UNITED STATES
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 JUNE 30, 1999
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 001-11473
Stanford Telecommunications, Inc.
---------------------------------
(Exact name of registrant as specified in its charter)
Delaware 94-2207636
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(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
1221 Crossman Avenue, Sunnyvale, CA 94089
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(Address of principal executives offices)
(Zip Code)
408/745-0818
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(Registrant's telephone number, including area code)
--------------------
(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
--- ---
APPLICABLE ONLY TO CORPORATE USERS:
Indicate the number of outstanding shares of each of the issuer's
classes of common stock, as of the latest practical date.
13,210,572 as of August 4, 1999
PART I. FINANCIAL INFORMATION
-----------------------------
ITEM 1. FINANCIAL STATEMENTS
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STANFORD TELECOMMUNICATIONS, INC.
---------------------------------
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------
(Unaudited)
The condensed consolidated financial statements included herein have been
prepared by the Company, without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations, although the Company believes the
disclosures which are made are adequate to make the information presented not
misleading. Further, the condensed consolidated financial statements have been
prepared in all material respects in conformity with the standards of accounting
measurement set forth in Accounting Principles Board Opinion No. 28 and reflect,
in the opinion of management, all adjustments (which include only normal
recurring adjustments) necessary to present fairly the financial position and
results of operations as of and for the periods indicated.
It is suggested that these condensed consolidated financial statements be read
in conjunction with the financial statements and the notes thereto included in
the Stanford Telecommunications, Inc. 1999 Annual Report.
The results of operations for the first three months of fiscal year 2000 ended
June 30, 1999 are not necessarily indicative of results to be expected for the
entire year ending March 31, 2000.
STANFORD TELECOMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(in thousands, except per share amounts)
Three Months
Ended June 30,
-------------------
1999 1998
------- -------
Revenues
Products and services $43,246 $44,362
Licenses 17,750 --
------- -------
Total revenues 60,996 44,362
Cost of revenues 37,329 34,919
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Gross profit 23,667 9,443
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Expenses
Research and development 2,754 3,709
Marketing and administrative 6,041 4,712
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Total expenses 8,795 8,421
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Operating income 14,872 1,022
Interest income 393 484
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Income before provision for income taxes 15,265 1,506
Provision for income taxes (4,732) (467)
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Net income $10,533 $ 1,039
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Earnings per share
Shares used in computing basic earnings per share 13,139 12,976
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Basic earnings per share $ 0.80 $ 0.08
======= =======
Shares used in computing diluted earnings per share 13,495 13,171
======= =======
Diluted earnings per share $ 0.78 $ 0.08
======= =======
See accompanying notes
STANFORD TELECOMMUNICATIONS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amount)
June 30, March 31,
1999 1999
----------- -----------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 15,340 $ 19,400
Short-term investments 29,148 9,934
Accounts receivable 27,463 30,086
Unbilled receivables 24,172 23,955
Inventories, net of related progress billings 12,341 13,973
Prepaid taxes and other 4,510 3,963
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Total current assets 112,974 101,311
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Property and equipment at cost:
Electronic test equipment 51,007 50,557
Furniture and fixtures 4,070 4,021
Leasehold improvements 4,506 4,472
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59,583 59,050
Less: Accumulated depreciation and amortization (47,865) (46,385)
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Net property and equipment 11,718 12,665
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Other assets 1,046 1,087
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$125,738 $115,063
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term obligations $ 32 $ 40
Accounts payable 4,224 10,426
Advance payments from customers 2,885 2,738
Accrued liabilities 8,173 7,801
Accrued income taxes 8,749 3,961
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Total current liabilities 24,063 24,966
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Long-term obligations, less current maturities 66 73
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Other long-term liabilities 542 595
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Shareholders' equity:
Common shares - par value $.01; 25,000 shares authorized
Outstanding - 13,188 shares at June 30, 1999 132 131
- 13,067 shares at March 31, 1999
Paid-in capital 44,677 43,573
Retained earnings 56,258 45,725
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Total shareholders' equity 101,067 89,429
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$125,738 $115,063
======== ========
See accompanying notes.
