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 December 31, 1996 or
Transition Report Pursuant to Section 13 or 15(d) of the
- ----- Securities Exchange Act of 1934
For the transition period from to
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Commission file number 1-6435
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BBN Corporation
-----------------------------
(Exact name of registrant as specified in its charter)
Massachusetts 04-2164398
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
150 CambridgePark Drive, Cambridge, Massachusetts 02140
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (617) 873-2000
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--------------------------------------------------------------------------
(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 Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Number of shares of common stock, $1.00 par value, outstanding as of
January 31, 1997: 21,222,359
Exhibit index appears on page 19
BBN CORPORATION
INDEX
Page No.
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Part I. Financial Information
Consolidated Statements of Operations -
Three Months Ended December 31, 1996 and 1995.................3
Consolidated Statements of Operations -
Six Months Ended December 31, 1996 and 1995...................4
Consolidated Balance Sheets -
as of December 31, 1996 and June 30, 1996.....................5
Consolidated Statements of Cash Flows -
Six Months Ended December 31, 1996 and 1995...................6
Notes to Consolidated Financial Statements.......................7
Management's Discussion and Analysis of Financial
Condition and Results of Operations..........................11
Part II. Other Information
Item 2. Changes in Securities..................................18
Item 6. Exhibits and Reports on Form 8-K.......................18
Signatures......................................................18
Note: Page references relate solely to this document in its
traditional filing format.
ITEM 1 PART I. FINANCIAL INFORMATION
BBN CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Amounts in thousands, except shares and per-share data
Three Months Ended
------------------------------
December 31 December 31
1996 1995
------------ ------------
Revenue $ 83,923 $ 54,608
------------ ------------
Costs and expenses:
Cost of revenue 69,063 40,697
Research and development 2,740 2,622
Selling, general and administrative 22,639 18,653
------------ ------------
94,442 61,972
------------ ------------
Loss from operations (10,519) (7,364)
Interest income 1,753 1,077
Interest expense (1,394) (1,125)
Minority interest (28) (15)
------------ ------------
Loss from continuing operations
before income taxes (10,188) (7,427)
Income taxes (1,882)
------------ ------------
Loss from continuing operations (10,188) (5,545)
Loss from discontinued operations
(net of applicable income taxes) (2,345)
------------ ------------
Net loss $ (10,188) $ (7,890)
============ ============
Loss per share:
Continuing operations $ (.48) $ (.32)
Discontinued operations (.13)
------------ ------------
Net loss per share $ (.48) $ (.45)
============ ============
Shares used in per-share calculations 21,053,000 17,694,000
============ ============
The accompanying notes are an integral
part of the consolidated financial statements.
BBN CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Amounts in thousands, except shares and per-share data
Six Months Ended
------------------------------
December 31 December 31
1996 1995
------------ ------------
Revenue $ 158,219 $ 104,789
------------ ------------
Costs and expenses:
Cost of revenue 130,490 77,784
Research and development 5,892 4,987
Selling, general and administrative 43,269 36,252
------------ ------------
179,651 119,023
------------ ------------
Loss from operations (21,432) (14,234)
Interest income 3,309 2,671
Interest expense (2,783) (2,259)
Minority interest (30) (84)
------------ ------------
Loss from continuing operations
before income taxes (20,936) (13,906)
Income taxes (3,931)
------------ ------------
Loss from continuing operations (20,936) (9,975)
Income (loss) from discontinued operations
(net of applicable income taxes) 20,000 (6,566)
------------ ------------
Net loss $ (936) $ (16,541)
============ ============
Income (loss) per share:
Continuing operations $ (.98) $ (.57)
Discontinued operations .94 (.37)
------------ ------------
Net loss per share $ (.04) $ (.94)
============ ============
Shares used in per-share calculations 21,396,000 17,606,000
============ ============
The accompanying notes are an integral
part of the consolidated financial statements.
