<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, 1999
OR
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from to
COMMISSION FILE NUMBER 0-07428
ADAPTIVE BROADBAND CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 94-1668412
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification Number)
1143 BORREGAS AVENUE
SUNNYVALE, CALIFORNIA 94089
(Address of principal executive offices)
(Zip Code)
(408) 732-4000
(Registrant's telephone number, including area code)
(Former name, 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.
<TABLE>
<CAPTION>
CLASSES OUTSTANDING AT NOVEMBER 1, 1999
------- -------------------------------
<S> <C>
Common Stock $.10 Par Value(and related share purchase rights) 16,065,000
</TABLE>
-1-
<PAGE>
ADAPTIVE BROADBAND CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
--------------------
1999 1998
-------- --------
<S> <C> <C>
REVENUE $ 42,935 $ 34,731
Costs of revenue 27,331 23,086
-------- --------
Gross margin 15,604 11,645
EXPENSES:
Research and development 6,659 5,424
Sales, marketing and administration 14,081 10,725
Amortization of intangible assets 552 395
Purchased in-process research and development - 8,210
-------- --------
Total expenses 21,292 24,764
-------- --------
OPERATING LOSS (5,688) (13,119)
Interest expense, net (348) (872)
-------- --------
LOSS FROM CONTINUING OPERATIONS BEFORE INCOME
TAXES (6,036) (13,991)
Benefit from income taxes (2,173) (3,065)
-------- --------
LOSS FROM CONTINUING OPERATIONS (3,863) (10,926)
Discontinued operations:
Income from discontinued operations, net of income
taxes - 1,075
-------- --------
- 1,075
-------- --------
NET LOSS $ (3,863) $ (9,851)
======== ========
BASIC AND DILUTED EARNINGS (LOSS) PER SHARE:
Loss from continuing operations $ (0.26) $ (0.72)
Income from discontinued operations - 0.07
-------- --------
Net Loss $ (0.26) $ (0.65)
======== ========
WEIGHTED AVERAGE SHARES USED IN COMPUTING BASIC
AND DILUTIVE EARNINGS (LOSS) PER SHARE 14,719 15,115
</TABLE>
<PAGE>
ADAPTIVE BROADBAND CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999 JUNE 30, 1999
------------------ --------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 31,673 $ 48,887
Accounts receivable, net 39,580 33,980
Inventories 23,441 22,339
Deferred income taxes 20,271 14,293
Prepaid expenses and other current assets 4,069 4,150
--------------- --------------
Total current assets 119,034 123,649
--------------- --------------
Property, plant and equipment, net 21,624 20,746
Deferred income taxes - 3,805
Intangible assets, net 31,503 32,055
Other assets 5,499 6,221
--------------- --------------
$ 177,660 $ 186,476
=============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 11,365 $ 13,089
Accrued liabilites 24,900 26,546
Current portion of long-term debt 43 1,972
--------------- --------------
Total current liabilities 36,308 41,607
--------------- --------------
Long-term liabilities:
Long-term debt 326 786
Convertible subordinated notes 57,500 57,500
Other long-term liabilities 850 1,590
Shareholders' equity:
Common stock 1,663 1,663
Capital in excess of par value 95,673 95,673
Treasury stock (32,727) (36,066)
Retained earnings 18,067 23,723
--------------- --------------
Total shareholders' equity 82,676 84,993
--------------- --------------
$ 177,660 $ 186,476
=============== ===============
</TABLE>
<PAGE>
ADAPTIVE BROADBAND CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
-----------------------------
1999 1998
---------- ---------
<S> <C> <C>
Operating activities:
Loss from continuing operations $ (3,863) $(10,926)
Adjustments to reconcile to net cash
used in operating activities:
Purchased in-process research and development - 8,210
Depreciation and amortization 1,790 1,663
Amortization of intangible assets 552 395
Deferred income taxes (2,173) (3,065)
Other 37 156
Net effect of change in:
Accounts receivable (5,600) 792
Inventories (1,102) (888)
Prepaid expenses and other current assets (39) 155
Accounts payable (1,724) (25)
Other assets and accrued liabilities (2,346) (2,623)
-------- --------
Net cash used in continuing operations (14,468) (6,156)
-------- --------
Investing activities:
Captial expenditures (2,765) (1,460)
Acquisition of business - (10,354)
Other - (1,072)
-------- --------
Net cash used in continuing operations in investing activites (2,765) (12,886)
Net cash used in discountinued operations activities - (2,488)
-------- --------
Net cash used in investing activiites (2,765) (15,374)
-------- --------
Financing activities:
Payments on long-term debt (2,389) (37)
Proceeds from issuance of common stock 5,729 1,070
Proceeds from bank credit facilities - 4,383
Purchase of treasury stock (3,321) (6,691)
-------- --------
Net cash provided by (used in)financing activities 19 (1,275)
-------- --------
Net decrease in cash and cash equivalents (17,214) (22,805)
Cash and cash equivalents at begininng of year 48,887 24,630
-------- --------
Cash and cash equivalements at end of period $ 31,673 $ 1,825
======== ========
Supplemental cash flow information: Cash paid during the period
for:
Interest $ 418 $ 293
Income taxes 864 -
</TABLE>
<PAGE>
ADAPTIVE BROADBAND CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1. BASIS OF PRESENTATION
The unaudited condensed consolidated financial statements include the accounts
of Adaptive Broadband Corporation and its subsidiaries (the Company). All
significant intercompany balances and transactions have been eliminated. Certain
prior year amounts have been reclassified to conform to the current year
presentation. These unaudited condensed consolidated financial statements
include all adjustments (consisting only of normal recurring adjustments) which,
in the opinion of management, are necessary to fairly state the financial
position, results of operation and cash flows for the periods presented. Interim
results are not necessarily indicative of results for a full year. The condensed
consolidated interim financial statements should be read in conjunction with the
audited consolidated financial statements for the year ended June 30, 1999,
included in the Adaptive Broadband 1999 Annual Report to Shareholders.
