1
Exhibit 13.1
21 Five-Year Financial Summary
22 Managment's Discussion and Analysis
27 Consolidated Statements of Operations
28 Consolidated Balance Sheets
29 Consolidated Statements of Shareholders' Equity
30 Consolidated Statements of Cash Flows
31 Notes of Consolidated Financial Statements
39 Report of Independent Accountants
40 Quarterly Financial Data
41 Board of Directors and Corporate Officers
42 Corporate Headquarters and Information for Shareholders
2
FIVE-YEAR FINANCIAL SUMMARY
Dollars in thousands, except per-share data 1994 1993 1992 1991 1990
- - -----------------------------------------------------------------------------------------------------------------------
Results of Operations
Revenue $ 196,104 $ 233,453 $ 257,996 $ 270,628 $ 261,927
----------------------------------------------------------------
Income (loss) from operations (1) $ (8,444) $ (32,323) $ 6,878 $ 5,137 $ (38,357)
Interest and other income (expense), net 620 59 (2,725) 4,065 729
----------------------------------------------------------------
Income (loss) before income taxes
and extraordinary item (7,824) (32,264) 4,153 9,202 (37,628)
Provision (benefit) for income taxes 151 (2,824)
----------------------------------------------------------------
Income (loss) before extraordinary item (7,824) (32,264) 4,153 9,051 (34,804)
Extraordinary item (2) 3,648 467
----------------------------------------------------------------
Net income (loss) $ (7,824) $ (32,264) $ 7,801 $ 9,518 $ (34,804)
----------------------------------------------------------------
Per-share amounts:
Income (loss) before extraordinary item $ (.48) $ (2.05) $ .24 $ .49 $ (1.91)
Extraordinary item (2) .22 .03
----------------------------------------------------------------
Net income (loss) $ (.48) $ (2.05) $ .46 $ .52 $ (1.91)
----------------------------------------------------------------
Cash dividends declared per share $ 0.06 $ 0.06 $ 0.06
----------------------------------------------------------------
Shares used in per-share calculations 16,179,000 15,705,000 16,504,000 18,314,000 18,246,000
Financial Position
Cash and temporary investments $ 67,115 $ 56,835 $ 45,769 $ 66,933 $ 61,828
Working capital 60,337 57,990 78,662 88,665 80,916
Property, plant and equipment, net 19,658 20,861 30,152 33,654 40,601
Total assets 135,940 140,645 162,619 182,616 186,171
Convertible debentures 73,510 73,510 73,510 83,355 84,700
Shareholders' equity, net of treasury shares 7,271 10,042 41,887 44,473 43,164
General Information and Ratios
Additions to property, plant and equipment $ 6,938 $ 7,942 $ 11,668 $ 10,825 $ 11,241
Revenue per average number of employees 117 125 118 116 101
Employees at year-end 1,694 1,663 2,086 2,284 2,367
Shareholders of record at year-end 2,225 2,709 3,108 3,340 3,302
Current ratio 2.1 2.0 2.7 2.7 2.4
Debt to equity ratio 10.1 7.3 1.8 1.9 2.0
- - -----------------------------------------------------------------------------------------------------------------------
1 Results for fiscal year 1993 included a restructuring charge of $20.5 million,
or $1.30 per share, associated with employee severance and related facilities
costs. Results for fiscal year 1990 included a restructuring charge of $20.4
million, or $1.12 per share, for costs in connection with the downsizing of
BBN Advanced Computers, consolidation of certain of the company's leased
facilities, and severance and other costs.
2 Results for fiscal years 1992 and 1991 included an extraordinary gain of $3.6
million, or $.22 per share, and $.5 million, or $.03 per share,
respectively, from the purchase and early retirement of $9.8 million and $1.3
million, respectively, of the company's 6% convertible subordinated
debentures.
3
BOLT BERANEK AND NEWMAN INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FY1994 COMPARED TO FY1993
- - -------------------------
INTRODUCTION
In FY1994, the company consisted of three operating units, the Systems
and Technologies Division, BBN Software Products Corporation and LightStream
Corporation. The Systems and Technologies Division ("Systems and
Technologies") includes internetworking services and products, collaborative
systems and acoustic technologies. BBN Software Products Corporation
("Software Products"), a wholly-owned subsidiary of the company, develops,
markets and supports data analysis software products designed primarily for
manufacturing, engineering and health industry applications. LightStream
Corporation ("LightStream"), an 80%-owned subsidiary of the company, develops,
markets and supports networking products based on Asynchronous Transfer Mode
("ATM") technology.
SUMMARY
For the year ended June 30, 1994, the company had a loss of $7.8
million, or $.48 per share, on revenue of $196.1 million, compared to a loss of
$32.3 million, or $2.05 per share, on revenue of $233.4 million for FY1993.
Results for the prior year included a restructuring charge of $20.5 million, or
$1.30 per share, and a gain of $3.2 million, or $.20 per share, resulting from
the sale of the company's Advanced Simulation business in April 1993. The
reduction in revenue from the prior year reflects the sale of the Advanced
Simulation business and reduced defense communications systems revenue. The
company's losses continue to reflect significant expenditures on its LightStream
ATM switch, T/10[TM] Integrated Access Device and BBN/Cornerstone[TM] software
while revenue from these new products remains financially insignificant. These
losses were partially offset by operating income at Systems and Technologies.
The company's objective is to achieve revenue growth in FY1995 and a
return to profitability during the second half of the fiscal year. However,
this outlook is strongly dependent upon achieving a significant increase in new
product and services revenue. There can be no assurance that such an increase
will be realized. The outlook could also be affected by further expenditures on
commercial business opportunities available to the company.
The company's overall strategy is to capitalize upon its technical
expertise and problem solving experience in the internetworking, data analysis,
collaborative and acoustic systems areas. This strategy is being implemented
through five distinct and complementary business units. In addition to the
established Systems and Technologies and Software Products operating units, the
company in the past year has organized three early stage companies. LightStream
Corporation was organized in October 1993 to develop and market ATM products,
and in July 1994 the company formed BBN HARK Systems Corporation to develop and
market speech recognition products. Computer speech recognition is an emerging
market, and the company intends to increase its sales and marketing investment
in this area. The company is also investing in the expansion of its Internet
services business by organizing a new subsidiary, BBN Internet Services
Corporation, which is being established to provide Internet services on a
worldwide basis. The company's anticipated revenue growth is dependent upon its
ability to continue to recruit entrepreneurial marketing and sales leadership,
develop a support infrastructure and establish productive customer
relationships, particularly in the commercial marketplace. The implementation
of this strategy will require significant investment in sales and marketing.
On August 19, 1994, BBN Internet Services Corporation acquired, from
Stanford University, the Bay Area Regional Research Network ("BARRNET"), a
leading provider of Internet services in the San Francisco Bay area, for
approximately $6.5 million consisting principally of $2.0 million of cash,
270,270 shares of BBN's common stock and 200,000 shares of BBN Internet Services
Corporation's common stock. The company may accelerate its plans to invest in
expanding its Internet services activities. Such investments may include
additional acquisitions and increased spending which could adversely affect the
company's financial results for FY1995.
