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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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 March 31, 2000
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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
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ADAPTIVE BROADBAND CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 94-1668412
(State or other jurisdiction (I.R.S. Employer
of 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
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Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Classes Outstanding at April 28, 2000
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Common Stock $.10 Par Value 37,440,000
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ADAPTIVE BROADBAND CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
--------------------------------- ----------------------------------
2000 1999 2000 1999
---------------- --------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Revenue $ 8,304 $ - $ 11,604 $ -
Costs of revenue 8,253 - 12,028 -
---------------- --------------- ---------------- ----------------
Gross margin 51 - (424) -
Expenses
Research and development 5,483 1,610 11,210 3,044
Sales, marketing and administration 7,301 3,164 17,176 8,744
Amortization of intangible assets 106 75 255 200
Purchased in-process research and development - - - 8,210
---------------- --------------- ---------------- ----------------
Total expenses 12,890 4,849 28,641 20,198
---------------- --------------- ---------------- ----------------
Operating loss (12,839) (4,849) (29,065) (20,198)
Interest income (expense), net 381 (1,368) 412 (3,345)
Premium on conversion of notes - - (1,093) -
---------------- --------------- ---------------- ----------------
Loss from continuing operations before income taxes (12,458) (6,217) (29,746) (23,543)
Benefit from income taxes (4,485) (2,239) (10,709) (6,502)
---------------- --------------- ---------------- ----------------
Loss from continuing operations (7,973) (3,978) (19,037) (17,041)
Discontinued operations
Income (loss) from discontinued operations,
net of income taxes - (3,532) 4,097 (3,956)
---------------- --------------- ---------------- ----------------
Net loss $ (7,973) $ (7,510) $ (14,940) $ (20,997)
================ =============== ================ ================
Basic and diluted earnings (loss) per share
Loss from continuing operations $ (0.23) $ (0.13) $ (0.59) $ (0.57)
Income (loss) from discontinued operations - (0.12) 0.13 (0.13)
---------------- --------------- ---------------- ----------------
Net Loss $ (0.23) $ (0.25) $ (0.47) $ (0.70)
================ =============== ================ ================
Weighted average common shares used in computing basic
and diluted earnings (loss) per share 34,914 29,558 32,082 29,906
</TABLE>
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ADAPTIVE BROADBAND CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
March 31, 2000 June 30, 1999
-------------- -------------
<S> <C> <C>
Assets
- ------
Current assets
Cash and cash equivalents $ 50,002 $ 48,887
Accounts receivable, net 5,848 -
Inventories 9,753 1,116
Deferred income taxes 26,503 14,293
Prepaid expenses and other current assets 3,967 2,938
Net current assets of discontinued operations 58,113 42,057
-------- --------
Total current assets 154,186 109,291
-------- --------
Property, plant and equipment, net 7,437 3,088
Deferred income taxes - 3,805
Intangible assets, net 3,049 2,054
Other assets 3,613 3,017
Net long-term assets of discontinued operations 48,950 50,078
-------- --------
$217,235 $171,333
======== ========
Liabilities and Shareholders' Equity
- ------------------------------------
Current liabilities
Accounts payable $ 12,069 $ 2,132
Accrued liabilities 39,388 25,118
-------- --------
Total current liabilities 51,457 27,250
-------- --------
Convertible subordinated notes - 57,500
Other long-term liabilities 350 1,590
Shareholders' equity
Common stock 3,739 3,326
Capital in excess of par value 151,450 94,010
Treasury stock - (36,066)
Retained earnings 10,239 23,723
-------- --------
Total shareholders' equity 165,428 84,993
-------- --------
$217,235 $171,333
======== ========
</TABLE>
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ADAPTIVE BROADBAND CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
March 31,
--------------------------------
2000 1999
-------------- --------------
<S> <C> <C>
Operating activities:
Loss from continuing operations $ (19,037) $ (17,041)
Adjustments to reconcile to net cash
used in operating activities:
Purchased in-process research and development - 8,210
Premium on conversion of notes 1,093 -
Depreciation and amortization 785 341
Amortization of intangible assets 255 199
Deferred income taxes (10,709) (6,502)
Net effect of change in:
Accounts receivable (5,848) -
Inventories (8,637) -
Prepaid expenses and other current assets (1,893) (1,829)
Accounts payable 9,937 (345)
Other accrued liabilities 13,030 10,697
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Net cash used in continuing operations (21,024) (6,270)
-------------- --------------
Investing activities:
Capital expenditures (5,134) (2,919)
Acquisitions and investments in businesses (2,750) (11,111)
Other - 487
-------------- --------------
Net cash used in continuing operations investing activities (7,884) (13,543)
Net cash used in discontinued operations activities (8,527) (17,057)
-------------- --------------
Net cash used in investing activities (16,411) (30,600)
-------------- --------------
Financing activities:
Proceeds from issuance of common stock 42,964 2,019
Proceeds from bank credit facilities - 25,250
Purchase of treasury stock (3,321) (10,391)
Premium paid on conversion of notes (1,093) -
-------------- --------------
Net cash provided by financing activities 38,550 16,878
-------------- --------------
Net increase (decrease) in cash and cash equivalents 1,115 (19,992)
Cash and cash equivalents at beginning of period 48,887 24,630
-------------- --------------
Cash and cash equivalents at end of period $ 50,002 $ 4,638
============== ==============
Supplemental cash flow information:
Cash paid during the period for:
Interest $ 457 $ 2,232
Income taxes 1,107 5
Noncash transaction:
During the nine months ended March 31, 2000, the Company converted its entire $57,500 convertible
subordinated notes into 4,042,636 shares of common stock.
