Exhibit 99.1
CAUTIONARY FACTORS RELEVANT TO FORWARD-LOOKING INFORMATION
The Company wishes to caution readers that the following important
factors, among others, in some cases have affected the Company's results and in
the future could cause actual results and needs of the Company to vary
materially from forward-looking statements made from time to time by the
Company on the basis of management's then-current expectations. The businesses
in which the Company is engaged are in rapidly changing and competitive markets
and involve a high degree of risk, and accuracy with respect to forward-
looking projections is difficult.
Rapid Technological Change and Evolving Industry Standards; Dependence upon
Developments
The markets (both governmental and commercial) in which the Company
competes are characterized by rapidly changing technology, evolving industry
standards, intense competition, and frequent new service and product
introductions, which require, among other things, the Company to make
significant and on-going investment. The Company's success will depend upon
its ability on a timely basis to develop and provide new or enhanced offerings,
at competitive prices, that meet changing customer requirements or to acquire
rights to such services and related products from other providers. There can
be no assurance that the Company can successfully identify new opportunities
and develop or obtain and bring competitive new offerings to market in a timely
manner and at a competitive price. In addition, fundamental changes in the way
services and products are marketed and delivered, including bundled services
and products, could have a material adverse effect on the Company's business.
The Company's plans include significant investment in technological and
infrastructure development for Internet-related business opportunities. The
Company's pursuit of necessary technological advances may require substantial
effort, time, and expenditures. Development and introduction of technological
advances is typically expensive and the investment often involves a long pay-
back cycle. The Company has made significant investments in product and
service developments in the past, some of which have not been financially
successful. Failure of the Company, for technological or other reasons, to
develop or obtain and introduce, in a timely manner, and market new services
that are compatible with industry standards and that satisfy customer
requirements at a competitive price, would have a material adverse effect on
the Company's business, financial condition, and results of operations.
In addition, the Company or its competitors may introduce enhancements to
existing services or products, or embodying new technologies, industry
standards, or customer requirements, that have the potential to replace or
provide lower cost alternatives to the Company's existing offerings. The
introduction of such enhancements or new services or products could render any
of the Company's existing services and products obsolete and unmarketable. Any
such event could have a material adverse effect on the Company's business,
financial condition, or results of operations.
Transition of Business Focus
The Company has made a strategic decision to transition its businesses to
focus principally on commercial Internet-related business opportunities. This
transition entails significant redeployment of assets and energies and entails
significant investment in new technologies, as well as marketing-related and
personnel-related changes. There can be no assurance that this transition will
be successful or that the transition process will not have a material adverse
effect on the Company's business, financial condition, or results of
operations, particularly due to the Company's expenses (including selling,
general, and administrative expenses) and investments attendant to this
transition.
The success of the Company's initiative will depend particularly upon the
development and expansion of the market for Internet services and products.
This market has only recently begun to be developed, there is considerable
uncertainly as to how the market will develop, and critical issues which may
affect its commercial viability remain unresolved. For example, the Company
believes that the market for commercial Internet services will continue to
develop only if security, reliability, ease and cost of access, availability of
electronic commerce services, and quality of offerings are achieved. The
market will also be affected by application to it of existing or new laws or
regulations. The Company cannot predict the eventual size of the market or the
rate at which such market will develop. If the markets or the underlying
technologies fail to grow, grow at a rate slower than anticipated, or become
saturated with competitors, the Company's business, financial condition, and
results of operations could be materially adversely affected. In addition,
even if the Company is successful in developing important technology and
related services, the Company nevertheless may have difficulty generating
sufficient revenue growth and as a result may be forced either to curtail,
sell, or abandon its efforts.
In particular the Company believes the success of its Internet-related
efforts 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 relationship with AT&T Corp. ("AT&T") and America
Online, Inc. ("AOL"); the capacity, reliability, cost, and security of its
network infrastructure; its ability to finance the expansion of its network
infrastructure; its ability to develop price competitive services that meet
changing customer requirements; its ability on a timely basis to attract and
retain additional highly qualified management, technical, marketing, and sales
personnel; and its ability to manage its growth.
Dependence upon and Slowdown in Government Defense Spending; Dependence upon
Mature Products
The Company has historically derived the majority of its revenue from
contracts and subcontracts with the U.S. government, and currently
approximately one-half of the Company's revenue is derived from the U.S.
government and its agencies, particularly the Department of Defense. 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 the Company expects this general decline and attendant increased
competition within the consolidating defense industry to continue over the next
several years. Further, funding limitations could result in reduction, delay,
or cancellation of existing or emerging programs. These factors have reduced
the Company's U.S. government revenue and operating margins in recent fiscal
periods. The Company 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. Any reduction in the
level or profitability of the Company's business with the federal government,
if not offset by new commercial business, could have a material adverse effect
on the Company's business, financial condition, or results of operations.
