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 SEPTEMBER 30, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______________to__________________ Commission file number 0-12734 Stanford Telecommunications, Inc. --------------------------------- (Exact name of registrant as specified in its charter) Delaware 94-2207636 -------- ---------- (State or other jurisdiction of incorporation (I.R.S. Employer or organization) Identification No.) 1221 Crossman Avenue, Sunnyvale, CA 94089 ----------------------------------------- (Address of principal executives offices) (Zip Code) 408/745-0818 ------------ (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. 12,928,721 as of October 31, 1997 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS STANFORD TELECOMMUNICATIONS, INC. CONDENSED FINANCIAL STATEMENTS (Unaudited) The condensed 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 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 financial statements be read in conjunction with the financial statements and the notes thereto included in the Stanford Telecommunications, Inc. 1997 Annual Report. The results of operations for the first six months of fiscal year 1998 ended September 30, 1997 are not necessarily indicative of results to be expected for the entire year ending March 31, 1998. STANFORD TELECOMMUNICATIONS, INC. CONDENSED STATEMENTS OF INCOME (UNAUDITED) (in thousands, except per share amount) Three Months Ended Six Months Ended September 30, September 30, ------------- ------------- 1997 1996 1997 1996 ---- ---- ---- ---- Revenues $ 36,838 $ 41,058 $ 72,169 $ 81,901 Cost of revenues 27,465 30,889 53,894 62,883 -------- -------- -------- -------- Gross profit 9,373 10,169 18,275 19,018 Expenses Research and development 3,868 3,444 6,899 5,673 Marketing and administrative 4,602 4,105 8,854 8,127 -------- -------- -------- -------- Total expenses 8,470 7,549 15,753 13,800 Operating income 903 2,620 2,522 5,218 Interest income, net 492 298 951 582 -------- -------- -------- -------- Income before income taxes 1,395 2,918 3,473 5,800 Provision for income taxes (467) (1,007) (1,164) (2,001) -------- -------- -------- -------- Net income $ 928 $ 1,911 $ 2,309 $ 3,799 ======== ======== ======== ======== Weighted average common 13,219 13,098 13,153 13,072 shares and equivalents Net income per share $ 0.07 $ 0.15 $ 0.18 $ 0.29 ======== ======== ======== ======== See accompanying notes STANFORD TELECOMMUNICATIONS, INC. CONDENSED BALANCE SHEETS (in thousands, except per share amount) ASSETS September 30, March 31, 1997 1997 ---- ---- Current assets: (Unaudited) Cash and cash equivalents $ 12,349 $ 8,235 Short-term investments 22,964 25,074 Accounts receivable 23,247 25,856 Unbilled receivables 20,823 19,754 Inventories 8,951 6,011 Prepaid expenses 4,421 4,201 --------- --------- Total current assets 92,755 89,131 --------- --------- Property and equipment at cost: Electronic test equipment 44,458 42,797 Furniture and fixtures 3,770 3,613 Leasehold improvements 3,853 3,722 --------- --------- 52,081 50,132 Less: Accumulated depreciation and amortization (38,215) (36,019) --------- --------- Net property and equipment 13,866 14,113 --------- --------- Other assets 316 274 --------- --------- $ 106,937 $ 103,518 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current maturities of long-term obligations $ 72 $ 88 Accounts payable 8,004 5,902 Advance payments from customers 1,131 1,581 Accrued liabilities 9,996 10,601 Accrued and current deferred income taxes 3,796 4,549 --------- --------- Total current liabilities 22,999 22,721 --------- --------- Long-term obligations, less current maturities 8 30 --------- --------- Other long-term liabilities 864 910 --------- --------- Deferred income taxes 108 151 --------- --------- Shareholders' equity: Common shares- par value $.01; 25,000 shares authorized Outstanding - 12,921 shares at September 30, 1997 129 128 - 12,833 shares at March 31, 1997 Paid-in capital 41,352 40,410 Retained earnings 41,477 39,168 --------- --------- Total shareholders' equity 82,958 79,706 --------- --------- $ 106,937 $ 103,518 ========= ========= See accompanying notes. STANFORD TELECOMMUNICATIONS, INC. CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED) (in thousands) Six Months Ended September 30, -------------------- Cash flows from operating activities: 1997 1996 -------- -------- Net income $ 2,309 $ 3,799 Adjustments to reconcilenetincome to net cash provided by operating activities: Depreciation and amortization 2,820 2,511 Issuances of stock to employees under bonus and award plans 5 56 Change in provision for losses on receivables, contracts (978) 1,378 and inventories Loss on disposition of property and equipment 1 3 (Increase) decrease in assets: Receivables billed and unbilled 1,829 (3,246) Inventories (2,209) 6,774 Prepaid expenses and other assets (262) 223 Increase (decrease) in liabilities: Accounts payable, advance payments, and accrued expenses 1,005 (740) Other long-term liabilities (46) (38) Accrued and deferred income taxes (796) (253) -------- -------- Net