STANFORD TELECOMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
Three Months Ended
June 30,
--------------------
1999 1998
-------- --------
Operating activities:
Net income $ 10,533 $ 1,039
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 1,616 1,527
Issuances of stock to employees under award plans 10 8
Change in provision for losses on receivables, contracts and inventories 1,327 (185)
Loss on disposition of property and equipment 5 33
(Increase) decrease in assets:
Receivables billed and unbilled 1,781 (1,324)
Inventories 930 184
Prepaid taxes and other assets (506) (2,708)
Increase (decrease) in liabilities:
Accounts payable, advance payments, and accrued liabilities (5,683) 2,339
Other long-term liabilities (53) (50)
Accrued income taxes 4,788 1,497
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Net cash provided by operating activities 14,748 2,360
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Investing activities:
Proceeds from maturities of short-term investments 9,934 11,657
Purchases of short-term investments (29,148) (13,738)
Purchases of property and equipment (674) (1,418)
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Net cash used in investing activities (19,888) (3,499)
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Financing activities:
Payments on capital lease obligations (15) (17)
Proceeds from transactions under stock plans 1,095 327
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Net cash provided by financing activities 1,080 310
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Net decrease in cash and cash equivalents (4,060) (829)
Cash and cash equivalents at beginning of period 19,400 13,914
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Cash and cash equivalents at end of period $ 15,340 $ 13,085
======== ========
See accompanying notes.
STANFORD TELECOMMUNICATIONS, INC.
Notes to Condensed Consolidated Interim Financial Statements
(Unaudited)
June 30, 1999
1. Basis of Presentation: The accompanying unaudited condensed consolidated
financial statements have been prepared in accordance with generally
accepted accounting principals for interim financial information.
2. Fiscal Year: The Company's fiscal year ending March 31, 2000 is comprised
of four 13-week quarters. Fiscal year ended March 31, 1999 was comprised of
one 14-week quarter (quarter ended June 30, 1998) and three 13-week
quarters.
3. Inventories: Inventories are stated at the lower of cost (first-in,
first-out) or market. Cost includes materials, labor and related indirect
expenses. General and administrative costs are only included in inventory
for government contracts, as such costs are reimbursed by the government.
The components of inventory are as follows (in thousands):
June 30, 1999 March 31, 1999
------------- --------------
Work-in-progress $ 9,267 $ 11,250
Finished goods 2,992 2,696
Allocated general and administrative costs 141 83
Less: progress billings (59) (56)
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$ 12,341 $ 13,973
======== ========
4. Earnings per share: Basic earnings per share (EPS) is computed by dividing
net income by the weighted average number of common shares outstanding.
Diluted EPS is computed by dividing net income by the diluted weighted
average number of common shares outstanding. Diluted EPS reflects the
potential dilution that could occur upon exercise of outstanding stock
options.
The following is a summary of the calculation of the number of shares used
in calculating basic and diluted EPS (in thousands):
June 30, 1999 June 30, 1998
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Shares used to compute basic EPS 13,139 12,976
Add effect of dilutive securities:
Stock options 356 195
------ ------
Shares used to compute diluted EPS 13,495 13,171
====== ======
Options to purchase approximately 85,000 and 455,000 weighted shares
outstanding during the first quarter of fiscal years 2000 and 1999
respectively were excluded from the computation of diluted EPS because the
options' exercise prices were greater than the average market price of the
Company's common stock during those periods.
5. Comprehensive Income: Effective April 1, 1998 the Company adopted Statement
of Financial Accounting Standards No. 130 ("SFAS 130") "Reporting
Comprehensive Income", which establishes standards for reporting and
displaying comprehensive income and its components
in the financial statements. For the first quarter of fiscal years 2000 and
1999, the Company's net income was equal to comprehensive income as defined
in SFAS 130.
6. Segment reporting: On March 31, 1999 Stanford Telecommunications, Inc.
adopted statement of Financial Accounting Standard (SFAS) Number 131
"Disclosures about segments of an Enterprise and Related Information." SFAS
131 establishes standards for public companies relating to the reporting of
financial and descriptive information about their operating segments in
financial statements. Operating segments are defined as components of an
enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision maker when deciding how
to allocate resources and when assessing performance. The Company's chief
operating decision making group is the Executive Staff, which is comprised
of the Chief Executive Officer and Executive Vice Presidents. The adoption
of SFAS 131 did not have a material effect on the company's primary
financial statements, but has expanded the disclosure of segment
information contained elsewhere herein.
The Company classifies its business into three operating segments: Base
Business, Wireless Broadband and Contract Manufacturing. Base Business
consists of multiyear hardware and software engineering services for data
and voice communications systems. Wireless Broadband consists of the
development and production of products for two-way transmission of
high-speed digital data and voice. Contract Manufacturing provides
manufacturing services for both the Company's products as well as products
for other companies. Stanford Wireless Broadband Inc., consists of Contract
Manufacturing and Wireless Broadband segments.