</TABLE>
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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.
Share amounts and related information have been restated to reflect the
Company's common stock-split in the form of a two for one common stock dividend
paid on March 30, 2000.
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 nine months ended March 31, 2000 and March 31, 1999, the
Company's comprehensive loss was the same as its net loss.
Note 3. Segment Reporting
The Company adopted SFAS No. 131 in fiscal year 1998. SFAS No. 131 establishes
standards for disclosures about operating segments, products and services,
geographic areas and significant customers. The Company is organized and
operates as one operating segment: the design, development, manufacturing,
marketing and selling of broadband wireless communication systems.
Note 4. Discontinued Operations
In January 2000, the Company's Board of Directors adopted a formal plan to sell
its EFData Satellite Products Division (EFData), Microwave Radio Communications
Division (MRC) and Microwave Data Systems Division (MDS). These three divisions
qualify as segments of business under Accounting Principles Board (APB) 30 as
each operates in separate lines of businesses with separate customer classes.
The Company's continuing business, the AB-Access Division, does not operate in
these lines of businesses and sells to different customers. EFData is a leading
provider of satellite communication technology focused on addressing the
commercial, industrial and military markets. MRC provides the majority of the
US analog and digital point-to-point microwave systems for transporting video
signals for television broadcast operations, including electronic news
gathering, satellite backhauls, studio-transmitter links and regional networks.
MDS supplies data telemetry point-to-multipoint terrestrial radio systems.
The operating results and financial position of the EFData, MRC and MDS
divisions, together with the operating results and financial position of the
Government Division that was sold in April 1999, have been classified as
discontinued operations for all periods presented in the Company's financial
statements. Total revenue from EFData, MRC and MDS was $42.6 million and $38.6
million for the three months ended March 31, 2000 and 1999, and $131.4 million
and $116.1 million for the nine months ended March 31, 2000 and 1999. The loss
from EFData, MRC and MDS for the three months ended March 31, 2000, net of
income taxes, was $4.5 million, which has been deferred in accordance with
discontinued operation accounting and will be recognized against the gain from
the discontinued operations sale. The loss is primarily driven by charges
related to the early termination of certain compensation plans. The net income
(loss) from EFData, MRC and MDS for the three months ended March 31, 1999, net
of income taxes, was $(3.5) million, and $4.1 million and $(6.0) million for the
nine months ended March 31, 2000 and 1999. Total revenue from the Government
Division was $19.9 million and $59.7 million for the three and nine months ended
March 31, 1999. Loss from the Government Division was deferred for the three
months ended March 31, 1999. Net income from the Government Division was $2.0
million for the nine months ended March 31, 1999.
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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 from this contingent future payment. Final accounting
for the Government Division is subject to completion of the post-closing
procedures provided for in the Northrop Grumman agreement. The Company has
accrued for future price adjustments that may occur in the post-closing
procedures for the Government Division divestiture. At March 31, 2000, the
discontinued operations reserves for the Government Division divestiture was
$6.5 million. 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 had subsequently taken the position that
the Company was 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, Nokia began arbitration proceedings
to recover damages, which were claimed to be $40.6 million. In January 2000,
the Company and Tadiran settled the Nokia claims for $2 million and reserved
rights against each other. In May 1999, the Company began arbitration
proceedings against Tadiran, primarily to determine that Tadiran is responsible
for the Nokia claims, which later had been liquidated at $2 million. In April
2000, the Company and Tadiran settled all of their claims against each other.
The Nokia and Tadiran settlements had no impact on the Company's financial
position, results of operations or cash flows.
Note 5. Inventories
Inventories are valued at cost and consist entirely of work-in-process and
finished goods.
