<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
X Quarterly Report Pursuant to Section 13 or 15(d) of the
- ----- Securities Exchange Act of 1934
For the quarterly period ended September 30, 1996 or
Transition Report Pursuant to Section 13 or 15(d) of the
- ----- Securities Exchange Act of 1934
For the transition period from to
------ ------
Commission file number 1-6435
----------------
BBN Corporation
- -----------------------------
(Exact name of registrant as specified in its charter)
Massachusetts 04-2164398
- ---------------------------------- --------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
150 CambridgePark Drive, Cambridge, Massachusetts 02140
- ------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (617) 873-2000
--------------------
- --------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since
last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Number of shares of common stock, $1.00 par value, outstanding as of
October 31, 1996: 21,012,534
Exhibit index appears on page 17
Page 1 of 17 pages
<PAGE>
BBN CORPORATION
INDEX
Page No.
--------
Part I. Financial Information
Consolidated Statements of Operations -
Three Months Ended September 30, 1996 and 1995................3
Consolidated Balance Sheets -
as of September 30, 1996 and June 30, 1996....................4
Consolidated Statements of Cash Flows -
Three Months Ended September 30, 1996 and 1995................5
Notes to Consolidated Financial Statements.......................6
Management's Discussion and Analysis of Financial
Condition and Results of Operations..........................10
Part II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders....16
Item 6. Exhibits and Reports on Form 8-K.......................16
Signatures......................................................16
Note: Page references relate solely to this document in its
traditional filing format.
<PAGE>
PART I. FINANCIAL INFORMATION
BBN CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Dollars in thousands, except per-share data
Three Months Ended
------------------------------
September 30 September 30
1996 1995
------------ ------------
Revenue $ 74,296 $ 50,181
----------- -----------
Costs and expenses:
Cost of revenue 61,427 37,087
Research and development expenses 3,152 2,365
Selling, general and administrative expenses 20,630 17,599
------------ ------------
85,209 57,051
------------ ------------
Loss from operations (10,913) (6,870)
Interest income 1,556 1,594
Interest expense (1,389) (1,134)
Minority interests (2) (69)
------------ ------------
Loss from continuing operations
before income taxes (10,748) (6,479)
Income taxes (2,049)
------------ ------------
Loss from continuing operations (10,748) (4,430)
Income (loss) from discontinued operations
(net of applicable income taxes) 20,000 (4,221)
------------ ------------
Net income (loss) $ 9,252 $ (8,651)
============ ============
Income (loss) per share:
Continuing operations $ (.51) $ (.25)
Discontinued operations $ .95 $ (.24)
------------ ------------
Net income (loss) per share $ .44 $ (.49)
============ ============
Shares used in per-share calculations 21,190,000 17,518,000
============ ============
The accompanying notes are an integral
part of the consolidated financial statements.
<PAGE>
BBN CORPORATION
CONSOLIDATED BALANCE SHEETS
Dollars in thousands
September 30 June 30
1996 1996
------------ ------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents (includes restricted
cash of $4,774 at September 30, 1996 and
$4,711 at June 30, 1996) $ 73,755 $ 79,533
Short-term investments 49,980 40,742
Accounts receivable, net 64,674 60,825
Other current assets 10,654 10,314
Net assets of discontinued operations 8,082
------------ ------------
Total current assets 199,063 199,496
Property, plant and equipment, net 54,032 48,069
Other assets 7,258 1,772
------------ ------------
Total assets $ 260,353 $ 249,337
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 17,480 $ 27,702
Accrued compensation and retirement plan 6,114 8,272
Accrued restructuring charges 7,086 7,352
Other accrued costs 32,093 16,649
Short term lease obligations 4,127 4,041
Deferred revenue 14,665 15,369
------------ ------------
Total current liabilities 81,565 79,385
6% convertible subordinated debentures due 2012 73,170 73,170
Capital lease obligation 7,627 8,692
Minority interests 756 754
Redeemable convertible preferred stock of subsidiary 8,000
Redeemable common stock 8,000
Shareholders' equity:
Common stock, $1 par value, authorized:
100,000,000 shares; issued: 24,980,285 shares at
September 30, 1996 and 24,911,529 shares at
June 30, 1996 24,980 24,912
Additional paid-in capital 111,347 113,742
Foreign currency translation adjustment 794
Accumulated deficit (18,673) (27,925)
------------ ------------
117,654 111,523
Less shares in treasury, at cost: 3,997,551 and
4,527,464 shares at September 30, 1996 and
June 30, 1996, respectively 28,419 32,187
------------ ------------
Total shareholders' equity 89,235 79,336
------------ ------------
Total liabilities and shareholders' equity $ 260,353 $ 249,337
============ ============
The accompanying notes are an integral
part of the consolidated financial statements.