BBN CORPORATION
CONSOLIDATED BALANCE SHEETS
Dollars in thousands
December 31 June 30
1996 1996
------------ ------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents (includes restricted
cash of $4,854 at December 31, 1996 and
$4,711 at June 30, 1996) $ 55,001 $ 79,533
Short-term investments 52,499 40,742
Accounts receivable, net 70,638 60,825
Other current assets 13,295 10,314
Net assets of discontinued operations 8,082
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Total current assets 191,433 199,496
Property, plant and equipment, net 63,090 48,069
Other assets 7,478 1,772
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Total assets $ 262,001 $ 249,337
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 26,500 $ 27,702
Accrued compensation and retirement plan 6,749 8,272
Accrued restructuring charges 6,693 7,352
Other accrued costs 30,206 16,649
Short term lease obligations 4,215 4,041
Deferred revenue 18,292 15,369
------------ ------------
Total current liabilities 92,655 79,385
6% convertible subordinated debentures due 2012 73,170 73,170
Capital lease obligation 6,540 8,692
Minority interest 784 754
Redeemable convertible preferred stock of subsidiary 8,000
Redeemable common stock 8,000
Commitments and contingencies
Shareholders' equity:
Common stock, $1 par value, authorized:
100,000,000 shares; issued: 25,188,226 shares at
December 31, 1996 and 24,911,529 shares at
June 30, 1996 25,188 24,912
Additional paid-in capital (net of $1,772 of 112,944 114,536
deferred compensation at December 31, 1996)
Accumulated deficit (28,861) (27,925)
------------ ------------
109,271 111,523
Less shares in treasury, at cost: 3,998,751 and
4,527,464 shares at December 31, 1996 and
June 30, 1996, respectively (28,419) (32,187)
------------ ------------
Total shareholders' equity 80,852 79,336
------------ ------------
Total liabilities and shareholders' equity $ 262,001 $ 249,337
============ ============
The accompanying notes are an integral
part of the consolidated financial statements.
BBN CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Dollars in thousands Six Months Ended
----------------------------
December 31 December 31
1996 1995
------------ ------------
Cash flows from continuing operating activities:
Loss from continuing operations $ (20,936) $ (9,975)
------------ ------------
Adjustments to reconcile loss from
continuing operations to net cash
used by operating activities:
Depreciation and amortization 8,035 4,752
Amortization of goodwill 1,043
Change in assets and liabilities:
Accounts receivable (9,813) (2,612)
Other assets (3,687) (749)
Accounts payable and other liabilities 5,216 823
Restructuring expenditures (659) (750)
Deferred revenue 2,923 3,909
Income taxes, net (4,329)
Other (477) (160)
------------ ------------
Total adjustments 1,538 1,927
------------ ------------
Net cash used by continuing operating
activities (19,398) (8,048)
------------ ------------
Cash flows from discontinued operating activities (1,868) (5,426)
------------ ------------
Cash flows from investing activities:
Proceeds from sale of BBN Domain 36,000
Purchases of short-term investments, net (11,757) (47,281)
Additions to property, plant and equipment (23,491) (9,404)
Additions to property, plant and equipment
from discontinued operations (1,807)
Investment in joint venture (5,000)
Payments to minority owner (2,199)
Net cash used by investing ------------ ------------
activities (4,248) (60,691)
------------ ------------
Cash flows from financing activities:
Sale of subsidiary preferred stock 8,000
Repayments on capital lease obligations (1,978)
Employee stock purchase and option plans 2,960 (1,626)
------------ ------------
Net cash provided by financing activities 982 6,374
------------ ------------
Net decrease in cash and cash equivalents (24,532) (67,791)
Cash and cash equivalents - beginning of period 79,533 107,608
------------ ------------
Cash and cash equivalents - end of period $ 55,001 $ 39,817
============ ============
The accompanying notes are an integral
part of the consolidated financial statements
BBN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
A. Basis of Presentation
The financial information included herein, with the exception of the
consolidated balance sheet at June 30, 1996, has not been audited. However,
in the opinion of management, all material adjustments necessary for a fair
presentation of the results for these periods, have been reflected and
consist only of normal recurring accruals. The results for these periods
are not necessarily indicative of the results for the full fiscal year. The
net assets and liabilities of BBN Domain at June 30, 1996, and the related
results of operations and cash flows for the periods presented, are
classified as discontinued operations in the consolidated financial
statements. Refer to Footnote E, "Discontinued Operations" for further
discussion.
The accompanying financial information should be read in conjunction with
the consolidated financial statements and notes thereto contained in the
Company's annual report on Form 10-K filed with the Securities and Exchange
Commission for the year ended June 30, 1996.
B. Change in Accounting Estimate
Effective July 1, 1996, the Company revised its estimate of the useful life
of certain data communications equipment from three to five years to better
reflect the useful service period of the related equipment. The change had
the effect of reducing depreciation expense and the loss from continuing
operations by approximately $400,000 or $.02 per share, and $950,000 or $.04
per share for the three and six months ended December 31, 1996,
respectively.
C. Segment Information
The following is a summary of business segment information from continuing
operations for the three and six months ended December 31, 1996 and 1995,
respectively.
