RISKS.WP6
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
Date of Report: November 14, 1996
BBN Corporation
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(Exact name of registrant as specified in its charter)
Massachusetts
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(State or other jurisdiction of incorporation)
1-6435 04-2164398
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(Commission File Number) (I.R.S. Employer Identification Number)
150 CambridgePark Drive, Cambridge, Massachusetts 02140
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(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code: (617) 873-2000
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(Former name or former address, if changed since last report.)
Item 5. Other Events.
In connection with the "Safe Harbor" Provisions of the Private Securities
Litigation Reform Act of 1995, BBN Corporation ("BBN" or the "Company", each of
which terms includes, unless the context indicates otherwise, BBN and its
consolidated subsidiaries) is hereby filing cautionary statements identifying
important factors that could cause the Company's actual results to differ
materially from those projected in forward-looking statements made by, or on
behalf of, the Company.
Exhibit index appears on Page 3
Page 1 of 11 pages
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Item 7. Financial Statements and Exhibits.
The following is filed as an Exhibit to this Report.
Exhibit:
99.1 Cautionary Statement for Purposes of the "Safe Harbor" Provisions of
the Private Securities Litigation Reform Act of 1995.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BBN Corporation
Dated: November 14, 1996 By: /s/ Paul F. Brauneis
Paul F. Brauneis
Vice President
and Corporate Controller
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Exhibit Index
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Number Exhibit Page
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99.1 Cautionary Statement for Purposes of the 4
"Safe Harbor" Provisions of the Private Securities
Litigation Reform Act of 1995.
<PAGE>
[italics][bold]Exhibit 99.1 [end italics]
CAUTIONARY FACTORS RELEVANT TO FORWARD-LOOKING INFORMATION
[italics]The Company wishes to caution readers that the following
important factors, among others, in some cases have affected the Company's
results and in the future could cause actual results and needs of the Company
to vary materially from forward-looking statements made from time to time by
the Company on the basis of management's then-current expectations. The
businesses in which the Company is engaged are in rapidly changing and
competitive markets and involve a high degree of risk, and accuracy with
respect to forward-looking projections is difficult.[end italics]
[italics][bold]Rapid Technological Change and Evolving Industry Standards;
Dependence upon Developments; Network Infrastructure. [end italics][end
bold]The markets (both governmental and commercial) in which the Company
competes are characterized by rapidly changing technology, evolving industry
standards, intense competition, and frequent new service and product
introductions, which require, among other things, the Company to make
significant and on-going investment. The Company's success will depend upon
its ability on a timely basis to develop and provide new or enhanced offerings,
at competitive prices, that meet changing customer requirements or to acquire
rights to such services and related products from other providers. There can
be no assurance that the Company can successfully identify new opportunities
and develop or obtain and bring competitive new offerings to market in a timely
manner and at a competitive price. In addition, fundamental changes in the way
services and products are marketed and delivered, including bundled services
and products, could have a material adverse effect on the Company's business.
The Company's plans include significant investment in technological and
infrastructure development for Internet-related business opportunities. The
Company's pursuit of necessary technological advances may require substantial
effort, time, and expenditures. Development and introduction of technological
advances is typically expensive and the investment often involves a long pay-
back cycle. The Company has made significant investments in product and
service developments in the past, some of which have not been commercially
successful. Failure of the Company, for technological or other reasons, to
develop or obtain and introduce, in a timely manner, and market new or enhanced
offerings that are compatible with industry standards and that satisfy customer
requirements at competitive prices, would have a material adverse effect on the
Company's business, financial condition, and results of operations.
In addition, the Company or its competitors may introduce enhancements to
existing services or products, or embodying new technologies, industry
standards, or customer requirements, that have the potential to replace or
provide lower cost alternatives to the Company's existing offerings. The
introduction of such enhancements or new services or products could render any
of the Company's existing services and products obsolete and unmarketable. Any
such event could have a material adverse effect on the Company's business,
financial condition, or results of operations.