<PAGE>
BBN CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Dollars in thousands Three Months Ended
----------------------------
September 30 September 30
1996 1995
------------ ------------
Cash flows from continuing operating activities:
Loss from continuing operations $ (10,748) $ (4,430)
------------ ------------
Adjustments to reconcile loss from
continuing operations to net cash
used by operating activities:
Depreciation and amortization 3,420 2,317
Amortization of goodwill 662
Change in assets and liabilities:
Accounts receivable (3,849) (3,651)
Other assets (826) (227)
Accounts payable and other liabilities (3,002) 1,177
Restructuring expenditures (266) (376)
Deferred revenue (704) 249
Income taxes, net (3,452)
Other (314) (149)
------------ ------------
Total adjustments (5,541) (3,450)
------------ ------------
Net cash used by continuing operating
activities (16,289) (7,880)
------------ ------------
Cash flows from discontinued operating activities (1,418) (4,062)
------------ ------------
Cash flows from investing activities:
Proceeds from sale of BBN Domain 36,000
Purchases of short-term investments, net (9,238) (37,011)
Additions to property, plant and equipment (9,868) (4,307)
Additions to property, plant and equipment
from discontinued operations (1,471)
Investment in joint venture (5,000)
Payments to minority owner (2,199)
Net cash provided (used) by ------------ ------------
investing activities 11,894 (44,988)
------------ ------------
Cash flows from financing activities:
Sale of subsidiary preferred stock 8,000
Repayments on capital lease obligations (979)
Proceeds from employee options and stock plans 1,014 97
------------ ------------
Net cash provided by financing activities 35 8,097
------------ ------------
Net decrease in cash and cash equivalents (5,778) (48,833)
Cash and cash equivalents - beginning of period 79,533 107,608
------------ ------------
Cash and cash equivalents - end of period $ 73,755 $ 58,775
============ ============
The accompanying notes are an integral
part of the consolidated financial statements
<PAGE>
BBN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. Basis of Presentation
The financial information included herein, with the exception of the
consolidated balance sheet at June 30, 1996, has not been audited.
However, in the opinion of management, all material adjustments necessary
for a fair presentation of the results for these periods, have been
reflected and consist only of normal recurring accruals. The results for
these periods are not necessarily indicative of the results for the full
fiscal year. The net assets, liabilities, results of operations, and
cash flows of BBN Domain for the three months ended September 30, 1995
and the month ended July 31, 1996 are classified as discontinued
operations in the consolidated financial statements.
The accompanying financial information should be read in conjunction with
the consolidated financial statements and notes thereto contained in the
CompanyOs annual report on Form 10-K filed with the Securities Exchange
Commission for the year ended June 30, 1996.
B. Change in Accounting Estimate
Effective July 1, 1996, the Company revised its estimate of the useful
life of certain data communications equipment from three to five years to
better reflect the useful service period of the related equipment. The
change had the effect of reducing depreciation expense and the loss from
continuing operations by approximately $400,000 or $.02 per share.
C. Segment Information
The following is a summary of business segment information from
continuing operations for the three months ended September 30, 1996 and
1995, respectively.
Three Months Ended
September 30
-------------------------
Dollars in Thousands 1996 1995
---------- ----------
Revenue:
BBN Planet $ 32,705 $ 10,669
BBN Systems and Technologies 41,963 39,675
Eliminations (372) (163)
---------- ----------
$ 74,296 $ 50,181
========== ==========
Income (loss) from continuing operations:
BBN Planet $ (10,786) $ (7,947)
BBN Systems and Technologies 67 1,606
Unallocated corporate expenses (194) (529)
---------- ----------
$ (10,913) $ (6,870)
=========== ==========
<PAGE>
BBN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
D. Other Assets
On August 14, 1996, the Company and Andersen Consulting LLP entered into
a joint venture aimed at exploring and developing opportunities in the
Internet market. The Company contributed $5,000,000 in exchange for an
approximately 12.5% ownership stake in the venture entity; Andersen
Consulting LLP retains the remaining 87.5% interest. The Company entered
into an agreement with Andersen Consulting LLP to provide the joint
venture with technical and engineering services, the value of which is
expected to be approximately $4,000,000 in fiscal 1997.
