 26, 1999 1. PURPOSE. The purpose of this Plan is to provide incentives to attract, retain and motivate eligible persons whose present and potential contributions are important to the success of the Company by offering them an opportunity to participate in the Company's future performance through awards of Options. Capitalized terms not defined in the text are defined in Section 20 hereof. 2. SHARES SUBJECT TO THE PLAN. 2.1 NUMBER OF SHARES AVAILABLE. Subject to Sections 2.2 and 15 hereof, the total number of Shares reserved and available for grant and issuance pursuant to this Plan will be 1,000,000 Shares. Subject to Sections 2.2 and 15 hereof, Shares will again be available for grant and issuance in connection with future Awards under this Plan to the extent such Shares: (a) cease to be subject to issuance upon exercise of an Option, other than due to exercise of such Option; or (b) are subject to an Award that otherwise terminates without Shares being issued. At all times the Company will reserve and keep available a sufficient number of Shares as will be required to satisfy the requirements of all Awards granted under this Plan. 2.2 ADJUSTMENT OF SHARES. In the event that the number of outstanding shares of the Company's Common Stock is changed by a stock dividend, recapitalization, stock split, reverse stock split, subdivision, combination, reclassification or similar change in the capital structure of the Company without consideration, then (a) the number of Shares reserved for issuance under this Plan and (b) the Exercise Prices of and number of Shares subject to outstanding Options, subject to any required action by the Board or the stockholders of the Company and compliance with applicable securities laws; provided, however, that fractions of a Share will not be issued but will either be paid in cash at Fair Market Value of such fraction of a Share or will be rounded down to the nearest whole Share, as determined by the Committee. 3. ELIGIBILITY. Awards may be granted only to officers of the Company or of a Parent or Subsidiary of the Company. A person may be granted more than one Award under this Plan. 4. ADMINISTRATION. 4.1 COMMITTEE AUTHORITY. This Plan will be administered by the Committee or the Board acting as the Committee. Subject to the general purposes, terms and conditions of this Plan, and to the direction of the Board, the Committee will have full power to implement and carry out this Plan. Without limitation, the Committee will have the authority to: (a) construe and interpret this Plan, any Stock Option Agreement and any other agreement or document executed pursuant to this Plan; (b) prescribe, amend and rescind rules and regulations relating to this Plan or any Award; (c) select persons to receive Awards, (d) determine the form and terms of Awards; (e) determine the number of Shares or other consideration subject to Awards; (f) determine whether Awards will be granted singly, in combination with, in tandem with, in replacement of, or as alternatives to, other Awards under this Plan or awards under any other incentive or compensation plan of the Company or any Parent or Subsidiary of the Company; (g) grant waivers of Plan or Award conditions; (h) determine the vesting, exercisability and payment of Awards; (i) correct any defect, supply any omission, or reconcile any inconsistency in this Plan, any Award, any Stock Option Agreement or any Exercise Agreement; and (j) make all other determinations necessary or advisable for the administration of this Plan. 4.2 COMMITTEE DISCRETION. Any determination made by the Committee with respect to any Award will be made in its sole discretion at the time of grant of the Award or, unless in contravention of any express term of this Plan or Award, and subject to Section 5.8 hereof, at any later time, and such determination will be final and binding on the Company and on all persons having an interest in any Award under this Plan. The Committee may delegate to one or more officers of the Company the authority to grant an Award under this Plan. 5. OPTIONS. The Committee may grant Options to eligible persons and will determine whether such Options will be Incentive Stock Options within the meaning of the Code ("ISOS") or Nonqualified Stock Options ("NQSOS"), the number of Shares subject to the Option, the Exercise Price of the Option, the period during which the Option may be exercised and all other terms and conditions of the Option, subject to the following: 5.1 FORM OF OPTION GRANT. Each Option granted under this Plan will be evidenced by a Stock Option Agreement which will expressly identify the Option as an ISO or a NQSO and will be in such form and contain such provisions (which need not be the same for each Participant) as the Committee may from time to time approve, and which will comply with and be subject to the terms and conditions of this Plan. 5.2 DATE OF GRANT. The date of grant of an Option will be the date on which the Committee makes the determination to grant such Option, unless otherwise specified by the Committee. The Stock Option Agreement and a copy of this Plan will be delivered to the Participant within a reasonable time after the granting of the Option. 5.3 EXERCISE PERIOD. Options may be exercisable within the times or upon the events determined by the Committee as set forth in the Stock Option Agreement governing such Option; provided, however, that no Option will be exercisable after the expiration of ten years from the date the Option is granted and provided further that no ISO granted to a person who directly or by attribution owns more than 10% of the total combined voting power of all classes of stock of the Company or any Parent or Subsidiary of the Company ("TEN PERCENT STOCKHOLDER") will be exercisable after the expiration of five years from the date the ISO is granted. The Committee also may provide for Options to become exercisable at one time or from time to time, periodically or otherwise, in such number of Shares or percentage of Shares as the Committee determines. 5.4 EXERCISE PRICE. The Exercise Price of an Option will be determined by the Committee when the Option is granted and may not be less than 85% of the Fair Market Value of the Shares on the date of grant, provided that: (i) the Exercise Price of an ISO will not be less than 100% of the Fair Market Value of the Shares on the date of grant; and (ii) the Exercise Price of any ISO granted to a Ten Percent Stockholder will not be less than 110% of the Fair Market Value of the Shares on the date of grant. Payment for the Shares purchased must be made in accordance with Section 6 hereof. 5.5 METHOD OF EXERCISE. Options may be exercised only by delivery to the Company of a written stock option exercise agreement (the "EXERCISE AGREEMENT") in a form approved by the Committee (which need not be the same for each Participant), stating the number of Shares being purchased, the restrictions imposed on the Shares purchased under such Exercise Agreement, if any, and such representations and agreements regarding Participant's investment intent and access to information and other matters, if any, as may be required or desirable by the Company to comply with applicable securities laws, together with payment in full of the Exercise Price, and any applicable taxes, for the number of Shares being purchased. 5.6 TERMINATION. Subject to earlier termination pursuant to Section 15 hereof and notwithstanding the exercise periods set forth in the Stock Option Agreement, exercise of an Option will always be subject to the following: (a) If the Participant is Terminated for any reason except death, Disability or for Cause, then the Participant may exercise such Participant's Options only to the extent that such Options are exercisable upon the Termination Date and such Options must be exercised by the Participant, if at all, as to all or some of the Vested Shares calculated as of the Termination Date, within three months after the Termination Date (or within such shorter time period, not less than 30 days, or within such longer time period, not exceeding five years, as may be determined by the Committee, with any exercise beyond three months after the Termination Date deemed to be an ISO), but in any event no later than the expiration date of the Options. (b) If the Participant is Terminated because of Participant's death or Disability (or the Participant dies within three months after a Termination other than because of Participant's death or Disability), then Participant's Options may be exercised only to the extent that such Options would have been exercisable by Participant on the Termination Date and must be exercised by Participant (or Participant's legal representative or authorized assignee), no later than 12 months after the Termination Date (or within such shorter time period, not less than six months, or within such longer time period, not exceeding five years, as may be determined by the Committee, with any such exercise beyond (a) three months after the Termination Date when the Termination is for any reason other than the Participant's death or Disability or (b) 12 months after the Termination Date when the Termination is for the Participant's death or Disability, deemed to be an NQSO), but in any event no later than the expiration date of the Options. (c) Notwithstanding the provisions in paragraph 5.6(a) above, if a Participant is terminated for Cause, neither the Participant, the Participant's estate nor such other person who may then hold the Option shall be entitled to exercise any Option with respect to any Shares whatsoever, after termination of service, whether or not after termination of service the Participant may receive payment from the Company or Subsidiary for vacation pay, for services rendered prior to termination, for services rendered for the day on which termination occurs, for salary in lieu of notice, or for any other benefits. In making such determination, the Board shall give the Participant an opportunity to present to the Board evidence on his behalf. For the purpose of this paragraph, termination of service shall be deemed to occur on the date when the Company dispatches notice or advice to the Participant that his service is terminated. 5.7 LIMITATIONS ON EXERCISE. The Committee may specify a reasonable minimum number of Shares that may be purchased on any exercise of an Option, provided that such minimum number will not prevent Participant from exercising the Option for the full number of Shares for which it is then exercisable. 5.8 LIMITATIONS ON ISOS. The aggregate Fair Market Value (determined as of the date of grant) of Shares with respect to which ISOs are exercisable for the first time by a Participant during any calendar year (under this Plan or under any other incentive stock option plan of the Company, Parent or Subsidiary of the Company) will not exceed $100,000. If the Fair Market Value of Shares on the date of grant with respect to which ISOs are exercisable for the first time by a Participant during any calendar year exceeds $100,000, then the Options for the first $100,000 worth of Shares to become exercisable in such calendar year will be ISOs and the Options for the amount in excess of $100,000 that become exercisable in that calendar year will be NQSOs. In the event that the Code or the regulations promulgated thereunder are amended after the Effective Date of this Plan to provide for a different limit on the Fair Market Value of Shares permitted to be subject to ISOs, such different limit will be automatically incorporated herein and will apply to any Options granted after the effective date of such amendment. 5.9 MODIFICATION, EXTENSION OR REMOVAL. The Committee may modify, extend or renew outstanding Options and authorize the grant of new Options in substitution therefor, provided that any such action may not, without the written consent of a Participant, impair any of such Participant's rights under any Option previously granted. Any outstanding ISO that is modified, extended, renewed or otherwise altered will be treated in accordance with Section 424(h) of the Code. The Committee may reduce the Exercise Price of outstanding Options without the consent of Participants affected by a written notice to them; provided, however, that the Exercise Price may not be reduced below the minimum Exercise Price that would be permitted under Section 5.4 hereof for Options granted on the date the action is taken to reduce the Exercise Price. 5.10 NO DISQUALIFICATION. Notwithstanding any other provision in this Plan, no term of this Plan relating to an ISO will be interpreted, amended or altered, nor will any discretion or authority granted under this Plan be exercised, so as to disqualify this Plan under Section 422 of the Code or, without the consent of the Participant affected, to disqualify any ISO under Section 422 of the Code. 6. PAYMENT FOR SHARE PURCHASES. 6.1 PAYMENT. Payment for Shares purchased pursuant to this Plan may be made in cash (by check) or, where expressly approved for the Participant by the Committee and where permitted by law: (a) by cancellation of indebtedness of the Company to the Participant; (b) by surrender of shares that: (i) either (A) have been owned by Participant for more than six months and have been paid for within the meaning of SEC Rule 144 (and, if such shares were purchased from the Company by use of a promissory note, such note has been fully paid with respect to such shares) or (B) were obtained by Participant in the public market and (ii) are clear of all liens, claims, encumbrances or security interests. (c) by tender of a full recourse promissory note having such terms as may be approved by the Committee and bearing interest at a rate sufficient to avoid imputation of income under Sections 483 and 1274 of the Code; provided, however, that the portion of the Exercise Price equal to the par value of the Shares must be paid in cash or other legal consideration permitted by Delaware General Corporation Law; (d) by waiver of compensation due or accrued to the Participant for services rendered; (e) with respect only to purchases upon exercise of an Option, and provided that a public market for the Company's stock exists: (1) through a "same day sale" commitment from the Participant and a broker-dealer that is a member of the National Association of Securities Dealers (an "NASD DEALER") whereby the Participant irrevocably elects to exercise the Option and to sell a portion of the Shares so purchased to pay for the Exercise Price, and whereby the NASD Dealer irrevocably commits upon receipt of such Shares to forward the Exercise Price directly to the Company; or (2) through a "margin" commitment from the Participant and an NASD Dealer whereby the Participant irrevocably elects to exercise the Option and to pledge the Shares so purchased to the NASD Dealer in a margin account as security for a loan from the NASD Dealer in the amount of the Exercise Price, and whereby the NASD Dealer irrevocably commits upon receipt of such Shares to forward the Exercise Price directly to the Company; or (f) by any combination of the foregoing. 6.2 LOAN GUARANTEES. The Committee may help the Participant pay for Shares purchased under this Plan by authorizing a guarantee by the Company of a third-party loan to the Participant. 7. WITHHOLDING TAXES. 7.1 WITHHOLDING GENERALLY. Whenever Shares are to be issued in satisfaction of Awards granted under this Plan, the Company may require the Participant to remit to the Company an amount sufficient to satisfy federal, state and local withholding tax requirements prior to the delivery of any certificate or certificates for such Shares. Whenever, under this Plan, payments in satisfaction of Awards are to be made in cash, such payment will be net of an amount sufficient to satisfy federal, state, and local withholding tax requirements. 7.2 STOCK WITHHOLDING. When, under applicable tax laws, a Participant incurs tax liability in connection with the exercise or vesting of any Award that is subject to tax withholding and the Participant is obligated to pay the Company the amount required to be withheld, the Committee may in its sole discretion allow the Participant to satisfy the minimum withholding tax obligation by electing to have the Company withhold from the Shares to be issued that number of Shares having a Fair Market Value equal to the minimum amount required to be withheld, determined on the date that the amount of tax to be withheld is to be determined. All elections by a Participant to have Shares withheld for this purpose will be made in accordance with the requirements established by the Committee for such elections and be in writing in a form acceptable to the Committee. 