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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 2000.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
FOR THE TRANSITION PERIOD to
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COMMISSION FILE NUMBER 0-07428
ADAPTIVE BROADBAND CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 94-1668412
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
1143 BORREGAS AVENUE, SUNNYVALE, CALIFORNIA 94089
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (408) 732-4000
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $.10 PAR VALUE
(TITLE OF CLASS)
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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by nonaffiliates of the
registrant was approximately $1,209,990,000 as of July 31, 2000, excluding
4,008,000 shares outstanding at July 31, 2000 of the registrant's common stock
held by directors, executive officers and holders of more than 10% of the
registrant's common stock. Exclusion of shares held by any person should not be
construed to indicate that such person possesses the power, direct or indirect,
to direct or cause the direction of the management or policies of the
registrant, or that such person is controlled by or under common control with
the registrant.
Indicate the number of shares outstanding of the registrant's common stock,
as of the latest practicable date: On July 31, 2000, there were 37,561,000
shares of common stock outstanding.
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DOCUMENTS INCORPORATED BY REFERENCE
(1) Portions of definitive proxy statement filed with Securities and Exchange
Commission relating to the registrant's 2000 Annual Meeting of
Shareholders. (Part III of Form 10-K)
ITEM 1. BUSINESS
GENERAL
Adaptive Broadband Corporation (the "Company") is a supplier of data
communications transmission equipment for the deployment of broadband wireless
communication over the Internet. Providing high-capacity, last-mile point-to-
multipoint data links spanning the frequency range of 2 to 42 GHz with current
products in the MMDS, 3.5 GHZ (WLL), U-NII (5 GHz license-free) and LMDS
frequencies, our AB-Access product platform is being deployed by carriers such
as Internet Service Providers and Competitive Local Exchange Carriers, as well
as traditional telecommunications providers.
During the past three years, we began to shift our market and product focus
to concentrate on wireless broadband transmission equipment, which led to the
process of divesting all our legacy satellite and terrestrial microwave product
businesses. Effective April 29, 1999, we changed our corporate name to Adaptive
Broadband Corporation from California Microwave, Inc. Our stock symbol of ADAP
was listed on the NASDAQ National Market trading system on April 29, 1999.
In June 1997, we announced our plans to divest the Microwave Networks
Division ("MN") and Satellite Transmission Systems Division ("STS"). The sale of
STS to L-3 Communications Corporation in exchange for $27.0 million in cash was
completed on February 5, 1998, and the sale of MN to Tadiran, Ltd. in exchange
for $31.5 million in cash was completed on April 21, 1998. In May 1998, we sold
the Services Division to Telscape International, Inc. for $8.2 million in cash.
In April 1999, we sold our Government Division to Northrop Grumman Corporation
for $93 million in cash. Adaptive Broadband received approximately $160 million
in proceeds through the divestiture of these businesses. Subsequently, we have
used a portion of the proceeds to invest in development of new products through
acquisition and internal development; eliminated all short-term debt and
continued our share repurchase program initiated in February 1998. See "Risk
Factor--Post-Closing Procedures and Litigation Related to Discontinued
Operations."
On August 20, 1998, we acquired, for $10.6 million in cash, Adaptive
Broadband Limited ("ABL"), a United Kingdom-based company developing high-speed
wireless Internet connectivity technology. This technology is the basis for the
AB-Access product line.
On February 5, 1998, we announced our intention to purchase, in the open
market, up to 6 million shares of our common stock. On October 6, 1998, we
announced an increase in the number of shares authorized for repurchase to 12
million. At June 30, 2000, approximately 5.6 million shares of common stock had
been repurchased since the commencement of the repurchase program. We are not
currently repurchasing on an active basis.
In July 2000, we completed the sale of our EFData Satellite Products
Division (EFData), Microwave Data Systems Division (MDS) and Microwave Radio
Communications Division (MRC). EF Data was sold to Comtech Telecommunications
Corp. for $61.5 million in cash , MDS to Moseley Associates Incorporated for
$38.6 million in cash and MRC was sold to Vislink plc for $19.3 million in cash.
We expect to retain substantially all of the cash from the collective
transactions due to income tax provisions to be applied against the combined
sales.
INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
RISK FACTORS
Statements of the company in this Annual Report on Form 10-K that are not
historical facts, including statements about management's expectations for
fiscal year 2000 and beyond, market demand for products, product
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development plans, competitive pressures and the regulatory environment are
forward-looking statements that involve certain risks and uncertainties. Words
such as "believes," "anticipates," "plans," "expects," "intends" and similar
expressions are intended to identify forward-looking statements, but are not the
exclusive means of identifying such statements. We assume no obligation to
update any forward-looking statement. Factors that could cause our actual
results to differ materially from management's projections, forecasts, estimates
and expectations include, but are not limited to, the following:
FLUCTUATIONS IN QUARTERLY RESULTS
We have experienced and will in the future experience significant
fluctuations in sales and operating results from quarter to quarter. Factors
that could cause our sales and operating results to vary significantly from
period to period include: mix of systems and products sold; timing of
significant orders and deliveries of new and existing systems and products;
receipt of documents to support export shipments, such as export licenses,
import documentation and letters of credit; fluctuating market demand; price
competition; new product introductions by us or by our competitors; fluctuations
in foreign currency exchange rates; disruptions in delivery of products
manufactured by subcontractors or of components or subsystems provided by third-
party suppliers; seasonal factors that may affect capital spending by customers,
such as the varying fiscal year ends of customers and the reduction in business
during the summer months; the relatively long sales cycles for our products;
changes in timing and amount of sales incentive compensation; political
instability; regulatory developments; conditions affecting the
telecommunications industry generally or general economic conditions;
acquisitions and other factors described in this section.
Our future revenues in any period are likely to be derived from a
smaller number of transactions with relatively high average revenues per order.
Therefore, the loss of any orders or delays in closing such transactions could
have a more significant impact on our quarterly revenues and results of
operations than historically.
Due to the relatively fixed nature of many of our costs, including
personnel and facilities costs, and because operating expenses are based on
anticipated revenue, a decline in revenue, failure to achieve expected revenue
in any fiscal quarter or unanticipated variations in the timing of recognition
of specific revenues can cause significant variations in operating results from
quarter to quarter. Under our manufacturing agreement for our AB-AccessTM
product, if we fail to purchase projected quantities of the manufactured
products, the agreement provides for an increase in the per-unit purchase price.
Accordingly, lower-than-anticipated demand could adversely affect our margins
for that product.
To prepare for the future, we must continue to invest resources heavily in
the development of high-speed wireless broadband products and technologies, the
evaluation of these products, plant, equipment, inventory, personnel and other
items required to efficiently produce these new products and to provide
necessary marketing and administrative service and support. As a result, in
addition to our fixed costs, our expenses will be increased by costs associated
with the initial development and production of new products. In the event of a
shortfall in revenues, these factors could have a material adverse effect on our
business, results of operations and financial condition. We believe, therefore,
that period-to-period comparisons of our operating results should not be relied
upon as an indication of future performance.
For all the foregoing factors, as well as other unanticipated factors, it
is possible that in future quarters our results of operations could
fail to meet the expectations of public market analysts or investors. In such
event, or in the event that adverse conditions prevail or are perceived to
prevail generally or with respect to our business, the price of our Common Stock
will likely be materially adversely affected.
MANAGEMENT OF CHANGING BUSINESS OPERATIONS
Our strategy is to develop and provide telecommunications transmission
equipment for high-speed wireless telecommunications networks. As part of this
strategy, we have, in the last three years, sold seven of our non-strategic
businesses and acquired Adaptive Broadband Limited, a developer of high-speed
wireless Internet connectivity technology based in the United Kingdom.
Implementation of our new strategy, particularly in a rapidly evolving market,
will require effective planning and management, as well as significant
additional expenses and financial and operational resources. To date, our
revenues from sales of these new products have been small and there can be no
assurance that we will be able to generate substantial revenues and profits from
these new products
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or otherwise successfully enter this new market. Failure to develop and
introduce enhanced new products in a cost-effective and timely manner or to
achieve market acceptance of these products would have a material adverse effect
on our business, results of operations and financial condition.
EFFECTIVE MANAGEMENT OF GROWTH
We intend to rapidly expand the number of personnel in the areas of
marketing, sales, customer support and product development in order to address
potential growth in our customer base and market opportunities. If we are unable
to manage this anticipated growth effectively, we may not be able to take
advantage of market opportunities, develop or enhance our products or technical
capabilities, execute our business strategy or otherwise respond to competitive
pressures or unanticipated requirements. To effectively manage the anticipated
growth of our operations, we believe we must both enhance our operational,
financial and management information controls, reporting systems and procedures
and effectively manage multiple relationships with our customers, suppliers and
other third parties. If we are unable to effectively manage the anticipated
growth, our business, results of operations, and financial condition could be
materially adversely effected.
LENGTHY SALES CYCLE
A customer's decision to purchase our products typically involves a
significant technical evaluation, demonstrations, field trials, and formal
internal procedures associated with large capital expenditure approvals. For
these and other reasons, the sales cycle associated with our products can be
lengthy and subject to a number of significant risks over which we have little
or no control. Because of the lengthy sales cycle and the potential for more
reliance on a relatively small number and large size of customers' orders, if
revenues forecast from a specific customer for a particular quarter are not
realized in that quarter, our operating results for that quarter could be
materially adversely affected.