The Company's traditional commercial products, consisting principally of
minicomputer-based data analysis software and X.25 network systems, have
reached maturity in their respective life cycles, and the Company has
discontinued sales of most of its traditional X.25 systems and products and has
substantially eliminated its development effort, and significantly reduced its
selling effort, related to the systems business as a whole. The Company
believes that sales of these mature products will continue to decline.
Continuing Operating Losses; Fluctuations in Financial Performance
The Company has incurred operating losses in recent fiscal periods. The
Company continues to invest in its commercial businesses, primarily in
Internet-related activities, and its expense levels are based, in part, on its
expectations of future revenue. If revenue levels are below expectations,
operating results may be adversely affected. The Company expects to incur a
significant operating loss for its fiscal year ending June 30, 1996 as a result
of its substantial investment in internetworking activities and related
significant operating losses. There can be no assurance that the Company will
be able to increase commercial sales and reestablish profitability of the
Company on an operating basis, or that profitability, if reestablished, can be
sustained. In addition, in the fiscal year ended June 30, 1995, the Company's
operating activities consumed $28.9 million in cash, exclusive of cash
generated from the sale of the assets of LightStream Corporation in fiscal
1995. Operating activities used an additional $22.9 million in cash in the
first three quarters of fiscal 1996. Further cash usage will be required to
fund operating losses as well as the high level of capital expenditures in
support of the investment being made in the Company's Internet-related
business. There can be no assurance that the Company will be able to generate
or otherwise obtain sufficient cash to meet its needs. Such inability could
have a material adverse effect on the Company's business, financial condition,
or results of operations.
Reliance on Strategic Relationships
Many of the Company's services are marketed in conjunction with the
services or products of other vendors, and the Company plans to continue its
strategy of developing key strategic relationships. Examples of important
strategic partners of the Company include AT&T and AOL. The Company also has
strategic relationships with other companies. There can be no assurance that
the Company will be successful in its ongoing strategic partnerships or that
the Company will be able to find further suitable business relationships as it
develops new services or expands current services. Any failure to continue or
expand such relationships could have a material adverse effect on the Company's
business, financial condition, or results of operations.
There can be no assurance that the Company's distributors and strategic
partners, many of which have significantly greater financial and marketing
resources than the Company, will not develop and market products in competition
with the Company in the future, discontinue their relationships with the
Company, or form competing arrangements with the Company's competitors. In
particular, there is no assurance that AT&T will continue to purchase Internet
services from the Company after the expiration of the current agreement.
Moreover, AT&T's obligations to purchase a minimum amount of services in years
4 and 5 of the agreement will terminate, among other reasons, if a
telecommunications carrier or on-line service provider, having the right to
appoint a director of the Company, acquires ownership of 15% or more of the
outstanding stock of the Company. In addition to certain other termination
provisions, AT&T may cancel the agreement in the event the Company merges with,
or becomes controlled by, another telecommunications carrier or an on-line
service provider, and AT&T has the right to terminate the exclusivity
obligation and to withhold other financial benefits in certain other
situations.
Competition
The Company's market for defense-related services is extremely
competitive. The defense markets are dominated by large defense contractors
with substantially greater financial and marketing resources and larger
technical staffs than the Company. Recent trends in this area are toward
further market consolidation of large defense contractors into a smaller number
of very large entities, further concentrating financial, marketing, and
technical strength and increasing competitive and pricing pressure in the
industry. Such competitive pressure may adversely impact the Company's
operating results.
The markets for the Company's Internet services are also highly
competitive. In general there are no substantial barriers to entry to the
Internet services market and the Company expects that competition with its
Internet activities will intensify in the future. The Company expects that all
of the major on-line services and telecommunications companies will compete
fully in the Internet services market, and that other new competitors,
including large computer hardware, software, media, and other technology and
telecommunications companies, will enter the Internet services market,
resulting in even greater competition for the Company's services and
significant pricing pressure, which may impact the Company's operating results.
Many of the Company's competitors are more established, benefit from greater
market recognition, and have greater financial, technological, production, and
marketing resources than the Company. In addition, competitors which are
telecommunications companies may be able to reduce customers' overall
communications costs by combining Internet access services with other services,
thereby reducing the overall cost of their Internet access services and
increasing pricing pressure on BBN. Competition could also increase if new
companies enter the market or if existing competitors expand their service and
product lines, or combine with other providers of Internet services or
complementary services. An increase in competition could have a material
adverse effect on the Company's business and operating results because of price
competition and failure to gain market share.
There can be no assurance that the Company will be able to compete
successfully in the future. Maintaining any technological advantages that the
Company may have or may develop will require continued significant investment
by the Company in research and development and in sales and marketing. There
can be no assurance that the Company will have or be able to obtain sufficient
resources to make such investments or that the Company will be able to make the
technological advances necessary to maintain such competitive advantages.