E. Discontinued Operations
On July 31, 1996 the Company completed the divestiture of a majority
interest in its BBN Domain Corporation ("Domain") subsidiary. Under the
terms of the agreement, Domain has been recapitalized, a significant
portion of the Company's interest has been redeemed, and a majority of
the stock interest in Domain has been purchased by an investment group.
The Company received a cash payment of $36,000,000 and will retain a
minority interest in the voting stock of the renamed Domain
Solutions Corporation. Domain Solutions Corporation has retained
substantially all assets and liabilities related to its operations. The
net gain recorded on the divestiture was $20,000,000 after considering
costs of approximately $8,000,000 including facilities, employee related
and other costs incurred in connection with the divestiture. The net
assets, liabilities, results of operations and cash flows of Domain are
classified as discontinued operations in the consolidated financial
statements.
F. Redeemable Common Stock and Preferred Stock of Subsidiary
In July 1995, AT&T Venture Company, L.P. ("AT&T Venture") purchased
1,000,000 shares of BBN Planet's Series A Redeemable Convertible
Preferred Stock for $8,000,000. On August 6, 1996, AT&T Venture's
preferred stock investment was exchanged for 400,000 common shares of BBN
Corporation. The shares, which were issued from treasury shares, are
restricted and were not registered under the Securities Act of 1933 ("the
Act") and may not be transferred or assigned before the sooner of the
filing of an effective registration statement under the Act or an
exemption from registration is available. The Company could be required,
under certain circumstances, to register the shares under the Act; in
addition, the holders of the shares are entitled to certain rights to
sell the shares in connection with the filing of a registration statement
initiated by the Company. During one year following the exchange, AT&T
Venture may require the Company to purchase all or any part of the common
shares at a price of $20.00 per share.
G. Common Stock
As of September 9, 1996, the minority shareholders' common stock
investments in BBN Planet were converted into an aggregate of 92,000
common shares of BBN Corporation. The shares, which were issued from
treasury shares, are restricted and were not registered under the Act and
may not be offered or sold before the sooner of the filing of an
effective registration statement under the Act or an exemption from
<PAGE>
BBN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
registration is available. The Company could be required, under certain
circumstances, to register 80,000 of the shares under the Act; in
addition, the holder of such 80,000 shares is entitled to certain rights
to sell the shares in connection with the filing of a registration
statement initiated by the Company. Refer to the "Redeemable Common
Stock and Preferred Stock of Subsidiary" footnote for discussions of
the conversion of BBN Planet's preferred shareholder's investment into
common shares of BBN Corporation.
H. Paid-in Capital
As provided by the Company's 1986 Stock Incentive Plan, during the
quarter ended September 30, 1995 the retiring chairman of the board
transferred shares of the Company's common stock to the Company in
payment of applicable withholding taxes in connection with the exercise
of non-qualified stock options. The effect of this transaction was to
reduce paid-in capital by approximately $1,400,000.
I. 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 institution of such proceedings against the Company
could, and suspension or debarment from contracting with the government
would, materially adversely affect the Company's business, financial
condition, and results of operations. The Company's policy has been and
continues to be to conduct its activities in compliance with all
applicable rules and regulations.
The books and records of the Company are subject to audit by the Defense
Contract Audit Agency ("DCAA"); such audits can result in adjustments to
contract billings. Final contract billing rates for the Company have
been established and billings audited for years through fiscal year 1991,
except for the Company's former BBN Communications activities for which
final contract billing rates have been established only through fiscal
year 1984. The audit by DCAA of the Company's former BBN Communications
activities for fiscal years 1985 through 1993, which had been delayed, is
currently in progress. U.S. government revenue for BBN Communications
activities during the nine-year period under audit represented
approximately 40% of the Company's total U.S. government revenue during
the period. Based upon its interpretations of government contract
regulations, DCAA in August 1996 recommended to the responsible
governmental administrative contracting officer that adjustments to BBN
Communications contract billings be made which, if asserted and sustained
upon appeal, would have a material adverse effect on the Company's
financial condition and results of operations. The amount of any
adjustments which may ultimately be asserted by the administrative
contracting officer on the basis of the DCAA recommendations is not
currently determinable. The Company and its counsel believe that DCAA's
recommendations, in substantial part, are based upon incorrect
<PAGE>
BBN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
interpretations of government contract regulations and are inconsistent
with decided cases. The Company expects that any adjustments which may
ultimately be asserted and sustained on appeal as a result of audits of
the Company's fiscal years 1985 through 1995 (including the 1985 through
1993 period for BBN Communications) will not have a material adverse
effect on the Company's financial condition and results of operations.