Information as to the operation of the company in different business
segments is set forth below based on the nature of the products and
services offered. The company evaluates performances based on several
functions of which the primary financial measure is business segment
operating income. The accounting polices of the segments are the same as
those described in the summary of significant accounting policies within
the notes within the consolidated financial statements. Intersegment sales
are generally accounted for at cost.
The following summarize selected financial information by segment:
Operating Segments Non Segment
- ------------------ Base Wireless Contract Property &
(in thousands) Business Broadband Manufacturing Equipment Total
-------- --------- ------------- ----------- -------
June 30, 1999
Revenues before elimination $54,751 $ 1,569 $ 7,670 $63,990
Revenues-Other segments (995) (1) (1,998) (2,994)
Revenues-Unaffiliated customers 53,756 1,568 5,672 60,996
Operating Income (loss) 19,175 (3,330) (973) 14,872
Net Property and Equipment 7,123 2,176 1,807 $612 11,718
Capital Expenditures 571 71 -- 32 674
June 30, 1998
Revenues before elimination 35,691 1,490 9,762 46,943
Revenues-Other segments (881) -- (1,700) (2,581)
Revenues-Unaffiliated customers 34,810 1,490 8,062 44,362
Operating Income (loss) 4,101 (2,654) (425) 1,022
Net Property and Equipment 8,159 2,150 2,839 845 13,993
Capital Expenditures $ 891 $ 295 $ 31 $201 $ 1,418
The Company's assets are located in the United States. Through June 30,
1999, the Company has derived its revenues primarily from customers located
in the United States.
7. On June 22, 1999 the Company entered into an agreement and plan of merger
with Newbridge Networks Corporation, a Canadian corporation ("Newbridge"),
which provides for the acquisition of the Company by Newbridge in a
tax-free, stock-for-stock exchange valued at approximately $490 million.
Consummation of the merger is subject to certain conditions, including the
following:
o Approval by the Company's stockholders at a special meeting of
stockholders, to be called for the purpose of voting on the merger;
o The Company having entered into a definitive agreement or
agreements to sell certain business units (the "Non-Core Assets")
to one or more third party buyers for an aggregate purchase price
which will result in after-tax net cash proceeds to the Company of
not less than $102 million;
o Regulatory approvals; and
o Other customary conditions.
The Non-Core Assets to be sold to one or more third party buyers consist of
the Company's operations in Satcom Ground Systems, Communications Systems
Integration, Applied Technology Operation, Advanced Communications Systems
and Manufacturing & Quality Assurance.
In the merger, for each share of the Company's common stock, the Company's
stockholders will receive Newbridge common shares with a value equal to (a)
$30, subject to adjustment if the value of the Newbridge common shares is
less than $24, and (b) an amount based upon a formula which includes the
proceeds from the sale of the Non-Core Assets (the "Contingent Value"). The
number of Newbridge shares to be received by the stockholders will be
determined based on the average price of the Newbridge common shares during
the 10 trading day period ending on the fifth trading day preceding the
Special Meeting.
If the Non-Core Assets have not been sold by the closing of the Merger,
then the Contingent Value will become payable following completion of the
sale of the Non-Core Assets. In such event, at the time of the Merger,
Newbridge and a rights agent will enter into a Contingent Value Rights
Agreement and the Company's stockholders will receive a certificate to
evidence their right to the Contingent Value, which right will not be
transferable.
Pursuant to the merger agreement, the Company has granted Newbridge an
option to acquire a non-exclusive license to the Company's wireless
broadband technology (the "Technology Option Agreement"), which option
would be exerisable at $69 million if a third party acquired control of the
Company. Also pursuant to the merger agreement, the Company has granted
Newbridge an option to purchase shares of the Company's common stock equal
to 19.9% of its issued and outstanding common stock at the time the option
becomes exercisable (the "Stock Option Agreement"). The option becomes
exercisable only in specified circumstances that could result in
termination of the merger agreement. The option has an exercise price of
$35 per share.
Certain officers and directors of the Company have entered into voting
agreements with Newbridge providing that they will vote, in their capacity
as stockholders, in favor of the adoption of the merger agreement and
approval of the merger.