DEPENDENCE ON LIMITED NUMBER OF CUSTOMERS
We expect that we will become more dependent upon a relatively limited
number of customers for a substantial portion of our revenues in future periods.
In the past 18 months, as part of our strategy to shift our market and product
focus, we divested our legacy satellite, microwave broadcast and terrestrial
microwave products. The loss of a major customer or the reduction, delay or
cancellation of orders from one or more of our significant customers could
materially adversely affect our business, results of operations and financial
condition.
RAPID TECHNOLOGICAL CHANGE
The market for telecommunications products and services is subject to rapid
technological change, evolving industry standards, rapid changes in customer
requirements and frequent product and service introductions and enhancements.
The company's future success will depend in part on our ability to anticipate
and respond to these changes by enhancing our existing products and services and
by developing and introducing on a timely and cost-effective basis, new
products, features and services that address the needs of its customer base.
There can be no assurance that we will be successful in identifying, developing
and marketing new products, product enhancements and related services that
respond to technological change or evolving industry standards or that
adequately meet new market demands.
DEPENDENCE ON RAPIDLY EVOLVING TELECOMMUNICATIONS AND INTERNET INDUSTRIES
Our future success is dependent upon the continued growth of the data
communications industry, particularly with regard to the Internet. The global
data communications and Internet industries are evolving rapidly, and it is
difficult to predict potential growth rates or future trends in technology
development. There can be no assurance that the deregulation, privatization and
economic globalization of the worldwide telecommunications market that has
resulted in increased competition and escalating demand for new technologies and
services will continue in a manner favorable to the company or its business
strategies. In addition, there can be no assurance that the growth in demand for
Internet services and the resulting need for high speed or enhanced data
communications products will continue at its current rate or at all.
DEPENDENCE ON PRODUCT ACCEPTANCE
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Since we have divested our legacy satellite, microwave broadcast and
terrestrial microwave products in order to concentrate our business prospects on
wireless broadband transmission equipment, our future success will be
substantially dependent on whether high-speed wireless telecommunications
products gain market acceptance as a means to provide telecommunications voice
and data service. Because these markets are relatively new, it is difficult to
predict which market segments will develop or expand. We have recently invested
and expect to continue to invest significant time and resources in the
development of new products for this market. In the event that service providers
adopt technologies other than the high-speed and other wireless technologies
that we offer, we may not be able to sustain or expand our business
Service providers continually evaluate alternative technologies,
including wire-based technologies such as digital subscriber line, cable modem,
optical fiber cable and high-speed wires leased from the traditional service
providers in a given locale, as well as different wireless technologies. For the
fiscal year ended June 30, 2000, our legacy business accounted for 86% of our
revenues while wireless broadband transmission equipment accounted for 14% of
our revenues. Because we will no longer have revenues from satellite, microwave
broadcast and terrestrial microwave products, the failure of service providers
to accept our wireless broadband transmission products would have a material
adverse effect on our business, results of operation and financial condition.
DEPENDENCE ON THIRD-PARTY MANUFACTURERS
We rely on independent manufacturers to provide full turnkey
manufacturing of our AB-Access product. We currently have qualified only one
manufacturer for our AB-Access product. We have a supply agreement with this
third-party manufacturer to manufacture the AB-Access product for an initial
term of two years, with rolling one-year renewals unless one party disagrees. In
the event, however, that this subcontractor were to experience financial,
operational, production or quality assurance difficulties or allocate production
resources to others in lieu of the company or experience a catastrophic event
that resulted in a reduction or interruption in manufacturing services to the
company, our business, results of operations and financial condition would be
materially adversely affected. There can be no assurance that manufacturing
services from alternative sources will be able to meet our future requirements
or that existing or alternative sources will continue to be available to us at
favorable prices.
DEPENDENCE ON COMPONENT AVAILABILITY, SUBCONTRACTOR PERFORMANCE AND KEY
SUPPLIERS
Timely delivery of our products is dependent upon the availability of
quality components and subsystems used by us in our products. We obtain certain
components and subsystems from a single, or a limited number of sources. We
operate without a substantial inventory of components and subsystems, but
believe that most components and subsystems are available from existing or
alternative suppliers and subcontractors.
We do not have any long-term supply agreements with these vendors to
ensure uninterrupted supply of these components. Inability to develop
alternative sources for these components or to obtain sufficient quantities of
components could result in delays or reductions in product shipments. In the
event of a reduction or interruption in the supply of a key component, a
significant amount of time could be required to qualify alternative suppliers
and receive an adequate flow of replacement components. Reconfiguration of our
products to adapt to new components may also be required and could entail
substantial time and expense. In either event, our business, results of
operations and financial condition would be materially adversely affected. In
addition, the process of manufacturing certain of these components is extremely
complex, and our reliance on the suppliers of these components exposes us to
potential production difficulties and quality variations, which could negatively
affect cost and timely delivery of our products.