Note 6. Intangible Assets of Acquired Business
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 acquired business:
<TABLE>
<CAPTION>
Amortization
(Dollars in thousands) Period March 31, 2000 June 30, 1999
- --------------------- ------------ -------------- -------------
<S> <C> <C> <C>
Goodwill 10 years $3,138 $1,888
Assembled workforce 4 years 440 440
Accumulated amortization (529) (274)
------ ------
$3,049 $2,054
====== ======
</TABLE>
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
assets and liabilities assumed by the Company were recorded based on their fair
values at the date of acquisition. The purchase price allocated $8.2 million to
in-process research and development, $0.4 million to net tangible assets, $0.4
million to identifiable intangible assets, and $1.9 million to goodwill. The
amount allocated to in-process research and development was expensed at the time
of acquisition. In January 2000, the Company paid $1.3 million as the first
portion of the contingent purchase price, which was
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accounted for as additional goodwill. The remaining contingent portion of the
purchase price will include payments up to $3.5 million and will be recorded as
goodwill.
Note 7. Borrowing Arrangements
In March 2000, the Company entered into a secured revolving credit facility with
available credit of $25 million that expires in March 2003. The annual
commitment fee on the unused portion of the facility and the interest rate for
borrowings vary based upon the Company's ratio of funded debt to earnings before
interest, amortization and taxes, with the maximum commitment fee set at 0.25%
and the maximum borrowing rate set at the bank's rate plus 0.5%. The maximum
borrowing rate was 9.5% at March 31, 2000. The net borrowing capacity under the
Company's credit facility was $25 million as of March 31, 2000.
During the first quarter of fiscal year 2000, 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 floating rates, based upon prevailing market conditions.
The Company originally issued $57.5 million of 5.25%, convertible subordinated
notes on December 15, 1993. The notes were due December 15, 2003. These notes
were 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 $14.2188 per share.
These notes were redeemable any time at the option of the Company and interest
was payable semi-annually. The notes were subordinated to all existing and
future senior indebtedness of the Company and were quoted on the Nasdaq
National Market. During the quarter ended December 31, 1999, at the request of
certain note holders, the Company converted $34.1 million of its subordinated
notes into approximately 2.4 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%. During the quarter ended
March 31, 2000, the Company called the conversion of the remaining notes. As a
result, the remaining principal amount of $23.4 million of its subordinated
notes was converted into 1.6 million shares of common stock.
Note 8. Shareholders' Equity
On February 5, 1998, the Company announced that its Board of Directors
authorized the repurchase of up to six 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 twelve
million. During the nine months ended March 31, 2000, the Company acquired
252,500 shares of common stock for $3.3 million, bringing the total shares
repurchased after February 5, 1998 to approximately 5.6 million.
In addition, on March 13, 2000, the Company's shareholders approved an increase
in the authorized number of common shares from 30 million to 250 million shares.
These additional shares may be used in the future, for example, to: declare
stock-splits, raise additional capital, provide equity incentives to employees,
officers or directors, establish strategic relationships with other companies
and expand the company's business or product lines through the acquisition of
other businesses or products.
The following table summarizes the changes in shareholders' equity for the nine
months ended March 31, 2000, adjusted for the stock split on March 30, 2000:
<TABLE>
<CAPTION>
Capital
Common in excess Total share-
shares of par Retained holders'
(Dollars in thousands) issued Amount value Treasury stock earnings equity
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1999 33,258,062 $3,326 $ 94,010 $(36,066) $ 23,723 $ 84,993
Treasury stock repurchased (3,321) (3,321)
Common stock issued from
treasury and common shares
for stock option and stock
purchase plans 85,428 9 1,189 39,387 1,456 42,041
Conversion of notes 4,042,636 404 56,251 56,655
Net loss (14,940) (14,940)
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Balance at March 31, 2000 37,386,126 $3,739 $151,450 $ 0 $ 10,239 $165,428
===============================================================================
</TABLE>
Note 9. Shareholder Rights
In July 1999, upon the expiration of the Company's previous
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
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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 also 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 10. Income Taxes
At March 31, 2000, the Company had net deferred tax assets of $26.5 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 $66 million of future taxable income. Management believes that it
is more likely than not that the assets will be realized based on forecasted
income and the expected gain from the sale of the EFData, MRC and MDS Divisions.
However, there is no assurance that the Company 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 11. 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.
Note 12. Recent Accounting Pronouncements
In June 1998, the FASB issued Statement of Financial Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133"), which will be effective for the year ending June 30, 2001. This
statement establishes accounting and reporting standards requiring that every
derivative instrument, including certain derivative instruments embedded in
other contracts, be recorded in the balance sheet as either an asset or
liability measured at its fair value. The statement also requires that changes
in the derivative's fair value be recognized in earnings unless specific hedge
accounting criteria are met. The Company believes the adoption of SFAS 133 will
not have a material effect on the financial statements, since it currently does
not invest in derivative instruments and engage in hedging activities.
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101, "Revenue Recognition in Financial Statements", or SAB 101.
SAB 101 summarizes certain of the SEC Staff's views in applying generally
accepted accounting principles to revenue recognition in financial statements.