The foregoing summaries of the Merger Agreement, Technology Option
Agreement, Stock Option agreement and Voting Agreements are not complete
and are qualified in their entirety by reference to the Agreements. Copies
of the Merger Agreement are filed in Form 8-K.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Overview
- --------
Since the Company's inception in 1973, revenues have been generated primarily
from sales to agencies of the U.S. Government, including the DoD, the U.S. Air
Force, Army and Navy, NASA and the FAA, or their prime contractors. Such
revenues are generated from many contracts including programs requiring
multi-year hardware and software development and limited production of products
and systems. The Company's contracts often require the design, production,
operation and maintenance of sophisticated equipment and systems and provision
of system integration services in the digital telecommunications and satellite
communications fields. A substantial portion of the digital telecommunications
and satellite communications research and development performed by the Company
since its inception has been funded by its customers and recorded as revenues by
the Company. Accordingly, the cost of performing this customer-funded research
and development is included in "Cost of Revenues" in the Company's financial
statements. The Company's government contracts are generally cost-reimbursement
plus profit or fixed-price contracts. The Company generally recognizes revenues
from its long-term government contracts on a percentage-of-completion basis.
Commencing in the late 1980's, the Company began to pursue commercial
opportunities utilizing its digital telecommunications technology developed and
enhanced by the Company since its inception. Commercial revenues have risen from
less than 6% of total revenues in fiscal year 1989 to approximately 38% of total
revenues in fiscal year 1999. During the first three months of fiscal year 2000,
commercial revenues amounted to approximately 49% of the total revenues
reported. These commercial revenues include approximately $17.8 million in
licensing fees for certain patents and products associated with the Company's
cable modem technology. The Company includes in commercial revenues sales of
standard or off-the-shelf products to any customers, including government
customers.
The Company's operating results have from time to time been adversely affected
by non-recoverable cost overruns on certain fixed-price contracts, primarily
fixed-price development contracts which have included significant software and
hardware development. The Company has instituted management controls to closely
monitor its bidding process and costs incurred on fixed-price development
contracts, however, no assurance can be given that the Company will not incur
losses on future fixed-price contracts or additional losses on existing
contracts. The Company believes that development contracts are an important
element in maintaining its technological leadership position in digital
telecommunications. As a result, the Company may incur losses on certain
fixed-price contracts. Such losses will be charged against results of operations
in the period when they first become known, typically near the initiation of the
contract and may have a material adverse effect on the Company's results of
operations.
Cautionary Statements
In the interest of providing the Company's shareholders and potential investors
with certain Company information, including management's assessment of the
Company's future potential, certain statements set forth herein (a) contain or
are based on projections of revenue, income, earnings per share and other
financial items or (b) relate to management's future plans, expectations, and
objectives or to the Company's future economic performance. Such statements are
forward-looking statements within the meaning of Section 27A(i) of the
Securities Act of 1933, as amended, and in Section 21E(i) of the Securities
Exchange Act of 1934, as amended.
Although any forward-looking statements contained herein or otherwise expressed
by or on behalf of the Company are to the knowledge and in the judgment of the
officers and directors of the Company, expected to prove true and to come to
pass, management is not able to predict the future with absolute certainty.
Accordingly, shareholders and potential investors are hereby cautioned that
certain events or circumstances could cause actual results to differ materially
from those projected or predicted herein. In addition, the forward-looking
statements herein are based on management's knowledge and judgment as of the
date hereof, and the Company does not intend to update any forward-looking
statements to reflect events occurring or circumstances existing hereafter.
For further information on the foregoing, reference is made to the Company's
Securities and Exchange Commission report on Form 10-K.
PARENT-SUBSIDIARY OVERVIEW
- --------------------------
The Company has invested heavily in the development of a family of products to
deliver telephone and data services over wireless broadband links. The high
level of R&D expenses associated with the development of the wireless broadband
family impacted the earnings results for the Company's base business over the
past several years. During the first quarter of fiscal year 2000, the Company
delivered initial LMDS/MMDS production units and anticipates that production
revenues will continue to increase as the demand in the broadband wireless
market materializes. In order to provide further detail as to the level of
revenues, cost of revenues, and operating expenses incurred by the base business
and the corresponding financial performance of the broadband wireless business,
the Company established a wholly owned subsidiary, Stanford Wireless Broadband,
Inc. in June 1998. In addition to providing financial visibility, the
establishment of the subsidiary allows the Company's wireless broadband
customers the benefit of working with a unique and separate entity dedicated to
the broadband family of products. The table shown below provides a summary of
the financial performance for the base business operations and Stanford Wireless
Broadband, Inc. for the three months ended June 30, 1999.