Three Months Ended Six Months Ended
December 31 December 31
-------------------- ------------------
Dollars in thousands 1996 1995 1996 1995
--------- --------- -------- --------
Revenue:
BBN Planet $ 39,179 $ 16,155 $ 71,884 $ 26,824
BBN Systems and Technologies 45,615 39,041 87,578 78,716
Eliminations (871) (588) (1,243) (751)
-------- -------- -------- --------
$ 83,923 $ 54,608 $ 158,219 $ 104,789
======== ======== ========= =========
Income (loss) from operations:
BBN Planet $ (11,770) $ (6,914) $ (22,556) $ (14,861)
BBN Systems and Technologies 1,821 692 1,888 2,298
Unallocated corporate expenses (570) (1,142) (764) (1,671)
-------- -------- --------- ---------
$ (10,519) $ (7,364) $ (21,432) $ (14,234)
.========== ========= ========= =========
BBN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
D. Other Assets
On August 14, 1996, the Company and Andersen Consulting LLP entered into a
joint venture aimed at exploring and developing opportunities in the
Internet market. The Company contributed $5,000,000 in exchange for an
approximately 12.5% ownership stake in the venture entity; Andersen
Consulting LLP retains the remaining 87.5% interest. The Company entered
into an agreement with Andersen Consulting LLP to provide the joint venture
with technical and engineering services, the value of which is expected to
be approximately $4,000,000 in fiscal 1997.
E. Discontinued Operations
On July 31, 1996 the Company completed the divestiture of a majority
interest in its former subsidiary BBN Domain Corporation ("Domain"). Under
the terms of the agreement, Domain has been recapitalized, a significant
portion of the Company's interest has been redeemed, and a majority of the
stock interest in Domain has been purchased by an investment group. The
Company received a cash payment of $36,000,000 and will retain a minority
interest in the voting stock of the renamed Domain Solutions Corporation.
Domain Solutions Corporation has retained substantially all assets and
liabilities related to its operations. The net gain recorded on the
divestiture was $20,000,000 after considering costs of approximately
$8,000,000 including facilities, employee related and other costs incurred
in connection with the divestiture. The net assets, liabilities, results of
operations and cash flows of Domain are classified as discontinued
operations in the consolidated financial statements.
F. Redeemable Common Stock and Preferred Stock of Subsidiary
In July 1995, AT&T Venture Company, L.P. ("AT&T Venture") purchased
1,000,000 shares of BBN Planet's Series A Redeemable Convertible Preferred
Stock for $8,000,000. On August 6, 1996, AT&T Venture's preferred stock
investment was exchanged for 400,000 common shares of BBN Corporation. The
common shares, which were sold from treasury shares in a private offering,
are restricted and were not registered under the Securities Act of 1933
("the Act") and may not be transferred or assigned before the sooner of the
filing of an effective registration statement under the Act or an exemption
from registration is available. The Company could be required, under certain
circumstances, to register the shares under the Act; in addition, the
holders of the shares are entitled to certain registration rights in
connection with the filing of a registration statement initiated by the
Company. During one year following the exchange, AT&T Venture may require
the Company to repurchase all or any part of the common shares at a price of
$20.00 per share.
G. Common Stock
As of September 9, 1996, the common stock investments held by four
institutional minority shareholders in BBN Planet were converted into an
aggregate of 92,000 common shares of BBN Corporation. The shares, which
were sold from treasury shares in a private offering, are restricted and
were not registered under the Act and may not be offered or sold before the
sooner of the filing of an effective registration statement under the Act or
an exemption from registration is available. The Company could be required,
BBN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
under certain circumstances, to register 80,000 of the shares under the Act;
in addition, the holder of such 80,000 shares is entitled to certain
registration rights in connection with the filing of a registration
statement initiated by the Company. Refer to the "Redeemable Common Stock
and Preferred Stock of Subsidiary" footnote above for discussions of the
conversion of BBN Planet's preferred shareholder's investment into common
shares of BBN Corporation.
H. Paid-in Capital
As provided by the Company's 1986 Stock Incentive Plan, during the six
months ended December 31, 1995 the retiring chairman of the board
transferred shares of the Company's common stock to the Company in payment
of applicable withholding taxes in connection with the exercise of non-
qualified stock options. The effect of this transaction was to reduce paid-
in capital by approximately $3,436,000.
I. Restricted Stock Grants
In November 1996, the Company issued 80,300 shares of restricted common
stock under its 1986 Stock Incentive Plan to certain key technical and
operational employees. The restrictions lapse on 25% of the shares per year
over the four years following issuance. The value of the shares on the date
of grant has been recorded to deferred compensation, and will be amortized
over the four-year restriction period.
J. Commitments and Contingencies
The Company, like other companies doing business with the U.S. government,
is subject to routine audit, and in certain circumstances to inquiry,
review, or investigation, by U.S. government agencies, of its compliance
with government procurement policies and practices. Based upon government
procurement regulations, under certain circumstances a contractor violating
or not complying with procurement regulations can be subject to legal or
administrative proceedings, including fines and penalties, as well as be
suspended or debarred from contracting with the government. The institution
of such proceedings against the Company could, and suspension or debarment
from contracting with the government would, materially adversely affect the
Company's business, financial condition, and results of operations. The
Company's policy has been and continues to be to conduct its activities in
compliance with all applicable rules and regulations.