REVENUE
Revenue decreased $37.3 million, or 16%, in FY1994 compared to FY1993.
The reduction reflects approximately $25.3 million in FY1993 revenue provided
by the company's former simulation unit as well as
22
4
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
declines in the company's defense communications systems business and lower
revenue in FY1994 from its mature X.25 network products and RS/Series[TM]
software.
The company, like other companies doing business with the Department of
Defense, has been adversely affected by reduced defense spending and expects
this general decline and attendant increased competition within the defense
industry to continue over the next several years. Uncertainty continues to exist
on the size and scope of reductions in future defense budgets and their impact
on the company's defense-related business. Further, there is the possibility
that funding limitations could result in a 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 years, and this trend
is expected to continue at least through FY1995, particularly in the defense
communications systems and acoustic and sensor systems areas.
In FY1991, the Defense Information Systems Agency awarded the company a
one-year contract in support of the Defense Data Network, with up to four
one-year optional extensions. The company is currently performing under the
third option year of the contract, valued at approximately $20 million, which
will continue the company's existing activities through October 1994. The
company now expects to be awarded the fourth option year of the contract, valued
at approximately $15 million, which will continue these activities through
October 1995. There can be no assurance that this activity will continue beyond
October 1995. Approximately $21 million and $27 million of revenue has been
recorded under the contract in FY1994 and FY1993, respectively.
The company conducts its commercial businesses in environments
characterized by intense competition, shortened product cycles and rapid
technological change, which require significant research and development
expenditures to develop new products which address emerging market requirements
and to improve its existing products. The company's traditional commercial
businesses, consisting principally of X.25 network products and RS/Series data
analysis software products, continue to experience substantially lower revenue.
In recent years, the company has been investing heavily in the development of
new products, primarily the LightStream ATM switch and the T/10 Integrated
Access Device in the networking area and BBN/Cornerstone data analysis software.
Several important trends have adversely affected the company's X.25
network systems business, including the growth of desktop computing, the
widespread installation of local area networks, increased transmission circuit
speed and improved circuit quality. These trends have led to market
requirements for networking technologies such as routers. The company's X.25
network systems business has experienced significantly lower revenue for several
years. The company has discontinued certain of its traditional X.25 products
and has substantially reduced its development and selling efforts relating to
this business.
Sales of the LightStream 2010 ATM switch, released in October 1993, have
not been financially significant. Further, the emerging market for ATM products
is very competitive, particularly from communications companies with marketing,
distribution and resources more extensive than those available to LightStream.
Accordingly, the success of LightStream's 2020 ATM switch, due to be released in
the fall of 1994, will depend upon the timely development of the ATM market, and
in particular the ATM enterprise switch market which is the market segment
targeted by LightStream, the technological superiority of LightStream's
products, their cost competitiveness and the development of strategic alliances
and distribution channels. In the event these conditions are not achieved on a
timely basis, the company's financial results will be adversely impacted.
For several years, the company has been developing the T/10 Integrated
Access Device designed to help customers consolidate traffic over a single
enterprise network. Development delays and limited functionality have
unfavorably affected the company's ability to generate sales, and revenue to
date from the T/10 has not been financially significant. During FY1994,
spending relating to the T/10 business was significantly reduced from prior year
levels. Effective April 1, 1994, the T/10 activities were merged into Systems
and Technologies. The T/10 effort is now being primarily focused on a few
reseller opportunities, and accordingly, the future success of the T/10 is
highly dependent upon the timely development of these opportunities.
23
5
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The company's data analysis software products business has been affected
by the growth of distributed processing and the associated use of personal
computers, workstations, and other desktop computers. Most of the company's
data analysis software products, primarily the RS/Series software, currently
operate on minicomputer systems. As demand for minicomputer-based software
declines, the company is experiencing substantially lower RS/Series software
revenue and downward pressure on prices.
In response to the trend toward desktop computing, Software Products
introduced its BBN/Cornerstone software during the fourth quarter of FY1993.
BBN/Cornerstone software is the first of a new series of data analysis software
products specifically designed for use on desktop computers in a client/server
environment. The initial release of BBN/Cornerstone software operates on
Unix-based workstations, utilizing a number of established graphical user
interfaces. Planned subsequent releases in the second half of FY1995 will
operate on personal computers. The company is also working to more tightly
integrate BBN/Cornerstone and its RS/Series software products. To date, sales
of BBN/Cornerstone have been financially insignificant. Software Products also
develops health industry applications software, including BBN/Clintrial[TM]
software used to support clinical trials. In FY1994, BBN/ClinTRACE[TM], an
adverse events tracking system, was also introduced to serve this market.
COST OF SALES
Cost of services and products as a percentage of revenue was 66% in
FY1994 compared to 64% in FY1993. The increase in the cost of sales percentage
is principally due to a lower proportion of products revenue primarily as a
result of the sale of the Advanced Simulation business and to competitive price
pressures in the company's defense-related business. Services revenue, which
typically contributes lower margins than products sales, represented 85% of
total revenue in FY1994 compared to 75% in FY1993.
RESEARCH AND DEVELOPMENT EXPENSES
The majority of the company's internally funded research and development
spending is currently directed principally toward the LightStream ATM products,
the T/10 and BBN/Cornerstone. Research and development expenses in FY1994 were
$22.5 million compared to $34.0 million in FY1993. The reduction in FY1994
reflects lower spending for the T/10 program and BBN/Cornerstone as well as the
sale of the Advanced Simulation business in FY1993. The company's continued
significant investment in research and development is dependent upon the timely
market acceptance of its new products.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses decreased $10.9 million in
FY1994 from FY1993 primarily as a result of lower selling expenses in the
defense communications systems business and at Software Products as well as the
cost reduction actions taken in FY1993.
INTEREST
Interest income increased $.7 million in FY1994 from FY1993 primarily in
connection with a state tax refund.
OTHER INCOME
Other income decreased $2.2 million in FY1994 from FY1993 primarily
reflecting the $3.2 million gain in FY1993 resulting from the sale of the
company's Advanced Simulation business and $.9 million in FY1994 resulting from
lower than expected costs associated with a previously divested contract.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 1994, the company's cash and temporary investments,
which consisted primarily of money market funds and short term U.S. government
securities, were $67.1 million, an increase of $10.3 million from June 30,
1993. The increase is primarily attributable to the investment by UB Networks,
Inc. in LightStream and cash proceeds from the sale of stock options.
As a result of the FY1993 downsizing, the company has unutilized space
which it is in the process of subleasing.
In December 1992, the Board of Directors of the company voted to suspend
the semiannual dividend of three cents per share. The company currently has no
plans to reinstate a dividend.