Base Stanford Wireless
(in thousands) Business Broadband, Inc.
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Revenues from unaffiliated customers $53,756 $ 7,240
Cost of revenues 28,682 8,647
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Gross profit (loss) 25,074 (1,407)
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Expenses
Research and development 1,326 1,428
Marketing and administrative 4,573 1,468
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Total expenses 5,899 2,896
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Operating income (loss) $19,175 $(4,303)
======= =======
For the first quarter of fiscal year 2000, revenues of the Base Business
segments consisted of $36.0 million and $17.8 million associated with
products/services and licensing fees, respectively. Revenues for Stanford
Wireless Broadband, Inc. consisted of $5.7 million and $1.6 million from the
Company's Contract Manufacturing segment and Wireless Broadband segment,
respectively. The Company's Wireless Broadband Subsidiary's operating loss of
$4.3 million for the first quarter of fiscal year 2000 was attributable to lower
margins on the initial product deliveries, high level of costs associated with
activities necessary to support worldwide LMDS/MMDS field trials, and an
operating loss associated with the Company's Contract Manufacturing segment due
to lower revenues. Operating income for the base business segment of $19.2
million was primarily derived from licensing fees for certain patents and
products associated with the Company's cable modem technology.
BUSINESS SEGMENTS OVERVIEW
- --------------------------
The Company classifies its business into three reportable segments: Base
Business, Wireless Broadband and Contract Manufacturing. The Base Business
segment primarily includes multi-year hardware and software engineering services
for data and voice communications. The primary customer for the Base Business
segment is the U.S. Government, however, 42% of the revenues during the first
quarter of fiscal year 2000 were derived from the sale of commercial products
and services including $17.8 million of licensing fees for certain patents and
products associated with the Company's cable modem technology. The Wireless
Broadband segment develops and produces hardware for broadband wireless
applications for the two-way, high-speed transmission of voice and data.
Finally, the Contract Manufacturing segment is in the business of providing
manufacturing services both for the Company's products as well as products for
other companies.
Three months ended June 30 (In thousands)
-----------------------------------------
Revenues Operating Income (Loss)
-------- -----------------------
FY 2000 FY 1999 FY 2000 FY 1999
---------------------------------------------------------------------------------------------------------------
Base Business $54,751 $35,691 $19,175 $ 4,101
Wireless Broadband 1,569 1,490 (3,330) (2,654)
Contract Manufacturing 7,670 9,762 (973) (425)
Less: Intra-Company Revenues (2,994) (2,581) -- --
------- ------- ------- -------
Stanford Telecommunications, Inc. $60,996 $44,362 $14,872 $ 1,022
------- ------- ------- -------
Segment Revenues. Base Business segment revenues increased from $35.7 million
for the first quarter of fiscal 1999 to $54.8 million recorded for the first
quarter of fiscal year 2000 primarily as a result of realizing $17.8 million in
licensing fees for certain patents and products associated with the Company's
cable modem technology. Revenues for the Wireless Broadband segment were
substantially equal at $1.6 million and $1.5 million for the first quarter of
fiscal years 2000 and 1999, respectively. Approximately 60% of revenues for the
first quarter of fiscal year 2000 represented initial production deliveries of
the Company's LMDS products. The decrease in the Contract Manufacturing segment
revenues from $9.8 million in the first quarter of fiscal year 1999 to $7.7
million in the first quarter of fiscal year 2000 was primarily the result of a
$2.4 million decrease in sales associated with the contract manufacturing of
products for other companies. Internal manufacturing sales increased by $0.3
million from the first quarter of fiscal year 1999 to the first quarter of
fiscal year 2000 primarily as a result of an increase in the production of the
Company's wireless broadband products. The Company anticipates that internal
sales in the Manufacturing segment will increase in future quarters as the
demand increases for the Company's wireless broadband products.
Segment Operating Income (Loss). The increase in operating income of the Base
Business segment from $4.1 million in the first quarter of fiscal year 1999 to
$19.2 million in the first quarter of fiscal year 2000 is mainly the result of
recording $17.8 million in licensing fees for certain patents and products
associated with the Company's cable modem technology offset by increases in
marketing and administrative expenses. Marketing and administrative expenses
increased by $1.5 million of which $1.1 million was primarily the result of
increased legal expenses associated with the patent infringement case brought by
the Company against Broadcom Corporation which was settled during the latter
part of the first quarter of fiscal year 2000. In addition, operating income was
impacted by approximately $1.1 million due to a decrease in gross margins on the
Base Business segment services/products revenue base primarily resulting from a
decrease in higher margin commercial contracts.