8. PRIVILEGES OF STOCK OWNERSHIP. 8.1 VOTING AND DIVIDENDS. No Participant will have any of the rights of a stockholder with respect to any Shares until the Shares are issued to the Participant. After Shares are issued to the Participant, the Participant will be a stockholder and have all the rights of a stockholder with respect to such Shares, including the right to vote and receive all dividends or other distributions made or paid with respect to such Shares. The Company will comply with Section 260.140.1 of Title 10 of the California Code of Regulations with respect to the voting rights of Common Stock. 8.2 FINANCIAL STATEMENTS. The company will provide financial statements to each Participant prior to such Participant's purchase of Shares under this Plan, and to each Participant annually during the period such Participant has Options outstanding, or as otherwise required under Section 260.140.46 of Title 10 of the California Code of Regulations. Notwithstanding the foregoing, the Company will not be required to provide such financial statements to Participants when issuance is limited to Participants whose services in connection with the Company assure them access to equivalent information. 9. TRANSFERABILITY. Options granted under this Plan, and any interest therein, will not be transferable or assignable by Participant, and may not be made subject to execution, attachment or similar process, otherwise than by will or by the laws of descent and distribution or as determined by the Committee and set forth in the Stock Option Agreement with respect to Options that are not ISOs. During the lifetime of the Participant an Option will be exercisable only by the Participant or Participant's legal representative, and any elections with respect to an Option may be made only by the Participant or Participant's legal representative unless otherwise determined by the Committee and set forth in the Stock Option Agreement with respect to Options that are not ISOs. 10. CERTIFICATES. All certificates for Shares or other securities delivered under this Plan will be subject to such stock transfer orders, legends and other restrictions as the Committee may deem necessary or advisable, including restrictions under any applicable federal, state or foreign securities law, or any rules, regulations and other requirements of the SEC or any stock exchange or automated quotation system upon which the Shares may be listed or quoted. 11. ESCROW; PLEDGE OF SHARES. To enforce any restrictions on a Participant's Shares, the Committee may require the Participant to deposit all certificates representing Shares, together with stock powers or other instruments of transfer approved by the Committee, appropriately endorsed in blank, with the Company or an agent designated by the Company to hold in escrow until such restrictions have lapsed or terminated, and the Committee may cause a legend or legends referencing such restrictions to be placed on the certificates. Any Participant who is permitted to execute a promissory note as partial or full consideration for the purchase of Shares under this Plan will be required to pledge and deposit with the Company all or part of the Shares so purchased as collateral to secure the payment of Participant's obligation to the Company under the promissory note; provided, however, that the Committee may require or accept other or additional forms of collateral to secure the payment of such obligation and, in any event, the Company will have full recourse against the Participant under the promissory note notwithstanding any pledge of the Participant's Shares or other collateral. In connection with any pledge of the Shares, Participant will be required to execute and deliver a written pledge agreement in such form as the Committee will from time to time approve. The Shares purchased with the promissory note may be released from the pledge on a pro rata basis as the promissory note is paid. 12. EXCHANGE AND BUYOUT OF AWARDS. The Committee may, at any time or from time to time, authorize the Company, with the consent of the respective Participants, to issue new Awards in exchange for the surrender and cancellation of any or all outstanding Awards. The Committee may at any time buy from a Participant an Award previously granted with payment in cash, shares of Common Stock of the Company or other consideration, based on such terms and conditions as the Committee and the Participant may agree. 13. SECURITIES LAW AND OTHER REGULATORY COMPLIANCE. An Award will not be effective unless such Award is in compliance with all applicable federal and state securities laws, rules and regulations of any governmental body, and the requirements of any stock exchange or automated quotation system upon which the Shares may then be listed or quoted, as they are in effect on the date of grant of the Award and also on the date of exercise or other issuance. Notwithstanding any other provision in this Plan, the Company will have no obligation to issue or deliver certificates for Shares under this Plan prior to (a) obtaining any approvals from governmental agencies that the Company determines are necessary or advisable, and/or (b) compliance with any exemption, completion of any registration or other qualification of such Shares under any state or federal law or ruling of any governmental body that the Company determines to be necessary or advisable. The Company will be under no obligation to register the Shares with the SEC or to effect compliance with the exemption, registration, qualification or listing requirements of any state securities laws, stock exchange or automated quotation system, and the Company will have no liability for any inability or failure to do so. 14. NO OBLIGATION TO EMPLOY. Nothing in this Plan or any Award granted under this Plan will confer or be deemed to confer on any Participant any right to continue in the employ of, or to continue any other relationship with, the Company or any Parent or Subsidiary of the Company or limit in any way the right of the Company or any Parent or Subsidiary of the Company to terminate Participant's employment or other relationship at any time, with or without Cause. 15. CORPORATE TRANSACTIONS. 15.1 ASSUMPTION OR REPLACEMENT OF AWARDS BY SUCCESSOR OR ACQUIRING CORPORATION. In the event of (a) a dissolution or liquidation of the Company, (b) a merger or consolidation in which the Company is not the surviving corporation (other than a merger or consolidation with a wholly-owned subsidiary, a reincorporation of the Company in a different jurisdiction, or other transaction in which there is no substantial change in the stockholders of the Company or their relative stock holdings and the Awards granted under this Plan are assumed, converted or replaced by the successor or acquiring corporation, which assumption, conversion or replacement will be binding on all Participants), (c) a merger in which the Company is the surviving corporation but after which the stockholders of the Company immediately prior to such merger (other than any stockholder which merges with the Company in such merger, or which owns or controls another corporation which merges, with the Company in such merger) cease to own their shares or other equity interests in the Company, (d) the sale of all or substantially all of the assets of the Company or (e) the acquisition, sale or transfer of more than 50% of the outstanding shares of the Company by tender offer or similar transaction, any or all outstanding Awards may be assumed, converted or replaced by the successor or acquiring corporation (if any), which assumption, conversion or replacement will be binding on all Participants. In the alternative, the successor or acquiring corporation may substitute equivalent Awards or provide substantially similar consideration to Participants as was provided to stockholders (after taking into account the existing provisions of the Awards). The successor or acquiring corporation may also issue, in place of outstanding Shares of the Company held by the Participant, substantially similar shares or other property subject to repurchase restrictions and other provisions no less favorable to the Participant than those which applied to such outstanding Shares immediately prior to such transaction described in this Section 15.1. In the event such successor or acquiring corporation (if any) refuses to assume or substitute Awards, as provided above, pursuant to a transaction described in this Section 15.1, then notwithstanding any other provision in this Plan to the contrary, such Awards will expire on such transaction at such time and on such conditions as the Board will determine; provided, however, that the Committee may, in its sole discretion, provide that the vesting of any or all Awards granted pursuant to this Plan will accelerate. If the Committee exercises such discretion with respect to Options, such Options will become exercisable in full prior to the consummation of such event at such time and on such conditions as the Committee determines, and if such Options are not exercised prior to the consummation of the corporate transaction, they shall terminate at such time as determined by the Committee. 15.2 OTHER TREATMENT OF AWARDS. Subject to any greater rights granted to Participants under the foregoing provisions of this Section 15, in the event of the occurrence of any transaction described in Section 15.1 hereof, any outstanding Awards will be treated as provided in the applicable agreement or plan of merger, consolidation, dissolution, liquidation or sale of assets. 15.3 ASSUMPTION OF AWARDS BY THE COMPANY. The Company, from time to time, also may substitute or assume outstanding awards granted by another company, whether in connection with an acquisition of such other company or otherwise, by either (a) granting an Award under this Plan in substitution of such other company's award or (b) assuming such award as if it had been granted under this Plan if the terms of such assumed award could be applied to an Award granted under this Plan. Such substitution or assumption will be permissible if the holder of the substituted or assumed award would have been eligible to be granted an Award under this Plan if the other company had applied the rules of this Plan to such grant. In the event the Company assumes an award granted by another company, the terms and conditions of such award will remain unchanged (except that the exercise price and the number and nature of shares issuable upon exercise of any such option will be adjusted appropriately pursuant to Section 424(a) of the Code). In the event the Company elects to grant a new Option rather than assuming an existing option, such new Option may be granted with a similarly adjusted Exercise Price. 16. ADOPTION OF PLAN. This Plan will become effective on the date that it is adopted by the Board (the "EFFECTIVE DATE"). If any Options are ISOs, this Plan will be approved by the stockholders of the Company (excluding Shares issued pursuant to this Plan), consistent with applicable laws, within 12 months after the Plan is adopted by the Board (if such approval is not obtained, the Options will be NQSOs). Upon the Effective Date, the Committee may grant Options pursuant to this Plan; provided, however, that the following requirements will be met for any Option that is an ISO (otherwise the Option will be an NQSO): (a) the Option may not be exercised prior to initial stockholder approval of this Plan, and (b) any Option granted pursuant to an increase in the number of Shares subject to this Plan approved by the Board may not be exercised prior to approval of such increase by the stockholders of the Company. 17. TERM OF PLAN/GOVERNING LAW. Unless earlier terminated as provided herein, this Plan will terminate ten years from the Effective Date or, if earlier, the date of stockholder approval. This Plan and all agreements hereunder shall be governed by and construed in accordance with the laws of the State of California excluding that body of law pertaining to conflict of laws. 18. AMENDMENT OR TERMINATION OF PLAN. The Board may at any time terminate or amend this Plan in any respect, including without limitation amendment of any form of Stock Option Agreement or instrument to be executed pursuant to this Plan; provided, however, that the Board will not, without the approval of the stockholders of the Company, amend this Plan in any manner that requires such stockholder approval. 19. NONEXCLUSIVITY OF THE PLAN. Neither the adoption of this Plan by the Board nor any provision of this Plan will be construed as creating any limitations on the power of the Board to adopt such additional compensation arrangements as it may deem desirable, including, without limitation, the granting of stock options and other equity awards otherwise than under this Plan, and such arrangements may be either generally applicable or applicable only in specific cases. 20. DEFINITIONS. As used in this Plan, the following terms will have the following meanings: "AWARD" means any Award of Options under this Plan. "BOARD" means the Board of Directors of the Company. "CAUSE" means Termination because of (i) any willful material violation by the Participant of any law or regulation applicable to to the business of the Company or a Parent or Subsidiary of the Company, the Participant's conviction for, or guilty plea to, a felony or a crime involving moral turpitude, any willful perpetration by the Participant of a common law fraud, (ii) the Participant's commission of an act of personal dishonesty which involves personal profit in connection with the Company or any other entity having a business relationship with the Company, (iii) any material breach by the Participant of any provision of any agreement or understanding between the Company or any Parent or Subsidiary of the Company and the Participant regarding the terms of the Participant's service as an employee, director or consultant to the Company, or a Parent or Subsidiary of the Company, including without limitation, the willful and continued failure or refusal of the Participant to perform the material duties required of such Participant as an employee, director or consultant of the Company or a Parent or Subsidiary of the Company, other than as a result of having a Disability, or a breach of any applicable invention assignment and confidentiality agreement or similar agreement between the Company and the Participant, (iv) Participant's disregard of the policies of the Company or any Parent or Subsidiary of the Company so as to cause loss, damage or injury to the property, reputation or employees of the Company or a Parent or Subsidiary of the Company, or (v) any other misconduct by the Participant which is materially injurious to the financial condition or business reputation of, or is otherwise materially injurious to, the Company or a Parent or Subsidiary of the Company. "CODE" means the Internal Revenue Code of 1986, as amended. "COMMITTEE" means the committee appointed by the Board to administer this Plan, or if no committee is appointed, the Board. "COMPANY" means Hybrid Networks, Inc., or any successor corporation. "DISABILITY" means a disability, whether temporary or permanent, partial or total, as determined by the Committee. "EXERCISE PRICE" means the price at which a holder of an Option may purchase the Shares issuable upon exercise of the Option. "FAIR MARKET VALUE" means, as of any date, the value of a share of the Company's Common Stock determined as follows. (a) if such Common Stock is then quoted on the Nasdaq National Market, its closing price on the Nasdaq National Market on the date of determination as reported in THE WALL STREET JOURNAL; (b) if such Common Stock is publicly traded and is then listed on a national securities exchange, its closing price on the date of determination on the principal national securities exchange on which the Common Stock is listed or admitted to trading as reported in THE WALL STREET JOURNAL; (c) if such Common Stock is publicly traded but is not quoted on the Nasdaq National