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FORM 10-K
COMMISSION FILE NO. 1-6435
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
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BOLT BERANEK AND NEWMAN INC.
(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04-2164398
(State of Incorporation) (IRS Employer Identification Number)
150 CAMBRIDGEPARK DRIVE, CAMBRIDGE, MASSACHUSETTS 02140
(Address of principal executive offices) (Zip Code)
(617) 873-2000
(Registrant's telephone number, including area code)
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SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
Common Stock, $1.00 par value New York Stock Exchange
6% Convertible Subordinated Debentures New York Stock Exchange
Common Stock Purchase Rights New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES 'X' NO
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in the definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. 'X'
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State the aggregate market value of the voting stock held by non-affiliates of
the registrant.
Market value at 9/14/95 of Common Stock held by other than directors and
executive officers of registrant: $633,676,208
Indicate the number of shares outstanding of each of the registrant's classes of
common stock.
Common Stock, $1.00 par value, outstanding 9/14/95: 17,534,365 shares
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement dated September 29, 1995 relating to
the Annual Meeting to be held on November 6, 1995 are incorporated by reference
into Items 10, 11, 12, and 13.
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ITEM 1. BUSINESS
GENERAL
Bolt Beranek and Newman Inc. ("BBN" or the "Company", each of which terms
includes, unless the context indicates otherwise, BBN and its consolidated
subsidiaries) was incorporated as a Massachusetts corporation in 1953 as the
successor to a partnership formed in 1948.
In fiscal 1995, the Company consisted of five operating units: the
Company's BBN Systems and Technologies Division, BBN Software Products
Corporation, LightStream Corporation, BBN Planet Corporation, and BBN HARK
Systems Corporation. The BBN Systems and Technologies Division includes
internetworking services and products, and collaborative systems and acoustic
technologies. BBN Software Products Corporation, a wholly-owned subsidiary of
the Company, develops, markets, and supports data analysis and process
optimization software products designed primarily for health industry and
manufacturing applications. LightStream Corporation, an 80%-owned subsidiary of
the Company which made asynchronous transfer mode ("ATM") network switches, sold
substantially all of its assets to Cisco Systems, Inc. on January 11, 1995. BBN
Planet Corporation, a 95%-owned subsidiary of the Company, provides Internet
services to businesses and other organizations. BBN HARK Systems Corporation, a
wholly-owned subsidiary of the Company, is an early stage company which develops
and markets commercial speech recognition software products.
During fiscal 1995, the Company reported financial information in three
business segments: Internetworking, Data Analysis Software, and Collaborative
Systems and Acoustic Technologies. The Internetworking business segment includes
that part of the activities of the Company's BBN Systems and Technologies
Division relating to advanced network systems (including the Company's defense
communications activities) and network services and products, the activities of
BBN Planet Corporation, and the activities of LightStream Corporation up to the
date of sale of substantially all of its assets on January 11, 1995. The Data
Analysis Software business segment includes the activities of BBN Software
Products Corporation. The Collaborative Systems and Acoustic Technologies
business segment includes that part of the activities of the BBN Systems and
Technologies Division relating to collaborative systems, sensor systems, and
acoustic technologies, and the activities of BBN HARK Systems Corporation.
The Company's overall business strategy is to capitalize upon its technical
expertise and problem solving experience in the internetworking, data analysis,
and collaborative systems and acoustic technologies areas. This strategy is to
create focused, entrepreneurial subsidiary companies while maintaining contract
research and development activities within the parent corporation. As of July 1,
1995 the Company is comprised of five distinct and complementary business units,
including two operating divisions and three operating subsidiaries, as described
below:
- BBN Systems and Technologies Division, an operating division of the
Company which generates a majority of the Company's revenue, provides a
range of services, including advanced systems and technologies to
government and commercial organizations, and performs most of the
Company's government contract activities, and its results are reported in
part in the Internetworking business segment, and in part in the
Collaborative Systems and Acoustic Technologies business segment. The
Internetworking activities of the BBN Systems and Technologies Division
include advanced network systems and network services and products, and a
majority of the revenue of these activities is related to defense
communications. The Collaborative Systems and Acoustic Technologies
activities of the BBN Systems and Technologies Division also includes
sensor systems. (See "Advanced Network Systems and Services", "Network
Services and Products", "Collaborative Systems", "Acoustic Technologies",
and "Sensor Systems" below.)
- BBN Software Products Corporation, a wholly-owned subsidiary of the
Company, the name of which is being changed to BBN Domain Corporation,
develops and markets data analysis and process optimization software
products, and its results comprise the Data Analysis Software segment.
(See "BBN Domain Corporation" below.)
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- BBN Planet Corporation (formerly named BBN Internet Services
Corporation), a 95%-owned subsidiary of the Company, provides Internet
services to businesses and other organizations. BBN Planet Corporation,
which was incorporated in 1994 to pursue certain commercial
Internet-related business opportunities, utilizes the Company's
experience and technical expertise in computer networking and
Internet-related activities (which dates back to 1968 when BBN
participated in the design and implementation of the ARPAnet, the
foundation of today's Internet). BBN Planet Corporation has expanded
through the acquisition of three regional Internet access providers
(including NEARnet in June 1993, and BARRNet and SURAnet in fiscal 1995),
and its results are included in the Internetworking segment. (See "BBN
Planet Corporation" below.)
- BBN HARK Systems Corporation, a wholly-owned subsidiary of the Company,
was established in 1994 (continuing certain of the Company's prior
development activities in speech recognition previously residing in the
BBN Systems and Technologies Division) to develop and market commercial
speech recognition computer software products and services which are
marketed primarily to the customer telephony market for call centers and
enhanced telephone services applications. Its results are included in the
Collaborative Systems and Acoustic Technologies business segment. (See
"BBN HARK Systems Corporation" below.)
- BBN Acoustic Technologies Division, an operating division of the Company
formed in July 1995, consolidates BBN's expertise in acoustic and
environmental technologies (continuing those activities previously
performed by the BBN Systems and Technologies Division). The BBN Acoustic
Technologies Division provides structural acoustic, environmental, and
noise control consulting services primarily to government customers, and
designs and develops Active Noise and Vibration Control products and
systems. Its results are reported in the Collaborative Systems and
Acoustic Technologies business segment. (See "Acoustic Technologies"
below.)
The Company's strategy is to continue to develop advanced technologies at
its BBN Systems and Technologies Division, and to create operating subsidiaries
and divisions focused on transforming these technologies into services and
products for the commercial and government markets. BBN Software Products
Corporation, BBN HARK Systems Corporation, and BBN Planet Corporation all were
founded on technologies that were originally developed at the BBN Systems and
Technologies Division, and the Division continues to work on a range of advanced
technologies. In addition, collaboration among the Company's operating
subsidiaries and divisions and its BBN Systems and Technologies Division is
designed to expand the opportunities of each for shared customers.
BBN has in the past sold minority interests in subsidiary companies to
outside investors in private transactions. That strategy is expected to
continue, as appropriate, with the Company considering from time to time the
sale of a minority interest in one or more subsidiary companies to outside
investors, including in public sales.
A significant portion of BBN's revenue continues to be derived from its
business with the U.S. government and its agencies, particularly the Department
of Defense. The Company's business with the Department of Defense has been
adversely affected by reduced defense spending. The Company expects overall
defense budgets to continue to decline over the next several years, and
anticipates attendant increased competition within the consolidating defense
industry. 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 fiscal 1996, particularly in the Company's defense
communications, acoustic technologies, and sensor systems activities. (See
"United States Government Contracts" below.)
BBN conducts its commercial businesses in environments characterized by
intense competition, shortened product life cycles, and rapid technological
change, which require significant research and development expenditures to
develop new products and services to address emerging market requirements and to
improve existing products and services. In recent years, the Company's
traditional commercial businesses, consisting principally of RS/Series(TM) data
analysis software products and X.25 network systems, have been experiencing
substantially lower revenue. The Company has discontinued sales of most of its
traditional X.25 systems and products, and has substantially eliminated its
development efforts and significantly reduced its selling efforts
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related to this business. In recent periods, the Company has been investing
heavily in development of new products, including the LightStream Corporation
ATM network switches, Cornerstone(TM) data analysis and visualization software,
the T/10(TM) Integrated Access Device ("IAD") for computer networks, and the BBN
HARK(TM) speech recognition software. In fiscal 1995, the Company made
significant investment in Internet services.
During the three most recent fiscal years, BBN's operating results have
been adversely affected by this high level of investment in new products and
services, by declines in the Company's defense communications and acoustic
technologies businesses, by substantially lower demand for the Company's
traditional X.25 network systems and RS/Series data analysis software products,
and by restructuring charges in fiscal 1993 relating to downsizing and staff
reductions.
In January 1995, Cisco Systems, Inc. acquired substantially all of the
assets of LightStream Corporation, resulting in a $105 million gain to the
Company before taxes and minority interest. The Company's fiscal 1995 results
include revenue of approximately $8.4 million and an operating loss of
approximately $3.7 million relating to LightStream Corporation's activities
(through the date of sale to Cisco in January 1995). (See "LightStream
Corporation" below.)
The Company continues to invest in its commercial businesses, and recorded
operating losses for fiscal 1995 at BBN Planet Corporation, BBN HARK Systems
Corporation, and BBN Software Products Corporation, as well as decreased
operating income at the BBN Systems and Technologies Division. The Company
expects to incur significant operating losses at BBN Planet Corporation during
fiscal 1996, which is expected to adversely impact the financial performance of
the Company. The outlook could also be affected by further expenditures on
commercial business opportunities available to the Company. The Company's
objective is to achieve increased revenue growth in fiscal 1996. However, this
outlook is strongly dependent upon achieving a significant increase in revenue,
primarily from BBN Planet Corporation and BBN Software Products Corporation.
There can be no assurance that such an increase will be realized. The Company's
revenue growth objective is dependent upon market acceptance of BBN Planet
Corporation's Internet-related services and BBN Software Products Corporation's
offerings; the Company's ability to continue to recruit entrepreneurial
marketing and sales leadership, develop a support infrastructure, and establish
productive customer relationships, particularly in the commercial marketplace;
and the Company's success at maintaining comparable levels of the Company's
government business. The implementation of the Company's overall business
strategy will continue to require significant additional investment in sales and
marketing and product development.
The Company's business segments represented approximately the following
percentages of BBN's total revenue in fiscal 1995, 1994, and 1993:
YEAR ENDED JUNE 30,
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PERCENTAGE OF TOTAL BBN REVENUE 1995 1994 1993
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Internetworking........................................................ 41 % 39 % 39 %
Data Analysis Software................................................. 18 % 18 % 16 %
Collaborative Systems and Acoustic Technologies........................ 41 % 43 % 45 %
--- --- ---
100 % 100 % 100 %
The Company's contracts and subcontracts involving the U.S. government and
its agencies represented approximately 58%, 67%, and 62% of BBN's total revenue
in fiscal years 1995, 1994, and 1993, respectively.
INTERNETWORKING
ADVANCED NETWORK SYSTEMS
Overview.
BBN designs, develops, and operates wide-area communications network
systems, designs and develops advanced routers and other communications network
products, and offers and performs contract research,
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development, and consulting services, primarily for government organizations
and, to a lesser extent, for commercial organizations. (For certain information
on the Company's Internet services activities, see generally the discussion
under "BBN Planet Corporation" below.)
For the past several years, BBN has provided network systems and services
to the U.S. Department of Defense, including to the Defense Data Network
("DDN"), a common-user data network serving the Department of Defense. In fiscal
1991, the Defense Information Systems Agency ("DISA") awarded BBN a one-year
contract in support of the DDN, with up to four one-year optional extensions.
The Company is currently performing under the fourth option year of that DDN
contract, valued at approximately $15 million, which will continue the Company's
existing activities through October 1995. The Company has been awarded a
six-month extension of the DDN contract, which will continue these activities
through April 1996. The value of this extension award is approximately $7.5
million. The Company does not expect that this activity will continue beyond
April 1996, although the Company may compete for follow-on contracts for the
DDN, at reduced funding levels.
BBN provides a range of other network services, systems, and products, for
use primarily by the U.S. government under various contracts. BBN provides
research, development, hardware, software, and professional services for
wide-area networks supporting distributed simulation and training, warfighting
simulation, and command and control functionality; advanced Internet routers
supporting integrated video, voice, and data requirements; and cryptographic
systems and products for sophisticated network security applications.
The Company's newly organized "Enterprise Networks" commercial consulting
services group is currently offering consulting services, strategic analysis and
planning, network management, network security, and advanced technology
integration for large commercial organizations.
In March 1995, the Company entered into an agreement with America Online,
Inc. ("AOL") to build, maintain, and operate a portion of AOL's nationwide,
high-speed, dial-in network. The Company's five-year agreement with AOL, valued
at approximately $11 million per year, includes substantial pass-through costs
to BBN for telecommunications circuits and other services provided by local and
interexchange carriers. In connection with the provision of such services to
AOL, the Company has built a Network Operations Center ("NOC") based in
Columbia, Maryland. As part of BBN's agreement with AOL, the Company has access
to use of the excess capacity of the portion of the network operated by BBN, and
BBN has the right to resell such excess capacity. The Company is exploring
opportunities to resell such excess capacity, the availability of which is
currently limited primarily to business hours.
Marketing.
The primary market for BBN's advanced network systems is U.S. government
agencies, primarily the U.S. Department of Defense. BBN markets its advanced
network systems to government customers both directly and through teaming
arrangements with large defense contractors. The general decline in the U.S.
Department of Defense budget, coupled with increased competition, are factors
that may affect BBN's future success in the government marketplace. (See "United
States Government Contracts" below.) The Company is also targeting for its
services offerings large commercial organizations with significant existing
network infrastructures that need to integrate, migrate, or build new enterprise
networks that incorporate emerging internetworking technologies.
The Company's success in offering advanced network systems is dependent
upon the Company's continued ability to recruit, hire, and retain suitable
scientific and engineering personnel who possess a high level of technical
expertise, knowledge, and experience in the computer networking field.
Competition.
Competition in the field of advanced network systems is intense. Government
contracts may be awarded either through a sole-source or competitive
procurement, although competitive procurements are increasingly common. The
market for developing and operating wide-area networks for government agencies
is dominated by large companies with substantially greater financial and
marketing resources than BBN.
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The Company believes that the primary factors of competition in the
government sector are the technical expertise and experience of the supplier,
and price. BBN believes that its ability to compete successfully will depend
heavily upon the Company's ability to attract and retain employees with a
high-level of technical expertise, knowledge, and experience.
In the commercial marketplace, the Company believes that its success will
depend upon BBN Systems and Technologies Division's success in continuing to
provide advanced networking consulting and contract research and development
services to certain U.S. government customers, including the Advanced Research
Projects Agency. These efforts provide the Company with extensive knowledge and
expertise relating to future internetworking trends and opportunities. Factors
of competition in the commercial sector include the extensiveness of the
supplier's consulting capabilities and service offerings, reputation,
responsiveness, and to a lesser extent, price.
NETWORK SERVICES AND PRODUCTS
BBN markets and supports network services and products, as described below.
BBN's X.25 network systems and products, which are based upon
packet-switching technology, include switching equipment, access devices, and
network management systems. The Company's X.25 network services and products
business has experienced significantly lower revenue for several years.
Substantially all of the Company's X.25 network services and products revenue in
fiscal 1995 was generated from sales into the Company's existing customer base
in connection with the maintenance and support of networks previously installed
by BBN. The Company has discontinued sales of most of its traditional X.25
systems and products, and has substantially eliminated its development efforts
and significantly reduced its selling efforts related to this business.
BBN's T/10 IAD is designed to help customers consolidate traffic from their
traditional terminal-to-computer and computer-to-computer traffic with newer
desktop computing applications over a single enterprise network. The T/10 IAD
operates simultaneously as an Internet Protocol router, X.25 packet switch, and
async, bisynch, and SNA packet assembler/disassembler, and provides frame relay
functionality. To date, revenue from the Company's T/10 IAD activities has been
substantially below expectations, and the Company has experienced operating
losses in connection with that business. The Company has substantially reduced
spending relating to the T/10 IAD from prior year levels.
The Company's T/10 IAD activities are now being primarily focused on a
limited number of reseller and strategic licensing opportunities, and the future
success of the T/10 IAD is highly dependent on these opportunities. In July
1995, the Company entered into an agreement with NEC Corporation ("NEC")
granting to NEC technology and manufacturing license rights in the T/10 IAD and
in the Company's T/40(TM) Video Internet Router (which BBN has under
development), and agreed to perform certain development activities in connection
with the joint development of a new multi-media access device. The value of the
NEC agreement is approximately $4.6 million, $1.9 million of which relates to
future development efforts.
The Company has outsourced most of its manufacturing capabilities for its
internetworking products. The Company does not currently maintain a qualified
second manufacturing source for the T/10 IAD and certain X.25 network products.