NOTE 2. COMPREHENSIVE INCOME
The Company has adopted Statement of Financial Accounting Standards No. 130
(SFAS 130), "Reporting Comprehensive Income." SFAS 130 establishes standards for
the reporting and display of comprehensive income and its components and
requires restatement of all previously reported information for comparative
purposes. For the three months ended September 30, 1999 and September 30, 1998,
the Company's comprehensive loss was the same as its net loss.
NOTE 3. SEGMENT INFORMATION
During the third quarter of fiscal year 1999, the Company completed the
reorganization of its continuing operations from a holding company operating
in two business segments to an integrated organization operating in one
business segment. The Company provides wireless data networking products and
supplies terrestrial wireless and satellite-based systems to support high
speed Internet access, broadcast digital TV transport and worldwide Internet
backbones. The Company also provides equipment for satellite-based data
communications and terrestrial wireless telemetry networks. The Company's
operations are treated as one operating segment as it reports operating
results on an aggregate basis to the chief operating decision maker. Prior to
the reorganization, the Company reported its continuing operation through the
Satellite Communications Division and the Terrestrial Wireless Division. See
"Results of Operations" in Management's Discussion and Analysis of Financial
Condition and Results of Operations.
NOTE 4. RESTRUCTURING AND OTHER CHARGES
During the third quarter of fiscal year 1999, the Company completed the
reorganization of its continuing operations from a holding company to one
integrated organization and recorded pre-tax charges of $3.3 million. The
charges included $2.5 million for severance and $0.8 million for write-offs of
property and equipment. The severance was associated with work force reductions
of approximately 130 employees in manufacturing operations and product
management. The work force reductions and write-offs of property and equipment
were primarily driven by the reduction of manufacturing capacity at the
Company's satellite communications operation in Tempe, Arizona. The Company has
utilized $1.5 million of the $2.5 million of severance reserve through cash
payment for termination benefits. The Company expects to utilize the remainder
of the severance accrual through additional cash payments for termination
benefits by June 30, 2000.
During the fourth quarter of fiscal year 1998, the Company reviewed and
refocused its operations and business processes in connection with its strategic
and operational initiatives and recorded $4.1 million for restructuring and
other charges, primarily for severance and excess facilities. The severance
charge was $2.4 million associated with workforce reductions of approximately
160 employees. The workforce reductions were primarily driven by the elimination
of manufacturing capacity in the Company's satellite communication operations
and factory consolidation in the Company's terrestrial wireless operations, as
well as the elimination of the Company's historical holding company structure,
impacting employees in all functional areas of the Company. The Company has
utilized all of the $2.4 million reserve through cash payments for termination
benefits.
NOTE 5. DISCONTINUED OPERATIONS
In April 1999, the Company completed the sale of its Government Division to
Northrop Grumman Corporation (Northrop Grumman) for $93 million in cash, for a
net gain of approximately $36 million (net of income taxes). The Government
Division sale price includes up to an additional $5 million cash payment,
contingent upon the future performance of the divested business. The Company has
not recognized any benefit for this contingent future payment.
-4-
<PAGE>
The operating results, gain on disposal, and financial position of the
Government Division have been classified as discontinued operations in the
Company's financial statements through the divestiture date. Revenue from the
Government Division discontinued operations was $19.8 million for the first
three months of fiscal year 1999. Net income from the Government Division
discontinued operations was $1.1 million for the first three months of fiscal
year 1999.
In April 1998, Microwave Networks (MN) was sold to Tadiran Ltd. (Tadiran) for
$31.5 million in cash. Final accounting for the Government Division and MN
divestitures are subject to completion of the post-closing procedures
provided for in the Northrop and Tadiran agreements. The Company has accrued
for future price adjustments that may occur in the post-closing procedures
for both divestitures. At September 30, 1999, the discontinued operations
reserves for the Government Division and MN divestitures are $6.7 million and
$2.5 million, respectively. The Company believes that the completion of these
procedures will not have a material impact on the Company's financial
position, results of operations, or cash flows.
In July 1999, Northrop Grumman filed a lawsuit against the Company alleging that
the Company failed to disclose certain events and information as required by the
terms of the agreement pursuant to which Northrop Grumman acquired the
Government Division of the Company in April 1999. No damages have been
specified. In September 1999, the Company filed a cross-complaint against
Northrop Grumman seeking to recover in excess of $3.7 million, which represents
the amount that the Company contends Northrop Grumman appropriated from the
Company's bank accounts following the acquisition. The Company believes that it
has strong defenses and counterclaims and plans to vigorously defend the lawsuit
filed by Northrop Grumman and pursue its counterclaims. No provisions have been
made for expenses that may be incurred to resolve the lawsuit, and the Company
believes final resolution of the Northrop Grumman allegations will not have a
material impact on the Company's financial position, results of operations, or
cash flows.
In May 1995, the Company's MN division entered into certain agreements with
Nokia Telecommunications Oy (Nokia) pursuant to which MN was to provide to Nokia
certain microwave radios and related software and services, and was to carry out
certain development programs. In September 1997, Nokia informed MN of a
purported failure of certain of the products sold to Nokia to meet certain
contractual specifications. MN was sold to Tadiran in April 1998 and under the
terms of the sale agreement, Tadiran assumed and indemnified the Company with
respect to the Nokia claims. Tadiran has now taken the position that the Company
is responsible for the Nokia claims, based upon allegations that the Company
failed to provide adequate disclosures and financial reserves with respect to
such claims. In September 1998, the Company received notice from Nokia that
Nokia has decided to terminate the May 1995 agreements. Also in September 1998,
Nokia began arbitration proceedings to recover damages, which are claimed to be
$40.6 million, which include loss of profits and goodwill, and damage to trade
and manufacturing secrets. The Company believes that it has strong defenses and
will vigorously defend the Nokia claims. In May 1999, the Company began
arbitration proceedings against Tadiran, primarily to determine that Tadiran is
responsible for the Nokia claims. The Company believes that it has strong claims
against Tadiran. No accruals have been recorded for expenses that may be
incurred to resolve the dispute, and the Company believes final resolution of
this matter will not have a material impact on the Company's financial position,
results of operations or cash flows.