Market nor listed or admitted to trading on a national securities exchange, the closing bid price on the date of determination as reported by THE WALL STREET JOURNAL (or, if not so reported, as otherwise reported by any newspaper or other source as the Board may determine); or (d) if none of the foregoing is applicable, by the Committee in good faith. "OPTION" means an award of an option to purchase Shares pursuant to Section 5 hereof. "PARENT" means any corporation (other than the Company) in an unbroken chain of corporations ending with the Company if each of such corporations other than the Company owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. "PARTICIPANT" means a person who receives an Award under this Plan. "PLAN" means this Hybrid Networks, Inc. 1999 Officer Stock Option Plan, as amended from time to time. "SEC" means the Securities and Exchange Commission. "SECURITIES ACT" means the Securities Act of 1933, as amended. "SHARES" means shares of the Company's Common Stock reserved for issuance under this Plan, as adjusted pursuant to Sections 2 and 15 hereof, and any successor security. "STOCK OPTION AGREEMENT" means, with respect to each Option, the signed written agreement between the Company and the Participant setting forth the terms and conditions of the Award. "SUBSIDIARY" means any corporation (other than the Company) in an unbroken chain of corporations beginning with the Company if each of the corporations other than the last corporation in the unbroken chain owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. "TERMINATION" or "TERMINATED" means, for purposes of this Plan with respect to a Participant, that the Participant has for any reason ceased to provide substantial services as (i) an employee, officer, director, consultant or independent contractor to the Company or a Parent or Subsidiary or affiliate of the Company, or (ii) as a consultant, independent contractor or advisor to the Board of Directors of the Company. A Participant will not be deemed to have ceased to provide services in the case of (i) sick leave, (ii) military leave, or (iii) any other leave of absence approved by the Committee, provided that such leave is for a period of not more than 90 days unless reinstatement upon the expiration of such leave is guaranteed by contract or statute, or unless provided otherwise pursuant to formal policy adopted from time to time by the Company and issued and promulgated in writing. In the case of any Participant on (i) sick leave, (ii) military leave or (iii) an approved leave of absence, the Committee may make such provisions respecting suspension of vesting of the Award while on leave from the Company or a Parent or Subsidiary of the Company as it may deem appropriate, except that in no event may an Option be exercised after the expiration of the term set forth in the Stock Option Agreement. The Committee will have sole discretion to determine whether a Participant has ceased to provide services and the effective date on which the Participant ceased to provide services (the "TERMINATION DATE"). EX-10.28 3 EXHIBIT 10.28 HYBRID NETWORKS, INC. 1999 STOCK OPTION PLAN AS ADOPTED AS OF MAY 5, 1999 1. PURPOSE. The purpose of this Plan is to provide incentives to attract, retain and motivate eligible persons whose present and potential contributions are important to the success of the Company by offering them an opportunity to participate in the Company's future performance through awards of Options. CAPITALIZED TERMS NOT DEFINED IN THE TEXT ARE DEFINED IN SECTION 20 HEREOF. 2. SHARES SUBJECT TO THE PLAN. 2.1 NUMBER OF SHARES AVAILABLE. Subject to Sections 2.2 and 15 hereof, the total number of Shares reserved and available for grant and issuance pursuant to this Plan will be 1,500,000 Shares. Subject to Sections 2.2 and 15 hereof, Shares will again be available for grant and issuance in connection with future Awards under this Plan to the extent such Shares: (a) cease to be subject to issuance upon exercise of an Option, other than due to exercise of such Option; or (b) are subject to an Award that otherwise terminates without Shares being issued. At all times the Company will reserve and keep available a sufficient number of Shares as will be required to satisfy the requirements of all Awards granted under this Plan. 2.2 ADJUSTMENT OF SHARES. In the event that the number of outstanding shares of the Company's Common Stock is changed by a stock dividend, recapitalization, stock split, reverse stock split, subdivision, combination, reclassification or similar change in the capital structure of the Company without consideration, then (a) the number of Shares reserved for issuance under this Plan and (b) the Exercise Prices of and number of Shares subject to outstanding Options, subject to any required action by the Board or the stockholders of the Company and compliance with applicable securities laws; provided, however, that fractions of a Share will not be issued but will either be paid in cash at Fair Market Value of such fraction of a Share or will be rounded down to the nearest whole Share, as determined by the Committee. 3. ELIGIBILITY. Awards may be granted only to employees (including officers and directors who are also employees) of the Company or of a Parent or Subsidiary of the Company who meet the suitability standards set forth below in this Section 3. A person may be granted more than one Award under this Plan. To be eligible to receive options under this Plan, a person must meet the following suitability standards: Such person must either (a) be an officer or director of the Company, (b) have a pre-existing personal or business relationship with the Company or any of its officers, directors or controlling persons or (c) by reason of such person's business or financial experience or the business or financial experience of such person's professional advisor who is unaffiliated with and who is not compensated by the Company or any affiliate or selling agent of the Company, directly or indirectly, could be reasonably assumed to protect such person's own interests in connection with the Options. The foregoing suitability standards are intended to comply, and shall be interpreted in a manner consistent with, the excemption from qualification under the California securities laws provided by Section 25102(f) of the California Corporations Code and the regulations thereunder. 4. ADMINISTRATION. 4.1 COMMITTEE AUTHORITY. This Plan will be administered by the Committee or by the Board acting as the Committee. Subject to the general purposes, terms and conditions of this Plan, and to the direction of the Board, the Committee will have full power to implement and carry out this Plan. Without limitation, the Committee will have the authority to: (a) construe and interpret this Plan, any Stock Option Agreement and any other agreement or document executed pursuant to this Plan; (b) prescribe, amend and rescind rules and regulations relating to this Plan or any Award; (c) select persons to receive Awards; (d) determine the form and terms of Awards; (e) determine the number of Shares or other consideration subject to Awards; (f) determine whether Awards will be granted singly, in combination with, in tandem with, in replacement of, or as alternatives to, other Awards under this Plan or awards under any other incentive or compensation plan of the Company or any Parent or Subsidiary of the Company; (g) grant waivers of Plan or Award conditions; (h) determine the vesting, exercisability and payment of Awards; (i) correct any defect, supply any omission, or reconcile any inconsistency in this Plan, any Award, any Stock Option Agreement or any Exercise Agreement; and (j) make all other determinations necessary or advisable for the administration of this Plan. 4.2 COMMITTEE DISCRETION. Any determination made by the Committee with respect to any Award will be made in its sole discretion at the time of grant of the Award or, unless in contravention of any express term of this Plan or Award, and subject to Section 5.8 hereof, at any later time, and such determination will be final and binding on the Company and on all persons having an interest in any Award under this Plan. The Committee may delegate to one or more officers of the Company the authority to grant an Award under this Plan. 5. OPTIONS. The Committee may grant Options to eligible persons and will determine whether such Options will be Incentive Stock Options within the meaning of the Code ("ISOS") or Nonqualified Stock Options ("NQSOS"), the number of Shares subject to the Option, the Exercise Price of the Option, the period during which the Option may be exercised and all other terms and conditions of the Option, subject to the following: 5.1 FORM OF OPTION GRANT. Each Option granted under this Plan will be evidenced by a Stock Option Agreement which will expressly identify the Option as an ISO or an NQSO and will be in such form and contain such provisions (which need not be the same for each Participant) as the Committee may from time to time approve, and which will comply with and be subject to the terms and conditions of this Plan. 5.2 DATE OF GRANT. The date of grant of an Option will be the date on which the Committee makes the determination to grant such Option, unless otherwise specified by the Committee. The Stock Option Agreement and a copy of this Plan will be delivered to the Participant within a reasonable time after the granting of the Option. 5.3 EXERCISE PERIOD. Options may be exercisable within the times or upon the events determined by the Committee as set forth in the Stock Option Agreement governing such Option; provided, however, that no Option will be exercisable after the expiration of ten years from the date the Option is granted and provided further that no ISO granted to a person who directly or by attribution owns more than 10% of the total combined voting power of all classes of stock of the Company or any Parent or Subsidiary of the Company ("TEN PERCENT STOCKHOLDER") will be exercisable after the expiration of five years from the date the ISO is granted. The Committee also may provide for Options to become exercisable at one time or from time to time, periodically or otherwise, in such number of Shares or percentage of Shares as the Committee determines. Notwithstanding the foregoing, Options to Participants who are not officers, directors or consultants of the Company, or of any Parent or Subsidiary of the Company, must become exercisable at a rate of at least 20% per year over five years from the date the Option is granted, subject to earlier termination of the Option pursuant to Sections 5.6 and 15. 5.4 EXERCISE PRICE. The Exercise Price of an Option will be determined by the Committee when the Option is granted, provided that: (i) the Exercise Price of an ISO will not be less than 100% of the Fair Market Value of the Shares on the date of grant; and (ii) the Exercise Price of any Option granted to a Ten Percent -2- Stockholder will not be less than 110% of the Fair Market Value of the Shares on the date of grant. Payment for the Shares purchased must be made in accordance with Section 6 hereof. 5.5 METHOD OF EXERCISE. Options may be exercised only by delivery to the Company of a written stock option exercise agreement (the "EXERCISE AGREEMENT") in a form approved by the Committee (which need not be the same for each Participant), stating the number of Shares being purchased, the restrictions imposed on the Shares purchased under such Exercise Agreement, if any, and such representations and agreements regarding Participant's investment intent and access to information and other matters, if any, as may be required or desirable by the Company to comply with applicable securities laws, together with payment in full of the Exercise Price, and any applicable taxes, for the number of Shares being purchased. 5.6 TERMINATION. Subject to earlier termination pursuant to Section 15 hereof and notwithstanding the exercise periods set forth in the Stock Option Agreement, exercise of an Option will always be subject to the following: (a) If the Participant is Terminated for any reason except death, Disability or for Cause, then the Participant may exercise such Participant's Options only to the extent that such Options are exercisable upon the Termination Date and such Options must be exercised by the Participant, if at all, as to all or some of the Vested Shares calculated as of the Termination Date, within three months after the Termination Date (or within such shorter time period, not less than 30 days, or within such longer time period, not exceeding five years, as may be determined by the Committee, with any exercise beyond three months after the Termination Date deemed to be an ISO), but in any event no later than the expiration date of the Options. (b) If the Participant is Terminated because of Participant's death or Disability (or the Participant dies within three months after a Termination other than because of Participant's death or Disability), then Participant's Options may be exercised only to the extent that such Options would have been exercisable by Participant on the Termination Date and must be exercised by Participant (or Participant's legal representative or authorized assignee), no later than 12 months after the Termination Date (or within such shorter time period, not less than six months, or within such longer time period, not exceeding five years, as may be determined by the Committee, with any such exercise beyond (i) three months after the Termination Date when the Termination is for any reason other than the Participant's death or Disability or (ii) 12 months after the Termination Date when the Termination is for the Participant's death or Disability, deemed to be an NQSO), but in any event no later than the expiration date of the Options. (c) Notwithstanding the provisions in paragraph 5.6(a) above, if a Participant is terminated for Cause, neither the Participant, the Participant's estate nor such other person who may then hold the Option shall be entitled to exercise any Option with respect to any Shares whatsoever, after termination of service, whether or not after termination of service the Participant may receive payment from the Company or Subsidiary for vacation pay, for services rendered prior to termination, for services rendered for the day on which termination occurs, for salary in lieu of notice, or for any other benefits. In making such determination, the Board shall give the Participant an opportunity to present to the Board evidence on his behalf. For the purpose of this paragraph, termination of service shall be deemed to occur on the date when the Company dispatches notice or advice to the Participant that his service is terminated. 5.7 LIMITATIONS ON EXERCISE. The Committee may specify a reasonable minimum number of Shares that may be purchased on any exercise of an Option, provided that such minimum number will not prevent Participant from exercising the Option for the full number of Shares for which it is then exercisable. 5.8 LIMITATIONS ON ISOS. The aggregate Fair Market Value (determined as of the date of grant) of Shares with respect to which ISOs are exercisable for the first time by a Participant during any calendar year (under -3- this Plan or under any other incentive stock option plan of the Company, Parent or Subsidiary of the Company) will not exceed $100,000. If the Fair Market Value of Shares on the date of grant with respect to which ISOs are exercisable for the first time by a Participant during any calendar year exceeds $100,000, then the Options for the first $100,000 worth of Shares to become exercisable in such calendar year will be ISOs and the Options for the amount in excess of $100,000 that become exercisable in that calendar year will be NQSOs. In the event that the Code or the regulations promulgated thereunder are amended after the Effective Date of this Plan to provide for a different limit on the Fair Market Value of Shares permitted to be subject to ISOs, such different limit will be automatically incorporated herein and will apply to any Options granted after the effective date of such amendment. 