The increase in operating loss of the Wireless Broadband segment from $2.7
million in the first quarter of fiscal year 1999 to $3.3 million in the first
quarter of fiscal year 2000 was primarily the result of lower gross margins
on initial production shipments and increased costs associated with LMDS
and MMDS field trials. The Wireless Broadband segment did however realize a $1.3
million decrease in research and development expenses in the first quarter of
fiscal year 2000 compared to the first quarter of the previous fiscal year as
the Company's LMDS products transition from development to production.
The Contract Manufacturing segment operating loss of $1.0 million in the first
quarter of fiscal year 2000 compared to $0.4 million loss in the first quarter
of fiscal year 1999 was primarily attributable to lower gross margin percentages
and a decrease in revenues.
Quarterly Results
- -----------------
The following table presents the Company's consolidated financial results by
quarter for fiscal 1999 and the first quarter of fiscal 2000. The Company's
fiscal year ending March 31, 2000 is comprised of four 13-week quarters. Fiscal
year ended March 31, 1999 was comprised of one 14-week quarter (quarter ended
June 30, 1998) and three 13-week quarters. These quarterly financial results are
unaudited. In the opinion of management, however, they have been prepared on the
same basis as the audited financial information and include all adjustments
necessary for a fair presentation of the information set forth therein. The
operating results for any quarter are not necessarily indicative of the results
that may be expected for any future period.
The Company's revenues and results of operations are subject to fluctuation from
period to period. Factors that could cause the Company's revenues and operating
results to vary from period to period include: underestimating costs on
fixed-price contracts, particularly for software and hardware development,
timing, bidding activity and delivery of significant contracts and orders,
termination of contracts, mix of products and systems sold, and services
provided, reduced levels of operation during the holidays which occur primarily
in the Company's third fiscal quarter, disruptions in delivery of components or
subsystems, regulatory developments, and general economic conditions. Research
and development expenses include both research and development costs as well as
bid and proposal expenses. Bid and proposal expenses vary significantly from
period to period based on the number of proposals being prepared at any time.
These requests for proposals are not received evenly during the year or in any
predictable pattern.
Quarter Ended
Consolidated Statements of Income Data
(in thousands, except per share data)
Fiscal 1999 Fiscal 2000
------------------------------------------ -----------
June 30 Sept. 30 Dec. 31 Mar. 31 June 30
------- -------- ------- ------- --------
Revenues $44,362 $40,705 $37,132 $43,206 $ 60,996
Cost of revenues 34,919 32,724 29,856 33,812 37,329
------- ------- ------- ------- --------
Gross profit 9,443 7,981 7,276 9,394 23,667
------- ------- ------- ------- --------
Expenses:
Research and development 3,709 3,417 3,363 3,616 2,754
Marketing and administrative 4,712 4,485 5,002 5,727 6,041
------- ------- ------- ------- --------
Total expenses 8,421 7,902 8,365 9,343 8,795
------- ------- ------- ------- --------
Operating income (loss) 1,022 79 (1,089) 51 14,872
Interest income 484 417 395 584 393
------- ------- ------- ------- --------
Income (loss) before provision for income taxes 1,506 496 (694) 635 15,265
(Provision) benefit for income taxes (467) (154) 215 (196) (4,732)
------- ------- ------- ------- --------
Net income (loss) $ 1,039 $ 342 $ (479) $ 439 $ 10,533
======= ======= ======= ======= ========
Earnings (loss) per Share (EPS)
Shares used in computing basic earnings per share 12,976 12,993 12,974 13,027 13,139
======= ======= ======= ======= ========
Basic earnings (loss) per share $ 0.08 $ 0.03 $ (0.04) $ 0.03 $ 0.80
======= ======= ======= ======= ========
Shares used in computing diluted earnings per share 13,171 13,122 12,974 13,202 13,495
======= ======= ======= ======= ========
Diluted earnings (loss) per share $ 0.08 $ 0.03 $ (0.04) $ 0.03 $ 0.78
======= ======= ======= ======= ========
Comparison of the First Quarter Ended June 30, 1999 and 1998
- ------------------------------------------------------------
Revenues. Revenues were $61.0 million and $44.4 million for the first quarter of
fiscal years 2000 and 1999, respectively, representing an increase of
approximately 38%. The increase in revenues was mainly attributable to $17.8
million in licensing fees recorded for the Base Business segment. The increase
in revenues was offset by a $2.4 million decrease in revenues recorded for the
Contract Manufacturing segment. The Company expects that commercial sales in its
Wireless Broadband segment will increase during the remainder of fiscal year
2000. In addition, as a result of strong bookings in fiscal year 1999 and a
significant contract award during the first quarter in the Base Business
segment, the Company anticipates growth in this segment primarily associated
with sales to the Government. The Company does not anticipate receiving
significant license fees similar to those recorded in the first quarter of
fiscal year 2000 in future quarters.