Field service, consisting of on-site hardware and software maintenance for
BBN's products, is provided both directly by BBN and through third party
maintenance organizations. The Company maintains dedicated field service
personnel at sites in the United States and in a limited number of foreign
countries, serving the field service requirements of its U.S. government
customers, primarily for the DDN.
Marketing.
The market for the Company's X.25 network services and products is
primarily BBN's existing commercial customer base. These customers typically
require ongoing maintenance, upgrade, operation, or expansion of a private X.25
network system previously installed by the Company. The Company markets its X.25
network services and products both directly and through third party resellers,
although the Company has
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substantially reduced its direct selling and marketing capabilities for X.25
network services and products in recent years.
Competition.
The Company believes that the primary factors of competition for X.25
network services and products are functionality, product performance, price,
reliability, and experience of the supplier. Several important trends have
adversely affected the Company's X.25 network services and products business,
including the growth of desktop computing, the widespread installation of LANs,
and increased transmission circuit speed and improved circuit quality. These
trends have led to market requirements for networking technologies such as
routers. The Company is not currently investing in additional development of its
X.25 products.
BBN PLANET CORPORATION
Overview.
BBN Planet Corporation ("BBN Planet") provides Internet services to
businesses and other organizations by operating a high-bandwidth digital data
communications network providing dedicated local access to its customers across
the United States. BBN Planet's Internet access services include a range of
dedicated leased line connectivity options, network design, implementation,
management, monitoring and problem-resolution services. BBN Planet also intends
to develop or acquire additional Internet-related value added services. In
addition to Internet access services, the Company currently offers managed
network security, World Wide Web server hosting, and application development
services.
In June 1993, BBN organized its commercial Internet-related business
activities into a new subsidiary which acquired the assets of the New England
Academic Research Network ("NEARnet"). This organization, evolving into BBN
Planet, has since acquired the business and assets of two additional regional
Internet access providers (including BARRNet in 1994 and SURAnet in 1995),
expanding its geographical service area and customer base, and supplementing the
technical expertise and the approximately 100 employees transferred to BBN
Planet from BBN. In addition, BBN Planet has recently hired senior management
and marketing personnel.
BBN Planet's high-bandwidth network utilizes both BBN Planet-owned network
points of presence ("POPs") and interconnected frame-relay and switched
multi-megabit facilities provided by local exchange and interexchange carriers,
in order to make available to its customers local Internet access throughout the
United States. BBN Planet is beginning to expand and upgrade its network
backbone, in order to meet the anticipated increase in Internet traffic and the
demand for high capacity Internet connections. To support its service offerings,
BBN Planet maintains a primary network operations center staffed 7 days-a-week,
24 hours per day, as well as two operations support centers that can serve as
limited back-up network operations centers in the event of an emergency. Field
service staff, consulting service engineers, and applications design personnel
are located in regional offices to provide technical sales and customer support.
Marketing.
Currently, BBN Planet's customers consist of over 1,300 businesses,
universities, and governmental customers. BBN Planet intends to target
organizational and business customers, in particular organizations and
businesses with extensive customer service and support requirements, including
computer and computer software companies, telecommunications companies, high
technology companies, consumer-oriented financial services companies,
publishers, manufacturers, and professional service firms. BBN Planet currently
sells its services through its own sales force and through AT&T Corp. ("AT&T").
In June 1995, BBN Planet and AT&T entered into a strategic relationship
under which BBN Planet is to be the exclusive provider for a period of up to
three years of dedicated Internet access and managed network security services
to AT&T for resale to customers of AT&T's Business Communications Services
division ("BCS") in the United States. During such three year period, as long as
BBN Planet is the exclusive provider of dedicated Internet access and managed
Internet security services to customers of BCS, BBN Planet is
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prohibited from providing such services to, or in conjunction with, other
telecommunications carriers or on-line service providers. Under the agreement,
AT&T provides certain incentives to BBN Planet to develop additional
Internet-related value-added services for sale to such customers. BBN Planet
will also provide training and sales support and post-sale implementation
support to AT&T. The agreement provides AT&T with discounts off of benchmark
pricing, based upon comparable pricing to BBN Planet's most favored customers.
In addition, either AT&T or BBN Planet may at any time initiate modifications in
the benchmark pricing for BBN Planet's Internet access services, as necessary to
ensure that BBN Planet's prices remain competitive with the prices charged by
other providers of similar services. AT&T's BCS sales force will resell BBN
Planet's dedicated Internet access services to AT&T customers. The relationship
offers to BBN Planet an opportunity to accelerate the expansion of BBN Planet's
Internet access and related value-added services business. AT&T has agreed to
purchase the following minimum order amounts of services during the first three
years of the agreement: year one, $20 million; year two, $40 million; and year
three, $60 million (subject to potential reduction under specified
circumstances). In addition, in years 4 and 5 of the agreement, AT&T has agreed,
to the extent BCS continues to receive revenue from the sale of dedicated
Internet access services, to purchase services from BBN Planet such that in
general BBN Planet's revenue from the sale of services to AT&T and AT&T
customers in such years is not less than two-thirds and one-third, respectively,
of BBN Planet's revenue from the sale of dedicated Internet access services to
AT&T and continuing AT&T customers during year 3 of the agreement. AT&T's
obligations to purchase a minimum amount of services in years 4 and 5 of the
agreement will terminate, among other reasons, if a telecommunications carrier
or on-line service provider having the right to appoint a director of BBN or BBN
Planet acquires ownership of 15% or more of the outstanding stock of BBN or BBN
Planet. In addition to certain other termination provisions, AT&T may cancel the
agreement in the event either BBN or BBN Planet merges with, or becomes
controlled by, another telecommunications carrier or an on-line service provider
and has the right to terminate the exclusivity obligation and to withhold other
financial benefits in certain other situations. BBN Planet's performance of the
AT&T agreement has been guaranteed by BBN. In July 1995, AT&T Venture Company
L.P., a venture capital partnership with AT&T as the sole limited partner, made
an $8.0 million investment in BBN Planet.
Competition.
The market for Internet services is rapidly expanding, and there are
considerable uncertainties as to how the market will develop. The market for
Internet access and related value-added services is highly competitive and in
general there are no substantial barriers to entry. BBN Planet believes there
are certain key marketing considerations in this market, including: price;
quality of service; technical expertise; the quality of network backbone and
infrastructure; and the quality and scope of sales, marketing, and distribution
channels. BBN Planet expects that competition in the market will intensify in
the future.
BBN Planet's current and prospective competitors may, in general, be
divided into the following four groups: (1) Internet access providers, such as
Performance Systems International, Inc. and UUNET Technologies Inc.; (2)
telecommunications companies, such as AT&T, MCI Telecommunications, Inc.,
Metropolitan Fiber Systems Communications, Inc., Sprint, Inc., regional Bell
operating companies, and various cable companies; (3) on-line services
providers, such as AOL and CompuServe Incorporated (a division of H&R Block,
Inc.); and (4) value-added networks and systems integrators, such as General
Electric Information Services and International Business Machines Corporation's
Advantis. Many of these competitors have greater market presence and have
engineering, marketing, financial, technological, and personnel resources
greater than those available to BBN Planet. As a result, they may be able to
develop and expand their communications and network infrastructures more
quickly, adapt more swiftly to new or emerging technologies and changes in
customer requirements, take advantage of acquisition and other opportunities
more readily, and devote greater resources to the marketing and sale of their
products than can BBN Planet. BBN Planet expects that all of the major online
services and telecommunications companies will compete fully in the Internet
services market, and that new competitors, including large computer hardware,
software, media, and other technology and telecommunications companies, will
enter the Internet services market, resulting in even greater competition for
BBN Planet.
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As a result of increased competition in the industry, the Company expects
to encounter pricing pressure, which in turn could result in significant
reductions in the selling price of BBN Planet's Internet access services
(including changes to the pricing to AT&T under BBN Planet's agreement with
AT&T). In addition, those of BBN Planet's competitors which are
telecommunications companies may be able to provide customers with reduced
overall communications costs by combining Internet access services with other
services, thereby reducing the overall cost of their Internet access services
and increasing pricing pressures on BBN Planet. There can be no assurance that
BBN Planet will be able to offset the effects of any such price reductions with
an increase in the number of its customers, higher revenue from value-added
services, cost reductions, or otherwise. There can be no assurance that BBN
Planet will have the financial resources, technical expertise, or marketing and
support capabilities to continue to compete successfully.
BBN Planet's success will primarily depend upon the development and
expansion of the market for Internet access services and products and the
networks which comprise the Internet; the capacity, reliability, and security of
its network infrastructure; its ability to develop value-added products and
services that meet changing customer requirements or acquire rights to such
products and services from BBN or other providers; its ability to attract and
retain additional highly qualified management, technical, marketing, and sales
personnel; and its ability to manage its growth.
LIGHTSTREAM CORPORATION
Until January 1995, BBN had invested heavily for several years in the
development of networking products based on ATM technology. The Company's ATM
development activities were conducted from October 1993 by LightStream
Corporation, a BBN subsidiary 80% owned by the Company and 20% owned by UB
Networks, Inc. (formerly Ungermann-Bass, Inc.), a wholly-owned subsidiary of
Tandem Computers, Inc. Sales of LightStream ATM switches were approximately $1.5
million in fiscal year 1994 and $8.4 million for the six months ended December
31, 1994. Operating losses relating to the LightStream ATM activities were
approximately $14.8 million in fiscal year 1994 and $3.7 million for the six
months ended December 31, 1994.
In January 1995, LightStream Corporation sold substantially all of its
assets to Cisco Systems, Inc. ("Cisco"), which resulted in a $105.0 million gain
to the Company before taxes and minority interest. BBN realized approximately
$80 million in cash from this transaction.
Simultaneous with the sale of LightStream Corporation, BBN entered into an
agreement with Cisco providing the Company with significant discounts on the
purchase of up to $30 million in Cisco equipment. The Company also formed a
strategic alliance with Cisco relating to Internet services. BBN was also
selected as a primary provider of Internet access services to Cisco and
currently manages part of Cisco's internal
network.
DATA ANALYSIS SOFTWARE
BBN DOMAIN CORPORATION
Overview.
Through its wholly-owned subsidiary BBN Software Products Corporation, the
name of which is being changed to BBN Domain Corporation (herein sometimes
referred to as "BBN Domain"), the Company develops, markets, and supports data
analysis and process optimization software products and services primarily
designed for companies in the health and manufacturing industries. The Company's
data analysis and process optimization software products embody data management,
data analysis, and domain-specific methodologies in visually-oriented,
client/server environments.
BBN Domain's offerings of software products, including RS/Series,
Clintrial(TM), Clintrace(TM), Cornerstone, BBN/Probe(TM), and BBN/Patterns(TM)
computer software, are described more fully below:
- RS/Series. The RS/Series of data analysis and visualization software
includes RS/1(R), RS/Explore(R), RS/Discover(R), and RS/QCA II(TM)
software. RS/1 software is a fully integrated data analysis system
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used by engineers in manufacturing companies. RS/Explore, RS/Discover,
and RS/QCA II software are sold as product options to RS/1 software.
Collectively, the RS/Series software is used to monitor and improve
processes through the use of data analysis, statistical process control,
and design of experiments.
- Clintrial and Clintrace. Clintrial and Clintrace data management
software are health industry applications software products used by
pharmaceutical, biotechnology, and medical devices companies, as well as
contract research organizations. Clintrial software is designed to
support data management of clinical trials, and Clintrace software is
designed to unify a company's adverse events processing.
- Cornerstone. Cornerstone data analysis and visualization software
provides integrated data access, visualization, analysis, and
presentation of results within a single consistent graphical user
interface. Cornerstone software is specifically designed for use on
desktop computers in a client/server environment, and operates on
workstations and personal computers from a number of manufacturers.
- BBN/Probe and BBN/Patterns. BBN/Probe and BBN/Patterns software provide
recognition, visualization, and analysis of complicated time-series data.
BBN/Probe software is used by engineers, primarily in the aerospace and
defense industries, to access and analyze complicated time-series data.
BBN/Patterns software helps engineers and scientists in the manufacturing
and aerospace industries recognize simple to complex signatures in their
data streams.
BBN Domain software products operate on a variety of operating systems, as
applicable, including VMS and Open VMS from Digital Equipment Corporation;
Windows 3.x, Windows95, and Windows NT from Microsoft Corporation; SunOS from
Sun Microsystems; HP-UX from Hewlett-Packard Corporation; and AIX from IBM
Corporation.
The Company's traditional data analysis software products, including
mini-computer based versions of the Company's RS/Series software, have been
affected over the last several years by a number of market changes, most notably
the growth of distributed processing and the associated use of personal
computers, workstations, and other desktop computers. As demand for
minicomputer-based software has declined, the Company has experienced
substantially lower RS/Series software revenue and downward pressure on prices.
In response to the trend toward desktop computing, the Company has developed
desktop versions of certain RS/Series software products including RS/Series for
Windows, and in 1994 the Company introduced Cornerstone software, a
desktop-based data analysis and visualization software tool. Sales of
Cornerstone software to date have been substantially below expectations.
Commencing in fiscal 1995, BBN Domain is more tightly integrating its
Cornerstone software with its RS/Series software products to provide platform
migration and ease of use for its existing RS/Series customer base, and to
provide greater capabilities and flexibility in client/server computing
environments.
Recently, the Company has refocused its traditional data analysis software
activities, and now targets customers principally in the health and
manufacturing industries. The Company's products are typically used in research,
development, and manufacturing operations.
In fiscal 1995, BBN acquired from IBM the exclusive rights to IBM's Process
Analysis Navigation System ("PANS") technology and software for manufacturing
processes. The Company is currently integrating and significantly enhancing this
methodology and technology with BBN's data analysis and visualization software
for manufacturers, and BBN Domain expects to release the resulting product in
fiscal 1996. The product is intended to combine data analysis and visualization
capabilities with process optimization methodology to assist customers in
reengineering on a statistical basis their manufacturing processes to improve
productivity in bringing products to market.
In the health industry, BBN Domain is participating with pharmaceutical
companies in the development of new features and functions for its Clintrial
clinical data management software for client/server computing environments.
The Company is increasing its development expenditures at BBN Domain, and
is investing in additional sales and marketing personnel. The Company believes
that the future success of its data analysis and process
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optimization software will depend primarily on the development and marketing of
software applications that permit operation on personal computers; on continued
market acceptance of its health industry software products; on development and
acceptance of its PANS manufacturing methodology; and on timely integration of
its Cornerstone and RS/Series software.
BBN Domain also offers maintenance, training, and consulting services to
its software customers. Maintenance services consist principally of system
updates, new releases, and telephone hotline support. Training is offered both
in product use and use of statistical methods embodied in the Company's software
products. Consulting services include principally installation, implementation,
and customization of BBN's software products for its customers.
Marketing.
The primary markets targeted by BBN Domain for its software products are
the health and manufacturing industries. In the health industry, the Company's
software products are used primarily by administrative and management personnel
who are responsible for conducting and managing clinical research, clinical
trials, drug safety, and regulatory affairs in the pharmaceutical,
biotechnology, and medical devices fields, and contract research organizations
supporting such companies. In the manufacturing industry, the Company's software
products are used primarily by engineers and management personnel in the
semiconductor, electronics, automotive, chemical, and pharmaceutical fields. The
manufacturing market is characterized by a need to acquire, analyze, visualize,
graph, and report engineering and manufacturing data.
BBN Domain markets its software products to organizations worldwide.
Selling and marketing is done principally through a direct sales force at
offices in the United States, Western Europe, and the Pacific Rim. The Company
is increasing its international activities, and has recently opened sales
offices in the People's Republic of China and Singapore.
Sales of the Company's health industry software have increased recently. In
June 1995, the Company announced that the Pharma Division of Ciba-Geigy Limited
will standardize on Clintrial software for its worldwide drug development
projects. In addition, in August 1995 the Company announced that Eli Lilly and
Company had licensed Clintrial and Clintrace software to help standardize its
clinical data management processes. However, the market for Clintrial and
Clintrace software is primarily pharmaceutical, biotechnology, and medical
devices companies and contract research organizations. Accordingly, the
Company's ability to continue to sustain revenue growth from its health industry
software is dependent upon the continued development by the Company of
enhancements and new product offerings for its limited customer base.
Competition.
BBN Domain's software for the health and manufacturing industries competes
principally with customized software solutions developed by in-house programmers
for internal use by corporations. Many of the companies using in-house systems
are also clients of the Company. The Company believes that there is currently no
other company offering a similar level of integrated process optimization
solutions to companies in the manufacturing industry, but many competitors do
offer discrete software products that improve a company's processes. BBN
Domain's principal competition for data analysis and visualization software
products from non-in-house suppliers is from statistical software packages
offered by independent software vendors and, to a lesser degree, by spreadsheet
vendors whose products are widely used in business and technical environments
for data organization, simple statistics, and graphics. Several of these
packages are marketed by organizations with established reputations and with
financial and marketing resources greater than those of BBN.