5.9 MODIFICATION, EXTENSION OR RENEWAL. The Committee may modify, extend or renew outstanding Options and authorize the grant of new Options in substitution therefor, provided that any such action may not, without the written consent of a Participant, impair any of such Participant's rights under any Option previously granted. Any outstanding ISO that is modified, extended, renewed or otherwise altered will be treated in accordance with Section 424(h) of the Code. The Committee may reduce the Exercise Price of outstanding Options without the consent of Participants affected by a written notice to them; provided, however, that the Exercise Price may not be reduced below the minimum Exercise Price that would be permitted under Section 5.4 hereof for Options granted on the date the action is taken to reduce the Exercise Price. 5.10 NO DISQUALIFICATION. Notwithstanding any other provision in this Plan, no term of this Plan relating to an ISO will be interpreted, amended or altered, nor will any discretion or authority granted under this Plan be exercised, so as to disqualify this Plan under Section 422 of the Code or, without the consent of the Participant affected, to disqualify any ISO under Section 422 of the Code. 6. PAYMENT FOR SHARE PURCHASES. 6.1 PAYMENT. Payment for Shares purchased pursuant to this Plan may be made in cash (by check) or, where expressly approved for the Participant by the Committee and, where permitted by law, by any of the means set forth below: (a) by cancellation of indebtedness of the Company to the Participant; (b) by surrender of shares that: (i) either (A) have been owned by Participant for more than six months and have been paid for within the meaning of SEC Rule 144 (and, if such shares were purchased from the Company by use of a promissory note, such note has been fully paid with respect to such shares) or (B) were obtained by Participant in the public market and (ii) are clear of all liens, claims, encumbrances or security interests; (c) by tender of a full recourse promissory note having such terms as may be approved by the Committee and bearing interest at a rate sufficient to avoid imputation of income under Sections 483 and 1274 of the Code; provided, however, that the portion of the Exercise Price equal to the par value of the Shares must be paid in cash or other legal consideration permitted by Delaware General Corporation Law (Participants who are not employees or directors of the Company will not be entitled to purchase Shares with a promissory note unless the note is adequately secured by collateral other than the Shares); (d) by waiver of compensation due or accrued to the Participant for services rendered; (e) with respect only to purchases upon exercise of an Option, and provided that a public market for the Company's stock exists: (1) through a "same day sale" commitment from the Participant and a broker-dealer that is a member of the National Association of Securities Dealers (an "NASD DEALER") whereby the Participant irrevocably elects to exercise the Option and to sell a portion of the Shares so purchased to pay for the Exercise Price, and whereby the NASD Dealer irrevocably commits upon receipt of such Shares to forward the Exercise Price directly to the Company; or -4- (2) through a "margin" commitment from the Participant and an NASD Dealer whereby the Participant irrevocably elects to exercise the Option and to pledge the Shares so purchased to the NASD Dealer in a margin account as security for a loan from the NASD Dealer in the amount of the Exercise Price, and whereby the NASD Dealer irrevocably commits upon receipt of such Shares to forward the Exercise Price directly to the Company; or (f) by any combination of the foregoing. 6.2 LOAN GUARANTEES. The Committee may help the Participant pay for Shares purchased under this Plan by authorizing a guarantee by the Company of a third-party loan to the Participant. 7. WITHHOLDING TAXES. 7.1 WITHHOLDING GENERALLY. Whenever Shares are to be issued in satisfaction of Awards granted under this Plan, the Company may require the Participant to remit to the Company an amount sufficient to satisfy federal, state and local withholding tax requirements prior to the delivery of any certificate or certificates for such Shares. Whenever, under this Plan, payments in satisfaction of Awards are to be made in cash, such payment will be net of an amount sufficient to satisfy federal, state, and local withholding tax requirements. 7.2 STOCK WITHHOLDING. When, under applicable tax laws, a Participant incurs tax liability in connection with the exercise or vesting of any Award that is subject to tax withholding and the Participant is obligated to pay the Company the amount required to be withheld, the Committee may in its sole discretion allow the Participant to satisfy the minimum withholding tax obligation by electing to have the Company withhold from the Shares to be issued that number of Shares having a Fair Market Value equal to the minimum amount required to be withheld, determined on the date that the amount of tax to be withheld is to be determined. All elections by a Participant to have Shares withheld for this purpose will be made in accordance with the requirements established by the Committee for such elections and be in writing in a form acceptable to the Committee. 8. PRIVILEGES OF STOCK OWNERSHIP. 8.1 VOTING AND DIVIDENDS. No Participant will have any of the rights of a stockholder with respect to any Shares until the Shares are issued to the Participant. After Shares are issued to the Participant, the Participant will be a stockholder and have all the rights of a stockholder with respect to such Shares, including the right to vote and receive all dividends or other distributions made or paid with respect to such Shares. The Company will comply with Section 260.140.1 of Title 10 of the California Code of Regulations with respect to the voting rights of Common Stock. 8.2 FINANCIAL STATEMENTS. The Company will provide financial statements to each Participant prior to such Participant's purchase of Shares under this Plan, and to each Participant annually during the period such Participant has Options outstanding, or as otherwise required under Section 260.140.46 of Title 10 of the California Code of Regulations. Notwithstanding the foregoing, the Company will not be required to provide such financial statements to Participants when issuance is limited to Participants whose services in connection with the Company assure them access to equivalent information. 9. TRANSFERABILITY. Options granted under this Plan, and any interest therein, will not be transferable or assignable by Participant, and may not be made subject to execution, attachment or similar process, otherwise than by will or by the laws of descent and distribution or as determined by the Committee and set forth in the Stock Option Agreement with respect to Options that are not ISOs. During the lifetime of the Participant an Option will be exercisable only by the Participant or Participant's legal representative, and any elections with respect to an Option may be made only by the Participant or Participant's legal representative unless otherwise determined by the Committee and set forth in the Stock Option Agreement with respect to Options that are not ISOs. 10. CERTIFICATES. All certificates for Shares or other securities delivered under this Plan will be subject to such stock transfer orders, legends and other restrictions as the Committee may deem necessary or advisable, including restrictions under any applicable federal, state or foreign securities law, or any rules, regulations -5- and other requirements of the SEC or any stock exchange or automated quotation system upon which the Shares may be listed or quoted. 11. ESCROW; PLEDGE OF SHARES. To enforce any restrictions on a Participant's Shares, the Committee may require the Participant to deposit all certificates representing Shares, together with stock powers or other instruments of transfer approved by the Committee, appropriately endorsed in blank, with the Company or an agent designated by the Company to hold in escrow until such restrictions have lapsed or terminated, and the Committee may cause a legend or legends referencing such restrictions to be placed on the certificates. Any Participant who is permitted to execute a promissory note as partial or full consideration for the purchase of Shares under this Plan will be required to pledge and deposit with the Company all or part of the Shares so purchased as collateral to secure the payment of Participant's obligation to the Company under the promissory note; provided, however, that the Committee may require or accept other or additional forms of collateral to secure the payment of such obligation and, in any event, the Company will have full recourse against the Participant under the promissory note notwithstanding any pledge of the Participant's Shares or other collateral. In connection with any pledge of the Shares, Participant will be required to execute and deliver a written pledge agreement in such form as the Committee will from time to time approve. The Shares purchased with the promissory note may be released from the pledge on a pro rata basis as the promissory note is paid. 12. EXCHANGE AND BUYOUT OF AWARDS. The Committee may, at any time or from time to time, authorize the Company, with the consent of the respective Participants, to issue new Awards in exchange for the surrender and cancellation of any or all outstanding Awards. The Committee may at any time buy from a Participant an Award previously granted with payment in cash, shares of Common Stock of the Company or other consideration, based on such terms and conditions as the Committee and the Participant may agree. 13. SECURITIES LAW AND OTHER REGULATORY COMPLIANCE. An Award will not be effective unless such Award is in compliance with all applicable federal and state securities laws, rules and regulations of any governmental body, and the requirements of any stock exchange or automated quotation system upon which the Shares may then be listed or quoted, as they are in effect on the date of grant of the Award and also on the date of exercise or other issuance. Notwithstanding any other provision in this Plan, the Company will have no obligation to issue or deliver certificates for Shares under this Plan prior to (a) obtaining any approvals from governmental agencies that the Company determines are necessary or advisable, and/or (b) compliance with any exemption, completion of any registration or other qualification of such Shares under any state or federal law or ruling of any governmental body that the Company determines to be necessary or advisable. The Company will be under no obligation to register the Shares with the SEC or to effect compliance with the exemption, registration, qualification or listing requirements of any state securities laws, stock exchange or automated quotation system, and the Company will have no liability for any inability or failure to do so. 14. NO OBLIGATION TO EMPLOY. Nothing in this Plan or any Award granted under this Plan will confer or be deemed to confer on any Participant any right to continue in the employ of, or to continue any other relationship with, the Company or any Parent or Subsidiary of the Company or limit in any way the right of the Company or any Parent or Subsidiary of the Company to terminate Participant's employment or other relationship at any time, with or without Cause. 15. CORPORATE TRANSACTIONS. 15.1 ASSUMPTION OR REPLACEMENT OF AWARDS BY SUCCESSOR OR ACQUIRING CORPORATION. In the event of (a) a dissolution or liquidation of the Company, (b) a merger or consolidation in which the Company is not the surviving corporation (other than a merger or consolidation with a wholly-owned subsidiary, a reincorporation of the Compahy in a different jurisdiction, or other transaction in which there is no substantial change in the stockholders of the Company or their relative stock holdings and the Awards granted under this Plan are assumed, converted or replaced by the successor or acquiring corporation, which assumption, conversion or replacement will be binding on all Participants), (c) a merger in which the Company is the surviving corporation but after which the stockholders of the Company immediately prior to such merger (other than any stockholder which merges with the Company in such merger, or which owns or controls another corporation which merges, with the Company in such merger) cease to own their shares or other equity interests in the Company, (d) the sale of all or substantially all of the assets of the Company or (e) the acquisition, sale or transfer of more than 50% of the outstanding shares of the -6- Company by tender offer or similar transaction, any or all outstanding Awards may be assumed, converted or replaced by the successor or acquiring corporation (if any), which assumption, conversion or replacement will be binding on all Participants. In the alternative, the successor or acquiring corporation may substitute equivalent Awards or provide substantially similar consideration to Participants as was provided to stockholders (after taking into account the existing provisions of the Awards). The successor or acquiring corporation may also issue, in place of outstanding Shares of the Company held by the Participant, substantially similar shares or other property subject to repurchase restrictions and other provisions no less favorable to the Participant than those which applied to such outstanding Shares immediately prior to such transaction described in this Section 15.1. In the event such successor or acquiring corporation (if any) refuses to assume or substitute Awards, as provided above, pursuant to a transaction described in this Section 15.1, then notwithstanding any other provision in this Plan to the contrary, such Awards will expire on such transaction at such time and on such conditions as the Board will determine; provided, however, that the Committee may, in its sole discretion, provide that the vesting of any or all Awards granted pursuant to this Plan will accelerate. If the Committee exercises such discretion with respect to Options, such Options will become exercisable in full prior to the consummation of such event at such time and on such conditions as the Committee determines, and if such Options are not exercised prior to the consummation of the corporate transaction, they shall terminate at such time as determined by the Committee. 15.2 OTHER TREATMENT OF AWARDS. Subject to any greater rights granted to Participants under the foregoing provisions of this Section 15, in the event of the occurrence of any transaction described in Section 15.1 hereof, any outstanding Awards will be treated as provided in the applicable agreement or plan of merger, consolidation, dissolution, liquidation or sale of assets. 15.3 ASSUMPTION OF AWARDS BY THE COMPANY. The Company, from time to time, also may substitute or assume outstanding awards granted by another company, whether in connection with an acquisition of such other company or otherwise, by either (a) granting an Award under this Plan in substitution of such other company's award or (b) assuming such award as if it had been granted under this Plan if the terms of such assumed award could be applied to an Award granted under this Plan. Such substitution or assumption will be permissible if the holder of the substituted or assumed award would have been eligible to be granted an Award under this Plan if the other company had applied the rules of this Plan to such grant. In the event the Company assumes an award granted by another company, the terms and conditions of such award will remain unchanged (except that the exercise price and the number and nature of shares issuable upon exercise of any such option will be adjusted appropriately pursuant to Section 424(a) of the Code). In the event the Company elects to grant a new Option rather than assuming an existing option, such new Option may be granted with a similarly adjusted Exercise Price. 16. ADOPTION OF PLAN. This Plan will become effective on the date that it is adopted by the Board (the "EFFECTIVE DATE"). If any Options are ISOs, this Plan will be approved by the stockholders of the Company (excluding Shares issued pursuant to this Plan), consistent with applicable laws, within 12 months after the Plan is adopted by the Board (if such approval is not obtained, the Options will be NQSOs). Upon the Effective Date, the Committee may grant Options pursuant to this Plan; provided, however, that the following requirements will be met for any Option that is an ISO (otherwise the Option will be an NQSO): (a) the Option may not be exercised prior to initial stockholder approval of this Plan, and (b) any Option granted pursuant to an increase in the number of Shares subject to this Plan approved by the Board may not be exercised prior to approval of such increase by the stockholders of the Company. 