NOTE 6. INVENTORIES
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) SEPTEMBER 30, 1999 JUNE 30, 1999
---------------------- ------------------ -------------
<S> <C> <C>
Raw materials $ 14,246 $ 14,640
Work-in-process and finished goods 9,195 7,699
---------- ---------
Total Inventory $ 23,441 $ 22,339
========= ========
</TABLE>
-5-
<PAGE>
NOTE 7. INTANGIBLE ASSETS OF BUSINESSES ACQUIRED
For acquisitions accounted for under the purchase method, the excess purchase
price over the fair value of net tangible assets acquired is allocated to
intangible assets based on fair value. The carrying value of the intangible
assets are reviewed if the facts and circumstances suggest that the asset may be
impaired. If this review indicates that the intangible assets are not
recoverable, the carrying value is reduced appropriately. The following table
summarizes net intangible assets of businesses acquired:
<TABLE>
<CAPTION>
AMORTIZATION
(DOLLARS IN THOUSANDS) PERIOD SEPTEMBER 30, 1999 JUNE 30, 1999
---------------------- ------ ------------------ -------------
<S> <C> <C> <C>
Goodwill 10- 30 years $ 40,222 $ 40,222
Developed technology 8 years 2,074 2,074
Assembled workforce 3 - 4 years 865 865
--------- --------
43,161 43,161
Accumulated amortization (11,658) (11,106)
-------- --------
$ 31,503 $ 32,055
======== ========
</TABLE>
NOTE 8. BORROWING ARRANGEMENTS
During the quarter ended September 30, 1999, the Company paid off the $1.6
million outstanding balance of its industrial development bonds. The industrial
development bonds were payable in annual installments through June 2013, and
accrued interest at a floating rate, based upon prevailing market conditions.
The Company originally issued $57.5 million of 5.25%, convertible
subordinated notes on December 15, 1993. The notes are due December 15, 2003.
These notes are convertible at any time prior to maturity, at the option of
the holder, into shares of the Company's common stock at a price of $28.4375
per share. These notes are redeemable at any time, at the option of the
Company. Interest is payable semi-annually. The notes are subordinated to all
existing and future senior indebtedness of the Company, and are quoted on the
Nasdaq National Market. In October 1999, at the request of certain note
holders, the Company converted approximately $33 million of its subordinated
notes into approximately 1.2 million shares of common stock. Upon the
conversion, the Company paid a $1.1 million premium which is equivalent to
accrued interest on the converted notes plus 1.6%.
NOTE 9. SHAREHOLDERS' EQUITY
On February 5, 1998, the Company announced that its Board of Directors
authorized the repurchase of up to three million shares of its common stock on
the open market. On October 6, 1998, the Company announced that its Board of
Directors had increased the number of shares authorized for repurchase to six
million. During the three months ended September 30, 1999, the Company acquired
126,250 shares of common stock for $3.3 million, bringing the total shares
repurchased subsequent to February 5, 1998 to approximately 2.8 million.
The following table summarizes the changes in shareholders' equity for the
three months ended September 30, 1999:
<TABLE>
<CAPTION>
CAPITAL IN TOTAL SHARE-
SHARES EXCESS OF TREASURY RETAINED HOLDERS'
(DOLLARS IN THOUSANDS) ISSUED AMOUNT PAR VALUE STOCK EARNINGS EQUITY
- ------------------------------------ ------------- ----------- ------------ ------------ ------------ ---------------
<S> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1999 16,629,031 $ 1,663 $ 95,673 $ (36,066) $ 23,723 $ 84,993
Treasury stock repurchased (3,321) (3,321)
Common stock issued from 6,660 (1,793) 4,867
treasury shares for stock option
and stock purchase plans
Net loss (3,863) (3,863)
------------- ----------- ------------ ------------ ------------ ---------------
Balance at September 30, 1999 16,629,031 $1,663 $95,673 $ (32,727) $18,067 $ 82,676
============= =========== ============ ============ ============ ===============
</TABLE>
NOTE 10. SHAREHOLDER RIGHTS
In July 1999, upon the expiration of the Company's current stockholder rights
plan, the Board of Directors approved the adoption of a new three-year
Stockholder Rights Plan under which all stockholders of record as of July 26,
1999, will receive rights to purchase shares of Common Stock. The rights will
be distributed as a non-taxable dividend and will expire on June 30, 2002.
The rights will be exercisable only if a person or a group acquires 20% or
more of the Company's Common Stock or announces a tender offer for 50% or
more of the Common Stock. In October 1999, the stockholders of the Company
approved an amendment to the Company's certificate of incorporation adding a
stockholder-friendly "chewable" feature for the Rights Plan. This chewable
feature requires the Company to redeem or otherwise make the Rights Plan
inapplicable if the Company receives certain types of acquisition proposals
and the stockholders vote to require it to do so. Also, the stockholders of
the Company approved the use of Preferred Stock in connection with the Rights
Plan instead of Common Stock.
NOTE 11. INCOME TAXES
At September 30, 1999, the Company had net deferred tax assets of $20.3 million,
after a valuation allowance of $5.7 million. Realization of the majority of the
net deferred tax assets is dependent on the Company's ability to generate
approximately $50 million of future taxable income. Management believes that it
is more likely than not that the assets will be realized based on forecasted
income. However, there can be no assurance that the Company
-6-
<PAGE>
will meet its expectations of future income. Management will evaluate the
realizability of the deferred tax assets quarterly and assess the need for
additional valuation allowance.