The books and records of the Company are subject to audit by the Defense
Contract Audit Agency ("DCAA"); such audits can result in adjustments to
contract billings. Final contract billing rates for the Company have been
established and billings audited for years through fiscal year 1991, except
for the Company's former BBN Communications activities, for which final
contract billing rates have been established only through fiscal year 1984.
The audit by DCAA of the Company's former BBN Communications activities for
fiscal years 1985 through 1993, which had been delayed, is currently in
progress. U.S. government revenue for BBN Communications activities during
the nine-year period under audit represented approximately 40% of the
Company's total U.S. government revenue during the period. Based upon its
interpretations of government contract regulations, DCAA in August 1996
recommended to the responsible governmental administrative contracting
BBN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
officer that adjustments to BBN Communications contract billings be made
which, if asserted and sustained upon appeal, would have a material adverse
effect on the Company's financial condition and results of operations. The
amount of any adjustments which may ultimately be asserted by the
administrative contracting officer on the basis of the DCAA recommendations
is not currently determinable. The Company and its counsel believe that
DCAA's recommendations, in substantial part, are based upon incorrect
interpretations of government contract regulations and are inconsistent with
decided cases. The Company expects that any adjustments which may
ultimately be asserted and sustained on appeal as a result of audits of the
Company's fiscal years 1985 through 1995 (including the 1985 through 1993
period for BBN Communications) will not have a material adverse effect on
the Company's financial condition and results of operations.
The Company is subject to other legal proceedings and claims which arise in
the ordinary course of its business. In the opinion of management, the
results of these other legal proceedings and claims will not have a material
effect on the Company's consolidated financial position and results of
operations.
K. Recent Pronouncement
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-
Based Compensation," which is effective for the Company's FY1997 financial
statements. SFAS No. 123 allows companies to either account for stock-based
compensation under the new provisions of SFAS No. 123 or under the
provisions of APB 25, but requires pro forma disclosure in the footnotes to
the financial statements as if the measurement provisions of SFAS No. 123
had been adopted. The Company expects to continue accounting for its stock-
based compensation in accordance with the provisions of APB 25. As such,
the adoption of SFAS No. 123 will not impact the Company's financial
position or the results of operations.
ITEM 2.
BBN CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
--------------------------
This discussion includes certain forward-looking statements about the
Company's revenue growth, including from its Internet-related activities,
the need for additional investment including capital expenditures, expected
expenses, operating losses, and possible capital and funding needs. Any
such statements are subject to risks that could cause the actual results or
needs to vary materially. Certain of these risks are discussed in the
appropriate sections of this Report. Each of these risk factors, and
others, affecting the Company's business are further discussed from time to
time in the Company's filings with the Securities and Exchange Commission,
including its Report on Form 8-K dated November 14, 1996.
The Company
-----------
The Company is a leading provider of Internet and internetworking services
and solutions to businesses and other organizations, and a provider of
contract research, development, and consulting services to governmental and
other organizations. The Company operates through two principal business
units: BBN Planet and BBN Systems and Technologies. BBN Planet is
responsible for BBN's Internet offerings to business and other
organizational customers, and includes the Company's managed Internet access
and value-added services and related network operations, the Company's
contract with AT&T Corp. ("AT&T"), and the Company's network management
contract with America Online, Incorporated ("AOL") and related Internet dial-
up access capabilities. BBN Systems and Technologies focuses on providing
networking solutions and contract research and development, principally for
the federal government, as well as creating next generation technology for
advanced Internet applications, and is organized into three principal
groups: Internetwork Technologies, Information Systems and Technologies,
and Physical Systems and Technologies. The Company's commercial speech
recognition activities are included in BBN Systems and Technologies. During
the quarter ended December 31, 1996, the Company and Amerscan Corporation
formed a new company, Parlance Corporation, to market a business call
routing service based on BBN's advanced speech recognition technology. BBN
has retained a minority position in the venture.
On July 31, 1996, the Company completed the divestiture of a majority
interest in BBN Domain, then a wholly-owned subsidiary of the Company
engaged in selling data analysis and process optimization software products
for pharmaceutical and manufacturing applications. BBN Domain is now
accounted for as a discontinued operation. Upon consummation of the
transaction, the Company received a cash payment of $36 million, and
recorded a gain from discontinued operations of $20 million during the first
quarter ended September 30, 1996. With the divestiture of BBN Domain, a
number of products, which in recent years had significant development
efforts, including BBN Domain's Cornerstone, Clintrial, and Starfire
software, are no longer offered for sale by the Company.