MANAGEMENT CHANGES
In January 1994, George H. Conrades became president and chief executive
officer, succeeding Stephen R. Levy who remains as chairman of the board.
24
6
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Mr. Conrades, 55, a former senior vice president of IBM who spent more
than thirty years with that company, also became a director. In January 1994,
LightStream named Jonathan C. Crane its president and chief executive officer
and in June 1994, John T. Kish joined Software Products as its president and
chief executive officer. In July 1994, Frank E. Heart, 65, president of the
company's Systems and Technologies Division, retired after 28 years with the
company. Searches are currently in process for a chief executive of both the
newly formed speech and Internet subsidiaries, and the company is also actively
recruiting for a number of marketing and sales positions throughout the
company.
FY1993 COMPARED TO FY1992
- - -------------------------
The management's discussion and analysis which follows reflects the
company's organization in effect prior to FY1994. During FY1993 and FY1992, the
company was organized in three divisions: BBN Systems and Technologies, which
includes internetworking services, collaborative and acoustic technologies, and
simulation systems; BBN Communications, which concentrates on defense
communications systems and X.25 network products, and also included the
company's ATM and T/10 activities; and BBN Software Products, which develops,
markets and supports data analysis software products designed primarily for
manufacturing, engineering and health industry applications. Effective July 1,
1993, BBN Systems and Technologies assumed responsibility for all of the
company's X.25 network systems and defense communications businesses and
performs virtually all government contracts for the company.
SUMMARY
The company reported a loss of $32.3 million, or $2.05 per share, on
revenue of $233.5 million in FY1993 compared to net income of $7.8 million, or
$.46 per share, on revenue of $258.0 million in FY1992. Results for FY1993
included a restructuring charge of $20.5 million, or $1.30 per share, in
connection with downsizing and staff reductions, and a gain of $3.2 million, or
$.20 per share, from the sale of the company's Advanced Simulation business.
Results for FY1992 included an extraordinary gain of $3.6 million, or $.22 per
share, from the purchase and early retirement of $9.8 million (face value) of
the company's 6% convertible subordinated debentures.
The company reported a loss from operations (excluding the $20.5 million
restructuring charge) of $11.9 million in FY1993 compared to income from
operations of $6.9 million in FY1992. Operating results for FY1993 reflected
significant losses at the former BBN Communications Division, arising from the
high level of investment the company was expending for network products (the
T/10 Integrated Access Device and the ATM switch), compounded by significant
revenue declines in its defense communications systems business and lower demand
for its mature X.25 network systems and data analysis software products.
REVENUE
Revenue decreased $24.5 million, or 10%, in FY1993 compared to FY1992.
The decrease primarily reflected significantly reduced defense communications
systems revenue and to a lesser extent lower revenue from the company's mature
X.25 network systems and data analysis software products. These declines were
partially offset by a revenue increase in the areas of advanced internetworking
and acoustic systems.
COST OF SALES
Cost of services and products as a percentage of revenue was 64% in
FY1993 compared to 57% in FY1992. The increase in the cost of sales percentage
primarily related to competitive price pressures in the company's
defense-related business, declines in the company's X.25 network systems and
data analysis software products businesses and inventory provisions. The lower
cost of sales percentage for FY1992 also included a $2.9 million benefit
relating the company's finalization of pricing in FY1992 for the Mobile
Subscriber Equipment program which was substantially completed FY1993.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses were $34.0 million in FY1993 compared
to $33.7 million in FY1992. A significant portion of the company's internally
funded research and development spending in FY1993 was directed toward the
LightStream 2010, T/10 Integrated Access Device, BBN/Cornerstone software,
and the
25
7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GT-200 Computer Image Generator in the Advanced Simulation business.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses decreased $7.6 million in
FY1993 compared to FY1992 which primarily reflected lower sales and marketing
expenses at Software Products, lower sales expenses in the Advanced Simulation
business and reduced administrative expenses caused mainly by reduction in
personnel.
INTEREST
Interest income decreased $1.0 million in FY1993 compared to FY1992
primarily attributable to a decline in short-term interest rates in FY1993.
OTHER INCOME
In the fourth quarter of FY1993, the company sold the fixed assets,
inventory and technology of its Advanced Simulation business to a subsidiary of
Loral Corporation for $6.0 million in cash. In connection with the sale, the
buyer assumed the lease obligation for the company's facility in Bellevue,
Washington and leased from the company certain space occupied by the Advanced
Simulation business in Massachusetts. More than 100 employees of the Advanced
Simulation business moved to the buyer. The company retained accounts
receivable of approximately $7.2 million associated with the Advanced Simulation
business which have been collected. In FY1993, approximately $25.3 million of
the company's revenue related to this business. Results for the fourth quarter
of FY1993 included a gain of $3.2 million in connection with the sale.
INCOME TAXES
In FY1993, the company adopted Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). The adoption
of SFAS 109 did not have a material impact on the company's consolidated
financial position and results of operations.
RESTRUCTURING
The company recorded a restructuring charge of $20.5 million in the
second quarter of FY1993 primarily associated with employee severance and
related facilities costs. Approximately one-half of the second quarter
restructuring charge related to the estimated cost of unutilized space. The
remainder of the restructuring charge reflected the company's downsizing and
cost reduction efforts at its former BBN Communications Division, the
consolidation of the company's defense business within the BBN Systems and
Technologies Division, and the elimination of substantially all of the company's
internal manufacturing capability.
In FY1993, the company consolidated a number of senior management
positions including those of chief executive officer and chief operating
officer. The company also made management changes at its former BBN
Communications Division and BBN Systems and Technologies Division, including
replacing the presidents of those divisions.
26
8
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended June 30
Dollars in thousands, except per-share data 1994 1993 1992
- - ---------------------------------------------------------------------------------------------------
Revenue:
Services $ 165,759 $ 175,917 $ 181,088
Products 30,345 57,536 76,908
-------------------------------------------
196,104 233,453 257,996
-------------------------------------------
Costs and expenses:
Cost of services 118,147 120,411 116,376
Cost of products 11,938 27,973 30,520
Research and development expenses 22,451 34,048 33,732
Selling, general and administrative expenses 52,012 62,874 70,490
Restructuring charge 20,470
-------------------------------------------
204,548 265,776 251,118
-------------------------------------------
Income (loss) from operations (8,444) (32,323) 6,878
Interest income 2,190 1,446 2,452
Interest expense (4,606) (4,511) (4,830)
Minority interest 2,071
Other income (expense), net 965 3,124 (347)
-------------------------------------------
Income (loss) before extraordinary item (7,824) (32,264) 4,153
Extraordinary item 3,648
-------------------------------------------
Net income (loss) $ (7,824) $ (32,264) $ 7,801
-------------------------------------------
Per-share amounts:
Income (loss) before extraordinary item $ (0.48) $ (2.05) $ 0.24
Extraordinary item 0.22
-------------------------------------------
Net income (loss) $ (0.48) $ (2.05) $ 0.46
- - ---------------------------------------------------------------------------------------------------
Shares used in per-share calculations 16,179,000 15,705,000 16,504,000
The accompanying notes are an integral part of the consolidated financial
statements.