NOTE 12. CONTINGENT LIABILITIES
The Company is subject to legal proceedings and claims that arise in the normal
course of its business. The Company believes these proceedings will not have a
material adverse effect on the financial position, results of operations or cash
flows of the Company.
-7-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
STATEMENTS MADE BELOW AND IN THE ADAPTIVE BROADBAND CORPORATION (THE COMPANY)
1999 ANNUAL REPORT TO SHAREHOLDERS CONTAIN FORWARD-LOOKING STATEMENTS THAT
INVOLVE RISKS AND UNCERTAINTIES, INCLUDING STATEMENTS REGARDING THE COMPANY'S
MARKETS, THE COMPANY'S ABILITY TO BE A LEADER IN ITS MARKETS AND TO ACHIEVE ITS
GROWTH OBJECTIVES, THE FUTURE OF NETWORK COMPUTING, TELECOMMUNICATIONS AND
BROADCASTING AND OTHER MATTERS, AS WELL AS STATEMENTS ABOUT THE RESULTS OF
LITIGATION OR DISPUTES, THE RESULTS OF POST-CLOSING PROCEDURES IN CONNECTION
WITH DISCONTINUED OPERATIONS SALE AGREEMENTS, PRODUCT MIX AND INTERNATIONAL
OPERATIONS, THE EFFECT OF NEW ACCOUNTING PRONOUNCEMENTS, THE REALIZATION OF
CERTAIN TAX ASSETS, ADEQUACY OF FUNDS FOR THE FORESEEABLE FUTURE, EXPECTATIONS
FOR FISCAL YEAR 2000 AND BEYOND. WORDS SUCH AS "BELIEVES," "ANTICIPATES,"
"EXPECTS," "INTENDS," AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY
FORWARD-LOOKING STATEMENTS, BUT ARE NOT THE EXCLUSIVE MEANS OF IDENTIFYING SUCH
STATEMENTS. READERS ARE CAUTIONED THAT FORWARD-LOOKING STATEMENTS REFLECT
MANAGEMENT'S ANALYSIS ONLY AS OF THE DATE THEREOF, AND THE COMPANY ASSUMES NO
OBLIGATION TO UPDATE THESE STATEMENTS. ACTUAL EVENTS OR RESULTS MAY DIFFER
MATERIALLY FROM THE EVENTS OR RESULTS DISCUSSED IN THE FORWARD-LOOKING
STATEMENTS. FACTORS THAT COULD CAUSE THE COMPANY'S ACTUAL RESULTS TO DIFFER
MATERIALLY FROM MANAGEMENT'S PROJECTIONS, ESTIMATES AND EXPECTATIONS INCLUDE,
BUT ARE NOT LIMITED TO, THE LEVEL OF DEMAND FOR PRODUCTS, COMPETITION, NEW
PRODUCT INTRODUCTIONS BY COMPETITORS, MARKET ACCEPTANCE OF THE COMPANY'S NEW
PRODUCTS, THE ABILITY OF THE COMPANY TO PARTICIPATE AND RESPOND TO RAPID
TECHNOLOGICAL CHANGE, AVAILABILITY OF QUALIFIED PERSONNEL, RISKS RELATED TO
INTERNATIONAL SALES, DELAYS IN THE RECEIPT OF ORDERS OR IN THE SHIPMENT OF
PRODUCTS, CHANGES IN DEMAND FOR PRODUCTS, COST OVERRUNS, FOREIGN CURRENCY
EXCHANGE RATE FLUCTUATIONS, TIMELY AVAILABILITY OF SUPPLY OF COMPONENTS,
DEPENDENCE ON MAJOR ORDERS FROM A SMALL NUMBER OF CUSTOMERS, LIMITATIONS ON THE
COMPANY'S ABILITY TO REDUCE INVENTORY AND EXPENSES IF FORECASTS AND EXPECTED
DEMAND ARE NOT REALIZED, GENERAL ECONOMIC CONDITIONS, THE IMPACT OF YEAR 2000
AND WHETHER THE COMPANY'S CLAIMS AND DEFENSES IN LITIGATION AND DISPUTES ARE
VIEWED AS MERITORIOUS. FOR A MORE DETAILED DISCUSSION OF THESE AND OTHER
FACTORS, SEE "INFORMATION REGARDING FORWARD LOOKING STATEMENTS" IN THE COMPANY'S
ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED JUNE 30, 1999, AND IN THE
COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS AND NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS. THE CONSOLIDATED FINANCIAL STATEMENTS SHOULD BE READ IN CONJUNCTION
WITH THIS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS.
In October 1998, the Company's board of director's adopted a formal plan to sell
its Government Division. The Government Division was sold on April 26, 1999. The
operating results, loss on disposal, and financial position of the Government
Division have been classified separately as discontinued operations for all
periods presented through the disposition date in the accompanying Condensed
Consolidated Financial Statements. See Note 5 Discontinued Operations, of Notes
to Condensed Consolidated Financial Statements for further discussion.
RESULTS OF OPERATIONS
OVERVIEW
The Company reported a loss from continuing operations of $3.9 million, or $0.26
per share, for the three months ended September 30, 1999, compared to a loss
from continuing operations of $10.9 million, or $0.72 per share for the three
months ended September 30, 1998. Excluding a $7.2 million after-tax in process
research and development charge for the acquisition of Adaptive Broadband
Limited (ABL), the Company's net loss from continuing operations for the three
months ended September 30, 1998 would have been $3.7 million, or $0.24 per
share.
The Company generally records bookings for new orders received if the product
will be shipped to the customer within twelve months. New orders booked from
continuing operations were $54.8 million and $37.2 million for the three
months ended September 30, 1999 and 1998, representing a 48% increase.