The Company is currently evaluating the impact of SAB 101. The Company believes
their current practices comply with SAB 101; however, should the Company
determine that a change in accounting policy is necessary, such a change will be
made after July 1, 2000 and would result in a charge to results of operations
for the cumulative effect of the change. This amount, if recognized, would be
recorded as deferred revenue and recognized as revenue in future periods.
Financial statements for prior periods would not be restated.
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Statements made below and in the Adaptive Broadband Corporation 1999 Annual
Report to Shareholders contain forward-looking statements that involve risks and
uncertainties, including statements regarding our markets, the ability to be a
leader in our markets and to achieve our 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. You should not place undue
reliance on these forward-looking statements and that these statements reflect
management's analysis only as of the date thereof, and we assume 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 our actual results to differ materially from these forward-looking
statements include, but are not limited to, the level of demand for products,
competition, new product introductions by competitors, market acceptance of our
new products, our ability to participate and respond to rapid technological
change, challenges in implementing the plan to divest our legacy businesses,
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 our ability to reduce inventory and
expenses if forecasts and expected demand are not realized, general economic
conditions, the impact of Year 2000 and whether our 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 our Annual Report on Form 10-K for the fiscal year
ended June 30, 1999, and in our 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 order to focus on the high-growth wireless broadband access market, in
January 2000, our Board of Directors adopted a formal plan to sell our EFData
Satellite Products Division (EFData), Microwave Radio Communications Division
(MRC), and Microwave Data Systems Division (MDS). The operating results and
financial position of these divisions, together with the operating results and
financial position of the Government Division that was sold in April 1999, have
been classified separately as discontinued operations for all periods presented
in the accompanying Condensed Consolidated Financial Statements. See Note 4 -
Discontinued Operations, of Notes to Condensed Consolidated Financial Statements
for further discussion.
Share amounts and related information have been restated to reflect our stock-
split in the form of a two for one common stock dividend paid on March 30, 2000.
RESULTS OF OPERATIONS
Overview
We are a data networking solutions company that is developing leading-edge
technology for the deployment of broadband wireless communications over the
Internet. Our AB-AccessTM fixed wireless broadband system (AB-Access) provides
a high-speed means to bridge the "last mile" for business and residential
subscribers by replacing or supplementing the traditional telephone company
local loop. It offers data transmission at rates up to 25 Mbps, which provides
the capability for real-time video conferencing, transmission of full streaming
video, web surfing, and transmission of data files - all simultaneously and over
one connection. Product bandwidth is planned to expand to 100 Mbps.
Following the successful field trials of AB-Access technology, we began to ship
AB-Access products to customers in the first quarter of fiscal year 2000. As of
March 31, 2000, we have generated over $1.2 billion of contracted five-year
demand for the AB-Access product. Contract signings are converted into bookings
when the orders received for product will be shipped within 12 months.
Solectron Corporation of Milpitas, California (Solectron), has been contracted
to manufacture the AB-Access product line with the goal of lowering per unit
product costs as a result of manufacturing economies of scale.
Our continuing operations, which reflect solely the results of our AB-Access
business, reported a loss of $6.6 million, or $0.19 per share, for the three
months ended March 31, 2000, excluding $2.2 million of pre-tax nonrecurring
charges relating to the realignment of our resources driven by the divestitures
of the discontinued operations. Including the non-recurring charges, the total
loss from continuing operations was $8.0 million, or $0.23
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per share, compared to a loss from continuing operations of $4.0 million, or
$0.13 per share for the three months ended March 31, 1999. The loss is primarily
driven by the continuing investment in research and development for the AB-
Access technology and in market introduction expenses.
Net loss from continuing operations was $19.0 million, or $0.59 per share, for
the nine months ended March 31, 2000, including the $2.2 million nonrecurring
charges and a $1.1 million premium on conversion of notes, compared to $17.0
million, or $0.57 per share for the same period in 1999, including an $8.2
million pre-tax in process research and development charge related to the
acquisition of Adaptive Broadband Limited (ABL).
Revenue
For the three and nine months ended March 31, 2000, we recorded revenue from
continuing operations of $8.3 million and $11.6 million. Revenue for the third
quarter of fiscal year 2000 increased 278% from the second quarter of the same
fiscal year mainly due to increased market demand and manufacturing volume. AB-
Access commenced shipping during the first quarter of fiscal year 2000 ended
September 30, 1999, and as such reported no revenue for comparison purposes
during the third quarter of last year. Revenue for the first three quarters of
fiscal year 2000 represents the initial units shipped from Solectron Corporation
and the revenue level was subjected to AB-Access products available only in
limited initial quantities. We have recently completed the process of
transferring volume manufacturing to Solectron and expect revenue to improve in
future periods. Solectron currently has the manufacturing capacity to supply
the AB-Access product for our current contracted demand.