Cost of Revenues. Cost of revenues were $37.3 million and $34.9 million for the
first quarter of fiscal years 2000 and 1999, respectively. The increase in cost
of revenues is mainly attributable to higher cost of goods in the Base Business
segment during the first quarter of fiscal 2000 compared to the first quarter of
the previous fiscal year. The increase in gross margin percentage from 21% in
the first quarter of fiscal year 1999 to 39% in the first quarter of fiscal year
2000 is primarily attributable to license fees the Company recorded for certain
patents and products associated with the Base business segment's cable modem
technology.
Research and Development. Research and development expenses, including bid and
proposal expenses, were $2.8 million and $3.7 million during the first quarter
of fiscal years 2000 and 1999, respectively. Excluding bid and proposal
expenses, the Company's research and development applied to the development of
its products was $2.1 million and $3.2 million during the first quarter of
fiscal years 2000 and 1999, respectively. The decrease in research and
development is mainly attributable to a $1.3 million decrease in expenses within
the Wireless Broadband segment as the LMDS/MMDS products transition from
development to production. Base Business segment research and development
expenses increased from $1.0 million in the first quarter of fiscal year 1999 to
$1.3 million in the first quarter of fiscal year 2000. The increase in expenses
is attributable to higher levels of expenditures in both research and
development and bid and proposals associated with the Base Business segment. The
Company anticipates that bid and proposal expenses will increase during fiscal
year 2000 as a result of increased Government related business opportunities in
the Base Business segment.
Marketing and Administrative. Marketing and administrative expenses were $6.0
million and $4.7 million for the first quarter of fiscal year 2000 and 1999,
respectively. The increase in cost was primarily the result of significant legal
expenses associated with a patent infringement case brought by the Company
against Broadcom Corporation and increased marketing expenses in pursuit of
Government and commercial opportunities in the Base Business segment. The patent
infringement case was settled during the latter part of the first quarter of
fiscal 2000.
Operating Income. Operating income was $14.9 million and $1.0 million for the
first quarter of fiscal years 2000 and 1999, respectively. The increase in
operating income was primarily the result of recording $17.8 million in license
fees for certain patents associated with the Base Business segment's cable modem
technology, offset by lower margins on various commerical programs.
Interest Income. Interest income for the first quarter of fiscal 2000 remained
significantly unchanged from the first quarter of the previous fiscal year at
approximately $0.4 million. The Company expects interest income to increase over
previous fiscal quarters due to the increase in the Company's cash position.
Provision for Income Taxes. Provision for income taxes was $4.7 million and $0.5
million for the first quarter of fiscal years 2000 and 1999, respectively. This
represents a provisional tax rate of 31.0% for the first quarter of fiscal 2000
and 1999.
Bookings and Backlog
- --------------------
Funded bookings were $55.9 million and $43.0 million for the first quarter of
fiscal 2000 and 1999, respectively. The Company's backlog at the end of the
first quarter of fiscal 2000 was $97.5 million compared to $92.2 million at the
end of the first quarter of fiscal 1999.
Liquidity and Capital Resources
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Working capital increased from $76.3million to $88.9 million at March 31, 1999
and June 30, 1999, respectively. The increase in working capital is attributable
to cash generated from net income related to the revenues for licensing fees for
certain patents and products associated with
its cable modem technology. Licensing fees recognized during the first quarter
of fiscal 2000 totaled $17.8 million.
During the first quarter ended June 30, 1999 $14.7 million of cash was provided
by operations compared to $2.4 million during the first quarter ended June 30,
1998. This increase resulted from the licensing fees collected and the decrease
in accounts receivable. The decrease in accounts receivable is related to the
payment of $2.0 million against a $3.9 million secured note receivable. Accounts
receivable as of June 30, 1999 includes the unpaid balance of $1.9 million
against this secured note. The Company expects to recover the full value of the
note receivable.