BBN Domain believes that competition in the data analysis and visualization
software market is primarily based upon the quality, features, price,
ease-of-use, and support offered by a particular product. In addition to
providing the sophisticated statistical functionality required to analyze and
visualize complex technical data, BBN Domain believes that its products provide
the market with a higher level of functional integration than is generally
available from most competitors. However, there are significant portions of the
overall market which
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do not need the level of functional integration which is embedded within the
Company's applications software products.
COLLABORATIVE SYSTEMS AND ACOUSTIC TECHNOLOGIES
COLLABORATIVE SYSTEMS
Overview.
BBN designs, develops, and markets collaborative systems, primarily in the
fields of distributed computing, speech and language processing, and education
technology. In each of these fields, BBN offers customized solutions to complex
problems.
In the field of distributed computing, the Company offers research,
development, and consulting services, primarily to government agencies, to
develop and implement advanced systems in the area of human-computer
applications, integrating advanced computing, expert systems, and artificial
intelligence capabilities. The Company has designed and built intelligent
systems for a number of government customers, including the U.S. Army
(mission-critical intelligent system for logistics planning) and the U.S.
Advanced Research Projects Agency (distributed collaborative planning systems
for joint task force operations).
In the field of speech and language processing, the Company offers
research, development, and consulting services, primarily to government
customers, relating to speech recognition, natural language processing, spoken
language systems, and text processing. For example, under contract to the U.S.
Advanced Research Projects Agency, the Company is developing interactive spoken
language systems enabling military personnel to interface efficiently and
effectively with intelligent computer applications. (The Company's commercial
speech recognition activity is carried on primarily through BBN HARK Systems
Corporation. See "BBN HARK Systems Corporation" below).
In the field of education technology, BBN offers a variety of research,
development, and consulting services, primarily to government organizations such
as the National Institutes of Health and the National Science Foundation, and to
public and private educational institutions. For example, under contract to the
New American Schools Development Corporation, the Company has developed and is
assisting in the implementation of the "Cooperative Networked Educational
Community for Tomorrow" (Co-NECT(TM)) School Design program, utilizing computer
and networked communications technology as part of a project-based curriculum.
In fiscal 1995, the Company announced an agreement with the Dade County Public
School system to assist in the creation of three model middle schools in the
Miami, Florida area.
The Company also designs, develops, and markets collaborative systems in
the fields of advanced command and control, cognitive sciences and systems,
intelligent systems, and underwater simulation.
Marketing.
Large government and commercial organizations face increasingly complex
challenges, including around-the-clock operations, globally dispersed
operations, and rapid response requirements. Effective computer-based solutions
to these challenges require transition from centralized, isolated computing
focused on managing information to connected, collaborative computing focused on
using information (including real time data capture), communications across
heterogeneous platforms and networks, and rapid analysis and reporting. The
systems and products provided by the Company to address these challenges are
called "collaborative systems".
BBN markets collaborative systems and related services and products
principally to U.S. government agencies. Substantially all of BBN's
collaborative systems contracts are won on the basis of the technical merits of
BBN's proposals and BBN's professional reputation. BBN's reputation is enhanced
through the visibility of its employees in professional pursuits and,
accordingly, BBN encourages participation by its employees in various
professional associations and sponsors the presentation and publication of
technical papers by employees at professional meetings and in technical
journals.
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Competition.
The primary factors of competition for collaborative systems are superior
technical expertise and price. BBN believes that its ability to maintain its
competitive position depends upon its ability to attract and retain talented
employees and to maintain a competitive cost structure.
BBN faces competition from a large number of organizations, many of which
have substantially greater financial resources and larger technical staffs than
BBN. Competitors include corporations and non-profit organizations (including
non-profit federal contract research centers) that may derive a substantial
portion of their revenue from research and development contracts with the U.S.
government and its agencies. In addition, some government agencies have internal
research departments that may perform some of the services offered by BBN,
although the Company's services generally supplement the capabilities and
talents available within such agencies. Increased competition for its
collaborative systems and services has had an adverse impact on the Company's
profit margins. Information as to the Company's U.S. government contract
activities may be found in the section captioned "United States Government
Contracts" below.
BBN HARK SYSTEMS CORPORATION
Overview.
Through its wholly-owned subsidiary, BBN HARK Systems Corporation ("BBN
HARK"), the Company develops, markets, and supports commercial speech
recognition computer software products and services, which are marketed
primarily to the customer telephony market for call centers and enhanced
telephone services applications. The foundation of the Company's commercial
speech recognition software-based solutions is the BBN HARK Recognizer software
product, which provides speaker independent, continuous speech recognition based
on a scalable, client/server architecture. The BBN HARK Recognizer is a
software-only system that operates on a number of standard workstations and
personal computers equipped with a standard audio interface, without additional
specialized digital signal processing hardware. The Company also provides
contract research and development services to commercial customers to develop
and implement customized speech recognition-based software applications. BBN
HARK is an early-stage company which is currently incurring operating losses.
Marketing.
The market for commercial speech recognition products and services consists
of two principal market segments, the customer telephony market (focused on
speech recognition capabilities for call centers and enhanced telephone
services) and the desktop speech market (focused on speech recognition
capabilities for operating system and applications software for desktop
computers and dictation systems). The principal market currently targeted by the
Company for its speech recognition products and services is the telephony call
center market. Potential customers for BBN HARK speech recognition products and
services include companies that interact with their customers through call
centers in a variety of fields, including the telephone, travel, transportation,
financial services, and health care industries, for a range of applications,
including customer service, reservations, sales and direct marketing, help desk,
product support, collection, fundraising, and dispatch.
The Company markets and sells its commercial speech recognition products
and services through a combination of direct and indirect channels, principally
in the United States. Currently, the Company has only modest direct sales
capabilities for its speech recognition products and services. In addition to
utilizing a direct sales force, the Company intends to establish multiple
distribution channels with telephony and computer hardware platform providers,
systems integrators, and value-added resellers.
In July 1995, the Company announced a distribution agreement for its speech
recognition software with IBM and a pilot program with AT&T for application of
the BBN HARK software in networked telephony applications. During fiscal 1995,
the Company also entered into an agreement with Time Warner Cable to develop
systems design for integrating speech recognition into Time Warner's prototype
interactive cable services, to be deployed in the later phases of a field trial
in Orlando, Florida.
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The Company's speech recognition software products are currently available
only in English-language versions, and are currently marketed primarily to
commercial organizations in the United States.
Computer speech recognition is an emerging market. Although the Company
expects that the telephony call center market segment presents greater
opportunities for the Company's speech recognition products and services than
the desktop speech market segment, there currently exists only a limited market
demand. In addition, the sale of the Company's speech recognition products and
services is characterized by long sales cycles, often including a lengthy
small-scale "pilot" test phase. Accordingly, the Company's success in the
commercial speech recognition marketplace will depend heavily upon the
development of market demand for large vocabulary speech recognition
capabilities; the ability of the Company to sustain technological superiority,
ease-of-use, and cost-competitiveness for its speech recognition products and
services; the development of third party applications incorporating the BBN HARK
speech recognition technology; and the establishment of productive distribution
channels (including strategic alliances) on a timely basis.
Competition.
The primary factors of competition for commercial speech recognition
products are the availability of appropriate end-use applications, technological
capabilities of the product (including speed, reliability, accuracy, features,
programmability, and ease-of-use), price, technical and support system
engineering services, and experience and reputation of the supplier.
The Company competes against other providers of commercial speech
recognition products and systems in the telephony and desktop markets. Although
the Company believes its technical resources compare favorably with its
competition, some competitors have established reputations and financial,
marketing, and distribution resources substantially greater than those of BBN,
and accordingly there can be no assurance of success in this highly competitive
market.
ACOUSTIC TECHNOLOGIES
Overview.
BBN performs contract research, development, and consulting services
primarily for U.S. government agencies in the defense application fields of
sonar, submarine, surface ship, and ocean environmental acoustics; signal and
information processing; shock and vibration analysis; marine systems; radar
cross-section reduction; materials engineering; and psychoacoustics.
BBN, through its BBN Acoustic Technologies Division, also is exploring
commercial applications for active noise and vibration control ("ANVC") products
and systems. Active control of noise and vibration is accomplished by
introducing one or more secondary sources of noise and vibration to generate
"anti-waves" that significantly reduce the original disturbance.
The market for acoustic technologies with defense applications has changed
dramatically in recent years. The end of the Cold War has led to the
cancellation or reduction in scope of a number of large procurements. In
addition, the Department of Defense is placing increased emphasis on research,
development, training, and evaluation, often stopping short of full-scale
production of a system until necessary. The Company experienced an approximately
30% decline in defense acoustic technologies revenue for fiscal year 1995 as
compared to the prior fiscal year. In light of these changes, BBN believes its
ability to sustain revenue in the acoustic technologies business area will
depend on continued program funding for acoustic systems by the U.S. government,
and an increase in commercial customer revenue, particularly in connection with
ANVC systems.
Marketing.
The primary customers for BBN's acoustic technologies consist of the U.S.
Navy, the U.S. Advanced Research Projects Agency, anti-submarine warfare prime
contractors, and the National Aeronautics and Space Agency.
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BBN markets its defense acoustic technologies capabilities to customers
both directly and, in connection with some large government procurements,
through teaming arrangements with large defense contractors. Periodically,
government agencies issue requests for proposals or broad-area announcements
seeking suppliers with specific technology skills and BBN often can respond to
these requests. Alternatively, the Company may propose systems-related work to
government agencies. The Company also may be invited to bid, or may seek to team
with one or more companies bidding, on a larger procurement of which a system or
subsystem within BBN's field of expertise is one component.
The Company is now targeting certain of its acoustic technologies
capabilities to commercial customers, primarily in the ANVC area. The market for
ANVC products and systems is slowly emerging, and manufacturers in the
automotive, aerospace, industrial equipment, and consumer products industries
are exploring applications of ANVC technology. This market is characterized by a
need to control noise and vibrations produced by systems such as automobiles,
airplanes, machine tools, commercial HVAC Systems, mining and construction
machinery, and office equipment. Company revenue from such commercial customers
has not been significant to date. In connection with the marketing of ANVC
products and systems, the Company is seeking to augment its direct sales
capabilities through the establishment of strategic alliances and other
distribution channels.
Competition.
The primary factors of competition for acoustic technologies are superior
technical expertise, experience of the supplier, and price.
Competition in the field of acoustic technologies with defense applications
is dominated by large defense contractors with substantially greater financial
and marketing resources than BBN. In major programs, where BBN's technical
expertise supports the allocation to BBN of a portion of the work, BBN typically
teams with a large defense contractor. In teaming arrangements where BBN acts in
a subcontractor capacity, BBN relies heavily on the effectiveness of its prime
contractor to win a given award. In defense-related areas, the Company
anticipates that competition will continue to be intense. (See also "United
States Government Contracts" below.)
The ANVC systems market is slowly emerging, and a number of manufacturers
are developing in-house ANVC applications. In addition, some competitors have
been actively pursuing patent rights in certain segments of ANVC technologies,
which could impact the Company's ability to compete in certain areas of the
commercial ANVC market.
SENSOR SYSTEMS
Overview.
BBN designs, develops, and markets underwater acoustic sonar and prototype
sensor systems, both fixed and mobile, primarily for U.S government agencies.
BBN combines experience in acoustics, signal analysis, and information
processing, to develop major sensor systems, from initial concept through
full-scale engineering development and deployment.
BBN is currently teamed with Loral Federal Systems to perform engineering
and development services in connection with two U.S. Navy procurements, the
Fixed Distributed System Shore Signal and Information Processing Segment ("FDS
SSIPS") program and the Advanced Deployable Systems ("ADS") program. Both the
FDS SSIPS and ADS programs are components of the U.S. Navy's Integrated
Underwater Surveillance System. In connection with the FDS SSIPS program, BBN's
role has been to define the overall operational concept for FDS SSIPS, and to
provide software development and operational training. BBN expects to perform a
similar role in connection with the ADS program. Although the scale of the FDS
SSIPS program has been reduced since its inception, the Company currently
believes that it will continue to be involved in the FDS SSIPS program for
several more years. The award of the ADS program to the BBN/Loral team is
currently the subject of a bid protest. While there exists some uncertainty over
the U.S. government's long-term level of funding for the FDS SSIPS and ADS
programs, the Company believes that
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the U.S. Navy will continue to fund development programs for its underwater
surveillance system. (See "United States Government Contracts" below.)
Marketing.
The primary customers for BBN's sensor systems consist of the U.S. Navy and
the Advanced Research Projects Agency. BBN markets its sensor systems to
customers both directly and through teaming arrangements with large defense
contractors. Periodically, government agencies issue requests for proposals or
broad-area announcements seeking suppliers with specific technology skills and
BBN often can respond to these requests. Alternatively, the Company may propose
systems-related work to government agencies. The Company also may be invited to
bid, or may seek to team with one or more companies bidding, on a larger
procurement of which a system or subsystem within BBN's field of expertise is
one component.
The market for sensor systems has changed dramatically in recent years. The
end of the Cold War has led to the cancellation or reduction in scope of a
number of large sensor systems procurements. In addition, the Department of
Defense is placing increased emphasis on research, development, training, and
evaluation, often stopping short of full-scale production of a system until
necessary. BBN believes its ability to sustain revenue in this business area
will depend on continued contract research and development and program funding
for underwater sensor systems by the U.S. government.
Competition.
The primary factors of competition for sensor systems are superior
technical expertise, experience of the supplier, and price.
Competition in the field of sensor systems is dominated by large defense
contractors with substantially greater financial and marketing resources than
BBN. In major programs, where BBN's technical expertise supports the allocation
to BBN of a portion of the work, BBN typically teams with a large defense
contractor. In teaming arrangements where BBN acts in a subcontractor capacity,
BBN relies heavily on the effectiveness of its prime contractor to win a given
award. In connection with contract research and development activities, the
Company occasionally contracts directly with the U.S. government. In
defense-related areas, the Company anticipates that competition will continue to
be intense. (See also "United States Government Contracts" below.)
SIMULATION SYSTEMS
Until April 1993, BBN designed, marketed, built, and supported distributed
simulation systems, combining computer image generators with networking
capabilities, primarily for tactical team training. BBN's customers included the
U.S. Army (through the SIMNET program) and the German Army (through the AGPT
program under a subcontract with Wegmann & Co. GmbH). In April 1993, in view of
ongoing capital requirements and an uncertain sales outlook, the Company sold
the fixed assets, inventory, and technology of its simulation systems business,
and transferred more than one hundred employees of that business, to a
subsidiary of Loral Corporation. The results of the Company's former simulation
systems business are included as appropriate in the Collaborative Systems and
Acoustic Technologies business segment.
PRODUCT DEVELOPMENT
The Company's commercial businesses are characterized by rapid
technological change, which requires continued research and development
expenditures by the Company to improve its existing products and services, and
to develop new software and hardware products and new services to address
emerging market requirements. The Company has incurred substantial internally
funded research and development costs, including $25,306,000, $23,306,000, and
$34,048,000 in fiscal 1995, 1994, and 1993, respectively.
In fiscal 1995, the largest portion of the Company's internally funded
research and development spending was directed principally toward data analysis
and process optimization software products at BBN Domain (see
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"BBN Domain Corporation"). The Company's continued significant investment in
research and development is dependent upon the timely market acceptance of its
new products.
Additional information as to the research and development activities of the
Company may be found on pages 27 and 29, and on page 39 under the caption
"Research and Development Costs" in the Notes to Consolidated Financial
Statements below.
UNITED STATES GOVERNMENT CONTRACTS
During fiscal 1995, 1994, and 1993, approximately 58%, 67%, and 62%,
respectively, of BBN's total revenue was derived from contracts and subcontracts
involving the U.S. government and its agencies. In fiscal 1995, approximately
$106,000,000 were sales pursuant to contracts funded through the Department of
Defense. Of these sales, contracts sponsored by three agencies of the Department
of Defense (under several programs in each case) contributed approximately
$42,000,000, $19,000,000 and $19,000,000, respectively.
The U.S. government accounted for approximately the following percentages
of revenue in each of the Company's current business segments in fiscal 1995,
1994, and 1993:
YEAR ENDED JUNE 30,
----------------------
PERCENTAGE OF U.S. GOVERNMENT REVENUE 1995 1994 1993
- ----------------------------------------------------------------------- ---- ---- ----
Internetworking........................................................ 50% 64% 72%
Data Analysis Software................................................. 2% 4% 4%
Collaborative Systems and Acoustic Technologies........................ 91% 96% 74%
The decreased percentage of U.S. government revenue in the Internetworking
business segment for fiscal 1995 reflects increased revenue in BBN's commercial
Internetworking subsidiaries (BBN Planet Corporation and LightStream
Corporation), as well as decreased advanced network systems revenue. The
decreased percentage of U.S. government revenue in the Collaborative Systems and
Acoustic Technologies business segment for fiscal 1995 reflects increased
revenue in the Company's commercial speech subsidiary BBN HARK.