We generally record bookings into backlog for new orders received if the product
will be shipped to the customer within 12 months. During the three and nine
months ended March 31, 2000, we received $27.3 million and $59.6 million in new
orders shippable over the next twelve months. AB-Access backlog at March 31,
2000 was $47.9 million.
The frequency band of our current commercial units are designed predominately
for the frequency range in the US, thus most of bookings and revenue for fiscal
2000 were domestic. We plan to introduce an AB-Access product for the Multi-
channel, Multi-point Distribution (MMDS) market, which is initially targeted for
the US and will be available internationally. Additionally, we plan to
introduce a 3.5Ghz version of AB-Access product that is targeted for
international markets, primarily in Europe.
Gross Margin
For the three and nine months ended March 31, 2000, gross margin was $ 0.1
million and $ (0.4) million. The gross margin for the quarter ended March 31,
2000 improved to above break-even from $(0.2) million for the second quarter of
fiscal year 2000. The improvement was due to increased volume in product
shipments and better manufacturing capacity utilization as the process of
transferring volume manufacturing to Solectron was completed. We expect gross
margin to continue to improve in future periods as greater production volume is
achieved, and as we complete the transition to manufacturing lower-cost ASIC
(Application Specific Integrated Circuit) based products and begin the volume
shipping of ASICs in the first quarter of fiscal year 2001.
Operating Expenses
Research and development expenses for continuing operations were $5.5 million
for the three months ended March 31, 2000, compared to $1.6 million for the same
period in the prior year. Research and development expenses for continuing
operations were $11.2 million for the nine months ended March 31, 2000, compared
to $3.0 million for the same period in the prior year. The continued increase in
research and development expenses is primarily due to an expansion in our
research and development investment for AB-Access including the expansion of
personnel, outside professional consulting expertise, and additional usage of
prototype materials for AB-Access. We believe that further development of AB-
Access is critical to sustain growth within our current and future target
markets, and therefore we will continue to commit substantial resources to
product development and engineering in future periods. As a result, we expect
research and development expenses to continue to increase in future periods. In
addition, we may consider strategic acquisitions of additional technologies
complementary to our business.
Sales, marketing and administrative expenses for continuing operations were $7.3
million for the three months ended March 31, 2000, compared to $3.2 million for
the same period in the prior year. Sales, marketing and administrative expenses
for continuing operations were $17.2 million for the nine months ended March 31,
2000, compared to $8.7 million for the same period in the prior year. Included
in the third quarter of fiscal year 2000 are non-recurring charges of $2.2
million that related to the realignment of resources driven by the divestitures
of the discontinued operations. The non-recurring charges included changes in
certain compensation plans that were necessary based upon a significantly
reduced employee base as we divest the three legacy businesses and to insure
that we had adequate retention through the transition. The charges also include
relocation and recruiting costs for certain
-10-
<PAGE>
employees that were necessary due to the expected transfer of facilities during
the divestiture process. In addition to the nonrecurring charges, the increase
for fiscal year 2000 was primarily due to the expansion in our sales and
marketing personnel to support the growing level of bid and proposal activities
for the new AB-Access products, increased sales commission associated with
generating AB-Access revenue, and increased promotional and product marketing
expenses. We expect to continue to focus our sales, marketing and administrative
investments in our high-growth wireless broadband data network markets.
The amortization of intangible assets, which consist of assembled workforce and
goodwill, was $0.1 million and $0.1 million for the three months ended March 31,
2000 and 1999, and $0.3 million and $0.2 million for the nine months ended March
31, 2000 and 1999. These intangible assets relate to the August 1998
acquisition of ABL and the additional purchase price paid in January 2000 for
ABL recorded as goodwill, which resulted in the increase of amortization expense
for the quarter ended March 31, 2000.
On August 20, 1998, we acquired ABL, a United Kingdom based company developing
high-speed wireless Internet connectivity technology. We accounted for the
acquisition 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. We recorded the assets and liabilities
assumed 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 identifiable intangible assets,
and $1.9 million to goodwill. The amount allocated to in-process research and
development was expensed at the time of acquisition. In January 2000, we paid
$1.3 million as the first portion of the contingent purchase price, which was
accounted for as additional goodwill. The remaining contingent portion of the
purchase price will include payments up to $3.5 million and will be recorded as
goodwill. Our results of operations for the first nine months of fiscal year
1999 include ABL's results from August 20, 1998.
In connection with the acquisition of ABL, we allocated a significant portion of
the purchase price to purchase in-process research and development. We
estimated the fair value of the in-process research and development using the
income approach, which discounts expected future after-tax cash flows generated
by the purchased in-process research and development to present value, using an
appropriate risk-adjusted discount rate and revenue forecasts. The discount
rate was derived based on consideration of the weighted average cost of capital
as well as other factors, including the useful life of the technology,
profitability levels of the technology, the uncertainty of technological
advances that were known at the time, and the stage of completion of the
technology. We believe that the estimated in-process research and development
amount so determined represents fair value and does not exceed the amount a
third party would have paid for the project.