27
9
CONSOLIDATED BALANCE SHEETS
June 30
Dollars in thousands 1994 1993
- - ------------------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and temporary investments $ 67,115 $ 56,835
Accounts receivable, net 41,503 49,676
Inventories, net 1,114 1,830
Other current assets 3,592 6,742
--------------------------
Total current assets 113,324 115,083
Property, plant and equipment, net 19,658 20,861
Other assets 2,958 4,701
--------------------------
Total assets $135,940 $140,645
- - ------------------------------------------------------------------------------------------------
LIABILITES AND SHAREHOLDERS' EQUITY
Current liabilites:
Accounts payable $ 4,279 $ 2,891
Accrued compensation and retirement plan contributions 5,198 3,600
Accrued restructuring charges 12,566 18,343
Accrued contract costs 1,414 3,392
Other accrued costs 18,418 17,529
Deferred revenue 11,112 11,338
--------------------------
Total current liabilities 52,987 57,093
--------------------------
6% convertible subordinated debentures due 2012 73,510 73,510
Minority interest 2,172
Commitments and contingencies
Shareholders' equity:
Common stock $1.00 par value, authorized: 100,000,000 shares;
issued: 1994, 21,253,890 shares; 1993, 20,710,223 shares 21,254 20,710
Additional paid-in capital 55,916 52,093
Foreign currency translation adjustment 337 (206)
Retained deficit (36,127) (28,303)
--------------------------
41,380 44,294
Less shares in treasury, at cost: 1994, 4,797,734 shares;
1993, 4,817,936 shares 34,109 34,252
--------------------------
Total shareholders' equity 7,271 10,042
--------------------------
Total liabilities and shareholders' equity $135,940 $140,645
- - ------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial
statements.
28
10
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Common Foreign
Stock Additional Currency Retained Total
$1.00 Paid-In Translation Earnings Treasury Shareholders'
Dollars in thousands, except per-share data Par Value Capital Adjustment (Deficit) Shares Equity
- - ------------------------------------------------------------------------------------------------------------------------
June 30, 1991 $20,082 $50,052 $ 225 $ (2,898) $(22,988) $ 44,473
Stock option and other activity, net 3 30 33
Stock issued under
employee stock purchase plan 330 1,072 1,402
Purchase of treasury shares (10,541) (10,541)
Foreign currency translation adjustment (339) (339)
Net income 7,801 7,801
Cash dividends - $.06 per share (942) (942)
------------------------------------------------------------------------
June 30, 1992 20,415 51,154 (114) 3,961 (33,529) 41,887
Stock option and other activity, net 12 97 109
Stock issued under
employee stock purchase plan 283 842 1,125
Purchase of treasury shares (723) (723)
Foreign currency translation adjustment (92) (92)
Net loss (32,264) (32,264)
------------------------------------------------------------------------
June 30, 1993 20,710 52,093 (206) (28,303) (34,252) 10,042
Stock option and other activity, net 359 1,393 1,752
Stock issued under
employee stock purchase plan 185 1,334 1,519
Sale of subsidiary stock 990 990
Treasury shares issued 106 143 249
Foreign currency translation adjustment 543 543
Net loss (7,824) (7,824)
------------------------------------------------------------------------
June 30, 1994 $21,254 $55,916 $ 337 $(36,127) $(34,109) $ 7,271
- - ------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial
statements.
29
11
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended June 30
Dollars in thousands 1994 1993 1992
- - ---------------------------------------------------------------------------------------------------------
Cash flows from operating activites:
Net income (loss) $(7,824) $(32,264) $ 7,801
Adjustments to reconcile net income (loss) to net cash
provided by operating activites:
Depreciation and amortization 9,136 11,700 14,449
Amortization of purchased and capitalized software 1,419 1,418 1,515
Gain from sale of Advanced Simulation business (3,191)
Extraordinary gain (3,648)
Provision for allowances for accounts receivable 405 703 1,796
Provision for inventories 2,293 83
Restructuring charge 20,470
Change in assets and liabilites:
Accounts receivable 7,768 16,502 (5,425)
Inventories 716 983 (501)
Income taxes, net (276) 1,454 (831)
Accounts payable and other liablities 2,209 (1,223) 268
Restructuring expenditures (5,777) (6,651) (1,797)
Deferred revenue (226) (638) (3,992)
Other 1,300 2,003 (1,326)
---------------------------------
Total adjustments 16,674 45,823 591
---------------------------------
Net cash provided by operating activites 8,850 13,559 8,392
---------------------------------
Cash flows from investing activites:
Additions to property, plant and equipment (6,938) (7,942) (11,668)
Proceeds from sale of Advanced Simulation business 6,000
---------------------------------
Net cash used by investing activites (6,938) (1,942) (11,668)
---------------------------------
Cash flows from financing activites:
Reduction of equipment loan and capital leases (62) (589) (1,597)
Purchase of 6% convertible subordinated debentures (6,190)
Proceeds from employee stock purchase and option plans 3,217 1,234 1,435
Proceeds from sale of subsidiary stock 5,000
(Purchase)/sale of treasury shares 213 (723) (10,541)
Dividends paid (473) (995)
---------------------------------
Net cash provided (used) by financing activites 8,368 (551) (17,888)
---------------------------------
Net increase (decrease) in cash and temporary investments 10,280 11,066 (21,164)
Cash and temporary investments at beginning of the year 56,835 45,769 66,933
---------------------------------
Cash and temporary investments at end of year $67,115 $ 56,835 $ 45,769
- - ---------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial
statements.
30
12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- - ------------------------------------------
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the
company and its majority- and wholly-owned subsidiaries. All significant
intercompany transactions and balances have been eliminated. Certain amounts
reported in prior years have been reclassified to be consistent with the current
year's presentation.
REVENUE RECOGNITION
Revenue from cost-reimbursement contracts, principally consisting of
services, is recorded as costs are incurred and fees are earned. Revenue from
fixed-price contracts, relating to services and certain systems, is recognized
using the percentage-of-completion method of accounting in the proportion that
costs incurred bear to total estimated costs at completion. Losses, if any, are
provided for in the period in which the loss is determined. Products revenue is
recognized at the time of shipment.
GAIN ON ISSUANCE OF STOCK BY SUBSIDIARIES
At the time a subsidiary sells its stock to unrelated parties at a price
in excess of its book value, the company's net investment in that subsidiary
increases. If at that time the subsidiary is an operating entity and not
engaged principally in research and development, the company records the
increase as a gain in its consolidated statements of operations. Otherwise, the
company records the increase as an equity transaction which is reflected in the
consolidated statements of shareholders' equity as a gain on the sale of
subsidiary stock.