The Company has a bank credit commitment of $15.0 million, which it has used to
augment cash flow needs and to secure term loans or standby letters of credit.
Available borrowings under this line at June 30, 1999, were $15.0 million. Under
this credit line, the Company must maintain certain financial covenants. The
Company was in compliance with all covenants throughout fiscal year 1999 and the
first quarter of fiscal year 2000. At June 30, 1999, the Company's long-term
obligations (including current maturities) and capital lease obligations totaled
approximately $0.1 million. At June 30, 1999, cash and cash equivalents of
$15.3 million were held in money market accounts. In addition, short-term
investments of $29.1 million were held in U.S. Government Treasury securities.
The Company believes that its current cash position, funds generated from
operations, and funds available from its existing bank credit agreement, will be
adequate to meet the Company's requirements for working capital, capital
expenditure and debt service for this fiscal year.
Year 2000 Issues
In March 1998, the Company's Corporate Steering Committee implemented a
remediation plan to address mission-critical software (mission-critical is
defined as software of systems that can seriously impair the Company's ability
to conduct its business) and products impacted by the Y2K issue. This plan
included Information Technology "IT" systems, as well as "non-IT" systems such
as building security systems. The Company's IT system is compliant and currently
operating without any significant problems for the Company's fiscal year 2000,
which commenced on April 2, 1999. Other mission-critical software has been
tested or is in the process of being tested, updated or replaced. This was the
first two phases of the Company's plan. At this time, the costs associated with
these phases have been less than $100,000, and software that has been replaced
has been done so in conjunction with planned changes not in connection with the
Y2K issue.
The third phase of the Company's plan involves the assessment of its products
that might be impacted by the Y2K issue. At this time, 96% of the Company's
products over the last 10 years have been reviewed. The remaining 4% are being
reviewed, as well as the Company's current products. The Company estimates that
it will complete this review by the end of the second quarter of fiscal year
2000.
The final phase of the Company's plan is to draft and put into effect any
contingency plan necessary to mitigate any Y2K issues. This phase is to be
completed by September 1999.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's interest income is sensitive to changes in the general level of
U.S. interest rates, particularly since the majority of the Company's
investments are in short-term instruments. Due to the nature of the short-term
investments, the Company has concluded that there is no material interest rate
risk exposure. Therefore, no quantitative tabular disclosures are required.
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On June 23, 1999 the Company held its annual meeting of stockholders and the
following proposals were adopted by the margins indicated:
(1) To elect a Board of Directors to hold office until the next Annual
Meeting of stockholders or until their respective successors have been
elected or appointed.
Number of shares
----------------
Authority
Voted For Withheld
---------- ---------
Michael Berberian 12,341,432 41,087
John W. Brownie 12,343,076 41,443
Robert Calafell 12,337,033 47,486
Dr. Val P. Peline 12,336,340 48,179
Leonard Schuchman 12,341,356 43,163
Dr. James J. Spilker, Jr. 12,342,959 41,560
Dr. C. J. Waylan 12,336,955 47,564
(2) To ratify the appointment of Arthur Andersen LLP as the Company's
independent auditors for the current fiscal year.
Number of shares
----------------
For-12,358,954 Against-8,458 Abstain-17,107
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
No. Description
--- -----------
2.1 Agreement and Plan of Merger, dated as of June 22,
1999, by and between Stanford Telecom, Newbridge
Networks Corporation and Saturn Acquisition Corp.
(incorporated by reference from the Current Report on
Form 8-K dated June 22, 1999, filed on June 25, 1999)
3.1 Certificate of Incorporation, as amended
No. Description
--- -----------
3.2 Bylaws, as amended (incorporated by reference from
the Annual Report on Form 10-K for the fiscal year
ended March 31, 1999)
27.1 Financial Data Schedule
(b) Reports on Form 8-K
A current report on Form 8-K dated June 22, 1999, relating to the
Agreement and Plan of Merger entered into with Newbridge Networks
Corporation, was filed by the Company with the Securities and Exchange
Commission on June 25, 1999.
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.
Stanford Telecommunications, Inc.
(Registrant)
/s/ Jerome F. Klajbor
- --------------------------------------------
Jerome F. Klajbor
Vice-President and Chief Financial Officer
(Principal Financial and Accounting Officer)
August 12, 1999