The decreased percentage of U.S. government revenue in the Internetworking
business segment for fiscal 1994 reflects decreased advanced network systems
revenue due to the substantial completion of the Company's Mobile Subscriber
Equipment program under subcontract with GTE Government Systems, and lower
revenue in connection with the Company's DDN contract. The increased percentage
of U.S. government revenue in the Collaborative Systems and Acoustic
Technologies business segment for fiscal 1994 reflects the fiscal 1993 sale of
the Company's simulation systems business (which had significant non-U.S.
government revenue in fiscal 1993). (See "Advanced Network Systems" and
"Simulation Systems" above.)
All of the Company's contracts and subcontracts involving the U.S.
government are subject to termination at the convenience of the government.
Should a contract be so terminated by the government, BBN would be reimbursed
for its allowable costs to the date of termination and would be paid a
proportionate amount of the stipulated profit attributable to the work actually
performed.
The U.S. government contracts for its procurement needs either through
formal advertising procedures or by negotiation. The government is authorized to
forego formal advertising under various circumstances, including the procurement
of experimental, developmental, or research services. Negotiated procurements
may or may not involve the solicitation of competitive proposals. If competitive
proposals are involved, the government selects the proposal most advantageous to
the government and normally conducts negotiations with the selected offeror.
Certain negotiated procurements are accomplished without a competitive
solicitation, such as when supplies or services can be obtained from only one
person or firm ("sole source") or when there is otherwise no substantial
question as to choice of source. In most noncompetitive procurements, after the
offeror submits a proposal, the government then negotiates the price and other
terms in accordance with guidance received from technical personnel of the
procuring agency and the profit or fee guidelines set forth in the applicable
regulations. Certain of the Company's contracts with the government involve
negotiated procurement procedures accomplished without competitive solicitation;
however, most of the Company's
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government contracts are subject to competitive bidding procedures, and the
government has adopted certain policy initiatives generally placing more
emphasis on competitive procurement.
The majority of BBN's revenue from the U.S. government and its agencies is
pursuant to contracts priced on a cost-plus-fixed-fee basis, under which the
government reimburses the contractor for its allowable costs (within the
contractual terms and conditions) and pays the contractor a negotiated fee.
Many of the government programs in which the Company participates as a
contractor or subcontractor may extend for several years, but they are normally
funded on an annual basis. The Company's government contracts and subcontracts
are subject to reduction or modification in the event of changes in the
government's requirements or budgetary constraints. Government curtailment of
expenditures for systems or services of the type sold by the Company in the
internetworking or collaborative systems and acoustic technologies fields can
have an adverse impact on BBN's revenue and results from operations. The
Department of Defense intends to make increasing use of the commercial
off-the-shelf ("COTS") policy in acquiring high technology systems for certain
non-combat related applications, and BBN's participation in such programs would
be dependent upon its ability to supply such COTS equipment on a cost-effective
basis.
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 in fiscal 1996, particularly in the Company's defense
communications, acoustic technologies, and sensor systems activities.
The Company anticipates that competition in all defense-related areas will
continue to be intense. Accordingly, the Company is experiencing competitive
pressure which is reducing profitability and decreasing government revenue,
particularly in the defense communications and acoustic areas. In addition, the
Company expects that the consolidation of large defense contractors into a
smaller number of very large, diverse organizations will continue, and that this
will result in additional competitive pressure.
The books and records of the Company are subject to audit by the Defense
Contract Audit Agency ("DCAA"); such audits can result in adjustments to
contract billings. Final contract billing rates have been established for years
through fiscal 1991, except for the Company's former BBN Communications
activities for which final contract billing rates have been established only
through fiscal 1984. BBN expects that any adjustments which may be made as a
result of audits of fiscal years 1985 through 1995 of the Company will not have
a material adverse effect on the Company's results of operations.
The Company, like other companies doing business with the U.S. government,
is subject to routine audit, and in certain circumstances to inquiry, review, or
investigation, by U.S. government agencies, of its compliance with government
procurement policies and practices. Based upon government procurement
regulations, under certain circumstances a contractor violating or not complying
with procurement regulations can be subject to legal or administrative
proceedings, including fines and penalties, as well as be suspended or debarred
from contracting with the government. The Company's policy has been and
continues to be to conduct its activities in compliance with all applicable
rules and regulations.
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 were made by the
government agencies and the Company was informed in August 1995 that the
investigation had been concluded. The audit of the Company's former BBN
Communications activities by the DCAA for fiscal years 1985 through 1993, which
was delayed as a result of the investigation, is currently in process. U.S.
government revenue for the Company's former BBN Communications activities,
during the nine year period under audit, represented approximately 40% of the
Company's total U.S. government revenue.
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BACKLOG
BBN's backlog of orders at June 30, 1995 and June 30, 1994 was
approximately $213,000,000 and $158,000,000, respectively. The increased backlog
at June 30, 1995 compared to June 30, 1994 particularly reflects the backlog
from a contract with America Online, Inc. ("AOL") in the Internetworking
business segment. This AOL agreement is valued at approximately $55,000,000 over
a five-year period, and includes substantial pass-through revenue to BBN for
telecommunications circuits and other telecommunications services. The backlog
at June 30, 1995 does not include minimum order amounts for Internet services
under BBN Planet's agreement with AT&T. Under that agreement, AT&T has agreed to
purchase from BBN Planet a minimum of $120,000,000 of services over three years
(subject to potential reduction under specified circumstances). For additional
information about the AT&T agreement with BBN Planet, see "BBN Planet
Corporation" above.
The backlog at June 30, 1995 includes approximately $55,000,000 of funded
U.S. government orders (expenditures appropriated by Congress), approximately
$60,000,000 of unfunded government orders, and approximately $98,000,000 of
commercial orders (approximately $55,000,000 of which is under the AOL
agreement). The amounts include estimates relating to customer-requirements
contracts, and to long-term contracts of a cost-reimbursement nature. Assuming
no terminations, cancellations, or changes, and completion of orders in the
normal course, BBN estimates that approximately 60% of the June 30, 1995 backlog
relates to work expected to be performed during fiscal 1996.
All of BBN's contracts and subcontracts involving the U.S. government are
subject to termination at the convenience of the government. Many of the
government programs in which the Company participates may extend for several
years, but they are normally funded only on an annual basis; the major portion
of the Company's other contracts cover a period of twelve months or less. (See
"United States Government Contracts" above.) A few significant contract orders,
primarily with the U.S. government, make up a substantial portion of the backlog
for the Company, and significant contract awards and extensions occur randomly
during the year. For these and other reasons, backlog data, and comparisons of
backlog as of different dates, may not be a reliable indicator of either future
sales or the ratio of future U.S. government sales to other sales.
Backlog is not a significant factor at BBN Domain (where the majority of
products are shipped almost immediately after receipt of an order). BBN HARK has
a small backlog in connection with certain custom development contracts,
although currently such backlog is not material.
PATENTS AND PROPRIETARY RIGHTS
The Company utilizes appropriate patent, trademark, copyright, and other
proprietary rights procedures to protect its commercial products, and has
applied for a limited number of patents in connection with certain recent
development activities at the Company's BBN Systems and Technologies Division
(principally in the Collaborative Systems and Acoustic Technologies segment),
and at its BBN Domain and BBN HARK subsidiaries. However, although BBN owns a
limited number of patents, none are of significant value to the Company's
current business.
The Company believes that certain of its commercial competitors, many of
whom have significantly greater financial, technical, and legal resources than
the Company, are actively seeking patent protection in connection with their new
products and technologies and that there has recently been a general increase in
patent activity by others in each of the commercial business segments in which
the Company conducts its business. In response, the Company has increased its
patent activity. However, the Company's patent efforts cover a wide range of
technologies, and it is probable that a competitor in any one technology can
outspend the Company's patent program in that area. The Company believes that
the award of patent rights to a competitor could have an adverse material impact
on the ability of BBN to conduct its business activities in areas covered by any
such patent award. However, the Company is not currently aware of any patents or
patent applications that impact or are likely to impact materially the ability
of BBN to conduct its current business activities.
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It may be possible for commercial competitors to replicate aspects of BBN's
products and services even though BBN regards such aspects as proprietary.
However, BBN currently believes that, in general, due to the rapid pace of
technological change in its commercial businesses, patent or other formal
protection of proprietary information is less significant than the knowledge and
experience of BBN personnel and the ability of BBN to develop, enhance, and
market its products and services.
Generally, patents on inventions developed by BBN under government contract
are owned by BBN, with the government retaining a royalty-free license to use
and to permit others to use such inventions for government purposes. Also, the
government has certain proprietary rights to technical data and software
programs resulting from the Company's services under government contracts and
the government may generally disclose such data and programs to third parties,
including competitors of the Company.
The Company believes that patent or proprietary rights protection are not
significant competitive factors in connection with its non-commercial contract
research and development activities, and that the success of the Company in
those activities depends primarily upon the technical expertise and creative
abilities of its employees.
EMPLOYEES
As of September 14, 1995, the Company employed approximately 2,000 persons,
a majority of whom are professional or technical persons having high levels of
education, training, and skill in the areas in which the Company operates. BBN's
domestic employees are not covered by any collective bargaining agreements, and
the Company believes its employee relations are excellent.
Recently, there have been a number of management changes at the Company. In
January 1994, George H. Conrades became president and chief executive officer of
the Company, succeeding Stephen R. Levy who continued as chairman of the board.
BBN has named new presidents to each of its three operating subsidiaries and to
one operating division in the last fifteen months, including John T. Kish, Jr.
at BBN Software Products Corporation (June 1994), Julie R. Donahue at BBN HARK
Systems Corporation (October 1994), Paul R. Gudonis at BBN Planet Corporation
(November 1994), and David N. Campbell at BBN Systems and Technologies Division
(July 1995).
A number of senior executives have left the Company in the last fifteen
months. These include Frank Heart, former president of the Company's BBN Systems
and Technologies Division, who retired in July 1994 after 28 years with the
Company; W.B. Barker, former senior vice president of the Company, who left in
January 1995 after 26 years with the Company; and David C. Walden, former senior
vice president of the Company, who left in January 1995 after 24 years with the
Company. In addition, Stephen R. Levy, Chairman of the Board and former chief
executive officer of the Company, has announced his retirement as an officer and
employee of the Company after 29 years of service, effective November 6, 1995.
BBN, along with other high-technology companies, faces competition in
hiring and retaining skilled technical, professional, marketing, and sales
personnel. In certain areas, such as emerging technologies and marketing, the
supply of such people is limited. The Company believes that its future success
depends in part upon its ability to attract and retain such personnel. The
Company is actively recruiting for a number of marketing, product management,
and sales positions throughout the Company.
EXPORT SALES
Export sales by the Company in fiscal 1995 were concentrated in the data
analysis software and network services and products areas. Revenue in fiscal
1995, 1994, and 1993 included U.S. export sales of $24,000,000, $27,300,000, and
$51,100,000, respectively. These figures include U.S. export sales relating to
the Company's former simulation systems business of approximately $19,000,000 in
fiscal 1993.
The Company's foreign operations, which are conducted in Western Europe and
the Pacific Rim, consist largely of sales and marketing activities for the
Company's commercial products. In the countries in which BBN focuses its export
sales activities, the Company knows of no unusual risks. Under certain
circumstances,
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however, the export of the Company's products and services requires the express
authorization of U.S. government agencies. Foreign sales of the Company's
applications software products, including its data analysis software and speech
recognition software products, are impacted by the current unavailability of
foreign language versions.
The Company enters into foreign exchange contracts to hedge certain of its
exposures to foreign currency fluctuations against the U.S. dollar. Such
contracts are with large banking institutions, and are based upon a direct,
non-multiple relationship between the dollar and the foreign currency being
hedged (primarily the British pound, the German mark, the Japanese yen, and the
French franc). At June 30, 1995 and 1994, BBN had foreign exchange contracts to
sell $950,000 and $750,000, respectively, of foreign currencies. To date, the
Company has not repatriated significant foreign currencies, the level of Company
sales denominated in non-US currencies has not been material to the Company, and
the impact of foreign exchange rate changes on the Company's financial
statements has not been material.
INDUSTRY SEGMENTS
Financial information with respect to the Company's activities in its three
industry segments may be found in the section captioned "Segment Information"
appearing in the Notes to the Consolidated Financial Statements below.
ITEM 2. PROPERTIES.
The Company's executive offices, its primary research, development, and
consulting facilities, and the majority of its computer, laboratory, and
manufacturing facilities are currently located in its Cambridge, Massachusetts
complex, which contains approximately 641,600 square feet of building space, of
which approximately 106,800 square feet is currently leased or subleased by the
Company to unaffiliated parties. Approximately 122,700 square feet of the
Cambridge, Massachusetts complex is owned by the Company; the remaining space is
leased by the Company, primarily under long-term leases granting the Company the
option to extend the lease. The Company also has first refusal rights and/or
options to purchase most of the leased space. The aggregate rental to be paid by
the Company for all its leased Massachusetts facilities, net of sublease income
and including taxes and certain operating expenses, will be approximately
$8,800,000 in fiscal 1996.
The Company also leases, on a short-term basis, office space at 24 other
domestic locations containing an aggregate of approximately 156,800 square feet
of space, net of subleases. The aggregate rental to be paid by the Company for
such locations, net of sublease income and including taxes and certain operating
expenses, will be approximately $2,600,000 in fiscal 1996.
The Company also occupies office space in 7 foreign countries, containing
an aggregate of approximately 31,000 square feet of space, net of subleases. The
aggregate rental to be paid by the Company for such office space, net of
sublease income and including taxes and certain operating expenses, will be
approximately $1,800,000 in fiscal 1996.
The Company believes that its facilities and equipment are well maintained
and are in good operating condition.
ITEM 3. LEGAL PROCEEDINGS.
There are no material pending legal proceedings involving the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted to shareholders of the Company during the fourth
quarter of fiscal 1995.
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ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT.
The executive officers of the Company, the age of each, and the period
during which each has served in his or her current office are as follow:
CONTINUOUSLY
IN SUCH
OFFICE
NAME AGE OFFICE SINCE
- ------------------------------------- ---- -------------------------------------------------
George H. Conrades................... 56 President and Chief Executive Officer 1994/1994
Stephen R. Levy...................... 55 Chairman of the Board of Directors 1983
Ralph A. Goldwasser.................. 48 Senior Vice President, Chief Financial 1991/1992/
Officer, and Treasurer 1991
David N. Campbell.................... 53 Senior Vice President 1995
Julie R. Donahue..................... 36 Vice President 1994
Paul R. Gudonis...................... 41 Vice President 1994
John T. Kish, Jr..................... 39 Vice President 1994
William S. Hurley.................... 51 Vice President and Controller 1992/1992
All of the executive officers except Messrs. Levy and Goldwasser have been
employed by the Company in their current or other capacities for less than the
past five years.
Mr. Conrades has been the President and Chief Executive Officer of the
Company since January 1994. Prior to that time, he had been employed for over 30
years at International Business Machines Corporation. During his employment with
IBM, Mr. Conrades held a number of marketing-management and general-management
positions, including most recently senior vice president, corporate marketing
and services and general manager of IBM United States, with responsibility for
all of that company's customer-related operations in the United States,
including hardware, software, maintenance, and services. Mr. Conrades retired
from IBM in March 1992, and since that time and prior to his appointment as
President of the Company, Mr. Conrades was consulting in venture capital
businesses and was on the board of directors of several small technology
ventures, including the board of LightStream Corporation, a subsidiary of the
Company. Mr. Conrades is also a director of Westinghouse Electric Corporation,
Pioneer Companies, Inc., and CRA Managed Care, Inc., and is chairman of the
board of the Company's operating subsidiaries, including BBN Planet Corporation,
BBN Software Products Corporation, and BBN HARK Systems Corporation.
Mr. Levy, Chairman of the Board and former chief executive officer of the
Company, has announced his retirement as an officer and employee of the Company
after 29 years of service, effective November 6, 1995.
Mr. Campbell was elected Senior Vice President of the Company in July 1995,
and has served as President of the Company's BBN Systems and Technologies
Division since that time. Prior to that time, he was with Computer Task Group,
Incorporated, an international integrated information technology services
company, from 1968 to 1994, most recently serving as its chairman and chief
executive officer, responsible for the Company's approximately 4,500 employees.
Mr. Campbell is a director of the Company's operating subsidiaries, including
BBN Planet Corporation, BBN Software Products Corporation, and BBN HARK Systems
Corporation. Mr. Campbell is also a director of Dunlop Tire Corp., First Empire
State Corporation, Gibraltar Steel Corp., and National Fuel Gas Company.