CASH AND TEMPORARY INVESTMENTS
For purposes of the consolidated statements of cash flows, cash includes
all cash and temporary investments, generally with original maturities of three
months or less, carried at original cost plus accrued interest, which
approximates market value. At June 30, 1994 and 1993, temporary investments
consisted principally of money market funds (invested in U.S. government
securities and other highly rated financial instruments) and U.S. government
securities.
INVENTORIES
Inventories are stated at the lower of cost (using the first-in,
first-out method) or market.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is stated at cost less accumulated
depreciation and amortization. Depreciation is computed over the assets'
estimated useful lives using the straight-line method. Leasehold improvements
are amortized over the shorter of the lease period or their estimated useful
lives using the straight-line method. Maintenance and repairs are charged to
expense as incurred; improvements are capitalized. Beginning in fiscal year
1994, the company's policy is to remove the amounts related to fully-depreciated
assets from its accounting records.
SOFTWARE COSTS
The company capitalizes purchased software technology and certain
internally developed computer software costs to be sold or otherwise marketed to
customers. Costs incurred internally after establishing technological
feasibility and before general release of a computer software product are
amortized over 3 years. Costs incurred for purchased software technology
are amortized over periods up to 7 years.
FOREIGN CURRENCY TRANSLATION
The assets and liabilities of the company's foreign subsidiaries are
translated at year-end exchange rates, and the related statements of operations
are translated at average exchange rates for the year. Translation gains and
losses are accumulated as a separate component of shareholders' equity.
Transaction gains and losses, which are immaterial, are included in "Other
income (expense), net" in the consolidated statements of operations.
INCOME TAXES
A deferred tax asset or liability is determined based on both the
difference between the financial statement and tax basis of assets and
liabilities as measured by the enacted tax rates which will be in effect when
these differences reverse, and the future tax benefit to be derived from tax
loss and tax credit carryforwards. A valuation allowance has been established
to reflect the likelihood of realization of deferred tax assets.
NET INCOME (LOSS) PER SHARE
Net income (loss) per share is calculated based on the weighted average
number of common and common equivalent shares outstanding. Common equivalent
shares result from the assumed exercise of dilutive stock options. The
company's 6% convertible subordinated debentures are not considered common stock
equivalents for per-share calculations. Common equivalent shares were
anti-dilutive in fiscal years 1994 and 1993 and, therefore, were excluded from
the net loss per-share calculation.
31
13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Accounts Receivable
- - -------------------
Consolidated accounts receivable consisted of the following:
June 30
Dollars in thousands 1994 1993
- - ----------------------------------------------------------------------------
U.S. government: Billed $14,579 $19,747
Unbilled 18,237 22,855
--------------------
32,816 42,602
Contract allowances (7,964) (8,499)
--------------------
24,852 34,103
--------------------
Other customers: Billed 15,874 15,013
Unbilled 1,187 973
--------------------
17,061 15,986
Allowances for doubtful accounts (410) (413)
--------------------
16,651 15,573
--------------------
$41,503 $49,676
- - ----------------------------------------------------------------------------
Unbilled amounts represent receivables for work performed for which billings
had not been presented to the customers or which were not yet contractually
billable. Unbilled receivables, except for retentions, are generally billed
and collected within one year. Retentions amounted to $3,662,000 and
$6,078,000 at June 30, 1994 and 1993, respectively. A significant portion of
the retentions at June 30, 1994 is anticipated to be collected after fiscal
year 1995.
Inventories
- - -----------
Consolidated inventories consisted of the following:
June 30
Dollars in thousands 1994 1993
- - ---------------------------------------------------------------------------
Materials and purchased parts $ 71 $ 998
Work in progress 832
Finished goods 1,043
-------------------
$1,114 $1,830
- - ---------------------------------------------------------------------------
The company has entered into outsourcing arrangements for the manufacture of
certain of its internetworking products. Under these agreements, in the event
the company discontinues the manufacture and shipment of any of these
products, the company would be liable for the cost of the related materials on
hand at the manufacturer. The cost of these materials at June 30, 1994 (which
is not reflected in the company's accounting records) was approximately
$1,600,000.
Property, Plant and Equipment
- - -----------------------------
Consolidated property, plant and equipment consisted of the following:
June 30
Dollars in thousands 1994 1993
- - ----------------------------------------------------------------------
Land $ 3,983 $ 3,983
Buildings 1,947 2,051
Computer equipment and machinery 79,034 114,029
Furniture and fixtures 5,184 10,335
Leasehold improvements 14,056 20,066
Construction in progress 214
----------------------
104,204 150,678
Less accumulated depreciation and amortization 84,546 129,817
----------------------
$ 19,658 $ 20,861
- - ----------------------------------------------------------------------
In fiscal year 1994, the company eliminated from its accounts a significant
portion of the cost and accumulated depreciation of property, plant and
equipment which is fully depreciated and no longer in use.
32
14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONVERTIBLE SUBORDINATED DEBENTURES
- - -----------------------------------
The 6% convertible subordinated debentures due 2012 (the "debentures")
may be converted into the company's common stock at a price of $30.00 per
share any time prior to maturity. The company has reserved 2,823,000 shares
of its authorized but unissued common stock to be available for the conversion
of the debentures. The debentures are unsecured obligations of the company and
are subordinated in right of payment to all of the company's senior
indebtedness. Debt issuance costs are being amortized over the term of the
debentures. The unamortized balance at June 30, 1994 of $1,152,000 is
included in "Other assets" in the consolidated balance sheets. The fair
market value of the debentures, which is based on quoted market prices,
was $50,722,000 at June 30, 1994.
Beginning April 1, 1998, the company is required to contribute to a
sinking fund with annual payments equal to 5% of the aggregate principal amount
issued. The sinking fund is calculated to retire 70% of the original debentures
prior to maturity. The debentures are redeemable at the company's option.
However, redemption of the debentures prior to April 1, 1998 requires payment of
a premium. None of the debentures have been redeemed.
In August 1990, the Board of Directors authorized the company to expend
from time to time in open market or negotiated transactions up to $15,000,000
for the purchase at a discount of its debentures. Any debenture purchased may
be utilized to satisfy sinking fund requirements. In fiscal year 1992,
$6,190,000 was expended under this authorization for the purchase and early
retirement of $9,845,000 (face value) of debentures resulting in an
extraordinary gain of $3,648,000. No income taxes were applied to the
extraordinary gain primarily due to the availability of net operating loss
carryforwards. As of June 30, 1994, $7,027,000 has been expended to date under
this authorization for the purchase and early retirement of $11,190,000 (face
value) of debentures. By utilizing the $11,190,000 of debentures purchased by
the company, contributions to satisfy the annual sinking fund requirements can
be deferred until April 1, 2000.