Revenue from continuing operations was $42.9 million and $34.7 million for
the three months ended September 30, 1999 and 1998, representing a 24%
increase. These increases in bookings and revenues were a result of expansion
of the Company's direct sales force, customers' acceptance of the Company's
new products from its core businesses and initial demand for the AB AccessTM
products. The revenue increased also because there was higher backlog at the
beginning of the first quarter of fiscal 2000. The Company recorded a record
level of bookings in the first quarter of fiscal 2000, with the bookings mix
shifting more to domestic business. This change in mix of orders indicates
some reduction in the Company's dependency on certain more volatile
international markets. However, certain domestic customers purchase product
as part of large international system integration projects, and therefore,
the Company does continue to have an indirect international market risk for
such business.
-8-
<PAGE>
During fiscal year 1999, the Company completed its transition from a holding
company operating in two business segments to an integrated organization
operating in one business segment. The Company derives its revenue from two
major product groups: the Satellite Communications Products Group (Satellite)
and the Terrestrial Wireless Products Group (Terrestrial). The supplemental
information for these two product groups are as follows:
<TABLE>
<CAPTION>
(Dollars in millions) Three months ended September 30,
1999 1998
---- ----
<S> <C> <C>
BOOKINGS
Satellite:
Domestic $ 14.7 66% $ 6.8 38%
International 7.6 34% 11.2 62%
----------------- ------------------
Total 22.3 100% 18.0 100%
Terrestrial:
Domestic 27.6 85% 14.3 75%
International 4.9 15% 4.9 25%
----------------- ------------------
Total 32.5 100% 19.2 100%
Total Domestic 42.3 77% 21.1 57%
Total International 12.5 23% 16.1 43%
---------------- ------------------
Total Bookings $ 54.8 100% $ 37.2 100%
REVENUE
Satellite:
Domestic $ 12.4 55% $ 6.0 37%
International 10.1 45% 10.2 63%
---------------- -------------------
Total 22.5 100% 16.2 100%
Terrestrial:
Domestic 15.7 77% 13.1 71%
International 4.7 23% 5.4 29%
---------------- -------------------
Total 20.4 100% 18.5 100%
Total Domestic 28.1 66% 19.1 55%
Total International 14.8 34% 15.6 45%
---------------- ------------------
Total Revenue $ 42.9 100% $ 34.7 100%
GROSS MARGIN
Satellite $ 7.7 34% $ 4.0 25%
Terrestrial 7.9 38% 7.6 42%
------- --------
Total $ 15.6 36% $ 11.6 34%
</TABLE>
SATELLITE COMMUNICATIONS PRODUCT GROUP
The Satellite Communications Products Group provides satellite modems and
transceiver products and services primarily to telecommunications carriers and
Internet Service Providers. It also develops and supplies products and software
for the network delivery of Internet Protocol (IP) data and multimedia services.
These products and services enable customers to provide voice, video, and data
services via satellite.
Satellite revenue was $22.5 million and $16.2 million for the three months
ended September 30, 1999 and 1998, representing an increase of $6.3 million
or 39%. Domestic revenue increased $6.4 million or 107% offset by a slight 1%
decrease in international revenue for the three months ended September 30,
1999. The Satellite revenue increased as a result of higher bookings and
higher backlog at the beginning of the quarter. Satellite bookings increased
$4.3 million or 24% for the first quarter of fiscal 2000 primarily due to the
expansion of the Company's direct sales force and increase in marketing
personnel and programs. In addition, the increasing Internet traffic has
created stronger demand from certain Internet service providers for the
Company's high-speed Satellite modems. Satellite book-to-bill ratios were 99%
and 111% for the three months ended September 30, 1999 and 1998.
Satellite gross margins were $7.7 million and $4.0 million, or as a
percentage of Satellite revenue, 34% and 25% for the three months ended
September 30, 1999 and 1998. The increase in gross margin in the first
quarter of fiscal 2000 was due to higher revenue and the realization of lower
manufacturing costs resulting from the reorganization of the Satellite
operations during the second half of fiscal year 1999.
-9-
<PAGE>
TERRESTRIAL WIRELESS PRODUCT GROUP
The Terrestrial Wireless Products Group provides products and services, based
upon microwave radio technology, primarily to the television broadcast, oil, gas
and utility, and transaction processing markets. The Group is also developing
high-speed, dynamic bandwidth management, wireless Internet connectivity
technology and products. One key product, AB AccessTM, was introduced in fiscal
year 1999 and contributed $1.1 million to revenue and $12.5 million to bookings
in the first quarter of fiscal year 2000. The Company is investing considerable
resources into this new area.
Terrestrial revenue was $20.4 million and $18.5 million for the three months
ended September 30, 1999 and 1998, representing an increase of $1.9 million
or 10%. Domestic revenue increased $2.6 million or 20%, partially offset by a
$0.7 million decrease in international revenue for the first quarter of
fiscal 2000. The increase in domestic revenue is due to customers' acceptance
of new terrestrial products and higher backlog at the beginning of the
quarter. The decrease in international revenue was due primarily to economic
conditions in developing countries, including declines in oil and gas prices
in Latin America. Terrestrial book-to-bill ratios were 159% and 104% for the
three months ended September 30, 1999 and 1998.
Terrestrial gross margins were $7.9 million and $7.6 million, or as a percentage
of Terrestrial revenue, 38% and 42% for the three months ended September 30,
1999 and 1998. The decrease in gross margin percentage was due to a change in
the revenue mix to lower margin broadcast products.
OPERATING EXPENSES
Research and development expenses were $6.7 million and $5.4 million, or as a
percentage of revenue 16% for both quarters ended September 30, 1999 and 1998.