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.
J. Recent Pronouncement
In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting
for Stock-Based Compensation," which is effective for the Company's
FY1997 financial statements. SFAS No. 123 allows companies to either
account for stock-based compensation under the new provisions of SFAS No.
123 or under the provisions of APB 25, but requires pro forma disclosure
in the footnotes to the financial statements as if the measurement
provisions of SFAS No. 123 had been adopted. The Company expects to
continue accounting for its stock-based compensation in accordance with
the provisions of APB 25. As such, the adoption of SFAS No. 123 will not
impact the Company's financial position or the results of operations.
<PAGE>
BBN CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
- --------------------------
This discussion includes certain forward-looking statements about the
Company's revenue growth, including from its Internet-related activities, the
need for additional investment, expected expenses, operating losses, and
possible capital and funding needs. Any such statements are subject to risks
that could cause the actual results or needs to vary materially. Certain of
these risks are discussed in the appropriate sections of this Report. Each of
these risk factors, and others, affecting the CompanyOs business are further
discussed from time to time in the CompanyOs filings with the Securities and
Exchange Commission, including its Report on Form 8-K dated November 14, 1996.
The Company
- -----------
The Company is a leading provider of Internet and internetworking services
and solutions to businesses and other organizations, and a provider of contract
research, development, and consulting services to governmental and other
organizations. The Company operates through two principal business units: BBN
Planet and BBN Systems and Technologies. BBN Planet is responsible for BBNOs
Internet offerings to business customers, and includes the Company's managed
Internet access and value-added services and related network operations, the
Company's contract with AT&T Corp. ("AT&T"), and the America Online,
Incorporated ("AOL") network management contract and related Internet dial-up
access capabilities. BBN Systems and Technologies focuses on providing
networking solutions and contract research and development, principally for the
federal government, as well as creating next generation technology for advanced
Internet applications, and is organized into three principal groups:
Internetwork Technologies, Information Systems and Technologies, and Physical
Systems and Technologies. The Company's commercial speech recognition
activities are currently included in BBN Systems and Technologies.
On July 31, 1996, the Company completed its previously announced
divestiture of a majority interest in BBN Domain, then a wholly-owned
subsidiary of the Company which focused its business on data analysis and
process optimization software products for pharmaceutical and manufacturing
applications. BBN Domain is accounted for as a discontinued operation at June
30, 1996. Upon consummation of the transaction, the Company received a cash
payment of $36 million, and recorded a gain from discontinued operations of $20
million during the three month period ended September 30, 1996. With the
divestiture of BBN Domain, a number of products, which in recent years had
significant development efforts, including BBN Domain's Cornerstone, Clintrial,
and Starfire software, are no longer offered for sale by the Company.
<PAGE>
BBN CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
BBN Planet
- ----------
Three Months Ended September 30,
------------------------------------
1996 1995
----------------- ----------------
(dollars in millions)
$ % $ %
------- ------- ------- -------
Revenue $ 32.7 100% $ 10.7 100%
Costs and expenses:
Cost of revenue 31.1 95% 10.1 94%
Research and development 1.6 5% .7 7%
Selling, general and administrative 10.8 33% 7.8 73%
------- ------- ------- -------
Loss from operations $(10.8) (33%) $ (7.9) (74%)
======= ======= ======= =======
BBN Planet provides a range of Internet services and solutions to
businesses and other organizations. BBN Planet operates a high-bandwidth
digital data communications network providing dedicated Internet access to its
customers across the United States. BBN Planet's Internet access services
include a range of dedicated leased line connectivity options, bulk private-
label business dial-up services, network design, implementation, management,
monitoring, and problem-resolution services. In addition to Internet access
services, BBN Planet currently offers a range of value-added Internet services,
including managed Internet security, World Wide Web server hosting, commercial
transaction and payment processing services, applications development, and
systems integration services.
BBN Planet's revenue includes monthly connectivity and value-added
services fees, related installation fees, sales of related equipment, and
consulting services. Approximately 45% of BBN PlanetOs revenues for the three
months ended September 30, 1996 were derived from the development, operations,
and maintenance of the dial-up network for AOL. A substantial portion of this
revenue represents the pass-through costs to BBN for telecommunications
circuits and services.