LEASES
- - ------
Operating lease commitments for real estate at June 30, 1994 consisted of the
following:
Real Estate
Lease
Dollars in thousands Commitments
- - ----------------------------------------------
Year ending June 30 1995 $14,314
1996 12,322
1997 12,141
1998 11,522
1999 5,837
Remainder 28,337
-------
Total minimum lease payments $84,473
- - ----------------------------------------------
The company leases a majority of its facilities under long-term
operating leases which generally provide for renewal options and options to
purchase the leased property. Although in most cases such leases will be
renewed or replaced by other leases in the normal course of business,
consolidation of certain of the company's leased facilities has resulted in
diminished need for such renewals and replacements. The company is actively
pursuing subletting certain of its leased facilities.
Total rent expenditures, net of sublet income, under all operating
leases and rental agreements amounted to $16,980,000, $18,180,000 and
$18,560,000 in fiscal years 1994, 1993 and 1992, respectively.
COMMON STOCK
- - ------------
The Board of Directors authorized the purchase of up to an aggregate of
2,000,000 shares of the company's common stock under which approximately 60,000
additional shares may be purchased. In fiscal years 1993 and 1992, the company
purchased 178,500 shares and 2,112,000 shares, respectively, for $723,000 and
$10,541,000, respectively. The fiscal year 1992 purchase included 988,000
shares purchased under a separately authorized transaction at a small discount
from the market price at the time of the transaction. Approximately 4,920,000
shares costing approximately $35,400,000 have been purchased under the
repurchase program and the other separately authorized transactions.
33
15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In December 1993, in connection with his hiring, an executive officer of
the company made an investment of $212,500 in the company by purchasing from the
company 20,202 restricted shares of the company's common stock at a 15% discount
from the closing market price on the date of the transaction. The restricted
shares were treasury shares and were not registered under the Securities Act of
1933 and may not be sold, assigned, pledged, or otherwise transferred before the
lesser of two years or the filing of an effective registration statement under
the Act.
The company has a Common Stock Rights Plan (the "plan") to protect the
interests of the company's shareholders. Under the plan, holders of each share
of the company's common stock have the right to purchase one additional share of
common stock at $90 per share, subject to adjustment, exercisable under certain
defined conditions. In the event that the rights become exercisable due to an
acquisition of the company or under certain other conditions, holders of the
rights would be entitled to purchase common stock of the surviving company
having a value of two times the exercise price of the rights. The holder of a
right is not entitled to vote or receive dividends until the right is
exercised. The rights are redeemable by action of the Board of Directors at
$.01 per right. The company is not currently aware of any activities which
would cause the rights to become exercisable.
EMPLOYEE BENEFIT PLANS
- - ----------------------
STOCK COMPENSATION PLANS
Under the company's stock option plan, key employees may be granted
options enabling them to purchase shares of the company's common stock at a
price of not less than 50% of the fair market value of the common stock on the
date of grant. All options granted in fiscal years 1994, 1993 and 1992 were at
fair market value on the dates of grant. The plan provides that directors who
are not employees of the company receive a non-qualified option for 10,000
shares. The plan also provides for granting of other stock-based awards at the
discretion of the Board of Directors and for granting of incentive stock
options. Options vest generally over four years and expire not more than ten
years from the dates of grant. Options which are cancelled become available for
future grants.
The changes in stock options outstanding for the three years ended
June 30, 1994 were as follows:
Range of
Number Option Prices
Shares in thousands of Shares Per Share
- - --------------------------------------------------------------------------------
Outstanding at June 30, 1991 (40 exercisable) 1,153 $4.13 - $20.75
Granted 604 5.00 - 5.75
Exercised (3) 5.00
Cancelled (77) 5.00 - 20.75
- - --------------------------------------------------------------------------------
Outstanding at June 30, 1992 (141 exercisable) 1,677 4.63 - 7.63
Granted 170 5.00
Exercised (12) 5.00
Cancelled (318) 5.00 - 14.25
- - --------------------------------------------------------------------------------
Outstanding at June 30, 1993 (446 exercisable) 1,517 4.63 - 7.63
Granted 1,374 9.75 - 15.25
Exercised (376) 5.00 - 6.88
Cancelled (65) 5.00 - 12.63
- - --------------------------------------------------------------------------------
Outstanding at June 30, 1994 (635 exercisable) 2,450 4.63 - 15.25
- - --------------------------------------------------------------------------------
Options granted in fiscal year 1994 include 350,000 conditional options which
are subject to shareholder approval at the 1994 Annual Meeting.
At June 30, 1994 and 1993, 73,000 shares and 1,051,000 shares, respectively,
of authorized but unissued common stock were reserved and available for
granting additional options. The shares reserved at June 30, 1994 do not
include the 350,000 conditional options granted in fiscal year 1994.
In fiscal year 1994, LightStream Corporation, the company's 80%-owned
subsidiary, adopted a stock option plan under which its employees may be granted
options enabling the purchase of up to 1,300,000 shares at the fair value of the
common stock on the date of grant. Additionally, under a separate plan 300,000
shares of LightStream Corporation's common stock issued to BBN at the time
LightStream Corporation was formed are reserved for award to employees of BBN.
Options granted under both of these plans are only exercisable 90 days after the
closing of an initial public offering of LightStream Corporation's common
stock. As of June 30, 1994, options to purchase 1,229,000 shares of LightStream
Corporation's common stock were outstanding. As of June 30, 1994, LightStream
Corporation had 11,300,000 shares of authorized common stock of which 10,000,000
shares were outstanding.
In fiscal year 1994, Software Products Corporation, the company's
wholly-owned subsidiary, adopted a stock
34
16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
option plan under which employees of the company and Software Products
Corporation may be granted options enabling the purchase of up to 1,000,000
shares at the fair value of the common stock on the date of grant. Options
granted under this plan are only exercisable 90 days after the closing of an
initial public offering of Software Products Corporation's common stock. As of
June 30, 1994, options to purchase 940,000 shares of Software Products
Corporation's common stock were outstanding. As of June 30, 1994, Software
Products Corporation had 11,000,000 shares of authorized common stock of which
10,000,000 shares were outstanding.
EMPLOYEE STOCK PURCHASE PLAN
Under the company's 1983 Stock Purchase Plan, an aggregate of 3,600,000
shares of common stock were made available for purchase by employees who have
completed at least six months of continuous service in the employ of the
company, upon exercise of options granted semi-annually. The options are
exercisable six months after grant, at the lower of 85% of the fair market value
of the common stock at the beginning or the end of the six-month period, but in
no event for less than the company's net book value per share as of the end of
the quarter next preceding the exercise, through accumulation of payroll
deductions ranging from 2% to 10% of each participating employee's compensation,
as defined, but in no event more than $3,000 or 400 shares during any six-month
option period prior to June 30, 1994. Effective July 1, 1994, the maximum
number of shares a participant may acquire in any six-month option period is
1,000 through the accumulation of payroll deductions which may not exceed
$12,500.
Options were exercised to purchase 185,000, 283,000 and 330,000 shares
for a total of $1,519,000, $1,125,000 and $1,402,000 in fiscal years 1994, 1993
and 1992, respectively. At June 30, 1994, 687,000 shares of authorized but
unissued common stock were reserved for future issuance under this plan.