The Company must continue to upgrade, expand, and adapt its network
infrastructure on a timely basis to meet additional demand, evolving industry
standards, and changing customer requirements. The upgrade, expansion, and
adaptation of the Company's network infrastructure will continue to require
substantial financial, operational, and management resources. There can be no
assurance that the Company will be able to upgrade, expand, and adapt its
network infrastructure to meet additional demand, evolving standards, or
customers' changing requirements on a timely basis, at a commercially
<PAGE>
reasonable cost, or at all. Any failure to do so could have a material adverse
effect on the Company's business, financial condition, or results of
operations. In addition, the Company's network infrastructure is subject to
malfunction, service interruptions, slowdowns, power loss, telecommunications
failures, break-ins, computer viruses, fire, floods, other natural disasters,
and other disruptive problems which could materially adversely affect the
Company's network operations. The occurrence of such a disruptive problem at
BBN's network operations centers, hubs (sites at which routers, switches, and
other computer equipment which make up the backbone of the network
infrastructure are located), or points-of-presence (sites at which BBN allows
local access to its network) could cause interruption of network access to its
customers. The Company has recently provided its customers with a guaranteed
credit of one full day's service for any network backbone outage of 15 minutes
or more in a 24-hour period. As a result, interruption in service could result
in liability of BBN to its customers, as well as loss of existing customer
business and deterrence of potential customers. Any event that causes
significant interruption in operations of the Company's network could have a
material adverse effect on the Company's business, financial condition, or
results of operations.
[italics][bold]Transition of Business Focus.[end italics][end bold] The
Company has made a strategic decision to transition its businesses to focus
principally on Internet-related business opportunities. This transition entails
significant redeployment of assets and energies and entails significant
investment in new technologies, as well as marketing-related and personnel-
related changes. There can be no assurance that this transition will be
successful or that the transition process will not have a material adverse
effect on the Company's business, financial condition, or results of
operations, particularly due to the Company's expenses (including selling,
general, and administrative expenses) and investments attendant to this
transition.
The success of the Company's initiative will depend particularly upon the
development and expansion of the market for Internet services and products.
This market has only recently begun to be developed, there is considerable
uncertainly as to how the market will develop, and critical issues which may
affect its commercial viability remain unresolved. For example, the Company
believes that the market for commercial Internet services will continue to
develop only if security, reliability, capacity, ease and cost of access,
availability of electronic commerce services, and quality of offerings are
achieved. The market will also be affected by application to it of existing or
new laws or regulations. The Company cannot predict the eventual size of the
market or the rate at which such market will develop. If the markets or the
underlying technologies fail to grow, grow at a rate slower than anticipated,
or become saturated with competitors, the Company's business, financial
condition, or results of operations could be materially adversely affected. In
addition, even if the Company is successful in developing important technology
and related services, the Company nevertheless may have difficulty generating
sufficient revenue growth or market share and as a result may be forced either
to curtail, sell, or abandon its efforts.
In particular the Company believes the success of its Internet-related
efforts 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 relationship with America Online, Incorporated ("AOL")
and AT&T Corp. ("AT&T") and to develop additional strategic relationships; the
capacity, reliability, cost, and security of the Company's network
infrastructure; its ability to finance the expansion and upgrade of its
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network infrastructure; its ability to develop price competitive products and
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 overall
margins through improved operating efficiencies and an increase in the value-
added services portion of its revenue.
[italics][bold]Dependence upon and Slowdown in Government Defense
Spending; Dependence upon Mature Products.[end italics][end bold] The Company
has historically derived the majority of its revenue from contracts and
subcontracts with the U.S. government, and currently approximately one-half of
the Company's revenue is derived from 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 significant changes in
defense spending. Overall defense budgets have been declining, and the Company
expects this general decline and attendant increased competition within the
consolidating defense industry to continue over the next several years.
Further, funding limitations could result in 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 periods. 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. Any reduction in the level or profitability of
the Company's business with the federal government, if not offset by new
commercial business, could have a material adverse effect on the Company's
business, financial condition, or results of operations.
The Company's traditional commercial systems and products, consisting
principally of X.25 network systems and products, have reached maturity in
their life cycles. The Company has discontinued sales of most of its
traditional X.25 systems and products and has substantially eliminated its
development effort, and significantly reduced its selling effort, for such X.25
systems and products. The Company believes that sales of these mature products
will continue to decline.