17. TERM OF PLAN/GOVERNING LAW. Unless earlier terminated as provided herein, this Plan will terminate ten years from the Effective Date or, if earlier, the date of stockholder approval. This Plan and all agreements hereunder shall be governed by and construed in accordance with the laws of the State of California excluding that body of law pertaining to conflict of laws. 18. AMENDMENT OR TERMINATION OF PLAN. The Board may at any time terminate or amend this Plan in any respect, including without limitation amendment of any form of Stock Option Agreement or instrument to be executed pursuant to this Plan; provided, however, that the Board will not, without the approval of the stockholders of the Company, amend this Plan in any manner that requires such stockholder approval. 19. NONEXCLUSIVITY OF THE PLAN. Neither the adoption of this Plan by the Board, the submission of this Plan to the stockholders of the Company for approval, nor any provision of this Plan will be -7- construed as creating any limitations on the power of the Board to adopt such additional compensation arrangements as it may deem desirable, including, without limitation, the granting of stock options and other equity awards otherwise than under this Plan, and such arrangements may be either generally applicable or applicable only in specific cases. 20. DEFINITIONS. As used in this Plan, the following terms will have the following meanings: "AWARD" means any award of Options under this Plan. "BOARD" means the Board of Directors of the Company. "CAUSE" means Termination because of (a) any willful material violation by the Participant of any law or regulation applicable to the business of the Company or a Parent or Subsidiary of the Company, the Participant's conviction for, or guilty plea to, a felony or a crime involving moral turpitude, any willful perpetration by the Participant of a common law fraud, (b) the Participant's commission of an act of personal dishonesty which involves personal profit in connection with the Company or any other entity having a business relationship with the Company, (c) any material breach by the Participant of any provision of any agreement or understanding between the Company or any Parent or Subsidiary of the Company and the Participant regarding the terms of the Participant's service as an employee, director or consultant to the Company or a Parent or Subsidiary of the Company, including without limitation, the willful and continued failure or refusal of the Participant to perform the material duties required of such Participant as an employee, director or consultant of the Company or a Parent or Subsidiary of the Company, other than as a result of having a Disability, or a breach of any applicable invention assignment and confidentiality agreement or similar agreement between the Company and the Participant, (d) Participant's disregard of the policies of the Company or any Parent or Subsidiary of the Company so as to cause loss, damage or injury to the property, reputation or employees of the Company or a Parent or Subsidiary of the Company or (e) any other misconduct by the Participant which is materially injurious to the financial condition or business reputation of, or is otherwise materially injurious to, the Company or a Parent or Subsidiary of the Company. "CODE" means the Internal Revenue Code of 1986, as amended. "COMMITTEE" means the committee appointed by the Board to administer this Plan, or if no committee is appointed, the Board. "COMPANY" means Hybrid Networks, Inc., or any successor corporation. "DISABILITY" means a disability, whether temporary or permanent, partial or total, within the meaning of Section 22(e)(3) of the Code, as determined by the Committee. "EXERCISE PRICE" means the price at which a holder of an Option may purchase the Shares issuable upon exercise of the Option. "FAIR MARKET VALUE" means, as of any date, the value of a share of the Company's Common Stock determined as follows: (a) if such Common Stock is then quoted on the Nasdaq National Market, its closing price on the Nasdaq National Market on the date of determination as reported in THE WALL STREET JOURNAL; (b) if such Common Stock is publicly traded and is then listed on a national securities exchange, its closing price on the date of determination on the principal national securities exchange on which the Common Stock is listed or admitted to trading as reported in THE WALL STREET JOURNAL; (c) if such Common Stock is publicly traded but is not quoted on the Nasdaq National Market nor listed or admitted to trading on a national securities exchange, and if current information about the Company is publicly available so as to comply with SEC Rule 144(c), the average of the closing bid and asked prices on the date of determination as -8- reported by THE WALL STREET JOURNAL (or, if not so reported, as otherwise reported by any newspaper or other source as the Board may determine); or (d) if none of the foregoing is applicable, by the Committee in good faith. "OPTION" means an award of an option to purchase Shares pursuant to Section 5 hereof. "PARENT" means any corporation (other than the Company) in an unbroken chain of corporations ending with the Company if each of such corporations other than the Company owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in such chain "PARTICIPANT" means a person who receives an Award under this Plan "PLAN" means this Hybrid Networks, Inc. 1999 Stock Option Plan, as amended from time to time. "SEC" means the Securities and Exchange Commission. "SECURITIES ACT" means the Securities Act of 193 3, as amended. "SHARES" means shares of the Company's Common Stock reserved for issuance under this Plan, as adjusted pursuant to Sections 2 and 15 hereof, and any successor security. "STOCK OPTION AGREEMENT" means, with respect to each Option, the signed written agreement between the Company and the Participant setting forth the terms and conditions of the Award. "SUBSIDIARY" means any corporation (other than the Company) in an unbroken chain of corporations beginning with the Company if each of the corporations other than the last corporation in the unbroken chain owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. "TERMINATION" OR "TERMINATED" means, for purposes of this Plan with respect to a Participant, that the Participant has for any reason ceased to provide substantial services as (a) an employee, officer, director, consultant or independent contractor to the Company or a Parent or Subsidiary or affiliate of the Company, or (b) as a consultant, independent contractor or advisor to the Board of Directors of the Company. A Participant will not be deemed to have ceased to provide services in the case of (i) sick leave, (ii) military leave, or (iii) any other leave of absence approved by the Committee, provided that such leave is for a period of not more than 90 days unless reinstatement upon the expiration of such leave is guaranteed by contract or statute, or unless provided otherwise pursuant to formal policy adopted from time to time by the Company and issued and promulgated in writing. In the case of any Participant on (i) sick leave, (ii) military leave or (iii) an approved leave of absence, the Committee may make such provisions respecting suspension of vesting of the Award while on leave from the Company or a Parent or Subsidiary of the Company as it may deem appropriate, except that in no event may an Option be exercised after the expiration of the term set forth in the Stock Option Agreement. The Committee will have sole discretion to determine whether a Participant has ceased to provide services and the effective date on which the Participant ceased to provide services (the "TERMINATION DATE"). -9- EX-10.29 4 EXHIBIT 10.29 MODIFICATION OF RETENTION BONUS AGREEMENT This Modification of Retention Bonus Agreement (this "Modification") is made to the original Retention Bonus Agreement (the "Agreement") dated as of January 6, 1999 (the "Effective Date"), between Hybrid Networks, Inc., a Delaware corporation (the "Company"), and THARA M. EDSON ("Executive"). WHEREAS, the purpose of the original Agreement was to provide an incentive for Executive to continue to perform services for the Company, and WHEREAS, the parties agree that the severance payment described in the Agreement is not the best method of encouraging Executive retention, NOW, THEREFORE, pursuant to the modification provision, paragraph 5 of the Agreement, and in consideration of the promises and covenants set forth below, it is mutually agreed to modify the Agreement as follows and that this Modification shall entirely replace and supersede the Agreement: 1. EXECUTIVE'S CONSIDERATION. Executive agrees to remain an employee of the Company at least through the earlier of the following events: A. Executive's termination of employment by the Company, its successors and/or assigns. B. Fourteen calendar days after the closing date of a Change of Control of the Company. A "Change of Control" means the sale or other disposition of all or substantially all of the Company's assets, and/or the sale or other transfer (as a result of a tender offer, merger, consolidation or otherwise) of a controlling share (50% or more) of the Common Stock of the Company. 2. THE COMPANY'S CONSIDERATION. The parties agree that the following is sufficient and new consideration for this Modification of the original Agreement. In consideration of Executive's commitment to remain an employee of the Company through the above-stated events, the Company agrees to: A. SALARY BONUS. Effective February 15, 1999, a salary bonus of 50% of salary. B. ADDITIONAL STOCK OPTIONS. Grant Executive options, pursuant to the Company's 1999 Officer Stock Option Plan and the Stock Option Agreement to be entered into between the Company and Executive pursuant thereto, to purchase up to 200,000 shares of the Company's Common Stock at an exercise price of $.50 per share and with the following vesting: (a) no option will be exercisable until the six-month anniversary date of the Effective Date, (b) each option will then become exercisable as to 12.5% of the shares and (c) thereafter, the option will become exercisable ratably over the next 42 months, at the end of each succeeding month, at the rate of 2.0833% per month; notwithstanding the foregoing, the options will become fully vested 14 calendar days after the closing date of a Change of Control of the Company, as defined above, provided that Executive has remained an employee of the Company to that date. C. RETENTION BONUS. Fourteen calendar days after the closing date of a Change of Control of the Company, as defined above, and if Executive has remained an employee of the Company to that date, the Company will pay Executive a retention bonus according to the following schedule:
Value of Sale of Assets or Stock Bonus $0 to 7 million $50,000 $7 to 15 million $80,000 $15 to 20 million $120,000 $20 to 25 million $140,000 $25 to 30 million $160,000 $Over 30 million $200,000
If Executive's employment with the Company terminated prior to a Change of Control and the expiration of such 14-day period, (a) the retention bonus will NOT be payable, and the acceleration of vesting of the options granted pursuant to Section 2.B above will not occur, in the event that the employment termination was (i) initiated by Executive, (ii) initiated by the Company for Cause as determined by the Company's Board of Directors or (iii) was because of Executive's death or disability as determined by the Company's Board of Directors, but (b) such bonus will be payable and such acceleration will occur upon a subsequent Change of Control and expiration of such 14-day period in the event that the employment termination was initiated by the Company without Cause as determined by the Company's Board of Directors. As used herein, "Cause" means: (a) An act of moral turpitude by Executive, including but not limited to theft, embezzlement, fraud, dishonesty, commission of a felony or a crime involving moral turpitude, misappropriation of property of the Company or other such conduct which adversely affects Executive's performance, or ability to perform, Executive's job. (b) Executive's failure to physically report for work for a period of three consecutive work days for other than authorized absences, vacation days, sick days, holidays or leaves of absence. (c) Willful violation of law, willful malfeasance or gross negligence by Executive. (d) Material failure by Executive to perform the job duties, or the substantial neglect by Executive of the duties assigned to Executive. (v) Executive's material breach of any agreement with the Company or disregard of the Company's policies. (e) Other misconduct of Executive which is injurious to the Company. D. SEVERANCE. If before Executive becomes eligible to receive the retention bonus provided for in 2.C above Executive's employment with the Company is terminated by the Company other than for Cause and other than because of Executive's death or disability, the Company will pay to Executive, as severance pay, an amount based on three months' salary and not including bonus. 3. Executive agrees that in the event of a Change of Control or the termination of Executive's employment with the Company, Executive will be entitled to no payments or other compensation except as provided for therein (other than, in the case of termination, accrued salary, reimbursable expenses and accrued and unused vacation) and that the compensation Executive receives pursuant to this Agreement represents the total amount of compensation, benefits and bonuses that the Company will be obligated to pay to Executive and that the Company does and will not owe Executive any other amounts. Executive further agrees and understands that any liability for state or federal income taxes that may be assessed as a result of the transactions provided for herein is Executive's sole responsibility, and Executive will not look to the Company for payment or reimbursement of any taxes. 4. AT WILL DISCLAIMER. Executive understands and agrees that this Modification is not a contract of employment for a definite term, and that his employment may be terminated by Executive or the Company at will, with or without cause. 5. MODIFICATION. This Modification may be further modified only by mutual agreement of the parties provided that any further modification must be reduced to writing and signed by Executive and an authorized representative of the Company. 6. SAVINGS. Any terms or provisions of this Agreement which prove to be invalid, void or illegal shall in no way affect, impair or invalidate any other term or provision herein and such remaining terms and provisions shall remain in full force and effect. 7. COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original and all of which taken together constitutes one and the same instrument and in making proof hereof it shall not be necessary to produce or account for more than one such counterpart. 8. ENTIRE AGREEMENT. The parties hereto acknowledge that each has read this Agreement, understands it, and agrees to be bound by its terms. The parties further agree that this Agreement constitutes the complete and exclusive statement of the agreement between the parties and supersedes all proposals (oral or written), understandings, representations, conditions, covenants, and all other communications between the parties relating to the subject matter hereof. 