RETIREMENT PLAN
The company has a defined contribution retirement plan covering
substantially all of its domestic employees. The company's contribution to the
plan is discretionary and is based on a percentage of employees' eligible
compensation, as defined. Employees may also contribute to the plan. The
company's total costs pursuant its retirement plan were $5,517,000, $6,515,000
and $6,535,000 in fiscal years 1994, 1993 and 1992, respectively. Effective July
1, 1994, the company adopted an amendment to its retirement plan which has been
qualified under Section 401(k) of the Internal Revenue Code. Eligible employees
are permitted to contribute to the plan through payroll deductions within the
statutory limitations and subject to any limitations included in the plan. The
plan provides for matching contributions by the company up to a maximum of $500
per employee annually.
INCENTIVE COMPENSATION PLANS
The company maintains incentive compensation plans for key employees,
including its executive management. Awards under these plans are paid in
recognition of individual contribution to divisional or corporate performance as
determined by management or the Compensation and Stock Option Committee of the
Board of Directors. Total costs pursuant to the company's incentive
compensation plans were $1,820,000, $510,000 and $460,000 in fiscal years 1994,
1993 and 1992, respectively.
RESEARCH AND DEVELOPMENT COSTS
- - ------------------------------
The company performs research and development under contracts
principally with the U.S. government. Costs incurred under these contracts are
charged to "Cost of services" in the consolidated statements of operations as
the related services revenue is recorded. Costs classified as "Research and
development expenses" in the consolidated statements of operations are costs
incurred under internally initiated programs, including independent research and
development as defined by government procurement regulations.
COMMITMENTS AND CONTINGENCIES
- - -----------------------------
The company, like other companies doing business with the U.S.
government, is subject to routine audit, and in certain circumstances to
inquiry, review, or investigation, by U.S. government agencies, of its
compliance with government procurement policies and practices. In April 1991,
the company was informed that it was the subject of an investigation by U.S.
government agencies of its compliance with certain government procurement
policies and practices. No allegations have been made by the government
agencies. Based upon government procurement regulations, under certain
circumstances a contractor violating or not complying with procurement
regulations can be subject to legal or administative proceedings, including
fines and penalties, as well as be suspended or debarred from contracting with
the government. The company's policy has been and continues to be to conduct
its activities in compliance with all applicable rules and regulations.
The company is subject to other legal proceedings and claims which arise
in the ordinary course of its business. In the opinion of management, the
results of these other legal proceedings and claims will not have a material
effect on the company's consolidated financial position and results of
operations.
35
17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INCOME TAXES
- - ------------
In fiscal year 1993, the company adopted Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). As
permitted under the new statement, prior years' financial statements were not
restated. The cumulative effect of adopting SFAS 109 is not material.
Year Ended June 30
Dollars in thousands 1994 1993 1992
- - -------------------------------------------------------------------------------------------------------
The components of domestic and foreign income (loss)
before income taxes were as follows:
Domestic $ (7,870) $(31,014) $ 4,526
Foreign 46 (1,250) (373)
-------------------------------
Income (loss) before income taxes $ (7,824) $(32,264) $ 4,153
- - -------------------------------------------------------------------------------------------------------
The provision (benefit) for income taxes consisted of the following:
Currently payable:
Federal $ $ $
State 50 78 63
Foreign 105 19
-------------------------------
155 78 82
Deferred:
Federal (155) (78) (82)
-------------------------------
Provision (benefit) for income taxes $ $ $
- - -------------------------------------------------------------------------------------------------------
The deferred provision (benefit) for income taxes consisted
of the following:
Net temporary differences without tax (provision) benefit $ (2,169) $ 6,051 $(2,158)
Revenue not contractually billlable (618) (960) (693)
Excess of book over tax depreciation and amortization (284) (127) 1,185
Provisions not currently deductible 3,109 (4,928) 1,696
Other, net (193) (114) (112)
-------------------------------
Deferred provision (benefit) for income taxes $ (155) $ (78) $ (82)
- - -------------------------------------------------------------------------------------------------------
The provision (benefit) for income taxes differs from the amount
computed using the statutory rate as follows:
Tax provision at the federal statutory rate $ (2,660) $(10,970) $ 1,412
Net temporary differences without tax (provision) benefit (2,169) 6,051 (2,158)
Research and investment tax credits (704) (1,068) (874)
Minority interest (704)
Domestic losses without current tax benefit 6,098 6,016 1,600
State taxes, net 33 51 42
Other, net 106 (80) (22)
-------------------------------
$ $ $
- - -------------------------------------------------------------------------------------------------------
No deferred taxes have been recognized in the consolidated balance
sheets at June 30, 1994 and 1993. The components were as follows:
Accruals and reserves not deducted for tax purposes $ 14,197 $ 16,389
Net operating loss carryforwards 12,152 6,070
Tax credit carryforwards 7,346 6,185
Depreciation and amortization 3,690 3,193
Deferred revenue (3,586) (4,204)
Other, net 622 523
----------------------
$ 34,421 $ 28,156
Valuation allowance (34,421) (28,156)
----------------------
$ $
- - -------------------------------------------------------------------------------------------------------
The net operating losses and general business tax credits expire in fiscal
years 1997 through 2009. A portion of the net operating loss carryforward is
related to a fiscal year 1987 acquisition and is subject to certain
limitations.
36
18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUPPLEMENTAL CASH FLOW INFORMATION
- - ----------------------------------
Cash paid and received for income taxes and interest was as follows:
Year Ended June 30
Dollars in thousands 1994 1993 1992
- - ----------------------------------------------------------------
Cash paid for:
Income taxes $ 215 $ 246 $ 452
Interest 4,438 4,453 4,914
Cash received for:
Income tax refunds 309 3,091 461
Income tax refunds received in fiscal year 1993 included $805,000 of
interest.
RESTRUCTURING CHARGE
- - --------------------
Operating results for fiscal year 1993 included a restructuring charge
of $20,470,000 primarily associated with employee severance and related
facilities costs, reflecting a reduction of employment of approximately 300
employees in fiscal year 1993.
OTHER INCOME
- - ------------
Other income in fiscal year 1994 includes approximately $900,000
resulting from lower than expected costs associated with a previously divested
contract.
In the fourth quarter of fiscal year 1993, the company sold the fixed
assets, inventory and technology of its Advanced Simulation business for
$6,000,000 in cash. Results for the fourth quarter of fiscal year 1993
included a gain of $3,191,000 in connection with the sale.
FOREIGN CURRENCY TRANSACTIONS
- - -----------------------------
The company may enter into foreign exchange contracts to hedge certain
of its exposures to foreign currency fluctuations. Gains or losses resulting
from these contracts are offset against the effects of the foreign currency
translation. At June 30, 1994 and 1993, the company had foreign exchange
contracts with maturities of three months or less to sell $750,000 and
$1,940,000, respectively, of foreign currencies.