At the date of the acquisition, the in-process research and development project
had not yet reached technological feasibility and had no alternative future
uses. Accordingly, the value allocated to the project was expensed at
acquisition.
Interest Income or Expense, Net
We reported net interest income of $0.4 million for the three months ended March
31, 2000, compared to $1.4 million net interest expense for the three months
ended March 31, 1999. The net interest income in the third quarter of fiscal
year 2000 was primarily due to interest earned on higher average cash balances
resulting from the sales proceeds of our Government division in April 1999 and
proceeds from the issuance of common stock under our employee stock plans during
fiscal year 2000. Additionally, interest expense was lowered due to the
conversion of our $57.5 million 5.25% subordinated notes during fiscal year
2000, as well as our pay off of our credit facility during the first quarter of
fiscal year 2000.
Premium on Conversion of Notes
We originally issued $57.5 million of 5.25% convertible subordinated notes on
December 15, 1993. The notes were due December 15, 2003. Note holders could
convert these notes at any time prior to maturity into shares of our common
stock at a price of $14.2188 per share, and we had the option to redeem these
notes at any time. Interest was payable semi-annually. The notes were
subordinated to all of our existing and future senior indebtedness, and were
quoted on the Nasdaq National Market. During the quarter ended December 31,
1999, at the request of certain note holders, we converted $34.1 million of the
subordinated notes into approximately 2.4 million shares of common stock. Upon
the conversion, we paid a $1.1 million premium which was equivalent to accrued
interest on the converted notes plus 1.6%. During the quarter ended March 31,
2000, we called the conversion of the remaining notes. As a result, the
remaining principal amount of $23.4 million of our subordinated notes was
converted into 1.6 million shares of common stock.
-11-
<PAGE>
Provision for Income Taxes
The income tax benefit from continuing operations was $4.5 million and $2.2
million for the three months ended March 31, 2000 and 1999, compared to $10.7
million and $6.5 million for the nine months ended March 31, 2000 and 1999. The
effective income tax rate for the three months ended March 31, 2000 and 1999 was
consistent at 36%. The effective income tax rate for the nine months ended
March 31, 2000 was consistent with the 36% rate for the nine months ended March
31, 1999, 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 order to focus on the high-growth wireless broadband access market, in
January 2000, our Board of Directors adopted a formal plan to sell our EFData
Satellite Products Division, Microwave Radio Communications Division and
Microwave Data Systems Division. The operating results and financial position
of these divisions, together with the operating results and financial position
of the Government Division that was sold in April 1999, have been classified as
discontinued operations for all periods presented in our financial statements.
Total revenue from EFData, MRC and MDS was $42.6 million and $38.6 million for
the three months ended March 31, 2000 and 1999, and $131.4 million and $116.1
million for the nine months ended March 31, 2000 and 1999. The loss from
EFData, MRC and MDS for the three months ended March 31, 2000, net of income
taxes, was $4.5 million, which was deferred in accordance with discontinued
operation accounting and will be recognized against the gain from the
discontinued operations sale. The loss is primarily driven by charges related
to the early termination of certain compensation plans. The net income (loss)
from EFData, MRC and MDS for the three months ended March 31, 1999, net of
income taxes, was $(3.5) million, and $4.1 million and $(6.0) million for the
nine months ended March 31, 2000 and 1999. Total revenue from the Government
Division was $19.9 million and $59.7 million for the three and nine months ended
March 31, 1999. Loss from the Government Division was deferred for the three
months ended March 31, 1999. Net income from the Government Division was $2.0
million for the nine months ended March 31, 1999. We are in active negotiations
with potential buyers for the three businesses and expect the sales of all three
businesses to be completed in June 2000.
In April 1999, we completed the sale of the 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. We have not recognized any benefit
from this contingent future payment. Final accounting for the Government
Division is subject to completion of the post-closing procedures provided for
in the Northrop Grumman agreement. We have accrued for future price adjustments
that may occur in the post-closing procedures for the Government Division
divestiture. At March 31, 2000, the discontinued operations reserve for the
Government Division was $6.5 million. We believe that the completion of these
procedures will not have a material impact on our financial position, results of
operations, or cash flows.
In July 1999, Northrop Grumman filed a lawsuit against us alleging that we
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, we filed a cross-complaint against Northrop Grumman seeking to
recover in excess of $3.7 million, which represents the amount that we contend
Northrop Grumman appropriated from our bank accounts following the acquisition.