cash provided by operating activities 3,678 10,467 -------- -------- Cash flows used in investing activities: Proceeds from maturities (purchase) of short-term investments 2,110 (2,855) Purchase of property and equipment (2,574) (3,654) -------- -------- Net cash used in investing activities (464) (6,509) -------- -------- Cash flows from financing activities: Payments on capital lease obligations (38) (37) Proceeds from transactions under stock plans 938 1,112 -------- -------- Net cash provided by financing activities 900 1,075 -------- -------- Net increase in cash and cash equivalents 4,114 5,033 Cash and cash equivalents at beginning of period 8,235 4,409 -------- -------- Cash and cash equivalents at end of period $ 12,349 $ 9,442 ======== ======== <FN> See accompanying notes. </FN> STANFORD TELECOMMUNICATIONS, INC. Notes to Condensed Financial Statements (Unaudited) September 30, 1997 1. Net income per share Net income per share is computed using the weighted average number of shares of common stock and common stock equivalents outstanding during the periods. Common stock equivalents consist of the dilutive effect of outstanding options to purchase common stock. Fully diluted net income per share is substantially the same as reported net income per share. In February 1997, the Statement of Financial Accounting Standards No. 128. "Earnings per Share" (SFAS 128) was issued and is effective for periods ending after December 15, 1997. SFAS No. 128 requires companies to compute earnings per share under two different methods, basic and diluted, and to disclose the methodology used for the calculation. The company does not believe that this pronouncement has a significant effect on previously stated earnings per share. 2. 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 (in thousands): September 30,1997 March 31, 1997 ----------------- -------------- Work-in-progress $6,838 $3,721 Finished goods 2,118 2,318 Allocated general and administrative costs 72 118 Less: progress billings (77) (146) ------ ------ $8,951 $6,011 ====== ====== 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, or a unit shipped basis for production contracts. 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 41% of total revenues in fiscal year 1997. During fiscal year 1997, commercial revenues which amounted to approximately $68.5 million included: (i) contract manufacturing revenues from the Company's electronics assembly business ($34.0 million); (ii) sales of ASICs, circuit boards and subsystems to the telecommunications industry ($17.0 million); and (iii) other commercial systems and product business ($17.5 million). During the first six months of fiscal 1998, commercial revenues amounted to approximately $27.3 million or approximately 38% of total revenues reported. 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 additional management controls to more 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. The Company plans to selectively bid on programs where it would be the sole provider or its technology leadership provides a competitive advantage. In addition, in order to position itself in the commercial marketplace, the Company may selectively enter into contracts with customers to deliver products where the Company will be funding a portion of the development costs. 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. Quarterly Results The following table presents the Company's financial results by quarter for fiscal 1997 and the first two quarters of fiscal 1998. 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. Quarter Ended Statement of Operations Data (in thousands, except per share data) Fiscal 1997 Fiscal 1998 ---------------------------------------- ------------------- June 30 Sept. 30 Dec. 31 Mar. 31 June 30 Sept. 30 -------- -------- -------- -------- -------- -------- Revenues $ 40,843 $ 41,058 $ 42,028 $ 43,073 $ 35,331 $ 36,838 Cost of revenues 31,993 30,889 32,305 32,245 26,430 27,465 -------- -------- -------- -------- -------- -------- Gross profit 8,850 10,169 9,723 10,828 8,901 9,373 -------- -------- -------- -------- -------- -------- Expenses: Research and development 2,229 3,444 2,903 3,292 3,031 3,868 Marketing and administrative 4,022 4,105 4,170 4,511 4,251 4,602 -------- -------- -------- -------- -------- -------- Total expenses 6,251 7,549 7,073 7,803 7,282 8,470 Operating income 2,599 2,620 2,650 3,025 1,619 903 Interest income, net 284 298 342 412 459 492 -------- -------- -------- -------- -------- -------- Income before provision for income taxes 2,883 2,918 2,992 3,437 2,078 1,395 Provision for income taxes (995) (1,007) (1,032) (1,185) (696) (467) -------- -------- -------- -------- -------- -------- Net income $ 1,888 $ 1,911 $ 1,960 $ 2,252 $ 1,382 $ 928 ======== ======== ======== ======== ======== ======== Net income per share $ 0.14 $ 0.15 $ 0.15 $ 0.17 $ 0.11 $ 0.07 ======== ======== ======== ======== ======== ======== Weighted average common shares and equivalents 13,048 13,098 13,042 13,040 13,073 13,219 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. Comparison