The increase in research and development spending for the first quarter of
fiscal year 2000, was mainly attributable to the Company's investment in
research and development for AB-AccessTM . Additionally, the Company has
invested significantly in the development of its Spectracast(R) satellite
internet protocol multicasting products, its on-line transaction processing data
radios (TransltTM), and its new digital broadcast products, such as TwinstreamTM
and CodeRunnerTM. The Company believes that the continual and rapid introduction
of new products and technologies is critical to sustaining growth within its
current and future target markets, and expects to continue to commit substantial
resources to product development and engineering in future periods. As a result,
the Company anticipates that research and development expenses will increase in
future periods as it continues to focus its efforts on developing wireless
broadband products. In addition, management may consider strategic acquisition
of additional technologies complimentary to the Company's business.
Sales, marketing and administrative expenses for continuing operations were
$14.1 million and $10.7 million, or as a percentage of revenue 33% and 31%, for
the three months ended September 30, 1999 and 1998. The increase was primarily
attributable to expansion of the Company's sales force and an increase in
marketing efforts to support the growing level of bid and proposal activity for
the new AB-AccessTM products. The Company expects to continue to focus its
sales, marketing and administrative investments in its high-growth wireless
broadband data network markets.
Amortization expense associated with intangible assets for the continuing
operations was $0.6 million and $0.4 million for the three months ended
September 30, 1999 and 1998. The slight increase over the same period in last
year was due to an increase in intangible assets from the ABL and Crown
Satellite acquisitions.
On August 20, 1998, the Company acquired Adaptive Broadband Limited (ABL) a
United Kingdom based company developing high-speed wireless Internet
connectivity technology. The acquisition was accounted for under the purchase
method. The initial purchase price was approximately $10.9 million including
cash payments, direct costs, and the assumption of ABL's net liabilities. The
purchase price will include additional future payments of up to $7 million,
contingent on ABL's performance exceeding certain targets. The assets and
liabilities assumed by the Company were recorded based on their fair values at
the date of acquisition. The purchase price was allocated $8.2 million to
in-process research and development, $0.4 million to net tangible assets, $0.4
million to identified intangible assets, and $1.9 million to goodwill. The
amount allocated to in-process research and development was expensed at the time
of acquisition. A significant portion of the purchase price will accrue in the
future if a certain level of market acceptance is achieved, and the goodwill
recorded as a result will be substantially increased. The Company's results of
operations for the first three months of fiscal year 1999 include ABL's results
from August 20, 1998.
In connection with the acquisition of ABL, the Company allocated a significant
portion of the purchase price to purchased in-process research and development.
The Company estimated the fair value of the in-process research and development
using an income approach. This involved estimating the fair value of the
in-process research and development using the present value of the estimated
after-tax cash flows expected to be generated by the purchased in-process
research and development, using a risk-adjusted discount rate and revenue
forecasts as appropriate. The selection of the discount rate was based on
consideration of the Company's weighted average cost of capital as well as other
factors, including the useful life of each technology, profitability levels of
the technology, the uncertainty of technological advances that were known at the
time and the stage of completion of each technology. The Company believes that
the estimated in-process research and development amounts so determined
represent fair value and do not exceed the amount a third party would pay for
the projects.
-10-
<PAGE>
At the date of the acquisition, the in-process research and development projects
had not yet reached technological feasibility and had no alternative future
uses. Accordingly, the value allocated to the project was expensed at
acquisition. If the project is not successful or completed timely, management's
product pricing and growth rates may not be achieved and the Company may not
realize the financial benefits expected from the projects.
In fiscal year 1999, the Company introduced AB-Access-TM- products to the
market, which contributed $1.1 million to revenue and $12.5 million to
bookings in the first quarter of fiscal year 2000. The Company is investing
considerable resources into this new area.
INTEREST EXPENSE, NET
Net interest expense was $0.3 million and $0.9 million for the three months
ended September 30, 1999 and 1998. The decrease in net interest expense reflects
a reduction in average borrowings primarily from the use of proceeds from sale
of the Company's Government Division to paydown its credit facility and an
increase in interest income from investing the remaining sale proceeds.
PROVISION FOR INCOME TAXES
The Company's income tax benefit from continuing operations was $2.2 million and
$3.1 million for the three months ended September 30, 1999 and 1998. The
effective income tax rate for the three months ended September 30, 1999 was 36%,
consistent with the 36% effective income tax rate for the three months ended
September 30, 1998, excluding the impact of the partial valuation allowance
recorded against future deductions from the amortization of intangible assets
acquired in the ABL acquisition.
DISCONTINUED OPERATIONS
In April 1999, the Company completed the sale of its Government Division to
Northrop Grumman Corporation (Northrop Grumman) for $93 million in cash, for a
net gain of approximately $36 million (net of income taxes). The Company used a
portion of the proceeds to pay down the entire outstanding balance of its credit
facility and to resume its share repurchase program. The Company plans to use
the remaining proceeds to support working capital requirements as it expands,
and continue to invest in the development and marketing of its new wireless
broadband products. The Government Division sale price includes up to an
additional $5 million cash payment, contingent upon the future performance of
the divested business. The Company has not recognized any gain for this
contingent future payment.
The operating results, gain on disposal, and financial position of the
Government Division have been classified as discontinued operations in the
Company's financial statements through the divestiture date. Revenue from the
Government Division discontinued operations was $19.8 million for the first
three months of fiscal year 1999. Net income from the Government Division
discontinued operations was $1.1 million for the first three months of fiscal
year 1999.
In April 1998, Microwave Networks (MN) was sold to Tadiran Ltd. (Tadiran) for
$31.5 million in cash. Final accounting for the Government Division and MN
divestitures are subject to completion of the post-closing procedures
provided for in the Northrop and Tadiran agreements. The Company has accrued
for future price adjustments that may occur in the post-closing procedures
for both divestitures. At September 30, 1999, the discontinued operations
reserves for the Government Division and MN divestitures are $6.7 million and
$2.5 million, respectively. The Company believes that the completion of these
procedures will not have a material impact on the Company's financial
position, results of operations, or cash flows.