We believe that we have strong defenses and counterclaims and plan to vigorously
defend the lawsuit filed by Northrop Grumman and to pursue our counterclaims. No
provisions have been made for expenses that may be incurred to resolve the
lawsuit, and we believe final resolution of the Northrop Grumman allegations
will not have a material impact on our financial position, results of
operations, or cash flows.
In May 1995, our 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 us with respect to
the Nokia claims. Tadiran had subsequently taken the position that we were
responsible for the Nokia claims, based upon allegations that we failed to
provide adequate disclosures and financial reserves with respect to such claims.
In September 1998, Nokia began arbitration proceedings to recover damages, which
were claimed to be $40.6 million. In January 2000, Adaptive Broadband
Corporation and Tadiran settled the Nokia claims for $2 million, and Tadiran and
we reserved rights against each other. In May 1999, we began arbitration
proceedings against Tadiran, primarily to determine that Tadiran is responsible
for the Nokia claims, which later had been liquidated at $2 million. In April
2000, we and
-12-
<PAGE>
Tadiran settled all claims against each other. The Nokia and Tadiran settlements
had no impact on our financial position, results of operations or cash flows.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2000, our net working capital was $102.7 million, which includes
$50.0 million of cash and cash equivalents, as compared to net working capital
of $82.0 million, which includes cash and cash equivalents of $48.9 million, at
June 30, 1999.
For the nine months ended March 31, 2000, we used $21.0 million of cash for
continuing operating activities, primarily due to a loss from operations, and
change in net working capital to support the growth of the AB-Access product
introduction. For the same period in the prior year, we used $6.3 million of
cash for continuing operating activities, primarily due to a loss from
operations, an increase of $1.8 million in prepaid expenses and other assets,
offset by an increase of $ 10.7 million in accrued liabilities.
For the nine months ended March 31, 2000, we used $16.4 million of cash for
investing activities, including an additional $1.0 million investment in
AstroTerra Corporation (AstroTerra) which brings our ownership interest to 12%,
$1.3 million for the first portion of the contingent purchase price for ABL,
$0.5 million for an investment in Cambridge Broadband Laboratories, $5.1 million
for capital expenditures, and $8.5 million used in discontinued operations. For
the same period in the prior year, we used $30.6 million for investing
activities, including $10.6 million for the acquisition of ABL, $0.5 million for
the initial investment in AstroTerra, $2.9 million for capital expenditures, and
$17.1 million for discontinued operations.
During the first three quarters of fiscal year 2000, we acquired 252,500 shares
of our common stock for $3.3 million, bringing the total shares repurchased to
approximately 5.6 million shares under the Board of Directors authorized twelve
million share common stock repurchase plan.
Offsetting the common stock repurchases, for the nine months ended March 31,
2000, we received $43.0 million from the sale of common stock under our stock
option and stock purchase plans. Additionally, we paid $1.1 million for the
premium on conversion of notes, which is described in the section titled
"Premium on Conversion of Notes" above. For the same period in the prior year,
we used $10.4 million for common stock repurchases, received $2.0 million from
the sale of common stock under stock option and stock purchase plans, and
borrowed $25.3 million on our credit facility.
In March 2000, we entered into a secured revolving credit facility with
available credit of $25 million that expires in March 2003. The annual
commitment fee on the unused portion of the facility and the interest rate for
borrowings vary based upon our ratio of funded debt to earnings before interest,
amortization and taxes, with the maximum commitment fee set at 0.25% and the
maximum borrowing rate set at the bank's rate plus 0.5%. The maximum borrowing
rate was 9.5% at March 31, 2000. The net borrowing capacity under the credit
facility was $25 million as of March 31, 2000.
We believe that our current cash position, funds generated from operations,
available credit facility and expected proceeds from the sale of EFData, MRC,
and MDS, will be adequate to meet our requirements for working capital, capital
expenditures and debt service for the next 12 months.
-13-
<PAGE>
Item 3. Quantitative and Qualitative Disclosure about Market Risks
Market risk disclosures set forth in our 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 us alleging that we
failed to disclose certain events and information as required by the terms of
the agreement pursuant to which Northrop Grumman acquired our Government
Division in April 1999. No damages have been specified. In September 1999, we
filed a cross-complaint against Northrop Grumman seeking to recover in excess of
$3.7 million, which represents the amount that we contend Northrop Grumman
appropriated from our bank accounts following the acquisition. We believe that
we have 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 we
believe final resolution of the Northrop Grumman allegations will not have a
material impact on our financial position, results of operations, or cash flows.
In May 1995, our 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 we were indemnified with
respect to the Nokia claims. Tadiran had subsequently taken the position that we
were responsible for the Nokia claims, based upon allegations that we failed to
provide adequate disclosures and financial reserves with respect to such claims.