Ms. Donahue was elected Vice President of the Company in October 1994, and
has served as President and Chief Executive Officer of BBN HARK Systems
Corporation, a subsidiary of the Company, since that time. Prior to joining the
Company, she was president and chief operating officer of Voice Processing
Corporation, a speech recognition board manufacturer with approximately 60
employees, serving from August 1993 to September 1994. Prior to that, Ms.
Donahue was senior vice president, marketing and business development at Dun &
Bradstreet Software Services, Inc., where she was responsible for strategic
planning, mergers and acquisitions, marketing, and channel development. Ms.
Donahue has also held management positions at Cullinet Software and
Motorola/Four Phase Systems. Ms. Donahue is a director of BBN HARK Systems
Corporation.
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Mr. Gudonis was elected Vice President of the Company in November 1994, and
has served as Chief Executive Officer and President of BBN Planet Corporation, a
subsidiary of the Company, since November 1994 and January 1995, respectively.
From October 1990 to October 1994, Mr. Gudonis worked at Electronic Data Systems
Corporation ("EDS"), a worldwide provider of information technology services,
most recently as vice president and general manager -- international of its
Communications Industry Group. At EDS, Mr. Gudonis was responsible for building
a global division of EDS serving the telecommunications and media industries.
Mr. Gudonis had worldwide financial responsibility for this division, which
directed the activities of approximately 400 EDS employees in over 20 countries.
Prior to that, Mr. Gudonis worked at Appex Corporation, a provider of software
and services to the cellular phone industry, from 1989 to October 1990, most
recently as a senior vice president and general manager. Appex Corporation was
acquired by EDS in October 1990. Mr. Gudonis is a director of BBN Planet
Corporation.
Mr. Kish was elected Vice President of the Company in August 1994, and has
served as President and Chief Executive Officer of BBN Software Products
Corporation, a subsidiary of the Company, since June 1994. Prior to joining BBN,
Mr. Kish had been employed for approximately five years at Oracle Corporation in
a number of senior management positions, including vice president, desktop
division, and most recently as senior vice president, business development, with
a staff of approximately 150 employees. After leaving Oracle in 1993 and prior
to joining BBN, Mr. Kish provided management consulting, and development
services for the telecommunications, entertainment, financial, and information
services industries. Mr. Kish is a director of BBN Software Products
Corporation.
Mr. Hurley joined BBN in March 1992 as Vice President and Controller of the
Company. Prior to joining BBN, Mr. Hurley had worked for approximately 19 years
at Wyman Gordon Co., a manufacturer of forgings, investment castings, and
advanced composite structures. At Wyman Gordon, Mr. Hurley served in various
management positions in the accounting and finance areas, including most
recently as vice president and controller from 1988 to 1992. Mr. Hurley has
announced his resignation from the employ of the Company, effective October 6,
1995.
Each of the chairman, president, and treasurer has been elected to hold
office until the first meeting of the directors following the next annual
meeting of shareholders and until his or her successor is chosen and qualified,
and each other executive officer has been elected to his or her described office
to hold office until the first meeting of directors following the next annual
meeting of shareholders.
None of the directors or executive officers of the Company has any
relationship to any other director or executive officer of the Company or its
subsidiaries, by blood, marriage, or adoption, not more remote than first
cousin.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Registrant's shares of Common Stock are traded under the symbol "BBN"
primarily on the New York Stock Exchange, and to a lesser extent on the Boston,
Cincinnati, Midwest, Pacific, and Philadelphia exchanges. The Registrant's 6%
Convertible Subordinated Debentures due 2012 are traded under the symbol "BBN12"
on the New York Stock Exchange. Options in the Registrant's Common Stock are
traded on the Chicago Board Options Exchange.
Quarterly information related to high and low sales prices for the
Registrant's Common Stock may be found under the caption "Quarterly Financial
Data (Unaudited)" appearing on page 46.
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Information related to holders of the Registrant's Common Stock and as to
dividends paid on the Registrant's Common Stock may be found under the caption
"Item 6. Selected Financial Data" below.
ITEM 6. SELECTED FINANCIAL DATA.
FIVE-YEAR FINANCIAL SUMMARY
DOLLARS IN THOUSANDS, EXCEPT PER-SHARE DATA 1995 1994 1993 1992 1991
- ---------------------------------------------------------------------------------------------------------------
RESULTS OF OPERATIONS
Revenue........................................ $ 215,031 $ 196,104 $ 233,453 $ 257,966 $ 270,628
--------------------------------------------------------------
Income (loss) from operations1................. $ (18,814) $ (8,444) $ (32,323) $ 6,878 $ 5,137
Interest and other income (expense), net2...... 97,441 620 59 (2,725) 4,065
--------------------------------------------------------------
Income (loss) before income taxes and
extraordinary item........................... 78,627 (7,824) (32,264) 4,153 9,202
Provision for income taxes..................... 13,783 151
--------------------------------------------------------------
Income (loss) before extraordinary item........ 64,844 (7,824) (32,264) 4,153 9,051
Extraordinary item3............................ 3,648 467
--------------------------------------------------------------
Net income (loss).............................. $ 64,844 $ (7,824) $ (32,264) $ 7,801 $ 9,518
--------------------------------------------------------------
Per-share amounts:
Income (loss) before extraordinary item........ $ 3.61 $ (0.48) $ (2.05) $ .24 $ .49
Extraordinary item3............................ .22 .03
--------------------------------------------------------------
Net income (loss).............................. $ 3.61 $ (0.48) $ (2.05) $ .46 $ .52
--------------------------------------------------------------
Cash dividends declared per share.............. $ .06 $ .06
-----------------------
Shares used in per-share calculations.......... 17,984,000 16,179,000 15,705,000 16,504,000 18,314,000
FINANCIAL POSITION
Cash and cash equivalents4..................... $ 110,792 $ 67,115 $ 56,835 $ 45,769 $ 66,933
Working capital................................ 108,398 60,337 57,990 78,662 88,665
Property, plant and equipment, net............. 30,075 19,658 20,861 30,152 33,654
Total assets................................... 219,466 135,940 140,645 162,619 182,616
Convertible debentures......................... 73,510 73,510 73,510 73,510 83,355
Shareholders' equity, net of treasury shares... 82,552 7,271 10,042 41,887 44,473
GENERAL INFORMATION AND RATIOS
Additions to property, plant and equipment..... $ 18,476 $ 6,938 $ 7,942 $ 11,668 $ 10,825
Revenue per average number of employees........ 118 117 125 118 116
Employees at year-end.......................... 1,954 1,694 1,663 2,086 2,284
Shareholders of record at year-end............. 2,080 2,225 2,709 3,108 3,340
Current ratio.................................. 2.8 2.1 2.0 2.7 2.7
Debt to equity ratio........................... 0.9 10.1 7.3 1.8 1.9
<FN>
1 Results for fiscal year 1993 included a restructuring charge of $20.5 million,
or $1.30 per share, associated with employee severance and excess facilities
costs.
2 Interest and other income (expense), net for fiscal year 1995 includes the
gain on the sale of assets of LightStream Corporation of approximately $105.0
million before minority interest of $11.8 million and provision for income
taxes of $13.5 million, and amounts arising from contracts which were
substantially completed in prior years.
3 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.
4 Includes restricted cash of $12.1 million at June 30, 1995.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
FY1995 COMPARED TO FY1994
INTRODUCTION
In FY1995, the Company consisted of five operating units: the Company's BBN
Systems and Technologies Division, BBN Software Products Corporation,
LightStream Corporation, BBN Planet Corporation, and BBN HARK Systems
Corporation. The BBN Systems and Technologies Division ("Systems and
Technologies") includes internetworking services and products, and collaborative
systems and acoustic technologies. BBN Software Products Corporation, the name
of which is being changed to BBN Domain Corporation ("BBN Domain"), a
wholly-owned subsidiary of the Company, develops, markets, and supports data
analysis and process optimization software products designed primarily for
health industry and manufacturing applications. LightStream Corporation
("LightStream"), an 80%-owned subsidiary of the Company which made asynchronous
transfer mode ("ATM") network switches, sold substantially all of its assets to
Cisco Systems, Inc. on January 11, 1995. BBN Planet Corporation ("BBN Planet"),
a 95%-owned subsidiary of the Company, provides Internet services to businesses
and other organizations. BBN HARK Systems Corporation ("BBN HARK"), a
wholly-owned subsidiary of the Company, is an early stage company which develops
and markets commercial speech recognition software products.
SUMMARY
For the year ended June 30, 1995, the Company reported net income of $64.8
million, or $3.61 per share, on revenue of $215.0 million, compared with a net
loss of $7.8 million, or $.48 per share, on revenue of $196.1 million for the
same period a year earlier. These results include a $105.0 million gain, before
taxes and minority interest, from the sale of the assets of LightStream in
January 1995. Primarily as a result of the LightStream sale, the Company's cash
and cash equivalents balance as of June 30, 1995 rose to $110.8 million and the
Company's equity increased to $82.6 million.
For the year, the Company reported a loss from operations of $18.8 million,
compared to an $8.4 million loss for the same period a year earlier. The FY1995
results reflect significant investment in sales, marketing, and new product
development, and include an operating loss of $3.7 million relating to the
LightStream activities (sold on January 11, 1995), an operating loss of $12.7
million at BBN Planet, and an operating loss of $3.7 million at BBN Domain. The
Systems and Technologies Division experienced a reduction in profitability for
the fiscal year due to declines in its defense communications and acoustics
businesses, and increased investment in sales and marketing activities.
The Company continues to invest in its commercial businesses, and recorded
operating losses for FY1995 at BBN Planet, BBN HARK, and BBN Domain as well as
declining operating income at BBN Systems and Technologies. The Company expects
to incur significant operating losses at BBN Planet during FY1996, which is
expected to adversely impact the financial performance of the Company. The
outlook could also be affected by further expenditures on commercial business
opportunities available to the Company.
REVENUE
Revenue for FY1995 increased $18.9 million from FY1994. Internetworking
segment revenue increased by $11.5 million, reflecting $8.6 million of increased
revenue at BBN Planet and $6.9 million of increased revenue at LightStream.
LightStream revenue for FY1995 included up-front technology license fees of $3.6
million. These increases were partially offset by declines in revenue in the
Systems and Technologies Division's defense communications business. Revenue of
the Company's data analysis software products business segment increased by
approximately $4.0 million in FY1995, reflecting higher health industry related
software sales, with particularly significant sales to major pharmaceutical
companies. In the collaborative systems and acoustic technologies segment,
revenue increases of approximately $3.4 million reflected increases in
government related contracts for collaborative systems and technologies as well
as revenue increases at BBN HARK, offset in part by declines in acoustic-related
activities.
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The Company, like other companies doing business with the U.S. 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 in FY1996, particularly in the defense communications,
acoustic technologies, and sensor systems activities.
The Company anticipates that competition in all defense-related areas will
continue to be intense. Accordingly, the Company is experiencing competitive
pressure which is reducing profitability and decreasing government revenue,
particularly in the defense communications and acoustic areas. In addition, the
Company expects that the consolidation of large defense contractors into a
smaller number of very large, diverse organizations will continue, and that this
will result in additional competitive pressure.
In FY1991, the Defense Information Systems Agency ("DISA") awarded the
Company a one-year contract in support of the Defense Data Network ("DDN"), with
up to four one-year optional extensions. In September 1994, the Company
completed the third option year of the contract, valued at approximately $20
million. In October 1994, the Company was awarded the fourth option year of the
contract, valued at approximately $15 million, which will continue these
activities through October 1995. The Company has been awarded a six-month
extension of the DDN contract, which will continue these activities through
April 1996. The value of this extension award is approximately $7.5 million. The
Company does not expect that this activity will continue beyond April 1996,
although the Company may compete for follow-on contracts for the DDN, at reduced
funding levels. Approximately $17.8 million and $20.5 million of revenue has
been recorded under the DDN contract in FY1995 and FY1994, respectively.
The Company conducts its commercial businesses in environments
characterized by intense competition, shortened product life cycles, and rapid
technological change, which require significant research and development
expenditures to develop new products and services to address emerging market
requirements and to improve existing products and services. In recent years, the
Company's traditional commercial businesses, consisting principally of RS/Series
data analysis software products and X.25 network systems, have been experiencing
substantially lower revenue. The Company has discontinued sales of most of its
traditional X.25 systems and products, and has substantially eliminated its
development efforts and significantly reduced its selling efforts related to
this business. In recent periods, the Company has been investing heavily in
development of new products, including the LightStream Corporation ATM network
switches, Cornerstone data analysis and visualization software, the T/10
Integrated Access Device ("IAD") for computer networks, and the BBN HARK speech
recognition software. In FY1995, the Company made significant investment in
Internet services.
The sale on January 11, 1995 of substantially all of the assets of
LightStream Corporation to Cisco Systems, Inc., is reflected in the Company's
FY1995 results. Reference is made to the Notes to the Consolidated Financial
Statements for further discussion of this transaction. The Company's T/10 IAD
activities are now being primarily focused on a limited number of reseller and
strategic licensing opportunities, and the future success of the T/10 IAD is
highly dependent on these opportunities. The Company has experienced operating
losses in connection with that business. The Company has substantially reduced
spending relating to the T/10 IAD from prior year levels. In July 1995, the
Company entered into an agreement with NEC Corporation granting to NEC
technology and manufacturing license rights in the T/10 IAD and the T/40 Video
Internet Router under development, and agreed to perform certain development
activities in connection with the joint development of a new multi-media access
device. The value of the NEC agreement is approximately $4.6 million, of which
$1.9 million is related to future development efforts.
The Company's BBN Planet subsidiary (formerly BBN Internet Services
Corporation) is significantly increasing its investment in the emerging market
for Internet access services. In August 1994, BBN Planet 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.
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In March 1995, BBN Planet acquired substantially all of the assets of the
Southeastern Universities Research Association Internet service ("SURAnet"), a
leading provider of Internet services in the southeastern United States, for
approximately $13.0 million in cash and the assumption of certain operating
liabilities of approximately $5.1 million.
In June 1995, BBN, BBN Planet, and AT&T Corp. ("AT&T") entered into an
agreement under which BBN Planet is to be the exclusive provider for a period of
up to three years of dedicated Internet access and managed network security
services to AT&T for resale to business customers in the United States of AT&T's
Business Communications Services division. AT&T has agreed to purchase a minimum
of $120 million of services during the first three years of the agreement. The
relationship provides BBN Planet with an opportunity to accelerate the expansion
of its Internet services business. In July 1995, AT&T Venture Company L.P., a
venture partnership with AT&T as the sole limited partner, made an $8.0 million
investment in BBN Planet.
BBN's objective is to provide Internet-related services to business and
other organizational customers which enhance interaction within the customers'
organizations and with their customers, suppliers, and business partners. In
support of its Internet business strategy, the Company may make additional
acquisitions or enter into strategic alliances.
The market for Internet services is rapidly expanding, and there are
considerable uncertainties as to how the market will develop. The market is
highly competitive, in general there are no substantial barriers to entry, and
the Company expects that competition with its Internet activities will intensify
in the future. The Company expects that all of the major on-line services and
telecommunications companies will compete fully in the Internet services market,
and that new competitors, including large computer hardware, software, media,
and other technology and telecommunications companies will enter the Internet
services market, resulting in even greater competition for the Company's
services and significant pricing pressure, which may impact operating results.
The success of BBN's Internet services will primarily depend upon the
development and expansion of the market for Internet access services and
products and the networks which comprise the Internet; the capacity,
reliability, and security of its network infrastructure; its ability to develop
value-added products and services that meet changing customer requirements; its
ability to attract and retain additional highly qualified management, technical,
marketing, and sales personnel; and its ability to manage its growth.
In March 1995, the Systems and Technologies Division entered into an
agreement with America Online, Inc. ("AOL") to build, maintain, and operate a
portion of AOL's nationwide, high-speed, dial-in network. The Company's
five-year agreement with AOL, valued at approximately $11 million per year,
includes substantial pass-through costs to BBN for telecommunications circuits
and other services provided by local and inter-exchange carriers. As part of
BBN's agreement with AOL, the Company has access to use of the excess capacity
of the portion of the network operated by the Company, and the Company has the
right to resell such excess capacity. The Company is exploring opportunities to
resell such excess capacity, the availability of which is currently limited
primarily to business hours.
The Company's traditional data analysis software business has been affected
by the growth of distributed processing and the associated use of personal
computers, workstations, and other desktop computers. The Company's mature data
analysis software products, primarily the RS/Series software, currently operate
primarily on minicomputer systems. As demand for minicomputer-based software
continues to decline, the Company is experiencing substantially lower RS/Series
software revenue and downward pressure on prices. In response to the trend
toward desktop computing, BBN Domain has been investing in recent years in
Cornerstone software, a desktop-based data analysis and visualization software
tool. Sales of Cornerstone software to date have been substantially below
expectations. Commencing in FY1995, the Company is more tightly integrating its
Cornerstone software with its RS/Series software products to provide platform
migration and ease of use for its existing RS/Series customer base, and to
provide greater capabilities and flexibility in client/server computing
environments.