BBN CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
BBN Planet
----------
Three Months Ended Six Months Ended
December 31, December 31,
------------------ ----------------
1996 1995 1996 1995
------- ------- ------- -------
(dollars in millions)
Revenue $ 39.2 $ 16.2 $ 71.9 $ 26.8
Costs and expenses:
Cost of revenue 37.3 14.6 68.3 24.7
Research and development 1.7 .6 3.3 1.3
Selling, general and administrative 12.0 7.9 22.9 15.7
------- ------- ------- -------
Loss from operations $ (11.8) $ (6.9) $ (22.6) $ (14.9)
======= ======= ======= =======
BBN Planet provides a range of Internet services and solutions to
businesses and other organizations. BBN Planet operates a high-bandwidth
digital data communications network providing dedicated Internet access to
its customers across the United States. BBN Planet's Internet access
services include a range of dedicated leased line connectivity options, bulk
private-label business dial-up services, network design, implementation,
management, monitoring, and problem-resolution services. In addition to
Internet access services, BBN Planet currently offers a range of value-added
Internet services, including managed Internet security, World Wide Web
server hosting, commercial transaction and payment processing services,
applications development, and systems integration services.
BBN Planet's revenue includes monthly connectivity and value-added
services fees, related installation fees, sales of related equipment, and
consulting and network management service fees. Approximately 45% of BBN
Planet's revenues for the three and six month periods ended December 31,
1996 were derived from the development, operations, and maintenance of a
portion of AOL's dial-up network. A substantial portion of this AOL-related
revenue represents the pass-through costs to BBN for telecommunications
circuits and services.
In support of its Internet business strategy, the Company has entered into
strategic alliances. In FY1995, the Company entered into a five-year
agreement with AOL, originally valued at approximately $11 million per year,
to develop, operate, and maintain a portion of AOL's nationwide, high-speed,
dial-up network. In October 1996, AOL and the Company significantly
expanded this relationship by signing a four year replacement agreement,
valued at $340 million, under which BBN will continue to develop, operate,
and maintain a portion of AOL's network. The Company has subsequently
received substantial additional work, expanding the value of the contract to
in excess of $500 million. The current contract provides for cost recovery
on a per modem basis within an agreed upon range, plus a fee consistent with
cost reimbursement contracts. The contract provides that BBN and AOL will
share equally in cost reductions below a minimum specified cost per modem,
while in certain circumstances cost per modem above a specified maximum will
be the responsibility of BBN. As with the original agreement, the
BBN CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
replacement agreement includes substantial pass-through costs to BBN,
primarily for telecommunications circuits. As part of BBN's agreement with
AOL, the Company has access to use certain capacity of the portion of the
AOL network operated by BBN, and BBN has the right to resell a portion of
such capacity as the basis for its own bulk dial-up service for business
users. The availability of this network capacity is currently limited
primarily to business hours under the agreement, and may be further limited
by general availability limitations on the AOL network.
In FY1995, BBN and AT&T entered into a strategic relationship under which
BBN provides dedicated Internet access and managed network security services
to AT&T for resale to customers of AT&T's Business Communications Services
division in the United States. BBN is the exclusive provider under this
agreement for the first 2 years of the agreement. Beginning September 1,
1997, BBN will not be the exclusive provider to AT&T; after such date, AT&T
may obtain such services from other providers or may provision such services
itself and BBN will be permitted to market and provide such services to
other large telecommunications carriers. AT&T has agreed to purchase a
minimum of $120 million of services during the first three years of the
agreement, subject to certain adjustments. During the first year of the
agreement ended August 31, 1996, AT&T met its first year minimum commitment
of $20 million, accounting for a substantial portion of BBN Planet's new
high-speed connections orders. The number of new AT&T-related connections
continues to be a substantial portion of BBN Planet's total new connections,
and AT&T activity is expected to constitute a higher proportion of BBN
Planet's revenue during the current fiscal year.
BBN Planet has experienced significant revenue growth and incurred
substantial operating losses. The Company expects continued revenue growth
in BBN Planet, and it expects to incur substantial operating losses in
FY1997 as a result of its continued investment in Internet network
infrastructure, increased sales and marketing, and the development of new
value-added services. Additionally, network usage per connection has been
growing and is projected to increase rapidly, requiring an additional level
of investment in the second half of FY1997 for network capacity, redundancy
and systems infrastructure, including expansion of BBN Planet's customer
care services, which is expected to negatively affect margins. The Company
believes that the revenue growth in BBN Planet's value added services will
not be sufficient to offset the increased infrastructure investment,
resulting in increased losses in the third quarter of FY1997.