In July 1999, Northrop Grumman filed a lawsuit against the Company alleging that
the Company failed to disclose certain events and information as required by the
terms of the agreement pursuant to which Northrop Grumman acquired the
Government Division of the Company in April 1999. No damages have been
specified. In September 1999, the Company filed a cross-complaint against
Northrop Grumman seeking to recover in excess of $3.7 million, which represents
the amount that the Company contends Northrop Grumman appropriated from the
Company's bank accounts following the acquisition. The Company believes that it
has strong defenses and counterclaims and plans to vigorously defend the lawsuit
filed by Northrop Grumman and pursue its counterclaims. No provisions have been
made for expenses that may be incurred to resolve the lawsuit, and the Company
believes final resolution of the Northrop Grumman allegations will not have a
material impact on the Company's financial position, results of operations, or
cash flows.
In May 1995, the Company's MN division entered into certain agreements with
Nokia Telecommunications Oy (Nokia) pursuant to which MN was to provide to Nokia
certain microwave radios and related software and services, and was to carry out
certain development programs. In September 1997, Nokia informed MN of a
purported failure of certain of the products sold to Nokia to meet certain
contractual specifications. MN was sold to Tadiran in April 1998 and under the
terms of the sale agreement, Tadiran assumed and indemnified the Company with
respect to the Nokia claims. Tadiran has now taken the position that the Company
is responsible for the Nokia claims, based upon allegations that the Company
failed to provide adequate disclosures and financial reserves with respect to
such claims. In September 1998, the Company received notice from Nokia that
Nokia has decided to terminate the May 1995 agreements. Also in September 1998,
Nokia began arbitration proceedings to recover damages, which are claimed to be
$40.6 million, which include loss of profits and goodwill, and damage to trade
and manufacturing
-11-
<PAGE>
secrets. The Company believes that it has strong defenses and will vigorously
defend the Nokia claims. In May 1999, the Company began arbitration
proceedings against Tadiran, primarily to determine that Tadiran is
responsible for the Nokia claims. The Company believes that it has strong
claims against Tadiran. No accruals have been recorded for expenses that may
be incurred to resolve the dispute, and the Company believes final resolution
of this matter will not have a material impact on the Company's financial
position, results of operations or cash flows.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1999, the Company had net working capital of $82.7 million,
including $31.7 million of cash and cash equivalents, as compared to a net
working capital of $82.0 million, including cash and cash equivalents of
$48.9 million, at June 30, 1999.
Net cash used in continuing operating activities was $14.5 million for the three
months ended September 30, 1999, primarily due to a loss from operations, $5.6
million increase in accounts receivable and $4.0 million decrease in accounts
payables and accrued liabilities. Net cash used in continuing operating
activities was $6.2 million for the three months ended September 30, 1998, due
to a loss from operations and the payment of certain year-end accruals.
Net cash used in investing activities for the three months ended September 30,
1999 was $2.8 million for capital expenditures. Net cash used in investing
activities for the three months ended September 30, 1998 was $15.4 million,
including the acquisition of ABL for $10.4 million, capital expenditures of $1.5
million and $2.5 million cash used in discontinued operations.
During the first three months of fiscal year 2000, the Company acquired 126,250
shares of its common stock for $3.3 million, bringing the total shares
repurchased to approximately 2.8 million shares under the Board of Directors
authorized six million share common stock repurchase plan.
In addition to the common stock repurchased, the Company's financing activities
for the three months ended September 30, 1999 included debt payments of $2.4
million and the receipt of $5.7 million from the sale of the Company's common
stock under stock option and stock purchase plans.
The Company originally issued $57.5 million of 5.25%, convertible
subordinated notes on December 15, 1993. The notes are due December 15, 2003.
These notes are convertible at any time prior to maturity, at the option of
the holder, into shares of the Company's common stock at a price of $28.4375
per share. These notes are redeemable at any time, at the option of the
Company. Interest is payable semi-annually. The notes are subordinated to all
existing and future senior indebtedness of the Company, and are quoted on the
Nasdaq National Market. In October 1999, at the request of certain note
holders, the Company converted approximately $33 million of its subordinated
notes into approximately 1.2 million shares of common stock. Upon the
conversion, the Company paid a $1.1 million premium which is equivalent to
accrued interest on the converted notes plus 1.6%.
The Company believes that its current cash position and funds generated from
operations, will be adequate to meet the Company's requirements for working
capital, capital expenditures and debt service for the foreseeable future.
YEAR 2000
State of Readiness
The Company established a formal Year 2000 readiness program in fiscal 1998 with
two principal objectives: (1) to assess the readiness of its internal
information technology infrastructure and of its critical component and service
providers, and (2) to analyze the readiness status of the telecommunications
equipment manufactured by the Company and to communicate the readiness status to
customers.
In July 1999, the Company engaged an independent consulting firm to perform a
risk analysis of the Company's Year 2000 program. Based upon the findings, a
remediation plan was implemented, and the Company intends to complete the
necessary actions by the end of calendar year 1999.
The Company has completed the assessment of its internal systems, and where
remedial steps were required to make those systems Year 2000 ready, is
prioritizing the steps to be taken. The Company has also completed a review of
all its critical vendors to assess that their Year 2000 readiness. Because the
Company is relying on information provided to it by its vendors to assess their
Year 2000 readiness, the Company cannot provide assurances that all of its
critical vendors are or will be Year 2000 ready. Therefore, the Company cannot
provide assurances that the Company will not be adversely affected by the Year
2000 date change.
The Company has completed the assessment of the impact of Year 2000 on its
products. The Company is completing efforts to make its new commercially
available products Year 2000 ready. The Company has also developed evolution
strategies for customers who have existing products. The Company believes that
is has sufficient resources to provide timely support to its customers that
require product mitigation and upgrade to be Year 2000 ready.