[italics][bold]Continuing Operating Losses; Cash Flow.[end italics][end
bold] The Company has incurred operating losses in recent fiscal periods and
operating activities continue to consume cash. The Company continues to invest
in its commercial businesses, primarily in Internet-related activities, and its
expense levels are based, in part, on its expectations of future revenue. If
revenue levels are below expectations, operating results may be adversely
affected. The Company incurred a significant operating loss for its fiscal
year ending June 30, 1996 as a result of its substantial investment in
internetworking activities and related significant operating losses. There can
be no assurance that the Company will be able to increase commercial sales and
reestablish profitability of the Company on an operating basis or that
profitability, if reestablished, can be sustained. Excluding cash generated
from financing activities, in the fiscal year ended June 30, 1996, the
Company's continuing operations used cash of $17.8 million for operating
activities and $26.4 million for the purchase of capital equipment. Further
cash usage will be required to fund operating losses as well as the high level
of capital expenditures in support of the investment being made in the
Company's Internet-related business. There can be no assurance that the
Company will be able to generate or otherwise obtain sufficient cash to meet
<PAGE>
its needs. Such inability could have a material adverse effect on the
Company's business, financial condition, or results of operations.
[italics][bold]Reliance on Strategic Relationships.[end italics][end bold]
Many of the Company's services are marketed in conjunction with the services or
products of other vendors, and the Company plans to continue its strategy of
maintaining and developing such key strategic relationships. Examples of
important strategic partners of the Company include AOL and AT&T. The Company
also has strategic relationships with other companies. It is not atypical that
strategic relationships involving important areas of business are often covered
by contractual arrangements which are, of necessity, general on many topics and
sometimes lead to failures of communication and of expectations, and to
disagreements. The Company assumes that there will be disagreements with its
strategic partners, and there can be no assurance that such a disagreement, or
an accumulation of such disagreements, may not cause a breakdown in a strategic
relationship in the future. In addition, there can be no assurance that the
Company will continue to be successful in its ongoing strategic relationships,
or that the Company will be able to develop additional strategic relationships.
Any failure to continue or expand such relationships could have a material
adverse effect on the Company's business, financial condition, or results of
operations.
There can be no assurance that the Company's distributors and other
strategic partners, many of which have significantly greater financial and
marketing resources than the Company, will not develop and market products in
competition with the Company in the future, discontinue their relationships
with the Company, or form competing arrangements with the Company's
competitors. In particular, there is no assurance that AT&T will continue to
purchase Internet services from the Company after the expiration of the current
agreement. The agreement with AT&T also provides that at any time after the
exclusivity provisions are discontinued, and subject to the guaranteed
minimums, BBN agrees to provide reasonable cooperation in support of the
migration of the provisioning of Internet access services to any AT&T customer,
such that the services are provided by AT&T or another party other than BBN.
Since entering into the agreement with AT&T, a significant number of Internet
access customers added by the Company have been AT&T customers, and the
percentage of such AT&T customers in the customer base purchasing the Company's
Internet access services, and the percentage of BBN Planet's revenues from AT&T
customers, is growing. Moreover, under 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 the Company,
acquires ownership of 15% or more of the outstanding stock of the Company. In
addition to certain other termination provisions upon breach of the agreement
by BBN, AT&T may cancel the agreement in the event the Company merges with, or
becomes controlled by, another telecommunications carrier or an on-line service
provider, and AT&T has the right to terminate the exclusivity obligation and to
withhold other financial benefits in certain other situations.
[italics][bold]Competition.[end italics][end bold] The markets for the
Company's Internet services are highly competitive. In general there are no
substantial barriers to entry to the Internet services market 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 other 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
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the Company's services and significant pricing pressure, which may impact the
Company's operating results. Many of the Company's competitors are more
established, benefit from greater market recognition and existing customer
relationships, and have engineering, marketing, financial, technological, and
personnel resources greater than the Company. In addition, competitors which
are telecommunications companies may be able to reduce customers' overall
communications costs by combining Internet access and related services with
other telecommunications services or taking advantage of installed
infrastructure, thereby reducing the overall cost of their Internet services
and increasing pricing pressures on BBN. Competition could also increase if
new companies enter the market or if existing competitors expand their service
and product lines, or combine with other providers of Internet services or
complementary services. Recent trends in the telecommunications industry are
toward market consolidation on a global basis to create mega-companies which
can provide a bundle of local, long-distance, wireless, and Internet services
to the most use-intensive customers from a single source. Relatively small,
single function players may be relegated to niche positions by these larger
competitors. An increase in competition could have a material adverse effect
on the Company's business, financial condition, and results of operations
because of price competition and loss of customers and market share. There can
be no assurance that the Company will be able to offset the effects of any such
price competition 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 the Company will have the financial resources, technical
expertise, or marketing and support capabilities to continue to compete
successfully.