In September 1998, Nokia began arbitration proceedings to recover damages, which
were claimed to be $40.6 million. In January 2000, Tadiran and we settled the
Nokia claims for $2 million, and Tadiran and we reserved rights against each
other. In May 1999, we began arbitration proceedings against Tadiran, primarily
to determine that Tadiran is responsible for the Nokia claims, which later had
been liquidated at $2 million. In April 2000, we and Tadiran settled all claims
against each other. The Nokia and Tadiran settlements had no impact on our
financial position, results of operations or cash flows.
Item 4. Submission of Matters to a Vote of Security Holders
At the special meeting of Shareholders of the registrant held on March 13, 2000,
the shareholders:
1. Approved an increase in the Company's authorized common shares from 30
million to 250 million.
For Against Abstain Non-Vote
- --- ------- ------- --------
9,096,805 6,684,613 16,203 5,283
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<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 27.1 Financial Data Schedule
Exhibit 99.1 Restated Condensed Consolidated Financial Statements of
Operations for the four quarters and for the fiscal year ended
June 30, 1998(to reflect the operations of EFData, MRC and MDS
and Government Division in discontinued operations)
(b) Reports on Form 8-K.
The Company filed a Current Report on Form 8-K on March 2, 2000, relating to
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)
May 8, 2000 BY /s/ Donna S. Birks
- ----------- -------------------
Date Donna S. Birks
Executive Vice President
Chief Financial Officer
-15-
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<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> 9-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> JUL-01-1999
<PERIOD-END> MAR-31-2000
<CASH> 50,002
<SECURITIES> 0
<RECEIVABLES> 6,000
<ALLOWANCES> 152
<INVENTORY> 9,753
<CURRENT-ASSETS> 154,186
<PP&E> 9,214
<DEPRECIATION> 1,777
<TOTAL-ASSETS> 217,235
<CURRENT-LIABILITIES> 51,457
<BONDS> 0
0
0
<COMMON> 3,739
<OTHER-SE> 161,689
<TOTAL-LIABILITY-AND-EQUITY> 217,235
<SALES> 11,384
<TOTAL-REVENUES> 11,604
<CGS> 12,028
<TOTAL-COSTS> 40,669
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (412)
<INCOME-PRETAX> (29,746)
<INCOME-TAX> (10,709)
<INCOME-CONTINUING> (19,037)
<DISCONTINUED> 4,097
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (14,940)
<EPS-BASIC> (0.47)
<EPS-DILUTED> (0.47)
</TABLE>
<PAGE>
EXHIBIT 99.1
<TABLE>
<CAPTION>
ADAPTIVE BROADBAND CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
Three Months Ended Fiscal Year
----------------------------------------------------- Ended
September 30, December 31, March 31, June 30, June 30,
1998 1998 1999 1999 1999
------------ ------------ --------- -------- -----------
<S> <C> <C> <C> <C> <C>
Revenue $ - $ - $ - $ - $ -
Costs of revenue - - - - -
-------- -------- -------- -------- --------
Gross margin - - - - -
Expenses
Research and development 650 784 1,610 1,687 4,731
Sales, marketing and administration 2,874 2,706 3,164 3,413 12,157
Amortization of intangible assets 50 75 75 75 275
Purchased in-process research and development 8,210 - - - 8,210
-------- -------- -------- -------- --------
Total expenses 11,784 3,565 4,849 5,175 25,373
-------- -------- -------- -------- --------
Operating loss (11,784) (3,565) (4,849) (5,175) (25,373)
Interest income (expense), net (873) (1,104) (1,368) (689) (4,034)
-------- -------- -------- -------- --------
Loss from continuing operations before income taxes (12,657) (4,669) (6,217) (5,864) (29,407)
Benefit from income taxes (2,585) (1,678) (2,239) (2,111) (8,613)
-------- -------- -------- -------- --------
Loss from continuing operations (10,072) (2,991) (3,978) (3,753) (20,794)
Discontinued operations
Income (loss) from discontinued operations,
net of income taxes 221 (645) (3,532) 89 (3,867)
Gain on disposal, net of income taxes - - - 36,281 36,281
-------- -------- -------- -------- --------
Loss from discontinued operations 221 (645) (3,532) 36,370 32,414
-------- -------- -------- -------- --------
Net Income(loss) $ (9,851) $ (3,636) $ (7,510) $ 32,617 $ 11,620
======== ======== ======== ======== ========
Basic and diluted earnings (loss) per share
Loss from continuing operations $ (0.33) $ (0.10) $ (0.13) $ (0.13) $ (0.70)
Income (loss) from discontinued operations 0.01 (0.02) (0.12) 1.24 1.09
-------- -------- -------- -------- --------
Net Income(loss) $ (0.33) $ (0.12) $ (0.25) $ 1.11 $ 0.39
======== ======== ======== ======== ========
Weighted average common shares used in computing
basic and diluted earnings (loss) per share 30,230 29,936 29,558 29,374 29,774
</TABLE>