Costs
The Company currently does not expect that the total costs of its Year 2000
readiness program will be material to its financial condition or results of
operation. All costs are charged to expense as incurred, and do not include
potential costs related to any customers or other claims or the cost of internal
software and hardware replaced in the normal course of business.
Risks / Contingency Plans
The Company believes that its most likely worst case scenarios would involve the
interruption of crucial suppliers as a result of infrastructure failures or
third party vendor failures. As a result, the Company is developing contingency
plans that will address each of the most likely worst case scenarios. Such
contingency plans are
-12-
<PAGE>
expected to be completed by the end of November 1999. The Company believes
that it is taking appropriate steps to assess and address its Year 2000
issues and currently does not expect that its business will be adversely
affected by the Year 2000 issue in any material respect. Nevertheless,
achieving Year 2000 readiness is dependent on many factors, some of which are
not completely within the Company's control. Should either the Company's
internal systems or the internal systems of one or more critical vendors or
key customers fail to achieve Year 2000 readiness, the Company's business and
its results of operations could be materially adversely affected.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS
The Company's market risk disclosures set forth in the 1999 Annual Report to
Shareholders have not changed significantly.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In July 1999, Northrop Grumman filed a lawsuit against the Company alleging that
the Company failed to disclose certain events and information as required by the
terms of the agreement pursuant to which Northrop Grumman acquired the
Government Division of the Company in April 1999. No damages have been
specified. In September 1999, the Company filed a cross-complaint against
Northrop Grumman seeking to recover in excess of $3.7 million, which represents
the amount that the Company contends Northrop Grumman appropriated from the
Company's bank accounts following the acquisition. The Company believes that it
has strong defenses and counterclaims and plans to vigorously defend the lawsuit
filed by Northrop Grumman and pursue its counterclaims. No provisions have been
made for expenses that may be incurred to resolve the lawsuit, and the Company
believes final resolution of the Northrop Grumman allegations will not have a
material impact on the Company's financial position, results of operations, or
cash flows.
In May 1995, the Company's MN division entered into certain agreements with
Nokia Telecommunications Oy (Nokia) pursuant to which MN was to provide to Nokia
certain microwave radios and related software and services, and was to carry out
certain development programs. In September 1997, Nokia informed MN of a
purported failure of certain of the products sold to Nokia to meet certain
contractual specifications. MN was sold to Tadiran in April 1998 and under the
terms of the sale agreement, Tadiran assumed and indemnified the Company with
respect to the Nokia claims. Tadiran has now taken the position that the Company
is responsible for the Nokia claims, based upon allegations that the Company
failed to provide adequate disclosures and financial reserves with respect to
such claims. In September 1998, the Company received notice from Nokia that
Nokia has decided to terminate the May 1995 agreements. Also in September 1998,
Nokia began arbitration proceedings to recover damages, which are claimed to be
$40.6 million, which include loss of profits and goodwill, and damage to trade
and manufacturing secrets. The Company believes that it has strong defenses and
will vigorously defend the Nokia claims. In May 1999, the Company began
arbitration proceedings against Tadiran, primarily to determine that Tadiran is
responsible for the Nokia claims. The Company believes that it has strong claims
against Tadiran. No accruals have been recorded for expenses that may be
incurred to resolve the dispute, and the Company believes final resolution of
this matter will not have a material impact on the Company's financial position,
results of operations or cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Annual Meeting of Shareholders of the registrant held on October 27,
1999, the shareholders:
1. Elected 6 directors to hold office until the next Annual Meeting of
Shareholders.
FOR AGAINST
--- -------
Frederick D. Lawrence 12,675,186 737,059
William B. Marx, Jr. 12,671,923 740,322
Terry W. Ward 12,677,478 734,767
Frederick W. Whitridge, Jr. 12,677,323 734,922
George A. Joulwan 12,675,842 736,403
Leslie G. Denend 12,674,828 737,417
2. Approved amendments to the Company's Certificate of Incorporation to permit
stockholders to withdraw the Rights Plan following certain types of offers to
acquire the company and to authorize the use of preferred stock in connection
with the Rights Plan.
FOR AGAINST ABSTAIN NON-VOTE
--- ------- ------- --------
8,224,937 876,823 30,201 4,280,284
3. Approved amendments to the Company's 1992 Stock Option Plan.
FOR AGAINST ABSTAIN NON-VOTE
--- ------- ------- --------
7,394,012 1,553,112 59,051 4,406,070
-13-
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 27.1 Financial Data Schedule
(b) Reports on Form 8-K.
The Company filed a Current Report on Form 8-K on July 21, 1999, relating to its
adoption of a rights plan.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
ADAPTIVE BROADBAND CORPORATION
(Registrant)
NOVEMBER 14, 1999 BY /S/ DONNA S. BIRKS
- ----------------------- -----------------------------------
Date DONNA S. BIRKS
EXECUTIVE VICE PRESIDENT
CHIEF FINANCIAL OFFICER
-15-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THIS FORM
10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> JUL-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 31,673
<SECURITIES> 0
<RECEIVABLES> 41,265
<ALLOWANCES> 1,685
<INVENTORY> 23,441
<CURRENT-ASSETS> 119,034
<PP&E> 55,067
<DEPRECIATION> 33,443
<TOTAL-ASSETS> 177,660
<CURRENT-LIABILITIES> 36,308
<BONDS> 57,500
0
0
<COMMON> 1,663
<OTHER-SE> 81,013
<TOTAL-LIABILITY-AND-EQUITY> 82,676
<SALES> 42,935
<TOTAL-REVENUES> 42,935
<CGS> 27,331
<TOTAL-COSTS> 48,623
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 555
<INTEREST-EXPENSE> 348
<INCOME-PRETAX> (6,036)
<INCOME-TAX> (2,173)
<INCOME-CONTINUING> (3,863)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (20,997)
<EPS-BASIC> (0.26)
<EPS-DILUTED> (0.26)
</TABLE>