In support of its Internet business strategy, the Company has entered
into strategic alliances. In FY1995, the Company entered into a five-year
agreement with AOL, originally valued at approximately $11 million per year,
to develop, operate, and maintain a portion of AOL's nationwide, high-speed,
dial-up network. In October 1996, AOL and the Company significantly expanded
this relationship by signing a four year replacement agreement under which BBN
will continue to develop, operate, and maintain a significant portion of AOLOs
network. The new contract, valued at $340 million, provides for cost recovery
on a per modem basis within an agreed upon range, plus a fee consistent with
cost reimbursement contracts. The contract provides that BBN and AOL will
share equally in cost reductions below a minimum specified cost per modem
while in certain circumstances cost per modem above a specified maximum will
be the responsibility of BBN. As with the original agreement, the replacement
agreement includes substantial pass-through costs to BBN, primarily for
telecommunications circuits. As part of BBN's agreement with AOL, the Company
has access to use certain capacity of the portion of the network operated by
<PAGE>
BBN CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
BBN Planet (continued)
- ----------------------
BBN, and BBN has the right to resell a portion of such capacity. BBN uses this
network capacity, the availability of which is currently limited primarily to
business hours, as the basis for its own bulk dial-up service for business
users.
In FY1995, BBN and AT&T entered into a strategic relationship under which
BBN is 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 in the United
States. AT&T has agreed to purchase a minimum of $120 million of services
during the first three years of the agreement. During the first year of the
agreement ending August 31, 1996, AT&T met its first year minimum commitment of
$20 million, accounting for a substantial portion of BBN PlanetOs new high-
speed connections orders. It is anticipated that the number of new AT&T-
related connections will continue to be a substantial portion of BBN PlanetOs
total new connections. AT&T activity is expected to constitute a higher
proportion of BBN PlanetOs revenue during the current fiscal year.
BBN Planet has experienced significant revenue growth and incurred
substantial operating losses. The Company expects continued revenue growth in
BBN Planet, and it expects to incur substantial operating losses in FY1997
primarily as a result of its continued investment in Internet network
infrastructure, sales and marketing, and the development of new value-added
services.
The Company expects that the success of BBN Planet will depend upon a
number of factors, including the development and expansion of the market for
Internet access services and products, and of the networks which comprise the
Internet; the ability of the Company to continue and expand its current
relationships with AOL and AT&T and develop additional strategic relationships;
the capacity, reliability, cost, and security of its network infrastructure;
its ability to finance expansion and upgrade of its network infrastructure; its
ability to develop price competitive services that meet changing customer
requirements or acquire rights to such products and services from other
providers; its ability to compete with larger competitors, including
telecommunications companies with greater resources and existing customer
relationships and with installed infrastructure and other compatible service
offerings; its ability on a timely basis to attract and retain additional
highly qualified management, technical, marketing, and sales personnel; its
ability to manage its growth; and its ability to improve its overall margins
through improved operating efficiencies and an increase in the value-added
services portion of its revenues.
<PAGE>
BBN CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
BBN Systems and Technologies
- ----------------------------
Three Months Ended September 30,
------------------------------------
1996 1995
----------------- ----------------
(dollars in millions)
$ % $ %
------- ------- ------- -------
Revenue $ 42.0 100% $ 39.7 100%
Costs and expenses:
Cost of revenue 31.4 75% 27.6 70%
Research and development 1.6 4% 1.6 4%
Selling, general and administrative 8.9 21% 8.9 22%
------- ------- ------- -------
Income from operations $ 0.1 - $ 1.6 4%
======= ======= ======= =======
The Company, through its BBN Systems and Technologies business unit, has
historically derived the majority of its revenue from contracts and
subcontracts with the U.S. government. BBN Systems and Technologies currently
derives approximately 80% of its revenues from the U.S. Government and its
agencies, particularly the Department of Defense. In recent years, the
CompanyOs business with the Department of Defense has been adversely affected
by significant changes in defense spending. Overall defense budgets have been
declining, and it is expected that this general decline and attendant increased
competition within the consolidating defense industry will continue over the
next several years. Further, funding limitations could result in reduction,
delay, or cancellation of existing or emerging programs. Although U.S.
government revenue modestly increased in FY1996 compared to FY1995, and for the
quarter ended September 30, 1996 compared to the comparable quarter ended
September 30, 1995, there can be no assurance that such increases will
continue in the future. The Company anticipates that competition in all
defense-related areas will continue to be intense and accordingly, that there
will be continued significant competitive pressure to lower prices, which may
reduce profitability in this area of the Company's business.