The Company's market for defense-related services is also highly
competitive. The defense markets are dominated by large defense contractors
with substantially greater financial and marketing resources and larger
technical staffs than the Company. Recent trends in this area are toward
further market consolidation of large defense contractors into a smaller number
of very large entities, further concentrating financial, marketing, and
technical strength and increasing competitive and pricing pressure in the
industry. Such competitive pressure may adversely impact the Company's results
of operations.
[italics][bold]Dependence upon Key Personnel; Need to Hire and Train
Additional Qualified Personnel.[end italics][end bold] The Company believes
that its future success depends in part upon its ability to attract and retain
skilled senior management and technical, professional, marketing, and sales
personnel. Recently, there have been a number of management changes at the
Company, including a new president and chief executive officer. In this
connection, a number of senior executives have left the Company recently,
including several with many years of experience with the Company.
The Company is currently actively recruiting for a number of technical,
marketing, product management, and sales positions throughout the Company. The
Company, along with other high-technology companies, faces competition in
hiring and retaining such skilled technical, professional, marketing, and sales
personnel. In certain areas, including emerging technologies, the Internet,
and marketing, the supply of such people is limited. The process of locating,
hiring, and training personnel with the combination of skills and attributes
required to carry out the Company's business strategy is often lengthy. The
Company's employees may voluntarily terminate their employment with the Company
at any time.
<PAGE>
The loss of service of key personnel, or the inability to attract
additional qualified personnel, could have a material adverse effect on the
Company's business, financial condition, or results of operations.
[italics][bold]Dependence on Suppliers.[end italics][end bold] In
connection with providing Internet access services to its customers and
performing under its network management contract with AOL, the Company relies
on certain national and regional telecommunications providers for data
communications services, including telecommunications circuits. These services
constitute a significant portion of the Company's costs to deliver connectivity
services and to perform under its agreement with AOL. The Company's agreement
with such telecommunications providers generally are for multi-year terms, are
cancelable or renegotiable upon the occurrence of specified events, and in
certain circumstances provide for minimum purchase commitments. In the event
that any of the Company's current telecommunications providers is unable or
unwilling to provide or expand its current level of service to the Company in
the future, or in the event of potential disruption in service, the Company's
operations could be materially adversely affected. In addition, there can be
no assurance that the Company could obtain substitute services from other
providers at reasonable or comparable prices or in a timely fashion. The
Company's significant providers of telecommunications services include
WorldCom, Inc. (formerly Wiltel) and MFS Communications Company, Inc., which
have recently announced plans to merge. This merger will increase the
Company's reliance on the combined WorldCom/MFS as a supplier of
telecommunications circuits. In addition, MFS recently consummated an
acquisition of UUNET Technologies, Inc., a provider of Internet access and
other services and a competitor of BBN Planet.
In addition, upgrading of current telecommunications circuits utilized for
data transmission to accommodate the increases in traffic anticipated as a
result of the increasing use of the Internet, including proposed future
regulations which would require Internet service providers to pay an access fee
for the right to utilize telecommunication circuits, could increase the costs
of such data communications services, and there can be no assurance that such
costs could be passed on, in whole or in part, by Internet services providers
to Internet access customers. Also, such increased costs could give an
advantage to those competitors of the Company which are telecommunications
companies and which can offer Internet access services as part of their overall
telecommunications offering.