The Company expects that the success of BBN Planet will depend upon a
number of factors, including the development and expansion of the market for
Internet access services and products, and of the networks which comprise
the Internet; the ability of the Company to continue and expand its current
relationships with AOL and AT&T and develop additional strategic
relationships; the capacity, reliability, cost, and security of its network
infrastructure; its ability to finance expansion and upgrade of its network
infrastructure; its ability to develop price competitive services that meet
rapidly changing customer requirements or acquire rights to such products
and services from other providers; its ability to compete with larger
competitors, including telecommunications companies with greater resources
and existing customer relationships and with installed infrastructure and
other compatible service offerings; its ability on a timely basis to attract
BBN CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
and retain additional highly qualified management, technical, marketing, and
sales personnel; its ability to manage its growth; and its ability to
improve its overall margins through improved operating efficiencies and an
increase in the value-added services portion of its revenues. Changes in
the regulatory environment relating to the Internet, the Internet access
industry, or the telecommunications industry in general, including
regulatory changes which directly or indirectly affect telecommunications
costs (including local access charges), the Company's status or regulation
under the telecommunications laws, or the scope of competition from regional
telephone companies or others, could have an adverse effect on the Company's
business.
BBN Systems and Technologies
----------------------------
Three Months Ended Six Months Ended
December 31, December 31,
------------------ ----------------
1996 1995 1996 1995
------- ------- ------- -------
(dollars in millions)
Revenue $ 45.6 $ 39.0 $ 87.6 $ 78.7
Costs and expenses:
Cost of revenue 33.6 26.8 64.9 54.4
Research and development 1.0 1.9 2.6 3.5
Selling, general and administrative 9.2 9.6 18.2 18.5
------- ------- ------- -------
Income from operations $ 1.8 $ .7 $ 1.9 $ 2.3
======== ======= ======= =======
The Company, through its BBN Systems and Technologies business unit, has
historically derived the majority of its revenue from contracts and
subcontracts with the U.S. government. BBN Systems and Technologies
currently derives approximately 80% of its revenues from the U.S. Government
and its agencies, particularly the Department of Defense. In recent years,
the Company's business with the Department of Defense has been adversely
affected by significant changes in defense spending. Overall defense
budgets have been declining, and it is expected that this general decline
and attendant increased competition within the consolidating defense
industry will continue over the next several years. Further, funding
limitations could result in reduction, delay, or cancellation of existing or
emerging programs. Although BBN's U.S. government revenue modestly
increased in FY1996 compared to FY1995, and for the three and six month
periods ended December 31, 1996 compared to the comparable three and six
month periods ended December 31, 1995, there can be no assurance that such
increases will continue in the future (see also the information on the
Defense Data Network below). The Company also anticipates that competition
in all defense-related areas will continue to be intense and accordingly,
that there will be continued significant competitive pressure to lower
prices, which may reduce profitability in this area of the Company's
business.
BBN CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
For the past several years, BBN has provided network systems and services
to the Department of Defense, including to the Defense Data Network ("DDN").
The Company's multi-year contract to support the DDN expired in April 1996.
The Company was awarded a one-year extension of the contract to support the
DDN, which continued the Company's existing activities for DDN into FY1997.
This contract was terminable at the convenience of the U.S. government, and
as expected the U.S. government exercised its termination right, effective
March 1997, following the commencement of operations under a follow-on
contract which was awarded to another contractor, thereby discontinuing
BBN's activities related to this contract. Revenues recorded on this
contract for FY1996 and the six months ended December 31, 1996 were $16.2
million and $4.4 million, respectively.
In recent years, the Company's traditional commercial systems and products
businesses, consisting principally of X.25 network systems and products,
have reached maturity in their life cycles. BBN Systems and Technologies
has been experiencing substantially lower revenue, and has significantly
reduced its development and selling efforts, for such X.25 network systems
and products.
Consolidated Results of Continuing Operations: Three and six month periods
--------------------------------------------------------------------------
ended December 31, 1996 compared to the three and six month periods ended
-------------------------------------------------------------------------
December 31, 1995
-----------------
Three Months Ended Six Months Ended
December 31, December 31,
------------------ ----------------
1996 1995 1996 1995
-------- ------- ------- -------
(dollars in millions)
Revenue $ 83.9 $ 54.6 $ 158.2 $ 104.8
Costs and expenses:
Cost of revenue 69.1 40.7 130.5 77.8
Research and development 2.7 2.6 5.9 5.0
Selling, general and administrative 22.6 18.7 43.2 36.2
-------- ------- -------- --------
Loss from operations $ (10.5) $ (7.4) $ (21.4) $ (14.2)
======== ======= ======== ========
Overview
--------
For the three and six month periods ended December 31, 1996, the Company's
continuing operations reported operating losses of $10.5 million and $21.4
million, compared to operating losses of $7.4 million and $14.2 million for
the three and six month periods ended December 31, 1995, respectively. The
operating losses reflect continued investment in BBN Planet, including the
upgrade and expansion of the Company's network infrastructure, increased
sales and marketing activities, and the development of new value-added
BBN CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
Internet services. During the year, the Company has expanded its national
backbone network and is upgrading other parts of its network infrastructure
for its Internet operations in order to meet increasing demand and to
improve reliability. Additionally, the results of operations of BBN Systems
and Technologies include operating losses of its commercial speech
recognition activities of approximately $1.9 million for the three months
ended December 31, 1995, and $1.3 million and $3.0 million for the six month
periods ended December 31, 1996 and December 31, 1995, respectively.