For the past several years, BBN has provided network systems and services
to the Department of Defense, including to the Defense Data Network ("DDN").
The Company's multi-year contract to support the DDN expired in April 1996.
The Company has been awarded a one-year extension of the contract to support
the DDN, valued at approximately $10 million, which would continue the
Company's existing activities for DDN through April 1997. However, this
contract is terminable at the convenience of the U.S. government upon sixty
days notice, and the Company expects that the U.S. government will exercise its
right to terminate this contract prior to April 1997, following the
commencement of operations under a follow-on contract for DDN (which has been
awarded to another contractor), thereby discontinuing BBN's activities related
to this contract.
In recent years, the CompanyOs traditional commercial systems and products
businesses, consisting principally of X.25 network systems and products, have
reached maturity in their life cycles. BBN Systems and Technologies has been
experiencing substantially lower revenue, and significantly reduced its
development and selling efforts, for such X.25 network systems and products.
<PAGE>
BBN CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
Consolidated Results of Continuing Operations: Three months ended September 30,
- -------------------------------------------------------------------------------
1996 compared to the three months ended September 30, 1995
- ----------------------------------------------------------
Three Months Ended September 30,
------------------------------------
1996 1995
----------------- ----------------
(dollars in millions)
$ % $ %
------- ------- ------- -------
Revenue $ 74.3 100% $ 50.2 100%
Costs and expenses:
Cost of revenue 61.4 83% 37.1 74%
Research and development 3.2 4% 2.4 5%
Selling, general and administrative 20.6 28% 17.6 35%
------- ------- ------- -------
Income from operations $(10.9) (15%) $ (6.9) (14%)
======= ======= ======= =======
Overview
- --------
For the three months ended September 30, 1996, the Company's continuing
operations reported an operating loss of $10.9 million, compared to an
operating loss of $6.9 million for the three months ended September 30, 1995.
The operating losses reflect continued investment in BBN Planet, including the
upgrade and expansion of the CompanyOs network infrastructure, sales and
marketing activities, and the development of new value-added Internet services.
The Company is accelerating the expansion of its national backbone network and
an upgrade of other parts of the network infrastructure for its Internet
operations in order to meet increasing demand and to improve reliability.
Additionally, the results of operations of BBN Systems and Technologies include
operating losses of its commercial speech recognition activities of
approximately $1.3 million and $1.1 million for the three month periods ended
September 30, 1996 and 1995, respectively. The prior year first quarter results
for BBN Systems and Technologies were also favorably impacted by a one time
licensing agreement approximating $1.5 million.
The loss from continuing operations, which includes interest and other
income and expense, for the three months ended September 30, 1996 was $10.7
million compared to a loss from continuing operations for the three months
ended September 30, 1995 of $4.4 million. The loss from continuing operations
for the three months ended September 30, 1995 includes a tax benefit of $2.0
million which represents the CompanyOs first quarter FY1996 benefit of
utilizing its FY1996 losses to recover taxes paid in FY1995. There is no tax
benefit in the current year since the loss carrybacks were fully utilized in
FY1996. The Company expects that it will incur substantial operating losses in
fiscal 1997 as it continues to invest in BBN Planet's Internet-related
business.
<PAGE>
BBN CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
Revenue
- -------
Revenue for the three months ended September 30, 1996 increased $24.1
million or 48% to $74.3 million, compared to $50.2 million for the three months
ended September 30, 1995. The increase in the first quarter of FY1997 compared
to the prior yearOs first quarter relates primarily to BBN Planet, which
reported first quarter FY1997 revenue of $32.7 million compared to $10.7
million for the first quarter of FY1996, an increase of over 200%.
Approximately one-half of the increased BBN Planet revenue relates to the AOL
network management contract. BBN Planet revenue includes substantial pass-
through costs to BBN for telecommunications circuits and services.
Additionally, BBN Systems and Technologies revenue increased approximately $2.3
million or 6% in the first quarter of FY1997 compared to the first quarter of
FY1996.