[italics][bold]Uncertainty of Future Financing.[end italics][end bold]
The Company may need to raise additional funds through public or private debt
or equity financings in order to implement its business strategy, including for
its Internet-related capital requirements. Capital needs may include funding
cash flow losses from operations; expanding, upgrading, and adapting its
Internet network infrastructure; investing in working capital, other capital
equipment, and selling and marketing infrastructure; and pursuing potential
investments, acquisitions, and other expansion opportunities. There can be no
assurance that any such funding will be available to the Company, or of the
terms or timing of any such funding. If adequate funds are not available or are
not available on acceptable terms, the Company may not be able to take
advantage of opportunities, develop new services and products, or otherwise
respond to competitive pressures. Such inability could have a material adverse
effect on the Company's business, financial condition, or results of
operations.
[italics][bold]Government Procurement Regulations.[end italics][end bold]
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
<PAGE>
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 and billings audited 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 on 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 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.
There can be no assurance that any such adjustments will not be material until
the results of such audits are finalized; any such adjustments, if material and
sustained on appeal, would materially adversely affect the Company's business,
financial condition, and results of operations.
[italics][bold]Dependence upon the Internet; Government Regulation and
Legal Uncertainties Regarding the Internet.[end italics][end bold] An
increasing percentage of the Company's revenue is being derived from Internet-
related services and products, and the Company expects that its success will
depend in large part upon the development of a market and infrastructure for
providing Internet access and carrying Internet traffic. There are currently
few domestic or foreign laws or regulations directly applicable to access to or
commerce on the Internet. However, due to the increasing popularity and use of
the Internet, it is possible that a number of laws and regulations, domestic
and foreign, may be adopted with respect to the Internet, covering issues such
as telecommunications in general, message content, user privacy, property
ownership, libel, pricing, characteristics and quality of services and
products, and export controls. The adoption of any such law or regulation may
decrease the growth of the Internet, which could in turn decrease the demand
for the Company's Internet-related services and products and increase the
Company's cost of doing business or otherwise have an adverse effect on the
Company's business, financial condition, or results of operations. Moreover,
<PAGE>
the Company's status or regulation under telecommunications laws, and the
applicability to the Internet of existing laws governing issues such as
property ownership, libel, and personal privacy are uncertain. Further,
certain of the Company's services and products containing encryption technology
are subject to U.S. export controls. There can be no assurance that such
export controls, either in their current form or as may be subsequently
enacted, will not limit the Company's ability to distribute products outside of
the United States or electronically. While the Company takes precautions
against unlawful exportation, the global nature of the Internet makes control
of distribution on the Internet virtually impossible. In addition, federal or
state legislation or regulation may further limit levels of encryption or
authentication technology. Any such export restrictions, or new legislation or
regulations on or application of existing laws to the Internet, could have a
material adverse impact on the Company's business, financial condition, or
results of operations.
The law in the United States relating to the liability of on-line service
providers, including Internet access providers, for information carried on,
disseminated through, or hosted on their systems is currently unsettled.
Several private lawsuits seeking to impose liability in one or more of these
situations are currently pending. The imposition on Internet access providers
or Web hosting site providers of potential liability for materials carried on
or disseminated through their systems could require the Company to implement
measures to reduce exposure to such liability, which may require the
expenditure of substantial resources or the discontinuation of certain products
or services offerings. International laws relating to the liability of on-line
service providers, including Internet access providers, for information
carried, disseminated through, or hosted on their systems likewise are being
developed.
Changes in the regulatory environment relating to the Internet access
industry or the telecommunications industry in general, including regulatory
changes which directly or indirectly affect telecommunication costs, the
Company's status or regulation under telecommunications laws, or the scope of
competition from regional telephone companies or others, could have an adverse
effect on the Company's business. The Company cannot predict the impact, if
any, that such regulatory changes may have on its business.
[italics][bold]Volatility of Stock Price.[end italics][end bold] The
market price of the Company's Common Stock has been volatile. Factors such as
announcements of fluctuations of the operating results of the Company or other
technology companies, sales of Common Stock by any of the Company's employees,
technological innovations or new services or pricing announcements by the
Company or its competitors, changes in financial estimates by securities
analysts, or other events or factors, could have a significant impact on the
future market price of the Common Stock. In addition, the stock market has
experienced significant price and volume fluctuations that have particularly
affected the market prices of equity securities of many technology companies,
particularly in Internet-related fields, and that often have been unrelated to
the operating performance of such companies. These broad market fluctuations
may also adversely affect the market price of the Company's Common Stock.