9. GOVERNING LAW. This Agreement shall be governed by the law of the State of California. IN WITNESS WHEREOF, the parties have executed this Agreement on the date first above written. HYBRID NETWORKS, INC. EXECUTIVE By: /s/ Carl S. Ledbetter /s/ Thara M. Edson ----------------------------------- ---------------------------- Carl S. Ledbetter Thara M. Edson Chairman & Chief Executive Officer MODIFICATION OF RETENTION BONUS AGREEMENT This Modification of Retention Bonus Agreement (this "Modification") is made to the original Retention Bonus Agreement (the "Agreement") dated as of January 6, 1999 (the "Effective Date"), between Hybrid Networks, Inc., a Delaware corporation (the "Company"), and Vishwas R. (Victor) Godbole ("Executive"). WHEREAS, the purpose of the original Agreement was to provide an incentive for Executive to continue to perform services for the Company, and WHEREAS, the parties agree that the severance payment described in the Agreement is not the best method of encouraging Executive retention, NOW, THEREFORE, pursuant to the modification provision, paragraph 5 of the Agreement, and in consideration of the promises and covenants set forth below, it is mutually agreed to modify the Agreement as follows and that this Modification shall entirely replace and supersede the Agreement: 1. EXECUTIVE'S CONSIDERATION. Executive agrees to remain an employee of the Company at least through the earlier of the following events: A. Executive's termination of employment by the Company, its successors and/or assigns. B. Fourteen calendar days after the closing date of a Change of Control of the Company. A "Change of Control" means the sale or other disposition of all or substantially all of the Company's assets, and/or the sale or other transfer (as a result of a tender offer, merger, consolidation or otherwise) of a controlling share (50% or more) of the Common Stock of the Company. 2. THE COMPANY'S CONSIDERATION. The parties agree that the following is sufficient and new consideration for this Modification of the original Agreement. In consideration of Executive's commitment to remain an employee of the Company through the above-stated events, the Company agrees to: A. SALARY BONUS. Effective February 15, 1999, a salary bonus of 50% of salary. B. ADDITIONAL STOCK OPTIONS. Grant Executive options, pursuant to the Company's 1999 Officer Stock Option Plan and the Stock Option Agreement to be entered into between the Company and Executive pursuant thereto , to purchase up to 262,152 shares of the Company's Common Stock at an exercise price of $.50 per share and with the following vesting: (a) no option will be exercisable until the six-month anniversary date of the Effective Date, (b) each option will then become exercisable as to 12.5% of the shares and (c) thereafter, the option will become exercisable ratably over the next 42 months, at the end of each succeeding month, at the rate of 2.0833% per month; notwithstanding the foregoing, the options will become fully vested 14 calendar days after the closing date of a Change of Control of the Company, as defined above, provided that Executive has remained an employee of the Company to that date. C. RETENTION BONUS. Fourteen calendar days after the closing date of a Change of Control of the Company, as defined above, and if Executive has remained an employee of the Company to that date, the Company will pay Executive a retention bonus according to the following schedule:
Value of Sale of Assets or Stock Bonus $0 to 7 million $50,000 $7 to 15 million $80,000 $15 to 20 million $120,000 $20 to 25 million $140,000 $25 to 30 million $160,000 $Over 30 million $200,000
If Executive's employment with the Company terminated prior to a Change of Control and the expiration of such 14-day period, (a) the retention bonus will NOT be payable, and the acceleration of vesting of the options granted pursuant to Section 2.B above will not occur, in the event that the employment termination was (i) initiated by Executive, (ii) initiated by the Company for Cause as determined by the Company's Board of Directors or (iii) was because of Executive's death or disability as determined by the Company's Board of Directors, but (b) such bonus will be payable and such acceleration will occur upon a subsequent Change of Control and expiration of such 14-day period in the event that the employment termination was initiated by the Company without Cause as determined by the Company's Board of Directors. As used herein, "Cause" means: (a) An act of moral turpitude by Executive, including but not limited to theft, embezzlement, fraud, dishonesty, commission of a felony or a crime involving moral turpitude, misappropriation of property of the Company or other such conduct which adversely affects Executive's performance, or ability to perform, Executive's job. (b) Executive's failure to physically report for work for a period of three consecutive work days for other than authorized absences, vacation days, sick days, holidays or leaves of absence. (c) Willful violation of law, willful malfeasance or gross negligence by Executive. (d) Material failure by Executive to perform the job duties, or the substantial neglect by Executive of the duties assigned to Executive. (v) Executive's material breach of any agreement with the Company or disregard of the Company's policies. (e) Other misconduct of Executive which is injurious to the Company. D. SEVERANCE. If before Executive becomes eligible to receive the retention bonus provided for in 2.C above Executive's employment with the Company is terminated by the Company other than for Cause and other than because of Executive's death or disability, the Company will pay to Executive, as severance pay, an amount based on three months' salary and not including bonus. 3. Executive agrees that in the event of a Change of Control or the termination of Executive's employment with the Company, Executive will be entitled to no payments or other compensation except as provided for therein (other than, in the case of termination, accrued salary, reimbursable expenses and accrued and unused vacation) and that the compensation Executive receives pursuant to this Agreement represents the total amount of compensation, benefits and bonuses that the Company will be obligated to pay to Executive and that the Company does and will not owe Executive any other amounts. Executive further agrees and understands that any liability for state or federal income taxes that may be assessed as a result of the transactions provided for herein is Executive's sole responsibility, and Executive will not look to the Company for payment or reimbursement of any taxes. 4. AT WILL DISCLAIMER. Executive understands and agrees that this Modification is not a contract of employment for a definite term, and that his employment may be terminated by Executive or the Company at will, with or without cause. 5. MODIFICATION. This Modification may be further modified only by mutual agreement of the parties provided that any further modification must be reduced to writing and signed by Executive and an authorized representative of the Company. 6. SAVINGS. Any terms or provisions of this Agreement which prove to be invalid, void or illegal shall in no way affect, impair or invalidate any other term or provision herein and such remaining terms and provisions shall remain in full force and effect. 7. COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original and all of which taken together constitutes one and the same instrument and in making proof hereof it shall not be necessary to produce or account for more than one such counterpart. 8. ENTIRE AGREEMENT. The parties hereto acknowledge that each has read this Agreement, understands it, and agrees to be bound by its terms. The parties further agree that this Agreement constitutes the complete and exclusive statement of the agreement between the parties and supersedes all proposals (oral or written), understandings, representations, conditions, covenants, and all other communications between the parties relating to the subject matter hereof. 9. GOVERNING LAW. This Agreement shall be governed by the law of the State of California. IN WITNESS WHEREOF, the parties have executed this Agreement on the date first above written. HYBRID NETWORKS, INC. EXECUTIVE By: /s/ Carl S. Ledbetter /s/ Vishwas R. (Victor) Godbole ---------------------------------------- -------------------------------- Carl S. Ledbetter Vishwas R. (Victor) Godbole Chairman & Chief Executive Officer MODIFICATION OF RETENTION BONUS AGREEMENT This Modification of Retention Bonus Agreement (this "Modification") is made to the original Retention Bonus Agreement (the "Agreement") dated as of January 6, 1999 (the "Effective Date"), between Hybrid Networks, Inc., a Delaware corporation (the "Company"), and Jane S. Zeletes ("Executive"). WHEREAS, the purpose of the original Agreement was to provide an incentive for Executive to continue to perform services for the Company, and WHEREAS, the parties agree that the severance payment described in the Agreement is not the best method of encouraging Executive retention, NOW, THEREFORE, pursuant to the modification provision, paragraph 5 of the Agreement, and in consideration of the promises and covenants set forth below, it is mutually agreed to modify the Agreement as follows and that this Modification shall entirely replace and supersede the Agreement: 1. EXECUTIVE'S CONSIDERATION. Executive agrees to remain an employee of the Company at least through the earlier of the following events: A. Executive's termination of employment by the Company, its successors and/or assigns. B. Fourteen calendar days after the closing date of a Change of Control of the Company. A "Change of Control" means the sale or other disposition of all or substantially all of the Company's assets, and/or the sale or other transfer (as a result of a tender offer, merger, consolidation or otherwise) of a controlling share (50% or more) of the Common Stock of the Company. 2. THE COMPANY'S CONSIDERATION. The parties agree that the following is sufficient and new consideration for this Modification of the original Agreement. In consideration of Executive's commitment to remain an employee of the Company through the above-stated events, the Company agrees to: A. SALARY BONUS. Qualifies for 1999 Sales Incentive Plan. B. ADDITIONAL STOCK OPTIONS. Grant Executive options, pursuant to the Company's 1999 Officer Stock Option Plan and the Stock Option Agreement to be entered into between the Company and Executive pursuant thereto, to purchase up to 141,982 shares of the Company's Common Stock at an exercise price of $.50 per share and with the following vesting: (a) no option will be exercisable until the six-month anniversary date of the Effective Date, (b) each option will then become exercisable as to 12.5% of the shares and (c) thereafter, the option will become exercisable ratably over the next 42 months, at the end of each succeeding month, at the rate of 2.0833% per month; notwithstanding the foregoing, the options will become fully vested 14 calendar days after the closing date of a Change of Control of the Company, as defined above, provided that Executive has remained an employee of the Company to that date. C. RETENTION BONUS. Fourteen calendar days after the closing date of a Change of Control of the Company, as defined above, and if Executive has remained an employee of the Company to that date, the Company will pay Executive a retention bonus according to the following schedule:
Value of Sale of Assets or Stock Bonus $0 to 7 million $50,000 $7 to 15 million $80,000 $15 to 20 million $120,000 $20 to 25 million $140,000 $25 to 30 million $160,000 $Over 30 million $200,000
If Executive's employment with the Company terminated prior to a Change of Control and the expiration of such 14-day period, (a) the retention bonus will NOT be payable, and the acceleration of vesting of the options granted pursuant to Section 2.B above will not occur, in the event that the employment termination was (i) initiated by Executive, (ii) initiated by the Company for Cause as determined by the Company's Board of Directors or (iii) was because of Executive's death or disability as determined by the Company's Board of Directors, but (b) such bonus will be payable and such acceleration will occur upon a subsequent Change of Control and expiration of such 14-day period in the event that the employment termination was initiated by the Company without Cause as determined by the Company's Board of Directors. As used herein, "Cause" means: (a) An act of moral turpitude by Executive, including but not limited to theft, embezzlement, fraud, dishonesty, commission of a felony or a crime involving moral turpitude, misappropriation of property of the Company or other such conduct which adversely affects Executive's performance, or ability to perform, Executive's job. (b) Executive's failure to physically report for work for a period of three consecutive work days for other than authorized absences, vacation days, sick days, holidays or leaves of absence. (c) Willful violation of law, willful malfeasance or gross negligence by Executive. (d) Material failure by Executive to perform the job duties, or the substantial neglect by Executive of the duties assigned to Executive. (v) Executive's material breach of any agreement with the Company or disregard of the Company's policies. (e) Other misconduct of Executive which is injurious to the Company. D. SEVERANCE. If before Executive becomes eligible to receive the retention bonus provided for in 2.C above Executive's employment with the Company is terminated by the Company other than for Cause and other than because of Executive's death or disability, the Company will pay to Executive, as severance pay, an amount based on three months' salary not including bonus. 3. Executive agrees that in the event of a Change of Control or the termination of Executive's employment with the Company, Executive will be entitled to no payments or other compensation except as provided for therein (other than, in the case of termination, accrued salary, reimbursable expenses and accrued and unused vacation) and that the compensation Executive receives pursuant to this Agreement represents the total amount of compensation, benefits and bonuses that the Company will be obligated to pay to Executive and that the Company does and will not owe Executive any other amounts. Executive further agrees and understands that any liability for state or federal income taxes that may be assessed as a result of the transactions provided for herein is Executive's sole responsibility, and Executive will not look to the Company for payment or reimbursement of any taxes. 4. AT WILL DISCLAIMER. Executive understands and agrees that this Modification is not a contract of employment for a definite term, and that his employment may be terminated by Executive or the Company at will, with or without cause. 5. MODIFICATION. This Modification may be further modified only by mutual agreement of the parties provided that any further modification must be reduced to writing and signed by Executive and an authorized representative of the Company. 6. SAVINGS. Any terms or provisions of this Agreement which prove to be invalid, void or illegal shall in no way affect, impair or invalidate any other term or provision herein and such remaining terms and provisions shall remain in full force and effect. 7. COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original and all of which taken together constitutes one and the same instrument and in making proof hereof it shall not be necessary to produce or account for more than one such counterpart. 8. ENTIRE AGREEMENT. The parties hereto acknowledge that each has read this Agreement, understands it, and agrees to be bound by its terms. The parties further agree that this Agreement constitutes the complete and exclusive statement of the agreement between the parties and supersedes all proposals (oral or written), understandings, representations, conditions, covenants, and all other communications between the parties relating to the subject matter hereof. 