Cost of Revenue
- ---------------
Cost of revenue increased to 83% for the three months ended September 30,
1996 compared to 74% in the comparable three month period ended September 30,
1995. The increase in the cost of revenue percentage is principally related to
lower margins on increased Internet services revenue. Internet services
revenue was 44% of consolidated revenue in the first quarter of FY1997 compared
to 21% in the prior yearOs first quarter. Cost of revenue for Internet
services consists of telecommunications circuit and services costs, labor and
expenses of operating the network infrastructure and supporting customers, and
the depreciation of network equipment. The increased cost of revenue
percentage in the Company's Internet related business reflects lower margin
revenue associated with the build-out of the dial-up network for AOL, the
upgrade and expansion of the Company's network infrastructure, and resulting
lower network utilization. Effective July 1, 1996, the Company revised its
estimate of the useful life of certain data communications equipment from three
to five years to better reflect the useful service period of the related
equipment. The change had the effect of reducing depreciation expense and the
loss from continuing operations by approximately $400,000. The cost of revenue
percentage for the first quarter of FY1996 was favorably impacted by a one-time
licensing fee of approximately $1.5 million recognized by BBN Systems and
Technologies.
Research and Development Expenses
- ---------------------------------
Research and development expenses for the three months ended September 30,
1996 were $3.2 million compared to $2.4 million for the three months ended
September 30, 1995. The increase for the FY1997 first quarter period was
primarily associated with the development of Internet-related products and
services at BBN Planet.
Selling, General, and Administrative Expenses
- ---------------------------------------------
Selling, general, and administrative expenses for the three months ended
September 30, 1996 increased $3.0 million from the comparable three month
period ended September 30, 1995. As a percentage of revenue, selling,
general, and administrative expenses decreased to 28% of revenue in the first
quarter of FY1997 from 35% of revenue for the first quarter of FY1996. The
dollar increase in the FY1997 first quarter period reflects the Company's
increasing investment during FY1996 in the sales and marketing infrastructure
<PAGE>
BBN CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
including expansion of indirect sales channels, advertising costs, and other
promotional activities primarily at BBN Planet. As a percentage of revenue, the
percentage decrease is indicative of the significantly higher period to period
revenue growth of 48% compared to the 17% growth in selling, general, and
administrative costs.
Interest Income and Expense
- ---------------------------
Interest income for the three months ended September 30, 1996 was
approximately the same as compared with the three months ended September 30,
1995, as a result of comparable levels of invested cash balances during the
respective three month periods. Interest expense was $1.4 million for the
three months ended September 30, 1996 compared to $1.1 million for the three
months ended September 30, 1995. The increase relates to interest expense
associated with capital leases entered into during the fourth quarter of
FY1996.
Income Taxes
- ------------
There is no income tax benefit for the three months ended September 30,
1996, compared to a $2.0 million income tax benefit for the three-month period
ended September 30, 1995, representing the first quarter benefit reflected in
the FY1996 period of utilizing its FY1996 losses to recover taxes paid in
FY1995. There is no current year benefit since the loss carryback was fully
utilized in FY1996.
Liquidity and Capital Resources
- -------------------------------
At September 30, 1996, the CompanyOs cash, cash equivalents, and short-
term investments (which consisted primarily of investment funds, short-term
U.S. government securities, and commercial paper) were $123.7 million, compared
to $120.3 million at June 30, 1996. The increase is primarily attributable to
the net proceeds from the divestiture of BBN Domain of $36 million partially
offset by $16.3 million used by operations, $9.9 million used for capital
expenditures, both primarily at BBN Planet, and in August 1996, a $5 million
investment for a 12.5% ownership stake in a joint venture with Andersen
Consulting LLP aimed at exploring and developing opportunities in the Internet
market. Changes in cash balances due to fluctuation in foreign exchange rates
were insignificant.
Accrued restructuring costs of $7.1 million relates to the Company's
FY1993 downsizing and represents excess facilities costs under long-term leases
in excess of sublease income. These costs are anticipated to be liquidated in
varying amounts through 2005. The Company has sublet or assigned certain of
its excess facilities under agreements with terms expiring between 1998 and
2005.
In April 1996, the Company entered into a capital lease agreement to
finance certain equipment acquisitions. The principal portion of the lease
payments for the three months ended September 30, 1996 was approximately $1.0
million.
<PAGE>
BBN CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
The Company's capital requirements which include the costs for the upgrade
and expansion of its Internet network infrastructure, for further investments
in working capital, other capital equipment, and selling and marketing
infrastructure, and for pursuing potential investments, acquisitions, and other
expansion opportunities, are expected to be significant. The Company believes
that existing cash balances are adequate to meet its requirements through
FY1997. The Company expects that it will need to raise additional funds
through public or private debt or equity financings in order to execute its
strategy. The Company's ability to raise such funds, if required, will be
dependent on, among other things, its ability to execute its business plan and
the availability of such funds within the capital markets. There can be no
assurance that any such funding will be available, or of the terms or timing of
any such funding. Currently, the Company does not have any bank lines of
credit.