of the Second Quarter Ended September 30, 1997 and 1996 Revenues. Revenues for the second quarter of fiscal 1998 decreased by 10% to $36.8 million from the second quarter of the previous fiscal year. Government revenues during the second quarter of fiscal year 1998 totaled $23.1 million, an increase of 11% from Government revenues of $20.9 million recorded during the second quarter of fiscal year 1997. Commercial revenues during the second quarter of fiscal year 1998 totaled $13.7 million, a decrease of 32% from commercial revenues of $20.1 million recorded during the second quarter of fiscal year 1997. The decrease can be primarily attributable to a decline in the Company's commercial contract manufacturing service and the reduced level of sales of commercial telecommunications chip and board level products. During the second quarter of fiscal year 1998 revenues from commercial contract manufacturing services totaled $7.2 million, down by $3.1 million from $10.3 million for the second quarter of fiscal year 1997. Revenues from the sale of commercial telecommunications chip and board level products totaled $2.9 million for the second quarter of fiscal year 1998 compared to $5.0 million for the second quarter of the previous fiscal year. Other commercial revenues decreased by $1.2 million from the second quarter of fiscal year 1997 to fiscal year 1998. Cost of Revenues. Cost of revenues were $27.5 million and $30.9 million for the second quarter of fiscal 1998 and 1997, respectively, representing an 11% decrease. The decrease during the second quarter of fiscal 1998 was the result of the recognition of costs on a lower revenue base. Research and Development. During recent quarters, the Company has focused its available research and development funds on the development of commercial products. Research and development expenses, including bid and proposal expenses were $3.9 million and $3.4 million during the second quarter of fiscal 1998 and 1997, respectively. Excluding bid and proposal expenses, the Company's research and development expenses applied to the development of products such as wireless broadband communications and cable high speed modems were $3.2 million and $2.7 million during the second quarter of fiscal 1998 and 1997, respectively. Bid and proposal expenses are largely the initial advanced technology development efforts directed toward a specific product or technical task for which the Company must show technical viability. Marketing and Administrative. Marketing and Administrative expenses were $4.6 million and $4.1 million for the second quarter of fiscal 1998 and 1997, respectively. This increase is primarily a result of personnel additions to its technical marketing staff, increased marketing expenses in pursuit of commercial opportunities, and increased legal expenses primarily associated with a patent infringement case brought by the Company in December 1996. Operating Income. Operating income was $.9 million and $2.6 million for the second quarter of fiscal 1998 and 1997, respectively. The decrease in operating income during the second quarter of fiscal 1998 compared to second quarter of fiscal 1997 was primarily attributable to a decrease in the revenue base, increased research and development, and increased marketing and administrative expenses. Interest Income. Interest income for the second quarter of fiscal 1998 was $492 thousand versus $298 thousand for the second quarter of the previous fiscal year. The increase in interest income is primarily a result of the Company increasing its net cash provided by operating activities and investing that cash in short-term investments. Provision for Income Taxes. Provision for income taxes was $.5 million and $1.0 million for the second quarter of fiscal years 1998 and 1997, respectively. This represents a provisional tax rate of 33.5% and 34.5% for the second quarter of fiscal 1998 and 1997, respectively. Comparison of Six Months Ended September 30, 1997 and 1996 Revenues. Revenues were $72.2 million and $81.9 million for the six months ended September 30, 1997 and 1996, respectively, representing a decrease of 12%. Government revenues during the second quarter of fiscal year 1998 totaled $44.9 million, an increase of 5% from Government revenues of $42.6 million recorded during the first six months of fiscal year 1997. Commercial revenues during the first half of fiscal 1998 totaled $27.3 million, a decrease of 31% from commercial revenues of $39.3 million recorded during the first six months of fiscal 1997. The decrease can be mainly attributable to a decline in the Company's commercial contract manufacturing services and the reduced level of sales of commercial telecommunication chip and board level products. During the first six months of fiscal 1998, revenues from the Company's commercial contract manufacturing services totaled $11.4 million down from $21.6 million recorded for the first half of fiscal 1997. Revenues from the sale of commercial telecommunication chip and board level products totaled $6.7 million for the