9. GOVERNING LAW. This Agreement shall be governed by the law of the State of California. IN WITNESS WHEREOF, the parties have executed this Agreement on the date first above written. HYBRID NETWORKS, INC. EXECUTIVE By: /s/ Carl S. Ledbetter /s/ Jane S. Zeletes -------------------------------------- ----------------------------- Carl S. Ledbetter Jane S. Zeletes Chairman & Chief Executive Officer MODIFICATION OF RETENTION BONUS AGREEMENT This Modification of Retention Bonus Agreement (this "Modification") is made to the original Retention Bonus Agreement (the "Agreement") dated as of January 6, 1999 (the "Effective Date"), between Hybrid Networks, Inc., a Delaware corporation (the "Company"), and William M. Daniher ("Executive"). WHEREAS, the purpose of the original Agreement was to provide an incentive for Executive to continue to perform services for the Company, and WHEREAS, the parties agree that the severance payment described in the Agreement is not the best method of encouraging Executive retention, NOW, THEREFORE, pursuant to the modification provision, paragraph 5 of the Agreement, and in consideration of the promises and covenants set forth below, it is mutually agreed to modify the Agreement as follows and that this Modification shall entirely replace and supersede the Agreement: 1. EXECUTIVE'S CONSIDERATION. Executive agrees to remain an employee of the Company at least through the earlier of the following events: A. Executive's termination of employment by the Company, its successors and/or assigns. B. Fourteen calendar days after the closing date of a Change of Control of the Company. A "Change of Control" means the sale or other disposition of all or substantially all of the Company's assets, and/or the sale or other transfer (as a result of a tender offer, merger, consolidation or otherwise) of a controlling share (50% or more) of the Common Stock of the Company. 2. THE COMPANY'S CONSIDERATION. The parties agree that the following is sufficient and new consideration for this Modification of the original Agreement. In consideration of Executive's commitment to remain an employee of the Company through the above-stated events, the Company agrees to: A. SALARY BONUS. Effective February 15, 1999, a salary bonus of 50% of salary. B. ADDITIONAL STOCK OPTIONS. Grant Executive options, pursuant to the Company's 1999 Officer Stock Option Plan and the Stock Option Agreement to be entered into between the Company and Executive pursuant thereto , to purchase up to 231,279 shares of the Company's Common Stock at an exercise price of $.50 per share and with the following vesting: (a) no option will be exercisable until the six-month anniversary date of the Effective Date, (b) each option will then become exercisable as to 12.5% of the shares and (c) thereafter, the option will become exercisable ratably over the next 42 months, at the end of each succeeding month, at the rate of 2.0833% per month; notwithstanding the foregoing, the options will become fully vested 14 calendar days after the closing date of a Change of Control of the Company, as defined above, provided that Executive has remained an employee of the Company to that date. C. RETENTION BONUS. Fourteen calendar days after the closing date of a Change of Control of the Company, as defined above, and if Executive has remained an employee of the Company to that date, the Company will pay Executive a retention bonus according to the following schedule:
Value of Sale of Assets or Stock Bonus $0 to 7 million $50,000 $7 to 15 million $80,000 $15 to 20 million $120,000 $20 to 25 million $140,000 $25 to 30 million $160,000 $Over 30 million $200,000
If Executive's employment with the Company terminated prior to a Change of Control and the expiration of such 14-day period, (a) the retention bonus will NOT be payable, and the acceleration of vesting of the options granted pursuant to Section 2.B above will not occur, in the event that the employment termination was (i) initiated by Executive, (ii) initiated by the Company for Cause as determined by the Company's Board of Directors or (iii) was because of Executive's death or disability as determined by the Company's Board of Directors, but (b) such bonus will be payable and such acceleration will occur upon a subsequent Change of Control and expiration of such 14-day period in the event that the employment termination was initiated by the Company without Cause as determined by the Company's Board of Directors. As used herein, "Cause" means: (a) An act of moral turpitude by Executive, including but not limited to theft, embezzlement, fraud, dishonesty, commission of a felony or a crime involving moral turpitude, misappropriation of property of the Company or other such conduct which adversely affects Executive's performance, or ability to perform, Executive's job. (b) Executive's failure to physically report for work for a period of three consecutive work days for other than authorized absences, vacation days, sick days, holidays or leaves of absence. (c) Willful violation of law, willful malfeasance or gross negligence by Executive. (d) Material failure by Executive to perform the job duties, or the substantial neglect by Executive of the duties assigned to Executive. (v) Executive's material breach of any agreement with the Company or disregard of the Company's policies. (e) Other misconduct of Executive which is injurious to the Company. D. SEVERANCE. If before Executive becomes eligible to receive the retention bonus provided for in 2.C above Executive's employment with the Company is terminated by the 2 Company other than for Cause and other than because of Executive's death or disability, the Company will pay to Executive, as severance pay, an amount based on three months' salary not including bonus. 3. Executive agrees that in the event of a Change of Control or the termination of Executive's employment with the Company, Executive will be entitled to no payments or other compensation except as provided for therein (other than, in the case of termination, accrued salary, reimbursable expenses and accrued and unused vacation) and that the compensation Executive receives pursuant to this Agreement represents the total amount of compensation, benefits and bonuses that the Company will be obligated to pay to Executive and that the Company does and will not owe Executive any other amounts. Executive further agrees and understands that any liability for state or federal income taxes that may be assessed as a result of the transactions provided for herein is Executive's sole responsibility, and Executive will not look to the Company for payment or reimbursement of any taxes. 4. AT WILL DISCLAIMER. Executive understands and agrees that this Modification is not a contract of employment for a definite term, and that his employment may be terminated by Executive or the Company at will, with or without cause. 5. MODIFICATION. This Modification may be further modified only by mutual agreement of the parties provided that any further modification must be reduced to writing and signed by Executive and an authorized representative of the Company. 6. SAVINGS. Any terms or provisions of this Agreement which prove to be invalid, void or illegal shall in no way affect, impair or invalidate any other term or provision herein and such remaining terms and provisions shall remain in full force and effect. 7. COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original and all of which taken together constitutes one and the same instrument and in making proof hereof it shall not be necessary to produce or account for more than one such counterpart. 8. ENTIRE AGREEMENT. The parties hereto acknowledge that each has read this Agreement, understands it, and agrees to be bound by its terms. The parties further agree that this Agreement constitutes the complete and exclusive statement of the agreement between the parties and supersedes all proposals (oral or written), understandings, representations, conditions, covenants, and all other communications between the parties relating to the subject matter hereof. 9. GOVERNING LAW. This Agreement shall be governed by the law of the State of California. IN WITNESS WHEREOF, the parties have executed this Agreement on the date first above written. 3 HYBRID NETWORKS, INC. EXECUTIVE By: /s/ Carl S. Ledbetter /s/ William M. Daniher -------------------------------------- ---------------------------- Carl S. Ledbetter William M. Daniher Chairman & Chief Executive Officer 4 EX-10.30 5 EXHIBIT 10.30 [LOGO] SEPARATION AGREEMENT AND GENERAL RELEASE This Agreement (this "AGREEMENT") is entered into as of March 17, 1999, between Hybrid Networks, Inc., a Delaware corporation (the "COMPANY"), and William M. Daniher ("EMPLOYEE"). RECITALS A. Whereas, the Company has employed Employee as its President and COO; B. Whereas Employee wishes to end his employment relationship with the Company as of March 31, 1999 (the "TERMINATION DATE"), and he and the Company wish to provide for termination of that relationship by mutual agreement in a way which will preserve the goodwill that exist between them. Now, therefore, in consideration of the premises and mutual promises herein contained, the parties agree as follows: 1. TERMS OF SEPARATION A. Employee's employment ends as of the Termination Date. The Company will deliver on March 17, 1999, to Employee a check based on the gross amount set forth in part 1 of EXHIBIT A hereto for accrued salary, reimbursable expenses, accrued but unused vacation pay and any other similar payments due and owing to Employee up to the Termination Date, adjusted for applicable withholding and deductions.. B. ON March 17, 1999, the Company will deliver to Employee a check based on the gross amount set forth in part 2 of EXHIBIT A as agreed upon in the Modification of Retention Bonus Agreement 2D representing severance pay. C. Employee will have 90 days after the Termination Date to exercise Employee's vested options. Employee's vested options are those options that have vested as of the Termination Date. The vesting of Employee's options will cease as of the Termination Date, except as indicated below in this Sections 1.C. If the company is successful in selling itself or its assets prior to April 1, 2000, Employee will receive the full bonus as provided for under paragraph 2C in the Modification of Retention Bonus Agreement. If the Company is successful in selling itself or its assets prior to April 1, 2000, vesting of the Additional Stock Options referred to in paragraph 2B of the Modification of Retention Bonus Agreement will accelerate and Employee will be able to exercise those options within 60 days after the sale. D. The Company offers to extend the health insurance coverage it currently provides Employee pursuant to the Consolidated Omnibus Budget Reconciliation Act of 1985 ("COBRA") at Employee's expense. Employee will have 60 days from the Termination Date to notify the Company in writing of his election to continue coverage pursuant to COBRA [LOGO] E. The Company will continue to provide Employee, during the period commencing on the Termination date and ending June 30, 1999, access to the Company's server for e-mail receipt and transmittal. Employee warrants that he has returned to the Company any and all property and data of the Company of any type whatsoever that was in his possession, custody or control. F. The parties acknowledge that Employee is bound by the Proprietary Information and Inventions Agreement, which he signed when he commenced employment with the Company, and that Employee has had access to and has become acquainted with various non-public, confidential or trade secret information of the Company, including, but not limited to information referred to in the PII Agreement as "Proprietary Information" and records of the Company that are regularly used in the operation of the Company's business, that affect the success, profitability and good will of the Company and that are not known or available to persons outside the Company, and other nonpublic, confidential or trade secret information of the Company (collectively, the "PROPRIETARY INFORMATION"). With respect to such Proprietary Information Employee agrees: (i) That all Proprietary Information and documents, memoranda, reports, files, correspondence and records that relate to the Company's business that Employee had contact with remain the Company's sole property; (ii) That Employee will continue to abide by the terms and conditions of the attached PII Agreement to the extent that such terms and conditions provide for continuing obligations after termination of his employment; (iii) That he will not directly or indirectly disclose any of this Proprietary Information, or use it in any way, either during the term of this Agreement or at any time thereafter, except as authorized in writing by the Company; (iv) That he has delivered and returned to the Company all written or graphic records that he knows, suspects or should know contain Proprietary Information. 2. MUTUAL RELEASE Employee and his representatives, heirs, successors and assigns do hereby completely release and forever discharge the Company, its affiliates, present and former shareholders, officers, directors, agents, employees, attorneys, successors and assigns from all claims, rights, demands, actions, obligations, liabilities and causes of action he may have had or now have, known or unknown, to pursue any remedies available to him whether based on tort, contract (express or implied) or any federal, state or local law, statute or regulation, including, but not limited to, matters that could have been raised in a civil action, any employment laws, including but not limited to, claims of unlawful discharge, breach of contract, breach of the covenant of good faith and fair dealing, fraud, violation of public policy, defamation, physical injury, emotional distress, claims under Title VII of the 1964 Civil Rights Act, as amended, the California Fair Employment and Housing Act, the Age Discrimination in Employment Act, the Older Worker Benefit Protection Act and any other laws and/or regulations relating to employment or employment discrimination. Notwithstanding the foregoing, Employee does not [LOGO] release any claims based on obligations created by or reaffirmed in the Pll Agreement, the Indemnity Agreement entered into between the Company and Employee (the "INDEMNITY AGREEMENT") or this Agreement, including, without limitation, the obligations of the Company under the Indemnity Agreement to provide indemnification and a defense for Employee as set forth therein, whether or not such claims have already arisen or arise after the date hereof. The Company and its successors and assigns do hereby completely release and forever discharge Employee and his representatives, heirs, attorneys, successors and assigns from all claims, rights, demands, actions, obligations, liabilities and causes of action the Company may have had or now have, known or unknown, to pursue any remedies available to the Company whether based on tort, contract (express or implied) or any federal, state or local law, statute or regulation, including, but not limited to, matters that could have been raised in a civil action, any employment laws, including but not limited to, claims of breach of contract, breach of the covenant of good faith and fair dealing, fraud, violation of public policy, defamation, physical injury, emotional distress, claims under Title VII of the 1964 Civil Rights Act, as amended, the California Fair Employment and Housing Act, the Age Discrimination in Employment Act, the Older Worker Benefit Protection Act and any other laws and/or regulations relating to employment. Notwithstanding the foregoing, the Company and its successors and assigns do not release any claims based on obligations created by or reaffirmed in the PII Agreement, the Indemnity Agreement or this Agreement, including, without limitation, the obligations referred to in Section 1.F above, whether or not such claims have already arisen or arise after the date hereof. 