The loss from continuing operations, which includes interest and other
income and expense, for the three and six month periods ended December 31,
1996 was $10.2 million and $20.9 million compared to a loss from continuing
operations for the three and six month periods ended December 31, 1995 of
$5.5 million and $10.0 million, respectively. The loss from continuing
operations for the three and six months ended December 31, 1995 includes a
tax benefit of $1.9 million and $3.9 million, respectively, which represents
the Company's first quarter and year-to-date FY1996 benefit of utilizing its
FY1996 losses to recover taxes paid in FY1995. There is no tax benefit in
the current year periods since the loss carrybacks were fully utilized in
FY1996. The Company expects that it will incur substantial operating losses
in fiscal 1997 as it continues to invest in BBN Planet's Internet-related
business.
Revenue
-------
Revenue for the three months ended December 31, 1996 increased $29.3
million or 54% to $83.9 million, compared to $54.6 million for the
comparable three month period ended December 31, 1995. The increase relates
primarily to BBN Planet, which reported revenues for the three months ended
December 31, 1996 of $39.2 million, a 142% increase compared to revenue of
$16.2 million in the comparable period of the prior year. Approximately 55%
of the increased BBN Planet revenue relates to the AOL network management
contract. Additionally, BBN Systems and Technologies revenue increased 17%
to $45.6 million for the three months ended December 31, 1996, compared to
$39.0 million for the three months ended December 31, 1995, and includes a
one time licensing fee of approximately $1.5 million.
Revenue for the six months ended December 31, 1996 increased $53.4 million
to $158.2 million compared to $104.8 million for the comparable six months
ended December 31, 1995. The increase for the six month period is also
primarily related to BBN Planet, whose revenue for the six month period
ended December 31, 1996 increased by 168% to $71.9 million from $26.8
million in the comparable six month period of the prior year. Approximately
56% of the BBN Planet increase relates to the AOL network management
contract. BBN Systems and Technologies revenue for the six months ended
December 31, 1996 increased 11% to $87.6 million compared to $78.7 million
for the six month period ended December 31, 1995.
BBN CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
Cost of Revenue
---------------
Cost of revenue as a percentage of revenue for the three and six months
ended December 31, 1996 was approximately 82% compared to 75% and 74%,
respectively, for the comparable prior year periods. The increase in the
cost of revenue percentage is principally related to lower margins on
increased BBN Planet Internet services revenue. BBN Planet revenue was 47%
and 45% of consolidated BBN revenue for the three and six months ended
December 31, 1996, respectively, compared to 30% and 26% of consolidated BBN
revenue for the comparable prior year three and six month periods. Cost of
revenue for BBN Planet consists of telecommunications circuit and services
costs, labor and expenses of operating the network infrastructure and
supporting customers, and the depreciation of network equipment. The
increased cost of revenue percentage reflects the costs associated with
higher network utilization, the investment in the expansion and upgrading of
the network infrastructure and the impact of the investment in the
introduction of new Internet Services. Effective July 1, 1996, the Company
revised its estimate of the useful life of certain data communications
equipment from three to five years to better reflect the useful service
period of the related equipment. The change had the effect of reducing
depreciation expense and the loss from continuing operations by
approximately $ .4 million and $ .9 million for the three and six month
periods ended December 31, 1996. Additionally, the cost of revenue
percentage increased in BBN Systems and Technologies resulting from a shift
in mix to lower margin contracts containing a higher component of
subcontract costs.
Research and Development Expenses
---------------------------------
Research and development expenses for the three months ended December 31,
1996 were $2.7 million compared to $2.6 million for the three months ended
December 31, 1995. For the six month period ended December 31, 1996,
research and development expenses increased to $5.9 million from $5.0
million in the comparable six month period. The change for both the three
and six month periods reflects increased development of Internet-related
services at BBN Planet of $1.1 million and $2.0 million, respectively,
offset by lower development costs for BBN Systems and Technologies'
commercial legacy and speech recognition products.