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The Company is also focusing its software application solutions on the
health and manufacturing industries. BBN Domain health industry offerings
include applications for clinical data management (Clintrial(TM)) and adverse
events tracking (Clintrace(TM)). In March 1995 BBN acquired, for $0.7 million,
the exclusive rights to IBM's Process Analysis Navigation System ("PANS"), a
manufacturing methodology and software system. BBN Domain intends to integrate
and significantly enhance PANS methodology and technology with its data analysis
and process optimization software for manufacturers.
As part of these efforts, BBN Domain is increasing its development
expenditures in its software business and is investing in additional sales and
marketing personnel. The Company believes that the future success of its data
analysis and process optimization software will depend primarily on the
development and marketing of software applications that permit operation on
personal computers, on continued market acceptance of its health industry
software products, on development and acceptance of its PANS manufacturing
methodology, and on development and timely integration of its Cornerstone and
RS/Series software.
COST OF SALES
Cost of services and products as a percentage of revenue was 63% in FY1995
compared to 64% in FY1994. The decrease in the cost of sales percentage is
principally related to increased sales of high margin software products sales
and $3.6 million in technology license and initial development fees, with higher
gross margins at LightStream. These decreases were offset by higher costs in the
Company's government contracting business.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses for FY1995 were $25.3 million compared to
$23.3 million for FY1994. The largest portion of the Company's FY1995 internally
funded research and development spending was directed principally toward data
analysis and process optimization software products, including the $0.7 million
charge related to the purchase of IBM's PANS manufacturing methodology software
system. The increase in research and development expense was partially offset by
decreased spending on the ATM switch at LightStream and the T/10 IAD. Research
and development expenses for the ATM switch for FY1995 were $3.9 million
compared to $8.9 million for FY1994.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general, and administrative expenses for FY1995 increased $18.5
million from FY1994 reflecting the investment the Company is making primarily in
the sales and marketing of its new services and products at BBN Planet and BBN
Domain. The Company anticipates continued increased spending related to its
commercial activities in FY1996.
INTEREST
Interest income increased $2.2 million in FY1995 from FY1994 primarily as a
result of the increased cash balances resulting from the sale of LightStream
assets.
OTHER INCOME
In January 1995, LightStream sold substantially all of its assets to Cisco
Systems, Inc., which resulted in a $105.0 million gain to the Company before
taxes and minority interest. Refer to footnote, "Sale of LightStream
Corporation", for further discussion of this transaction.
In December 1994, the Company settled a claim with the U.S. government for
approximately $0.7 million. This settlement resulted in an approximately $2.6
million reduction in liabilities and is included in other income for FY1995.
Other income in each of FY1995 and FY1994 also includes approximately $0.9
million resulting from lower than expected costs associated with a previously
divested contract.
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29
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 1995, the Company's cash and equivalents, which consisted
primarily of money market funds, short-term U.S. government securities, and
commercial paper, were $110.8 million, an increase of $43.7 million from June
30, 1994. The increase is primarily attributable to the sale of LightStream
assets which provided approximately $80.0 million of net cash proceeds
(including $12.1 million which is restricted for a period under the sale
agreement) to the Company after payment of amounts due for taxes, initial
payments to the minority shareholder, and certain expenses associated with the
sale.
For FY1995, the $80.0 million of cash proceeds from the LightStream sale
and $4.6 million of cash proceeds from employee stock purchase and option plans
have been offset by $15.0 million expended for the SURAnet and BARRNet
acquisitions, $18.5 million for capital expenditures, and $28.7 million of cash
used by operations. Of the $12.1 million restricted cash under the LightStream
sale agreement, $4.0 million became available on July 11, 1995 and the remainder
will become available to the Company in varying amounts, net of any claims,
within two years of the January 11, 1995 closing of the LightStream sale.
The $12.4 million increase in the Company's accounts receivable balance at
June 30, 1995 is primarily due to the increase in fourth quarter revenue.
The Company's accrued restructuring balance relates to excess facilities
costs under long-term leases, which were associated with the Company's FY1993
downsizing. The Company has sublet or assigned the majority of its excess
facilities under agreements with terms expiring between 1998 and 2005.
The Company anticipates a continued high level of capital expenditures for
the near-term in support of the investment being made in Internet services. In
addition, the Company may use a portion of its cash resources for acquisitions
of or investments in businesses, products, or technologies or through the
formation of strategic partnerships with other companies.
The Company believes that its liquidity in the form of existing cash
resources is adequate to meet its operating requirements through FY1996.
Currently, the Company does not have any bank lines of credit.
FY1994 COMPARED TO FY1993
INTRODUCTION
(The management's discussion and analysis which follows reflects the
Company's organization in effect prior to FY1995.)
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 ("BBN 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 $233.5 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 reflected the sale of the advanced simulation
business and reduced defense communications systems revenue. The Company's
losses continued to reflect significant expenditures on its LightStream ATM
switch, T/10 Integrated Access Device ("IAD"), and Cornerstone software, while
revenue from these new products remained financially insignificant. These losses
were partially offset by operating income at Systems and Technologies.
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30
REVENUE
Revenue decreased $37.3 million, or 16%, in FY1994 compared to FY1993. The
reduction reflected approximately $25.3 million in FY1993 revenue provided by
the Company's former advanced simulation business unit, as well as declines in
the Company's defense communications business and lower revenue in FY1994 from
its mature X.25 network products and RS/Series software.
RESEARCH AND DEVELOPMENT EXPENSES
The majority of the Company's internally funded research and development
spending was directed principally toward the LightStream ATM products, the T/10
IAD, and Cornerstone software. Research and development expenses in FY1994 were
$23.3 million compared to $34.0 million in FY1993. The reduction in FY1994
reflected lower spending for the T/10 program and Cornerstone software, as well
as the sale of the advanced simulation business in FY1993.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general, and administrative expenses decreased $8.1 million in
FY1994 from FY1993, primarily as a result of lower selling expenses in the
defense communications business and at BBN Software Products, as well as the
cost reduction actions taken in FY1993.
INTEREST
Interest income increased $0.7 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.
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31
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED JUNE 30
DOLLARS IN THOUSANDS, EXCEPT PER-SHARE DATA 1995 1994 1993
- -----------------------------------------------------------------------------------------------
Revenue:
Services................................................. $176,284 $165,759 $175,917
Products................................................. 38,747 30,345 57,536
----------------------------------
215,031 196,104 233,453
----------------------------------
Costs and expenses:
Cost of services......................................... 123,554 114,723 120,411
Cost of products......................................... 11,697 11,721 27,973
Research and development expenses........................ 25,306 23,306 34,048
Selling, general and administrative expenses............. 73,288 54,798 62,874
Restructuring charge..................................... 20,470
----------------------------------
233,845 204,548 265,776
----------------------------------
Income (loss) from operations.............................. (18,814) (8,444) (32,323)
Interest income............................................ 4,422 2,190 1,446
Interest expense........................................... (4,434) (4,606) (4,511)
Minority interests......................................... (11,195) 2,071
Other income (expense), net................................ 108,648 965 3,124
----------------------------------
Income (loss) before income taxes.......................... 78,627 (7,824) (32,264)
Provision for income taxes................................. 13,783
----------------------------------
Net income (loss).......................................... $ 64,844 $ (7,824) $(32,264)
----------------------------------
Net income (loss) per share................................ $3.61 $(0.48) $(2.05)
----------------------------------
Shares used in per-share calculations...................... 17,984,000 16,179,000 15,705,000
The accompanying notes are an integral part of the consolidated financial
statements.
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32
CONSOLIDATED BALANCE SHEETS
DOLLARS IN THOUSANDS 1995 JUNE 30 1994
- ----------------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents (includes restricted cash of $12,134 at
June 30, 1995).................................................... $ 110,792 $ 67,115
Accounts receivable, net............................................. 53,933 41,503
Other current assets................................................. 3,606 4,706
---------------------
Total current assets.............................................. 168,331 113,324
Property, plant and equipment, net................................... 30,075 19,658
Goodwill, net........................................................ 17,927
Other assets......................................................... 3,133 2,958
---------------------
Total assets...................................................... $ 219,466 $135,940
---------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable..................................................... $ 11,596 $ 4,279
Accrued compensation and retirement plan contributions............... 6,319 5,198
Accrued restructuring charges........................................ 9,216 12,566
Other accrued costs.................................................. 15,888 19,832
Deferred revenue..................................................... 16,914 11,112
---------------------
Total current liabilities......................................... 59,933 52,987
---------------------
6% convertible subordinated debentures due 2012...................... 73,510 73,510
---------------------
Minority interests................................................... 3,471 2,172
---------------------
Commitments and contingencies
Shareholders' equity:
Common stock $1.00 par value, authorized: 100,000,000 shares;
issued: 1995, 22,050,887 shares; 1994, 21,253,890 shares......... 22,051 21,254
Additional paid-in capital........................................ 62,664 55,916
Foreign currency translation adjustment........................... 1,307 337
Retained earnings (deficit)....................................... 28,717 (36,127)
---------------------
114,739 41,380
Less shares in treasury, at cost: 1995, 4,527,464 shares;
1994, 4,797,734 shares............................................ 32,187 34,109
---------------------
Total shareholders' equity........................................ 82,552 7,271
---------------------
Total liabilities and shareholders' equity........................ $ 219,466 $135,940
---------------------
The accompanying notes are an integral part of the consolidated financial
statements.
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33
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOREIGN
COMMON ADDITIONAL CURRENCY RETAINED TOTAL
STOCK $1.00 PAID-IN TRANSLATION EARNINGS TREASURY SHAREHOLDERS'
DOLLARS IN THOUSANDS PAR VALUE CAPITAL ADJUSTMENT (DEFICIT) STOCK EQUITY
- -------------------------------------------------------------------------------------------------------------
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
Sale of treasury shares......... 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
Stock option and other activity,
net........................... 603 1,759 2,362
Stock issued under employee
stock purchase plan........... 194 1,960 2,154
Tax benefit on stock option
exercises..................... 2,195 2,195
Sale of subsidiary stock, net... 256 256
Sale of treasury shares......... 578 1,922 2,500
Foreign currency translation
adjustment.................... 970 970
Net income...................... 64,844 64,844
--------------------------------------------------------------------------
June 30, 1995................... $22,051 $ 62,664 $1,307 $ 28,717 $(32,187) $ 82,552
--------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial
statements.
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34
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED JUNE 30
DOLLARS IN THOUSANDS 1995 1994 1993
- -----------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income (loss)......................................... $ 64,844 $(7,824) $(32,264)
Adjustments to reconcile net income (loss) to net cash
provided (used) by operating activities:
Depreciation and amortization............................. 9,171 9,136 11,700
Amortization of goodwill and capitalized software......... 995 1,419 1,418
Contract adjustments...................................... (3,546)
Gain from sale of assets.................................. (105,096) (3,191)
Minority interests........................................ 11,195 (2,071)
Provision for inventories................................. 2,293
Restructuring charge...................................... 20,470
Change in assets and liabilities:
Accounts receivable.................................... (10,158) 8,173 17,205
Accounts payable and other liabilities................. 1,505 1,871 (358)
Restructuring expenditures............................. (3,350) (5,777) (6,651)
Deferred revenue....................................... 2,223 (226) (638)
Other.................................................. 3,518 4,087 2,986
---------------------------------
Total adjustments...................................... (93,543) 16,612 45,234
---------------------------------
Net cash provided (used) by operating activities....... (28,699) 8,788 12,970
---------------------------------
Cash flows from investing activities:
Proceeds from sale of assets.............................. 120,000 6,000
Payments to minority owner and expenses of sale of
assets................................................. (18,800)
Additions to property, plant and equipment................ (18,476) (6,938) (7,942)
Payments for businesses acquired.......................... (14,960)
---------------------------------
Net cash provided (used) by investing activities....... 67,764 (6,938) (1,942)
---------------------------------
Cash flows from financing activities:
Proceeds from employee stock purchase and option plans.... 4,612 3,217 1,234
Proceeds from sale of subsidiary stock.................... 5,000
(Purchase)/sale of treasury shares........................ 213 (723)
Dividends paid............................................ (473)
---------------------------------
Net cash provided by financing activities.............. 4,612 8,430 38
---------------------------------
Net increase in cash and cash equivalents................... 43,677 10,280 11,066
Cash and cash equivalents at beginning of year.............. 67,115 56,835 45,769
---------------------------------
Cash and cash equivalents at end of year.................... $110,792 $67,115 $ 56,835
---------------------------------
The accompanying notes are an integral part of the consolidated financial
statements.
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35
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. These reclassifications primarily relate to the formation in
fiscal year 1995 of distinct commercial business units.
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.
Services revenue (including monthly service fees relating to Internet
services) is recognized as the services are provided. Advance billings and
payments are deferred until such services are provided.
Software license revenue is recognized upon delivery and receipt of a
signed software contract. Technology fees, advance royalties and other fees
received from customers on a non-refundable basis where the Company has no
significant obligations remaining are recognized as services revenue upon
receipt of payment.
ISSUANCE OF STOCK BY SUBSIDIARIES
At the time a subsidiary sells stock to unrelated parties at a price
different from its book value, the Company's net investment in that subsidiary
changes. If at that time the subsidiary is an operating entity and not engaged
principally in research and development, the Company records the change as a
gain or loss in its consolidated statements of operations. Otherwise, the
Company records the change as an equity transaction in its consolidated
statements of shareholders' equity as a sale of subsidiary stock.
CASH AND CASH EQUIVALENTS
Cash includes all cash and cash equivalents, generally with maturities of
three months or less at the time of purchase, carried at original cost plus
accrued interest, which approximates market value. At June 30, 1995 and 1994,
cash equivalents consisted principally of money market funds (invested in U.S.
government securities and other highly rated financial instruments), U.S.
government securities, and highly rated commercial paper.
AVAILABLE-FOR-SALE INVESTMENTS
Effective July 1, 1994, the Company adopted Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities" ("SFAS 115"). The Company classifies its securities as
available-for-sale since the Company may liquidate these investments currently.
SFAS 115 requires that unrealized gains and losses on available-for-sale
securities be excluded from earnings and reported as a component of
shareholders' equity. Realized gains and losses are recorded in the consolidated
statements of operations and the cost assigned to securities sold is based on
the specific identification method. The unrealized loss at June 30, 1995 was
immaterial.
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36
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. Useful lives used in
computing depreciation are as follows: buildings -- 15 to 25 years, computer
equipment -- 3 years, furniture and fixtures -- 5 years. 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. 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 as well as
costs incurred for purchased software technology are capitalized and amortized
on a product-by-product basis at an annual amortization computed using the
straight-line method over the remaining estimated economic life of the product,
generally three years. Amortization commences on the date of initial product
shipment.
GOODWILL
Goodwill represents the excess of the cost to acquire businesses over the
estimated fair value of the net assets acquired. These amounts are amortized
using the straight-line method over the estimated useful lives. Accumulated
amortization at June 30, 1995 was $737,000. The Company periodically reviews
goodwill to assess recoverability, and impairments would be recognized in
operating results if a permanent dimunition in value were to occur.
FOREIGN CURRENCY TRANSLATION AND TRANSACTION ACTIVITY
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
In accordance with Statement of Financial Accounting Standards No. 109,
"Accounting for 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 primarily from the assumed exercise of dilutive stock options and
are generally excluded from the calculation when the Company incurs net losses.
The Company's 6% convertible subordinated debentures are not considered common
stock equivalents for per-share calculations.
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ACCOUNTS RECEIVABLE
Consolidated accounts receivable consisted of the following:
DOLLARS IN THOUSANDS 1995 JUNE 30, 1994
- ------------------------------------------------------------------------------------------------
U.S. government: Billed................................................. $11,208 $14,579
Unbilled............................................... 20,602 18,237
-------------------
31,810 32,816
Contract allowances.................................... (6,136) (7,964)
-------------------
25,674 24,852
-------------------
Other customers: Billed................................................. 27,955 15,874
Unbilled............................................... 1,245 1,187
-------------------
29,200 17,061
Allowances for doubtful accounts....................... (941) (410)
-------------------
28,259 16,651
-------------------
$53,933 $41,503
-------------------
Unbilled amounts represent receivables for work performed for which
billings have 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
$4,000,000 and $3,662,000 at June 30, 1995 and 1994, respectively. A significant
portion of the retentions at June 30, 1995 is anticipated to be collected after
fiscal year 1996.