3. SECTION 1542 WAIVER Based on information currently available to the Company and Employee, as applicable, (i) the Company is not aware that Employee has committed any wrongdoing or has participated in the preparation and filing with any government agency of any report or final prospectus or registration statement that is incorrect or incomplete or in the preparation and issuance of any public announcement or any filing with any government agency which at the time thereof Employee knew or should have known to be incorrect or incomplete, and (ii) Employee is not aware that the Company has committed any wrongdoing or has prepared and filed with any government agency any report or final prospectus or registration statement that is incorrect or incomplete or in the preparation and issuance of any public announcement or any filing with any government agency which at the time thereof the Company knew or should have known to be incorrect or incomplete. Notwithstanding the foregoing, each party understands that, except for any claims referred to in the last sentence of the first paragraph of Section 2 or in the last sentence of the second paragraph of Section 2 (the "EXCEPTED CLAIMS"), such party releases not only claims presently known to such party, but also all unknown or unanticipated claims, rights, demands, actions, obligations, liabilities and causes of action of every kind and character that would otherwise come within the scope of the release and as described in the preceding sections. Each party understands that such party may hereafter discover facts different from what such party now believes to be true, which if known, could have materially affected this Agreement, but such party nevertheless waives any claims or rights based on different or additional facts, other than any Excepted Claims. Except for the Excepted Claims, each party knowingly and voluntarily waives any and all rights or benefits that such party may now have, or in the future may have, under the terms of section 1542 of the California Civil Code, which provides as follows: [LOGO] A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR. 4. CONFIDENTIALITY Employee and the Company understand and agree that this Agreement and each of its terms, and the negotiations surrounding it, are confidential and will not be disclosed by Employee or the Company, to any entity or person, for any reason, at any time, without the prior written consent of the other party, except (i) as required by law or regulatory authority (including governmental taxing agencies and the company's disclosure obligations, as reasonably interpreted by the company) or by lawful process (provided that Employee will give written notice to the Company of any such process sufficiently in advance of disclosure that the Company will have the reasonable opportunity to contest the disclosure) or (ii) to the parties' respective legal advisors, accountants or tax advisors (or, in the case of Employee, spouse), provided that such person be informed of and agree to be bound by this confidentiality obligation. 5. NON-ADMISSION The parties understand and agree that this Agreement is not and will not be deemed or construed at any time or for any purpose as an admission of liability by the Company or by Employee. The liability for any and all claims is expressly denied by the Company and by Employee. 6. INTEGRATION The parties understand and agree that the preceding sections recite the sole consideration for this Agreement; that no representation or promise has been made by Employee, the Company or any other party concerning the subject matter of this Agreement, except as expressly set forth in this Agreement or the PII Agreement; and that all agreements and understandings between the parties concerning the subject matter of this Agreement are embodied and expressed in this Agreement and the PII Agreement. This Agreement and the PII Agreement will supersede all prior agreements and understandings between Employee and the Company, whether written or oral, express or implied, with respect to the engagement, employment, termination and compensation of Employee. 7. AMENDMENTS; WAIVER This Agreement may not be modified, amended, or terminated except by an instrument in writing, signed by each of the parties. No failure to exercise and no delay in exercising any right, remedy or power under this Agreement will operate as a waiver thereof, and no single or partial exercise of any right, remedy or power under this Agreement will preclude any other or further exercise thereof, or the exercise of any other right, remedy or power provided herein or by law or in equity. 8. ASSIGNMENT; SUCCESSORS AND ASSIGNS [LOGO] This Agreement will be binding upon and will inure to the benefit of the parties and their respective heirs, successors, attorneys and permitted assigns. This Agreement will not benefit any other person or entity except as specifically enumerated in this Agreement. 9. SEVERABILITY If any provision of this Agreement, or its application to any person, place or circumstance, is held by an arbitrator or a court of competent jurisdiction to be invalid, unenforceable or void, such provision will be enforced to the greatest extent permitted by law, and the remainder of this Agreement and provision as applied to other persons, places and circumstances will remain in full force and effect. 10. GOVERNING LAW This Agreement will be governed by and construed in accordance with the law of the State of California. 11. CONSIDERATION PERIOD Employee acknowledges he has read and understands this Agreement and that his signature below is completely voluntary. Employee also acknowledges that the Company has offered him the opportunity to take up to 21 days to consider this Agreement but that he has elected to execute and deliver this Agreement before such 21-day period has elapsed and that he waives his rights to consider this Agreement for such 21-day period. Employee further acknowledges that he has been told by the Company that he has the right to consult with an attorney about this Agreement, that he was encouraged by the Company to consult with an attorney of his own choosing concerning the waivers contained in this Agreement, that he has done so and that the waivers he has made are knowing, conscious and with full appreciation that he may never pursue any of the rights he has waived. [LOGO] IN WITNESS WHEREOF, the parties have executed and delivered as of the first date set forth above. Employee: The Company: HYBRID NETWORKS, INC. /s/ William M. Daniher - ----------------------------- William M. Daniher By: --------------------------------------- Carl S. Ledbetter Chairman & Chief Executive Officer EXHIBIT A 1. Gross amount paid to Employee: $9184.18 and amount for accrued salary, reimbursable expenses and accrued but unused vacation pay through March 31, 1999. 2. Gross severance pay to Employee: $42,499.98, an amount equal to 3 months' base salary, not including bonus. [LOGO] EMPLOYEE CONFIDENTIALITY AND INVENTIONS AGREEMENT In consideration of and as part of the terms of my employment or continued employment by Hybrid Networks, Inc. ("Hybrid"), I agree as follows: 1. PURPOSE OF AGREEMENT. I understand that Hybrid is engaged in a continuous program of research, development, marketing and other activities in connection with its business. I further understand and agree that Hybrid has a critical interest in preserving and protecting its proprietary information, its rights in inventions and in all related intellectual property. Accordingly, I am entering into this Employee Confidentiality and Inventions Agreement ("Agreement") as a condition of my employment or continued employment by Hybrid. 2. NON-DISCLOSURE OF CONFIDENTIAL OR PROPRIETARY INFORMATION. I acknowledge and agree that while employed by Hybrid I will have access to confidential or proprietary information relating to the business and operations of Hybrid. Such confidential or proprietary information consists of all business information (1) that is not generally known to, and cannot be readily ascertained by others, (2) that has actual or potential economic value to Hybrid, and (3) that is treated as confidential by Hybrid. By way of illustration, confidential or proprietary information includes, but is not limited to, written and unwritten information concerning present and prospective products, services, sales and marketing concepts and methods, customer lists, costs, profits, market studies, and matters of a technical nature including know-how, methods, techniques, computer programs, computer hardware, computer software and documentation, research projects and studies, compilations, and personnel data about employees of Hybrid, including salaries, and other information of a similar nature. Confidential or proprietary information also includes any information belonging to third parties, including customers and suppliers of Hybrid, who may have disclosed confidential information to me during my employment with Hybrid. I will at all times, both during my employment and thereafter, keep and hold all such confidential or proprietary information in strictest confidence and trust. I will not at any time use or disclose any such information without the prior written consent of Hybrid, except as may be necessary to perform my duties for the benefit of Hybrid. 3. RETURN OF CONFIDENTIAL OR PROPRIETARY INFORMATION AND OTHER MATERIALS. Upon termination of my employment with Hybrid, or at the request of Hybrid at any time prior to termination of my employment, I will promptly deliver to Hybrid all documents and materials of any nature relating to my work with Hybrid. Further, I will not take with me or keep any documents, materials or copies containing any Hybrid confidential or proprietary information. [LOGO] 4a. NON-COMPETITION DURING EMPLOYMENT. While employed by Hybrid, I agree not to engage in any employment, consulting, or business activity, other than for Hybrid, relating to any line of business in which Hybrid is engaged or which would otherwise conflict with my obligations to Hybrid. 5. NO SOLICITATION DURING EMPLOYMENT. I agree that during my employment with Hybrid I will not, directly or indirectly, either for myself or any other person or entity, induce or influence any person who is engaged as an employee, agent, independent contractor, or otherwise by Hybrid to terminate his or her employment or engagement with Hybrid. I further agree that during my employment with Hybrid I will not approach or solicit in any manner, either for myself or any other person or entity, any customer of Hybrid to cease doing business with Hybrid or to do business with me or with any other person or entity. 6. NO SOLICITATION AFTER EMPLOYMENT. I agree that for a period of one year following the termination of my employment with Hybrid, for whatever reason, I will not directly or indirectly solicit any person employed or otherwise engaged by Hybrid to terminate his or her employment or engagement with Hybrid. I further agree that for a reasonable period of time after the termination of my employment, which I agree is a period of one year, I will not directly or indirectly solicit any customer of Hybrid to the extent the identity of the customer constitutes a trade secret or is proprietary or confidential information as defined in Paragraph 2 of this Agreement. 7. DISCLOSURE AND OWNERSHIP OF INVENTIONS. For purposes of this Agreement the term "inventions" means any and all creations, artworks, discoveries, improvements, technical developments, or inventions whether or not patentable, and all related know-how, designs, mask works, trademarks, formulae, processes, manufacturing techniques, ideas, artworks, software or trade secrets. I agree to promptly disclose in confidence to Hybrid all inventions that I make or conceive, either alone or jointly with others, during the period of my employment, whether or not in the course of my employment, and whether or not such inventions are patentable, copyrightable or protectable as trade secrets. I acknowledge that all inventions that (1) are developed using equipment, supplies, facilities or trade secrets of Hybrid, (2) result from work performed by me for Hybrid, or (3) relate to Hybrid's business or current or anticipated research and development, will be the sole and exclusive property of Hybrid. I hereby irrevocably assign any and all rights I may claim to any such inventions to Hybrid. I acknowledge and agree that any copyrightable works prepared by me within the scope of my employment are "works for hire" under the Copyright Act and that Hybrid will be considered the author and owner of such copyrightable works. I agree to execute documents and take all other appropriate actions to assist Hybrid in obtaining and enforcing any patents, copyrights, mask work rights, trade secret rights, and other legal protections for Hybrid's inventions or confidential or proprietary information. [LOGO] 8. LABOR CODE SECTION 2870 NOTICE. Notwithstanding Paragraph 8, above, I understand and acknowledge that I will not be required to assign to Hybrid the rights to any inventions that are developed entirely on my own time, without using Hybrid's equipment, supplies, facilities or trade secret information, and that otherwise fully qualify under the provisions of California Labor Code Section 2870. I understand and agree, however, that I will be required in all events to disclose all inventions made solely or jointly with others during the term of my employment with Hybrid, in accordance with California Labor Code Section 2871. I acknowledge that a copy of California Labor Code Sections 2870, 2871 and 2872 are attached to this Agreement. 9. NON-DISCLOSURE OF FORMER EMPLOYER'S CONFIDENTIAL INFORMATION. I certify that my performance of the terms of this Agreement, and of my duties as an employee of Hybrid, will not breach any existing agreement I may have with any former employer or other party. I certify that I will not bring with me to Hybrid or use in the performance of my duties for Hybrid any trade secret or proprietary information belonging to any former employer or other party. 10. NOTIFICATION. I authorize Hybrid to notify my past, present or future employers of the terms of this Agreement and my responsibilities under this Agreement. 11. INJUNCTIVE RELIEF. I acknowledge and agree that while employed by Hybrid I will have access to confidential or proprietary information and I will render personal services of a special, unique and extraordinary character. I agree that the restrictive covenants set forth in this Agreement are reasonable and necessary for the adequate protection of the affairs and business of Hybrid, that a breach of a covenant could affect the successful conduct of Hybrid's business and its goodwill, and that it would be difficult or impossible to determine adequate or appropriate monetary damages in the event of any breach of these obligations. In recognition of these facts, I consent and agree that if I violate any of these restrictive covenants, Hybrid is entitled to injunctive relief, restraining me from committing or continuing any violation of these covenants. Such injunctive relief will be in addition to any other rights and remedies that are available to Hybrid under this Agreement or otherwise. 12. SEVERABILITY. If any part of this Agreement is determined to be invalid or unenforceable, that part will be amended to achieve as nearly as possible the same effect as the original provision, and the remainder of this Agreement will remain in full force and effect. 13. GOVERNING LAW. This Agreement will be governed by and construed in accordance with the laws of the Unites States and the State of California as applied to agreements entered into and performed entirely within California between California residents. [LOGO] 14. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement between the parties relating to the covered subject matters and supersedes all prior or simultaneous representations, discussions, negotiations and agreements, whether written or oral. This Agreement may be modified only in writing and only with the written consent of both parties. DATED: APR 16, 1999 /s/ William M. Daniher ------------------------------ ----------------------------- [SIGNATURE] WILLIAM M. DANIHER ----------------------------- [TYPE OR PRINT EMPLOYEE'S NAME] DATED: APRIL 16, 1999 HYBRID NETWORKS, INC. ------------------------------ By /s/ Judson W. Goldsmith --------------------------- [SIGNATURE] Vice President, Finance ----------------------------- [TYPE OR PRINT EMPLOYEE'S NAME] JUDSON W. GOLDSMITH VICE PRESIDENT, FINANCE EX-27.1 6 EXHIBIT 27.1
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE 3/31/99 BALANCE SHEET AND THE STATEMENT OF OPERATIONS FOR THE THREE MONTHS THEN ENDED AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS DEC-31-1999 JAN-01-1999 MAR-31-1999 2,837 0 816 200 3,064 7,729 5,699 2,585 11,310 11,524 0 0 0 10 (560) 11,310 4,123 4,123 4,264 4,264 2,909 0 208 (3,253) 0 0 0 0 0 (3,253) (0.31) (0.31)
EX-27.2 7 EXHIBIT 27.2
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE 3/31/98 BALANCE SHEET AND THE STATEMETN OF OPERATIONS FOR THE THREE MONTHS THEN ENDED AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS DEC-31-1998 JAN-01-1998 MAR-31-1998 7,337 12,665 1,862 50 7,917 30,099 3,229 1,461 33,799 10,808 0 0 0 10 22,394 33,799 2,706 2,706 3,338 3,338 4,380 50 224 (4,834) 0 0 0 0 0 (4,834) (0.47) (0.47)
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