Selling, General, and Administrative Expenses
---------------------------------------------
Selling, general, and administrative expenses for the three and six month
periods ended December 31, 1996 increased $4.0 million and $7.0 million,
respectively, from the comparable FY1996 periods. As a percentage of
revenue, selling, general, and administrative expenses decreased to
approximately 27% of revenue for the three and six month periods ended
December 31, 1996 compared to approximately 34% in the comparable FY1996
periods. The dollar increase in both the three and six month periods of
FY1997 reflects the Company's increasing investment during FY1996, and the
first half of FY1997, in sales and marketing infrastructure including
expansion of indirect sales channels, advertising costs, and other
promotional activities, primarily at BBN Planet.
BBN CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
Interest Income and Expense
---------------------------
Interest income for the three and six month periods ended December 31,
1996 was $1.8 million and $3.3 million, respectively, compared to $1.1
million and $2.7 million for the comparable three and six month periods of
FY1996. The increases reflect a higher level of invested cash balances
during the FY1997 periods. Interest expense for the three and six months
ended December 31, 1996 increased $ .3 million and $ .5 million,
respectively, from the comparable FY1996 periods. The increases relate to
interest expense associated with capital leases entered into during the
fourth quarter of FY1996.
Income Taxes
------------
There is no income tax benefit for the three and six month periods ended
December 31, 1996, compared to tax benefits of $1.9 million and $3.9
million, respectively, for the comparable FY1996 periods and which represent
the three and six month benefits reflected in the FY1996 periods of
utilizing FY1996 losses to recover taxes paid in FY1995. There is no
current year benefit since the loss carryback was fully utilized in FY1996.
Liquidity and Capital Resources
-------------------------------
At December 31, 1996, the Company's cash, cash equivalents, and short-term
investments (which consisted primarily of investment funds, short-term U.S.
government securities, and commercial paper) were $107.5 million, compared
to $120.3 million at June 30, 1996, a decrease of $12.8 million. The
decrease includes $19.4 million used by operations, $23.5 million used for
capital expenditures, in each case primarily at BBN Planet, and in August
1996, a $5.0 million investment for a 12.5% ownership stake in a joint
venture with Andersen Consulting LLP aimed at exploring and developing
opportunities in the Internet market. These uses were partially offset by
the proceeds from the divestiture of BBN Domain of $36.0 million. Changes
in cash balances due to fluctuation in foreign exchange rates were
insignificant.
Accrued restructuring costs of $6.7 million relates to the Company's
FY1993 downsizing and represents excess facilities costs under long-term
leases in excess of sublease income. These costs are anticipated to be
liquidated in varying amounts through 2005. The Company has sublet or
assigned certain of its excess facilities under agreements with terms
expiring between 1998 and 2005.
In April 1996, the Company entered into a capital lease agreement to
finance certain equipment acquisitions. The principal portion of the lease
payments for the three and six month periods ended December 31, 1996 was
approximately $1.0 million and $2.0 million, respectively.
The Company's capital requirements include investments for network
capacity, redundancy, and system infrastructure, including the expansion of
customer care services; for further investments in working capital, other
BBN CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
capital equipment, and customer acquisition costs including selling and
marketing infrastructure; and for pursuing potential investments,
acquisitions, and other expansion opportunities, and are expected to be
significant. The Company believes that existing cash balances are adequate
to meet its requirements through FY1997. The Company expects that within
the next twelve months it will need to raise additional funds through public
or private debt or equity financing in order to execute its strategy. The
Company's ability to raise such funds, if required, will be dependent on,
among other things, its ability to execute its business plan, the then-
current state of the Internet market, and the availability of such funds
within the capital markets. There can be no assurance that any such funding
will be available, or of the terms or timing of any such funding. If such
funding is not available or is available on terms not acceptable to the
Company, the Company may have to change its business strategy or seek
alternative sources of capital. Currently, the Company does not have any
bank lines of credit.
PART II. OTHER INFORMATION
Item 2. Changes in Securities
See the information in Footnotes F and G of the notes to the
consolidated financial statements.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
11.1 Computation of Net Loss Per Share
27.1 Financial Data Schedule
(b) The Company filed a Current Report on Form 8-K dated November 14,
1996 with the Commission on November 14, 1996 reporting on cautionary
statements for the purposes of the "Safe Harbor" Provisions of the
Private Securities Litigation Reform Act of 1995.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BBN Corporation
By
-------------------------------
Paul F. Brauneis
Vice President and Corporate Controller
Date: February 14, 1997
BBN CORPORATION
LIST OF EXHIBITS
11.1 Computation of Net Loss Per Share (page 20)
27.1 Financial Data Schedule (page 21)