first six months of fiscal 1998, down from $9.5 million achieved during the first half of the previous fiscal year. Cost of Revenues. Cost of revenues were $53.9 million and $62.9 million for the first half of fiscal 1998 and 1997, respectively, representing a decrease of 14%. The decrease during the first six months of fiscal 1998 was a result of the recognition of costs on a lower revenue base. Research and Development. Research and development expenses, including bid and proposal expenses were $6.9 million and $5.7 million for the first half of fiscal 1998 and 1997, respectively, representing an increase of 22%. Excluding bid and proposal expenses, the Company's research and development expenses applied to the development of products such as wireless broadband communications and cable high speed modems were $5.6 million and $4.5 million for the first six months of fiscal 1998 and 1997, respectively. Marketing and Administrative. Marketing and administrative expenses were $8.9 million and $8.1 million for the first six months of fiscal 1998 and 1997, respectively, representing an increase of 9%. This increase is primarily a result of personnel additions to its technical marketing staff, increased marketing expenses in pursuit of commercial opportunities, and increased legal expenses. Operating Income. Operating income was $2.5 million and $5.2 million for the first half of fiscal 1998 and 1997, respectively. The decrease in operating income during the first half of fiscal 1998 was primarily attributable to a decrease in revenue base, increased research and development, and increased marketing and administrative expenses. Interest Income. Interest income for the first half of fiscal 1998 was $951 thousand versus $582 thousand for the first half of the previous fiscal year. The increase in interest income is primarily a result of the Company increasing its net cash provided by operating activities and investing that cash in interest bearing short-term investments. Provision for Income Taxes. Provision for income taxes was $1.2 million and $2.0 million for the first six months of fiscal 1998 and 1997, respectively. This represents a provisional tax rate of 33.5% and 34.5% for the first half of fiscal 1998 and 1997, respectively. Booking and Backlog Funded bookings were $40.2 million and $38.2 million for the second quarter of fiscal 1998 and 1997, respectively, and $85.5 million and $79.3 million for the six months ended September 30, 1997 and 1996, respectively. Bookings were derived from both the Company's commercial operations as well as its government business sectors. At the end of the second quarter of fiscal 1998 and 1997, backlog stood at $97.3 million and $79.8 million, respectively. Liquidity and Capital Resources Working capital increased from $59.8 million to $69.8 million at September 30, 1996 and 1997, respectively, and increased by $3.4 million from the end of fiscal 1997. Net cash provided by operating activities for the first six months of fiscal 1998 ended September 30, 1997 was $3.7 million. During the first two quarters of fiscal 1998, the Company realized net income of $2.3 million, increased its inventories by $2.2 million and decreased its billed and unbilled receivables by $1.8 million. Net cash provided by operating activities for the first six months of fiscal 1997 ended September 30, 1996 was $10.5 million. During the first half of fiscal 1997, the Company realized net income of $3.8 million, decreased its inventories by $6.8 million, and increased its billed and unbilled receivables by $3.2 million. The Company utilized its cash for the purchase of property and equipment totaling $2.6 million and $3.7 million during the first half of fiscal 1998 and 1997, respectively. The Company has a bank credit commitment of $15.0 million which it can utilize to augment cash flow need and to secure standby letters of credit. Available borrowings under this line at September 30, 1997 were $15.0 million. Under this line of credit the Company must maintain certain financial covenants, including a covenant prohibiting the Company from incurring a quarterly loss in any two consecutive quarters. The Company was in compliance with all covenants throughout the first six months of fiscal 1998. The credit agreement expires on December 5, 1997. At September 30, 1997, the Company's long-term obligations (including current maturities) and other long-term liabilities totaled approximately $.9 million. At September 30, 1997, cash and cash equivalents of $12.3 million were substantially held in money market accounts, and short term investments of $23.0 million were held in U.S. treasury instruments with maturities not exceeding 365 days. 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 expenditures and debt service for the next several fiscal quarters. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K No current Reports on Form 8-K were filed with the Securities and Exchange Commission during the period covered by this Form 10-Q. 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) November 7, 1997