<PAGE>
PART II. OTHER INFORMATION
BBN CORPORATION
Item 4. Submission of Matters to a Vote of Security Holders
At the annual meeting of shareholders of the Company held on November 6,
1996, the shareholders authorized the following proposals by the vote as
noted:
Number of Shares Voted
-----------------------
Proposal For Withheld
-------- ---------- ----------
Election as Director of
George H. Conrades 16,322,486 325,419
Election as Director of
Stephen R. Levy 16,311,127 336,778
Abstain or
For Against Not Voting
---------- ---------- ----------
To amend the Company's 1986 Stock
Incentive Plan relative to increase
in shares 13,957,138 2,456,033 234,734
Ratification of Coopers & Lybrand
L.L.P. as auditors 16,503,878 83,438 60,589
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
11.1 Computation of Net Loss Per Share
27.1 Financial Data Schedule
(b) Reports on Form 8-K for the quarter ended September 30, 1996
filed by the Registrant were as follows:
1. The Registrant filed a Current Report on Form 8-K dated
July 31, 1996 with the Securities and Exchange Commission on
August 14, 1996 reporting on the disposition of assets of BBN
Domain on July 31, 1996.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BBN Corporation
By
-----------------------------------------
Paul F. Brauneis
Vice President and Corporate Controller
Date: November 14, 1996
<PAGE>
BBN CORPORATION
LIST OF EXHIBITS
11.1 Computation of Net Loss Per Share (page 18)
27.1 Financial Data Schedule (page 19)
<PAGE>
BBN CORPORATION
EXHIBIT 11.1
COMPUTATION OF NET INCOME (LOSS) PER SHARE
(000's except per-share data)
Three Months Ended
-------------------------------------------
September 30, 1996 September 30, 1995
-------------------- --------------------
Fully Fully
Primary Diluted Primary Diluted
--------- --------- --------- ---------
Weighted average
shares outstanding 20,642 20,642 17,518 17,518
Incremental shares from use
of treasury stock method
for stock options 548 548 (a) (a)
--------- --------- --------- ---------
Shares used in per-share
calculations 21,190 21,190 17,518 17,518
========= ========= ========= =========
Loss from continuing operations $(10,748) $(10,748) $ (4,430) $ (4,430)
Income(loss) from discontinued
operations 20,000 20,000 (4,221) (4,221)
--------- --------- --------- ---------
Net income (loss) $ 9,252 $ 9,252 $ (8,651) $ (8,651)
========= ========= ========= =========
Income (loss) per share amounts:
Loss from continuing operations $ (.51) $ (.51) $ (.25) $ (.25)
Income (loss) from discontinued
operations .95 .95 (.24) (.24)
--------- --------- --------- ---------
Net income (loss) per share $ .44 $ .44 $ (.49) $ (.49)
========= ========= ========= =========
(a) Incremental shares were not used as their effect would be antidilutive.
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S CONSOLIDATED STATEMENTS OF OPERATIONS AND BALANCE SHEETS AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-END> SEP-30-1996
<CASH> 73,755
<SECURITIES> 49,980
<RECEIVABLES> 64,674<F1>
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 199,063
<PP&E> 54,032<F2>
<DEPRECIATION> 0
<TOTAL-ASSETS> 260,353
<CURRENT-LIABILITIES> 81,565
<BONDS> 73,170
0
0
<COMMON> 24,980
<OTHER-SE> 64,255
<TOTAL-LIABILITY-AND-EQUITY> 260,353
<SALES> 74,296
<TOTAL-REVENUES> 74,296
<CGS> 61,427
<TOTAL-COSTS> 61,427
<OTHER-EXPENSES> 23,782
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,389
<INCOME-PRETAX> (10,748)
<INCOME-TAX> 0
<INCOME-CONTINUING> (10,748)
<DISCONTINUED> 20,000
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,252
<EPS-PRIMARY> .44
<EPS-DILUTED> .44
<FN>
<F1>The receivables amount is shown net of contract allowances and allowances
for doubtful accounts.
<F2>The PP&E amount is shown net of accumulated depreciation and amortization.
</FN>
</TABLE>