PROPERTY, PLANT AND EQUIPMENT
Consolidated property, plant and equipment consisted of the following:
DOLLARS IN THOUSANDS 1995 JUNE 30 1994
- ----------------------------------------------------------------------------------------------
Land.................................................................... $ 3,983 $ 3,983
Buildings............................................................... 1,947 1,947
Computer equipment...................................................... 71,329 79,034
Furniture and fixtures.................................................. 5,574 5,184
Leasehold improvements.................................................. 14,625 14,056
--------------------
97,458 104,204
Less accumulated depreciation and amortization.......................... 67,383 84,546
--------------------
$30,075 $ 19,658
--------------------
CONVERTIBLE SUBORDINATED DEBENTURES
The 6% convertible subordinated debentures due 2012 (the "debentures") may
be converted by the bondholder into the Company's common stock at a price of
$30.00 per share or may be redeemed by the Company at any time prior to
maturity. Redemption of the debentures prior to April 1, 1998 requires payment
of a premium. 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, 1995 of $1,087,000 is
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38
included in "Other assets" in the consolidated balance sheets. The fair market
value of the debentures, which is based on quoted market prices, was $75,715,000
at June 30, 1995.
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. By
utilizing the $11,190,000 (face value) of debentures purchased and retired to
date by the Company, contributions to satisfy the annual sinking fund
requirements can be deferred until April 1, 2000.
LEASES
The Company leases a majority of its facilities under long-term operating
leases. Operating lease commitments for real estate at June 30, 1995 consisted
of the following:
REAL ESTATE
LEASE
DOLLARS IN THOUSANDS COMMITMENTS
- -----------------------------------------------------------------------------------------------
Year ending June 30 1996.............................................. $14,428
1997.............................................. 13,799
1998.............................................. 13,253
1999.............................................. 5,868
2000.............................................. 4,988
Remainder......................................... 14,841
-------
Total minimum lease payments .................................................. $67,177
-------
Minimum lease payments have not been reduced by future minimum sublease
rentals of $4,200,000 due under noncancelable subleases. In January 1995, the
Company assigned a lease in the United Kingdom with a remaining term of 18 1/2
years. Under the terms of the assignment, the assignee has the option of
cancelling the assignment in January 2002 and in January 2005. The Company's
operating leases for real estate generally provide for renewal options and
options to purchase the leased property.
Total rent expenditures, net of sublet income, under all operating leases
and rental agreements amounted to $17,060,000, $16,980,000 and $18,180,000 in
fiscal years 1995, 1994 and 1993, respectively.
COMMON STOCK
In December 1993, in connection with his hiring, the Company's chief
executive officer 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 (the "Act") and may not be sold, assigned, pledged, or
otherwise transferred before the sooner 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.
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39
EMPLOYEE BENEFIT PLANS
Stock Compensation Plans
Under the Company's stock option plan, options may be granted to purchase
shares of the Company's common stock at a price not less than 50% of the fair
market value of the common stock on the date of grant. All options granted in
fiscal years 1995, 1994 and 1993 were at fair market value on the dates of
grant. The plan, as amended in fiscal year 1995, provides that directors who are
not employees of the Company receive a non-qualified option for 3,000 shares
each year. 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 canceled become available for
future grant.
The changes in stock options outstanding for the three years ended June 30, 1995
were as follows:
RANGE OF
NUMBER OPTION PRICES
SHARES IN THOUSANDS OF SHARES PER SHARE
- -------------------------------------------------------------------------------------------------
Outstanding at June 30, 1992 (141 exercisable).................. 1,677 $ 4.63 - $7.63
Granted......................................................... 170 5.00
Exercised....................................................... (12) 5.00
Canceled........................................................ (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
Canceled........................................................ (65) 5.00 - 12.63
-------------------------------
Outstanding at June 30, 1994 (635 exercisable) 2,450 4.63 - 15.25
Granted......................................................... 613 14.13 - 19.50
Exercised....................................................... (654) 4.63 - 7.63
Canceled........................................................ (109) 5.00 - 15.25
-------------------------------
Outstanding at June 30, 1995 (641 exercisable).................. 2,300 5.00 - 19.50
-------------------------------
At June 30, 1995 and 1994, 415,000 shares and 73,000 shares, respectively,
of authorized but unissued common stock were reserved and available for granting
additional options.
During fiscal years 1995 and 1994, BBN Planet, BBN Software Products, and
BBN HARK adopted stock option plans under which options may be granted enabling
the purchase at a price not less than the par value of the common stock on the
date of grant. Options granted under these plans are exercisable 90 days after
the closing of an initial public offering of the respective subsidiaries' common
stock. As of June 30, 1995, options to purchase shares of subsidiaries' common
stock ranged from 8% to 12% of the common shares outstanding of the respective
subsidiaries and substantially all of the options were granted at the fair value
on the date of grant.
In fiscal year 1994, LightStream adopted stock option plans enabling
employees of LightStream and the Company to purchase shares of LightStream
common stock at the fair value of the common stock on the date of grant. In
connection with the sale of LightStream assets, stock options held by
LightStream employees were exchanged for a cash payment. Stock options held by
employees of the Company were not vested and were canceled.
Employee Stock Purchase Plan
Under the Company's 1983 Stock Purchase Plan, as amended, 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
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40
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. Amounts are accumulated through payroll deductions ranging from 2% to
10% of each participating employee's compensation, as defined, but in no event
more than $12,500 or 1,000 shares during any six-month option period.
Options were exercised to purchase 194,000, 185,000, and 283,000 shares for
a total of $2,154,000, $1,519,000, and $1,125,000 in fiscal years 1995, 1994 and
1993, respectively. At June 30, 1995, 493,000 shares of authorized but unissued
common stock were reserved for future issuance under this plan.
Retirement Plans
The Company has a defined contribution retirement plan (the "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. Effective
July 1, 1994, the Company adopted an amendment to the 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 also provides for matching contributions as determined annually by the
Company's Board of Directors. The Company's total costs pursuant to the plan
were $5,603,000, $5,517,000 and $6,515,000 in fiscal years 1995, 1994 and 1993,
respectively.
Effective April 1, 1995, the Company adopted a non-qualified deferred
compensation plan. Eligible employees are permitted to defer a portion of their
salary and incentive compensation subject to limitations. On an annual basis,
the deferred compensation plan also provides for a discretionary retirement
contribution by the Company for selected employees. The Company's cost pursuant
to its deferred compensation plan in fiscal year 1995 was insignificant.
Incentive Compensation Plans
The Company maintains incentive compensation and other performance related
bonus 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 $1,014,000, $1,820,000 and $510,000
in fiscal years 1995, 1994 and 1993, 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. Based upon government procurement
regulations, under certain circumstances a contractor violating or not complying
with procurement regulations can be subject to legal or administrative
proceedings, including fines and penalties, as well as be suspended or debarred
from contracting with the government. The Company's policy has been and
continues to be to conduct its activities in compliance with all applicable
rules and regulations.
39
41
The books and records of the Company are subject to audit by the Defense
Contract Audit Agency ("DCAA"); such audits can result in adjustments to
contract billings. Final contract billing rates have been established for years
through fiscal year 1991, except for the Company's former BBN Communications
activities for which final contract billing rates have been established only
through fiscal year 1984. BBN expects that any adjustments which may be made as
a result of audits of fiscal years 1985 through 1995 of the Company will not
have a material adverse effect on the Company's results of operations.
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 were made by the
government agencies and the Company was informed in August 1995 that the
investigation had been concluded. The audit of the Company's former BBN
Communications activities by the DCAA for fiscal years 1985 through 1993, which
was delayed as a result of the investigation, is currently in process. U.S.
government revenue for the Company's former BBN Communications activities,
during the nine year period under audit, represented approximately 40% of the
Company's total U.S. government revenue.
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.
INCOME TAXES
The components of domestic and foreign income (loss) before income taxes
were as follows:
YEAR ENDED JUNE 30
DOLLARS IN THOUSANDS 1995 1994 1993
- -----------------------------------------------------------------------------------------------
Domestic......................................................... $79,631 $(7,870) $(31,014)
Foreign.......................................................... (1,004) 46 (1,250)
----------------------------
Income (loss) before income taxes................................ $78,627 $(7,824) $(32,264)
----------------------------
The provision (benefit) for income taxes consisted of the following:
Currently payable:
Federal..................................................... $12,522
State....................................................... 2,558 $ 50 $ 78
Foreign..................................................... 298 105
----------------------------
15,378 155 78
Deferred:
Federal..................................................... (1,595) (155) (78)
----------------------------
Provision for income taxes....................................... $13,783
----------------------------
The provision (benefit) for income taxes differs from the amount computed
using the statutory rate as follows:
Tax provision at the federal statutory rate...................... $27,519 $(2,660) $(10,970)
State taxes, net................................................. 1,663 33 51
Minority interests............................................... 3,918 (704)
Change in valuation allowance.................................... (18,857) 3,929 12,067
Research, investment and foreign tax credits..................... (1,281) (704) (1,068)
Other, net....................................................... 821 106 (80)
----------------------------
$13,783
----------------------------
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42
The significant components of deferred income taxes are as follows:
YEAR ENDED JUNE 30
1995 1994
- ----------------------------------------------------------------------------------------------
Accruals and reserves not deducted for tax purposes.................... $ 11,472 $ 14,197
Tax credit carryforwards............................................... 4,403 7,346
Depreciation and amortization.......................................... 2,900 3,690
Net operating loss carryforwards....................................... 1,801 12,152
Deferred revenue....................................................... (2,357) (3,586)
Other, net............................................................. 339 622
---------------------
18,558 34,421
Valuation allowance.................................................... (16,963) (34,421)
---------------------
Net deferred tax asset................................................. $ 1,595
---------------------
During fiscal year 1995, a significant portion of the Company's net
operating losses and tax credit carryforwards were utilized in connection with
the sale of LightStream assets. The remaining net operating losses and general
business credits expire in fiscal years 2008 through 2012. A portion of the net
operating loss carryforward is related to a fiscal year 1987 acquisition and is
subject to certain limitations. The tax benefits of approximately $1,600,000
related to the exercise of stock options will be credited to additional paid-in
capital when certain tax credit carryforwards are utilized.
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid and received for income taxes and interest was as follows:
YEAR ENDED JUNE 30
DOLLARS IN THOUSANDS 1995 1994 1993
- -----------------------------------------------------------------------------------------------
Cash paid for:
Income taxes............................................... $12,094 $ 215 $ 246
Interest................................................... 4,418 4,438 4,453
Cash received for:
Income tax refunds......................................... 6 309 3,091
In connection with the Company's fiscal year 1995 acquisitions of BARRNet
and SURAnet, the Company assumed certain operating liabilities of $5,100,000 and
issued 270,270 shares of BBN's common stock and 200,000 shares of BBN Planet's
common stock. Refer to the "Acquisitions" footnote for further discussion of
these transactions.
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 excess facilities
costs, reflecting a reduction of employment of approximately 300 employees in
fiscal year 1993. The accrued restructuring charges at June 30, 1995 relates to
excess facilities costs. The Company has sublet or assigned the majority of its
excess facilities under agreements with terms expiring between 1998 and 2005.
OTHER INCOME
Refer to the "Sale of LightStream Corporation" footnote for discussion of
the gain included in other income for fiscal year 1995.
41
43
In December 1994, the Company settled a claim with the U.S. government for
approximately $700,000. This settlement resulted in an approximate $2,550,000
reduction in liabilities and is included in other income for fiscal year 1995.
Other income in each of fiscal years 1995 and 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 fiscal year 1993 included a gain of $3,191,000
in connection with the sale.
FOREIGN EXCHANGE CONTRACTS
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, 1995 and 1994, the Company had foreign exchange
contracts to sell $950,000 and $750,000, respectively, of foreign currencies.
SALE OF LIGHTSTREAM CORPORATION
The sale of the assets of the Company's majority-owned subsidiary
LightStream Corporation to Cisco Systems, Inc. ("Cisco") for a cash
consideration of $120,000,000 which was completed on January 11, 1995, is
reflected in the Company's fiscal year 1995 results. The Company's portion is
83% of the net proceeds and Ungermann-Bass Networks, Inc., which owns the
minority interest in LightStream, will receive the remainder. Of the cash
consideration paid to LightStream, $12,000,000 was placed in a restricted Escrow
Fund, and periodically declining portions of such amount together with interest
are to be maintained for up to two years following the closing of the
transaction, subject to any claims under the Asset Purchase Agreement by Cisco.
On July 11, 1995 $4,000,000 was released from the Escrow Fund. As part of the
sale, Cisco hired substantially all of the employees of LightStream, and is
operating from the Company's former facility in Billerica, Massachusetts. The
Company recorded a pre-tax gain from the sale of approximately $105,000,000
before minority interest of $11,800,000 and income taxes of $13,500,000.
LightStream's fiscal year 1995 results through the date of the sale included
revenue of approximately $8,400,000 and an operating loss of approximately
$3,700,000. In fiscal year 1994, the Company's ATM activities, which prior to
the formation of LightStream were conducted by its then Communications Division,
had aggregate revenue of approximately $1,500,000 and an operating loss of
approximately $14,800,000.
ACQUISITIONS
BARRNet Acquisition
On August 19, 1994, BBN Planet 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 $6,500,000 consisting
principally of $2,000,000 cash, 270,270 shares of BBN common stock and 200,000
shares of BBN Planet common stock. The common stocks issued were valued at their
fair value which reflects a discount attributable to their restricted nature.
The transaction was accounted for using the purchase method of accounting.
Accordingly, the acquired assets and liabilities were recorded at their
estimated fair values on the date of the acquisition. The aggregate cost in
excess of net assets acquired of approximately $4,500,000 is being amortized
over ten years.
SURAnet Acquisition
On March 31, 1995, BBN Planet acquired from the Southeastern Universities
Research Association, the SURAnet Internet services organization, a provider of
Internet services in the Southeastern United States. Substantially all of the
SURAnet net assets were acquired for approximately $12,960,000 in cash and the
assumption of certain operating liabilities of approximately $5,100,000. The
transaction was accounted for using the purchase method of accounting.
Accordingly, the acquired assets and liabilities were recorded at
42
44
their estimated fair values on the date of the acquisition. The aggregate cost
in excess of net assets acquired of approximately $14,000,000 is being amortized
over ten years.
SEGMENT INFORMATION
Business Segments
During fiscal year 1995, the Company reported financial information in
three business segments: Internetworking, Data Analysis Software, and
Collaborative Systems and Acoustic Technologies. The Internetworking business
segment includes that part of the activities of the Company's BBN Systems and
Technologies Division relating to advanced network systems (including the
Company's defense communications activities) and network services and products,
the activities of BBN Planet Corporation, and the activities of LightStream
Corporation up to the date of sale of substantially all of its assets on January
11, 1995. The Data Analysis Software business segment includes the activities of
BBN Domain. The Collaborative Systems and Acoustic Technologies business segment
includes that part of the activities of the BBN Systems and Technologies
Division relating to collaborative systems, sensor systems, and acoustic
technologies, and the activities of BBN HARK Systems Corporation. In fiscal year
1993, 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, 1995, 1994,
and 1993, respectively. All data are shown net of intersegment transactions.
DOLLARS IN THOUSANDS 1995 1994 1993
- -----------------------------------------------------------------------------------------------
Revenue:
Internetworking.......................................... $ 88,259 $ 76,765 $ 91,936
Data Analysis Software................................... 39,428 35,393 38,151
Collaborative Systems and Acoustic Technologies.......... 87,344 83,946 103,366
----------------------------------
$215,031 $196,104 $233,453
----------------------------------
Income (loss) from operations:
Internetworking.......................................... $(10,147) $ (9,362) $(32,411)
Data Analysis Software................................... (3,621) 497 (5,347)
Collaborative Systems and Acoustic Technologies.......... (2,210) 2,095 5,435
Unallocated corporate costs.............................. (2,836) (1,674)
----------------------------------
$(18,814) $ (8,444) $(32,323)
----------------------------------
U.S. government sales:
Internetworking.......................................... $ 44,272 $ 48,884 $ 66,175
Data Analysis Software................................... 644 1,377 1,607
Collaborative Systems and Acoustic Technologies.......... 79,892 80,303 76,655
----------------------------------
$124,808 $130,564 $144,437
----------------------------------
Depreciation and amortization:
Internetworking.......................................... $ 5,637 $ 4,835 $ 5,862
Data Analysis Software................................... 2,030 3,282 3,870
Collaborative Systems and Acoustic Technologies.......... 2,499 2,438 3,386
----------------------------------
$ 10,166 $ 10,555 $ 13,118
----------------------------------
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DOLLARS IN THOUSANDS 1995 1994 1993
- -----------------------------------------------------------------------------------------------
Identifiable assets:
Internetworking.......................................... $ 57,138 $ 38,076 $ 34,865
Data Analysis Software................................... 23,485 15,954 16,602
Collaborative Systems and Acoustic Technologies.......... 25,169 23,085 28,913
Corporate................................................ 113,674 58,825 60,265
----------------------------------
$219,466 $135,940 $140,645
----------------------------------
Capital expenditures:
Internetworking.......................................... $ 10,110 $ 3,677 $ 3,315
Data Analysis Software................................... 4,397 1,351 2,069
Collaborative Systems and Acoustic Technologies.......... 3,547 1,598 2,369
Corporate................................................ 422 312 189
----------------------------------
$ 18,476 $ 6,938 $ 7,942
----------------------------------
Geographic Segments
Revenue includes U.S. export sales primarily to Western Europe and Japan of
$24,000,000, $27,300,000 and $51,100,000 in fiscal years 1995, 1994, and 1993,
respectively.