Dependence upon Key Personnel; Need to Hire and Train Additional Qualified
Personnel
The Company believes that its future success depends in part upon its
ability to attract and retain skilled senior management and technical,
professional, marketing, and sales personnel. Recently, there have been a
number of management changes at the Company, including a new president and
chief executive officer. In this connection, a number of senior executives
have left the Company in the last eighteen months, including several with many
years of experience with the Company.
The Company, along with other high-technology companies, faces competition
in hiring and retaining skilled technical, professional, marketing, and sales
personnel. In certain areas, such as emerging technologies and marketing, the
supply of such people is limited. The process of locating personnel with the
combination of skills and attributes required to carry out the Company's
strategy is often lengthy. The Company's employees may voluntarily terminate
their employment with the Company at any time. The loss of service of key
personnel, or the inability to attract additional qualified personnel, could
have a material adverse effect on the Company's product development efforts,
business, financial condition, or results of operations.
Uncertainty of Future Financing
The Company may need to raise additional funds through public or private
debt or equity financings in order to implement its strategy of exploiting new
and emerging technologies, including its Internet-related capital requirements.
Capital needs may include funding cash flow losses from operations; building
and expanding its Internet network infrastructure; investing in working
capital, other capital equipment, and selling and marketing infrastructure; and
pursuing potential investments, acquisitions, and other expansion
opportunities. There can be no assurance that any such funding will be
available, or of the terms or timing of any such funding. If adequate funds are
not available or are not available on acceptable terms, the Company may not be
able to take advantage of opportunities, develop new services and products, or
otherwise respond to competitive pressures. Such inability could have a
material adverse effect on the Company's business, financial condition, or
results of operations.
Government Procurement Regulations
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 result 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 and billings audited 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. DCAA has
advised the Company that, based upon DCAA's interpretations of government
contract regulations, DCAA intends to recommend to the responsible governmental
administrative contracting 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 following receipt of the DCAA
recommendations is not currently determinable. The Company and its counsel
believe that DCAA's intended 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. There can be no
assurance that any such adjustments will not be material until the results of
such audits are finalized; any such adjustments, if material and sustained on
appeal, would materially adversely affect the Company's business, financial
condition, and results of operations.
Dependence upon the Internet; Government Regulation and Legal Uncertainties
Regarding the Internet
An increasing percentage of the Company's revenue is derived from Internet-
related services and products, and the Company expects that its success will
depend in large part upon the development of a market and infrastructure for
providing Internet access and carrying Internet traffic. There are currently
few domestic laws or regulations directly applicable to access to or commerce
on the Internet. For example, the recent federal Telecommunications Act of
1996 addresses the Internet directly only in criminalizing the making available
to minors of "patently offensive" sexual or other "indecent" material on the
Internet. However, due to the increasing popularity and use of the Internet,
it is possible that a number of laws and regulations, domestic and foreign, may
be adopted with respect to the Internet, covering issues such as
telecommunications in general, message content, user privacy, property
ownership, libel, pricing, characteristics and quality of services and
products, and export controls. The adoption of any such laws or regulations may
decrease the growth of the Internet, which could in turn decrease the demand
for the Company's Internet-related services and products and increase the
Company's cost of doing business or otherwise have an adverse effect on the
Company's business, financial condition, or results of operations. Moreover,
the Company's status or regulation under the telecommunications laws, and the
applicability to the Internet of existing laws governing issues such as
property ownership, libel, and personal privacy are uncertain. Further,
certain of the Company's services and products containing encryption technology
are subject to U.S. export controls. There can be no assurance that such
export controls, either in their current form or as may be subsequently
enacted, will not limit the Company's ability to distribute products outside of
the United States or electronically. While the Company takes precautions
against unlawful exportation, the global nature of the Internet makes control
of distribution on the Internet virtually impossible. In addition, federal or
state legislation or regulation may further limit levels of encryption or
authentication technology. Any such export restrictions or new legislation or
regulation could have a material adverse impact on the Company's business,
financial condition, or results of operations.
Changes in the regulatory environment relating to the Internet access
industry or the telecommunications industry in general, including regulatory
changes which directly or indirectly affect telecommunication costs, the
Company's status or regulation under telecommunications laws, or the scope of
competition from regional telephone companies or others, could have an adverse
effect on the Company's business. The Company cannot predict the impact, if
any, that regulation or regulatory changes may have on its business.
Volatility of Stock Price
The market price of the Company's Common Stock has recently been volatile.
Factors such as announcements of fluctuations of the operating results of the
Company or other technology companies, sales of Common Stock by any of the
Company's employees, technological innovations or new services by the Company
or its competitors, changes in financial estimates by securities analysts, or
other events or factors, could have a significant impact on the future market
price of the Common Stock. In addition, the stock market has experienced
significant price and volume fluctuations that have particularly affected the
market prices of equity securities of many technology companies, particularly
in Internet-related fields, and that often have been unrelated to the operating
performance of such companies. These broad market fluctuations may adversely
affect the market price of the Company's Common Stock.