FORMATION OF LIGHTSTREAM CORPORATION
- - ------------------------------------
In October 1993, the company and UB Networks, Inc. (formerly
Ungermann-Bass Inc.) combined technology, staff and other resources to form
LightStream Corporation, an ATM networking company, which is approximately 80%
owned by the company and a 20% minority interest owned by UB Networks, Inc. The
company and UB Networks, Inc. contributed $15,000,000 and $5,000,000 in cash,
respectively, to fund the enterprise and each signed non-exclusive Original
Equipment Manufacturer agreements with LightStream Corporation under which both
the company and UB Networks, Inc. will distribute LightStream Corporation's
products. The company recorded an increase of approximately $990,000 in both
its investment in LightStream Corporation and in its additional paid-in capital.
37
19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEGMENT INFORMATION
- - -------------------
BUSINESS SEGMENTS
For fiscal year 1994, in order to provide a better understanding of the
company's performance, the company has revised its business segments:
"Internetworking" which consists of the networking activities of its Systems and
Technologies Division, including network services, defense communications, X.25
network systems and the T/10 Integrated Access Device business activities;
internet services; and the activities of its LightStream subsidiary; "Data
analysis software" which consists primarily of its Software Products subsidiary;
and "Collaborative systems and acoustic technologies" which includes the Systems
and Technologies Division's services in distributed computing, education
technology, speech processing (including HARK systems) and sensor systems and
acoustic engineering. In fiscal years 1993 and 1992 the Collaborative systems
and acoustic technologies segment included the results of the company's former
simulation business. The following is a summary of business segments
information for the fiscal years ended June 30, 1994, 1993 and 1992,
respectively. Information for fiscal years 1993 and 1992 has been restated to
reflect the change in business segments. All data are shown net of intersegment
transactions.
Year Ended June 30
Dollars in thousands 1994 1993 1992
- - ------------------------------------------------------------------------------------------------
Revenue:
Internetworking $ 76,344 $ 91,936 $111,667
Data analysis software 35,760 38,151 43,438
Collaborative systems and acoustic technologies 84,000 103,366 102,891
----------------------------------------
$196,104 $233,453 $257,996
----------------------------------------
Income (loss) from operations:
Internetworking $(11,276) $(32,411) $ 1,823
Data analysis software 309 (5,347) (1,244)
Collaborative systems and acoustic technologies 3,523 5,435 6,299
Unallocated corporate costs (1,000)
----------------------------------------
$ (8,444) $(32,323) $ 6,878
----------------------------------------
U.S. government sales:
Internetworking $ 48,884 $ 66,175 $ 80,633
Data analysis software 1,377 1,607 1,830
Collaborative systems and acoustic technologies 80,303 76,655 78,684
----------------------------------------
$130,564 $144,437 $161,147
----------------------------------------
Depreciation and amortization:
Internetworking $ 4,835 $ 5,862 $ 7,558
Data analysis software 3,282 3,870 4,173
Collaborative systems and acoustic technologies 2,438 3,386 4,233
----------------------------------------
$ 10,555 $ 13,118 $ 15,964
----------------------------------------
Identifiable assets:
Internetworking $ 38,076 $ 34,865 $ 42,772
Data analysis software 15,954 16,602 21,951
Collaborative systems and acoustic technologies 23,085 28,913 46,930
Corporate 58,825 60,265 50,966
----------------------------------------
$135,940 $140,645 $162,619
----------------------------------------
Capital expenditures:
Internetworking $ 3,677 $ 3,315 $ 4,306
Data analysis software 1,351 2,069 2,207
Collaborative systems and acoustic technologies 1,598 2,369 4,778
Corporate 312 189 377
----------------------------------------
$ 6,938 $ 7,942 $ 11,668
----------------------------------------
GEOGRAPHIC SEGMENTS
Revenue includes U.S. export sales primarily to Western Europe and Japan
of $27,300,000, $51,100,000 and $52,800,000 in fiscal years 1994, 1993 and 1992,
respectively.
38
20
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors
Bolt Beranek and Newman Inc.
Cambridge, Massachusetts:
We have audited the consolidated balance sheets of Bolt Beranek and
Newman Inc., at June 30, 1994 and 1993, and the related consolidated statements
of operations, shareholders' equity, and cash flows for each of the three years
in the period ended June 30, 1994. These financial statements are the
responsibility of the company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Bolt
Beranek and Newman Inc., at June 30, 1994 and 1993, and the consolidated results
of its operations and its cash flows for each of the three years in the period
ended June 30, 1994, in conformity with generally accepted accounting
principles.
/s/ COOPERS & LYBRAND
Boston, Massachusetts
August 11, 1994
39
21
QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarterly financial data for the years ended June 30, 1994 and 1993 was as follows:
Three Months Ended Year Ended
1994 Sept. 30 Dec. 31 March 31 June 30 June 30,
Dollars in thousands, except per-share data 1993 1993 1994 1994 1994
- - ----------------------------------------------------------------------------------------------------------
Revenue:
Services $42,795 $40,448 $40,847 $41,669 $165,759
Products 7,135 7,959 7,678 7,573 30,345
------------------------------------------------------------
$49,930 $48,407 $48,525 $49,242 $196,104
------------------------------------------------------------
Gross margin $16,083 $16,450 $15,634 $17,852 $ 66,019
Loss from operations (1,524) (2,528) (2,356) (2,036) (8,444)
Net loss (1,947) (1,666) (2,259) (1,952) (7,824)
Net loss per share (.12) (.10) (.14) (.12) (.48)
Sales price of common stock: High 14 3/4 13 7/8 21 1/2 16 5/8
Low 7 3/8 8 3/8 11 3/4 10 1/8
- - ----------------------------------------------------------------------------------------------------------
Three Months Ended Year Ended
1993 Sept. 30 Dec. 31 March 31 June 30 June 30,
Dollars in thousands, except per-share data 1992 1992 1993 1993 1993
- - ----------------------------------------------------------------------------------------------------------
Revenue:
Services $46,769 $42,031 $42,234 $44,883 $175,917
Products 17,750 17,722 12,579 9,485 57,536
------------------------------------------------------------
$64,519 $59,753 $54,813 $54,368 $233,453
------------------------------------------------------------
Gross margin $25,706 $22,383 $18,588 $18,392 $ 85,069
Income (loss) from operations 829 (24,342) (5,704) (3,106) (32,323)
Net income (loss) 128 (25,135) (6,640) (617) (32,264)
Net income (loss) per share .01 (1.61) (.42) (.04) (2.05)
Sales price of common stock: High 4 3/4 5 5/8 6 1/4 8 1/2
Low 3 3/4 3 5/8 4 1/4 4 1/4
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During the second quarter of fiscal year 1993, the Company recorded a
restructuring charge of $20.5 million, or $1.30 per share (see accompanying
notes to consolidated financial statements).
40