SUBSEQUENT EVENT
On July 12, 1995, the Company announced that AT&T Venture Company, L.P.
made an investment in BBN Planet by purchasing 1,000,000 shares of BBN Planet's
Series A Convertible Preferred Stock at $8.00 per share. Such preferred shares
are subject to mandatory conversion into 1,000,000 shares of BBN Planet common
stock upon a public offering of BBN Planet, and may be put to the Company or BBN
Planet at $8.00 per share within twelve months.
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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, 1995 and 1994, and the related consolidated statements of
operations, shareholders' equity, and cash flows for each of the three years in
the period ended June 30, 1995. 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, 1995 and 1994, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
June 30, 1995, in conformity with generally accepted accounting principles.
Boston, Massachusetts
August 8, 1995
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47
QUARTERLY FINANCIAL DATA
(UNAUDITED)
Quarterly financial data for the years ended June 30, 1995 and 1994 was as
follows:
- -----------------------------------------------------------------------------------------------------
1995 THREE MONTHS ENDED YEAR ENDED
DOLLARS IN THOUSANDS, EXCEPT PER-SHARE SEPT. 30 DEC. 31 MARCH 31 JUNE 30 JUNE 30
DATA 1994 1994 1995 1995 1995
- -----------------------------------------------------------------------------------------------------
Revenue:
Services............................... $ 44,376 $41,016 $42,954 $47,938 $176,284
Products............................... 7,367 10,156 9,003 12,221 38,747
------------------------------------------------------------
$ 51,743 $51,172 $51,957 $60,159 $215,031
------------------------------------------------------------
Gross margin........................... $ 20,581 $19,342 $18,805 $21,052 $ 79,780
Income (loss) from operations.......... (1,492) (5,107) (5,597 ) (6,618) (18,814)
Net income (loss)...................... (1,808) (1,925) 74,466 (5,889) 64,844
Net income (loss) per share............ (.11) (.11) 4.11 (.34) 3.61
Sales price of common stock: High..... 18 3/4 20 7/8 22 1/4 30
Low... 10 12 5/8 14 5/8 16 1/2
1994 THREE MONTHS ENDED YEAR ENDED
DOLLARS IN THOUSANDS, EXCEPT PER-SHARE SEPT. 30 DEC. 31 MARCH 31 JUNE 30 JUNE 30
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........................... $ 17,167 $17,575 $16,274 $18,644 $ 69,660
Income (loss) from operations.......... (1,524) (2,528) (2,356 ) (2,036) (8,444)
Net income (loss)...................... (1,947) (1,666) (2,259 ) (1,952) (7,824)
Net income (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
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information in response to this item may be found in the section entitled
"1. Election of Directors" in the Company's definitive Proxy Statement dated
September 29, 1995 for the Registrant's Annual Meeting to be held on November 6,
1995, and such information is incorporated herein by reference.
Information in response to executive officers of the registrant appears in
Item 4A entitled "Executive Officers of the Registrant" on pages 21 and 22 of
this report, and such information is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION.
Information in response to this item may be found in the section entitled
"1. Election of Directors" under the caption "Board of Directors and Committee
Organization", in the sections entitled "Compensation and
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48
Certain Other Transactions Involving Executive Officers", "Summary Compensation
Table", "Option Grants in Last Fiscal Year", and "Option Exercises in Fiscal
Year 1995 and Year-End Option Values", in the section entitled "Report of
Compensation and Stock Option Committee on Annual Executive Compensation", and
in the section entitled "Comparative Stock Performance", each in the Company's
definitive Proxy Statement dated September 29, 1995 for the Registrant's Annual
Meeting to be held on November 6, 1995, and such information is incorporated
herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Information in response to this item may be found in the section entitled
"1. Election of Directors" under the caption "Biographical Information", and in
the section entitled "Principal Holders of Company Common Stock", each in the
Company's definitive Proxy Statement dated September 29, 1995 for the
Registrant's Annual Meeting to be held on November 6, 1995, and such information
is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information in response to this may be found in the section entitled
"Compensation and Certain Other Transactions Involving Executive Officers" in
the Company's definitive Proxy Statement dated September 29, 1995 for the
Registrant's Annual Meeting to be held on November 6, 1995, and such information
is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K.
(a) List of Financial Statements, Financial Statement Schedules, and
Exhibits.
1. Financial Statements
Consolidated Statements of Operations (page 30)
Consolidated Balance Sheets (page 31)
Consolidated Statements of Shareholders' Equity (page 32)
Consolidated Statements of Cash Flows (page 33)
Notes to Consolidated Financial Statements (pages 34-44)
Report of Independent Accountants (page 45)
2. FINANCIAL STATEMENT SCHEDULES
Schedules other than those listed below have been omitted because they are
inapplicable or are not required.
II Valuation and Qualifying Accounts, Years Ended June 30, 1995, 1994, and
1993 (page 51)
3. LIST OF EXHIBITS
3.1 Restated Articles of Organization of Registrant (filed with the
Securities and Exchange Commission as Exhibit 3.1 of Registrant's
Quarterly Report on Form 10-Q for the Quarter ended March 31, 1989, and
incorporated herein by reference).
3.2 By-laws of Registrant, as amended (filed with the Securities and
Exchange Commission as Exhibit 3.2 of Registrant's Annual Report on
Form 10-K for the fiscal year ended June 30, 1988, and incorporated
herein by reference).
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49
4.1 Form of Indenture of Trust dated as of April 1, 1987 between the
Registrant and The First National Bank of Boston relating to the
Registrants's 6% Convertible Subordinated Debentures due 2012 (filed
with the Securities and Exchange Commission as Exhibit 4.1 of
Registration Statement No. 33-12975 on Form S-3, and incorporated
herein by reference).
4.2 Form of Right Certificate to purchase shares of Common Stock of the
Registrant (filed with the Securities and Exchange Commission as
Exhibit 2 of Registrant's Current Report on Form 8-K dated June 23,
1988, and incorporated herein by reference).
4.3 Common Stock Rights Agreement dated as of June 23, 1988 between the
Registrant and The First National Bank of Boston relating to the
Registrant's Common Stock Purchase Rights (filed with the Securities
and Exchange Commission as Exhibit 1 of Registrant's Current Report on
Form 8-K dated June 23, 1988, and incorporated herein by reference).
4.4 Registration Rights Agreement dated August 24, 1994 between the
Registrant and the Board of Trustees of the Leland Stanford Junior
University (filed with the Securities and Exchange Commission as
Exhibit 4.4 of Registrant's Annual Report on Form 10-K for the fiscal
year ended June 30, 1994, and incorporated herein by reference).
4.5 (Note: Registrant agrees to furnish to the Securities and Exchange
Commission upon request a copy of any other instrument with respect to
long-term debt of the Registrant and its subsidiaries. Such other
instruments are not filed herewith since no such instrument relates to
outstanding debt in an amount greater than 10% of the total assets of
the Registrant and its subsidiaries on a consolidated basis.)
10.1 Registrant's 1983 Stock Option Plan, as amended (filed with the
Securities and Exchange Commission as Exhibit 10.1 of Registrant's
Annual Report on Form 10-K for the fiscal year ended June 30, 1994, and
incorporated herein by reference).
10.2 Registrant's 1986 Stock Incentive Plan, as amended (filed with the
Securities and Exchange Commission as Exhibit 10.1 of Registrant's
Quarterly Report on Form 10-Q for the quarter ended December 31, 1994,
and incorporated herein by reference).
10.3 Registrant's 1983 Employee Stock Purchase Plan, as amended.
10.4 BBN Planet Corporation 1994 Stock Option Plan, as amended.
10.5 BBN HARK Systems Corporation 1995 Stock Option Plan, as amended.
10.6 BBN Software Products Corporation 1993 Stock Option Plan, as amended.
10.7 Incentive Compensation Plan for George H. Conrades (filed with the
Securities and Exchange Commission as Exhibit 10.14 of Registrant's
Quarterly Report on Form 10-Q for the quarter ended December 31, 1993,
and incorporated herein by reference).
10.8 Registrant's amended Deferred Compensation Plan for Directors (filed
with the Securities and Exchange Commission as Exhibit 4 to
Registration Statement No. 33-52656 on Form S-8, and incorporated
herein by reference).
10.9 Registrant's Deferred Compensation Plan for Employees (filed with the
Securities and Exchange Commission as Exhibit 10.1 of Registrant's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1995, and
incorporated herein by reference).
48
50
10.10 Registrant's Executive Protection Policy (Executive, Outside
Directorship, and Fiduciary Liability), Directors and Officers
Liability and Reimbursements Excess Policy, Excess Directors and
Officers Liability and Corporate Indemnification Policy, Excess
Directors and Officers and Company Reimbursement Policy, and Excess
Insurance Policy, each for the policy period ending December 1, 1995.
10.11 Forms of Severance Agreement between Registrant and certain of its
executive officers (filed with the Securities and Exchange Commission
as Exhibit 10.17 of Registrant's Annual Report on Form 10-K for the
fiscal year ended June 30, 1988, and incorporated herein by reference).
10.12 Asset Purchase Agreement dated as of December 8, 1994 between
Registrant and Cisco Systems, Inc. and Amendment No. 1 thereto (filed
with the Securities and Exchange Commission as Exhibit 1 of
Registrant's Current Report on Form 8-K dated January 11, 1995, and
incorporated herein by reference).
10.13 Internet Services Agreement dated June 19, 1995 among Registrant, BBN
Planet Corporation, and AT&T Corp. (The exhibits and schedules to the
agreement are not being filed herewith. Except to the extent covered by
an application for an order pursuant to Rule 24b-2 under the Securities
Exchange Act of 1934, granting confidential treatment of certain
contractual provisions, which application may be filed in the future, a
copy of any exhibit or schedule will be furnished supplementary to the
Commission, upon request. A description of the exhibits and schedules
identifying the contents of such exhibits and schedules is contained in
the agreement.)
10.14 Registrant's Lease, Collateral Pledge Agreement, and Financing,
Construction, and Agency Agreement, with Fawcett Street Associates,
each dated January 20, 1981 (filed with the Securities and Exchange
Commission as Exhibit 20(a) of Registrant's Quarterly Report on Form
10-Q for the quarter ended December 31, 1980, and incorporated herein
by reference).
10.15 Registrant's Lease with Robert A. Jones and K. George Najarian dated as
of June 20, 1977 amending an Agreement dated October 18, 1973 and a
Letter Agreement dated July 8, 1975 (filed with the Securities and
Exchange Commission as Exhibit 1 of Registrant's Current Report on Form
8-K dated June 20, 1977, as Exhibit 1 of Registrant's Current Report on
Form 8-K for the month of March 1974, and as Exhibit 1 of Registrant's
Current Report on Form 8-K for the month of July 1975, respectively,
and incorporated herein by reference).
10.16 Registrant's Lease with Technology Park VII Limited Partnership
(executed by The Gutierrez Company, General Partner) dated as of June
1, 1984 (filed with the Securities and Exchange Commission as Exhibit 1
of Registrant's Current Report on Form 8-K dated June 15, 1984, and
incorporated herein by reference), as amended May 1, 1986 and July 23,
1986 (exclusive of exhibits) (filed with the Securities and Exchange
Commission as Exhibit 10.15 of Registrant's Annual Report on Form 10-K
for the Fiscal Year ended June 30, 1986, and incorporated herein by
reference).
10.17 Registrant's Lease with CambridgePark Two Limited Partnership dated
June 30, 1987 (filed with the Securities and Exchange Commission as
Exhibit 1 of Registrant's Current Report on Form 8-K dated July 14,
1987, and incorporated herein by reference).
11.1 Calculations of net income (loss) per share.
21.1 Subsidiaries of Registrant.
23.1 Consent of Coopers & Lybrand L.L.P.
27.1 Financial Data Schedule.
<FN>
(b) Reports on Form 8-K for the quarter ended June 30, 1995 filed by the
Registrant were as follows:
None
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, on this 28th day of
September, 1995.
BOLT BERANEK AND NEWMAN INC.
/S/ GEORGE H. CONRADES
By:.................................
GEORGE H. CONRADES
(PRESIDENT, CHIEF EXECUTIVE
OFFICER, AND DIRECTOR)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated, each on the 28th day of September,
1995.
/S/ STEPHEN R. LEVY Chairman of the Board of Directors
...........................................
STEPHEN R. LEVY
/S/ GEORGE H. CONRADES President, Chief Executive Officer,
........................................... and Director (Principal Executive
GEORGE H. CONRADES Officer)
/S/ JOHN M. ALBERTINE Director
...........................................
JOHN M. ALBERTINE
/S/ LUCIE J. FJELDSTAD Director
...........................................
LUCIE J. FJELDSTAD
/S/ GEORGE N. HATSOPOULOS Director
...........................................
GEORGE N. HATSOPOULOS
/S/ ANDREW L. NICHOLS Director
...........................................
ANDREW L. NICHOLS
/S/ ROGER D. WELLINGTON Director
...........................................
ROGER D. WELLINGTON
/S/ RALPH A. GOLDWASSER Senior Vice President, Chief
........................................... Financial Officer, and Treasurer
RALPH A. GOLDWASSER (Principal Financial Officer)
/S/ WILLIAM S. HURLEY Vice President and Controller
........................................... (Principal Accounting Officer)
WILLIAM S. HURLEY
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SCHEDULE II
BOLT BERANEK AND NEWMAN INC.
VALUATION AND QUALIFYING ACCOUNTS
Years Ended June 30, 1995, 1994 and 1993
(Dollars in thousands)
- ---------------------------------------------------------------------------------------------------------
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- ---------------------------------------------------------------------------------------------------------
BALANCE AT
BEGINNING CHARGED TO BALANCE AT
OF COSTS AND OTHER CHANGES END OF
DESCRIPTION YEAR EXPENSES ADD (DEDUCT) YEAR(F)
- ---------------------------------------------------------------------------------------------------------
Allowances for Accounts Receivable:
1995....................................... $ 8,374 $ 462 $(1,759)(a) $7,077
1994....................................... 8,912 405 (943)(a)(e) 8,374
1993....................................... 10,147 703 (1,938)(a) 8,912
Inventory Reserves:
1995....................................... $ 3,296 $ $(3,296)(d)
1994....................................... 2,795 501(e) 3,296
1993....................................... 3,108 2,993(b)(c) (3,306)(d) 2,795
<FN>
- ---------------
(a) Represents writeoffs and recoveries.
(b) Represents provisions to reflect current expectations of realizable value.
(c) Includes $700 reserve established as a part of restructuring charge.
(d) Represents writeoffs and disposals.
(e) Includes amounts transferred from allowances for accounts receivable to
inventory reserves.
(f) Represents amounts deducted in the consolidated balance sheets from the
accounts to which they apply.
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53
LIST OF EXHIBITS
PAGE
----
10.3 Registrant's 1983 Employee Stock Purchase Plan, as amended.
10.4 BBN Planet Corporation 1994 Stock Option Plan, as amended.
10.5 BBN HARK Systems Corporation 1995 Stock Option Plan, as amended.
10.6 BBN Software Products Corporation 1993 Stock Option Plan, as amended.
10.10 Registrant's Executive Protection (Executive, Outside Directorship, and
Fiduciary Liability), Directors and Officers Liability and Reimbursements Excess
Policy, Excess Directors and Officers Liability and Corporate Indemnification
Policy, Excess Directors and Officers and Company Reimbursement Policy, and
Excess Insurance Policy, each for the policy period ending December 1, 1995.
10.13 Internet Services Agreement dated June 19, 1995 among Registrant, BBN Planet
Corporation, and AT&T Corp. (The exhibits and schedules to the agreement are not
being filed herewith. Except to the extent covered by an application for an
order pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, granting
confidential treatment of certain contractual provisions, which application may
be filed in the future, a copy of any exhibit or schedule will be furnished
supplementary to the Commission, upon request. A description of the exhibits and
schedules identifying the contents of such exhibits and schedules is contained
in the agreement.)
11.1 Calculations of net income (loss) per share.
21.1 Subsidiaries of Registrant.
23.1 Consent of Coopers & Lybrand L.L.P.
27.1 Financial Data Schedule.