INTERNATIONAL SALES
For our continuing operations, international sales represented 15% of
total sales for fiscal year 2000. We expect that international sales will grow
to account for a significant proportion of future revenues. These sales expose
us to certain risks, including the difficulty and expense of staffing and
maintaining foreign sales offices and distribution channels, fluctuations in
foreign currency exchange rates, political instability, availability of suitable
export financing, export/import license requirements and other U.S. and foreign
regulations that may apply to the export of our products, longer customer
payment cycles, greater difficulty in accounts receivable collection, changes in
regulatory requirements or in economic or trade policy, costs related to
localizing products for foreign countries, potentially weaker protection for
intellectual property in certain foreign countries, the burden of complying with
a
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wide variety of foreign laws and practices, tariffs and other trade barriers,
and potentially adverse tax consequences, including restrictions on repatriation
of earnings. If the risks listed above materialize to a significant extent, our
business, results of operations and financial condition would be adversely
affected.
In addition, many countries require communications equipment used in their
country to comply with their own particular regulations, including safety
regulations, radio frequency allocation schemes and standards. If we cannot
develop products that work with different standards, we may be unable to sell
our products. If compliance proves to be more expensive or time consuming than
we anticipate, our business would be adversely affected. Inability to obtain
necessary regulatory approvals in foreign markets on a timely basis could have a
material adverse effect on our business, results of operations and financial
condition.
We attempt to reduce the risk of doing business in foreign countries by
seeking contracts denominated in dollars, advance payments and irrevocable
letters of credit in our favor. There can be no assurance that these activities
will be successful. To date we have assumed very little foreign exchange risk
but could do so in the future if deemed necessary to sell our products. We also
has foreign operations that have expenditures denominated in local currencies.
Fluctuations in foreign currency exchange rates may contribute to fluctuations
in our operating results. For example, changes in foreign currency exchange
rates could adversely affect revenues, net income, earning (loss) per share and
cash flow of our operations in the affected markets. Similarly, such
fluctuations may cause us to raise prices or the local price may effectively be
increased by such fluctuations, which could adversely affect demand for our
products and services. In addition, if exchange or price controls or other
restrictions are imposed in countries in which we do business, our business,
results of operations and financial condition would be materially adversely
affected.
COMPETITION
The market for data communications products and systems is rapidly evolving
and highly competitive. Increased competition is likely to result in price
reductions, shorter product life cycles, reduced gross margins, longer sales
cycles and potential loss of market share, any of which would adversely affect
our business. As a provider of high-speed and other wireless telecommunications
equipment, we compete directly or indirectly with a number of large
telecommunications equipment suppliers, including Alcatel, Cisco, Nortel,
Lucent, and Motorola, as well as with smaller start-up companies. In addition,
well-capitalized companies such as Nokia are potential entrants into the market.
Further, certain of our customers have technological capabilities in our product
areas and could choose to replace our products with their own. Many of our
competitors and potential competitors have significantly greater financial,
marketing and operating resources than we do. Our wireless solutions also
compete with products based on other technologies, such as digital subscriber
lines, fiber optic cable, cable modems and high-speed wires leased from
traditional telecommunications service providers.
We expect our competitors to continue to improve the performance of their
current products and to introduce new products or new technologies that may
supplant or provide lower-cost alternatives to our products. To be competitive,
we must continue to invest significant resources in research and development,
sales and marketing and customer support. There can be no assurance that we will
have sufficient resources to make these investments or that we will be able to
make the technological advances necessary to be competitive. As a result, we may
not be able to compete effectively.
BRIEF TENURE OF MANAGEMENT; DEPENDENCE ON KEY PERSONNEL
The majority of our senior management joined the company within the last 36
months. Most of these individuals have not worked together previously and there
can be no assurance that they will be able to work together effectively or
successfully implement our strategy, particularly as the execution of the
strategy shifts from the divestiture of our legacy products to increasing market
penetration of our wireless broadband transmission products. Our performance is
substantially dependent on the performance of our executive officers and other
key employees. We do not have key-man life insurance on any employee. Loss of
the services of any of our key executive officers or other key employees could
have a material adverse effect on the company. However, we do have a succession
plan in place and have begun implementation as evidenced by the promotion of
Daniel S. Scharre to president and chief operating officer from chief technology
officer. S. Michael Yang was appointed chief technology officer, succeeding Mr.
Scharre. Frederick D. Lawrence continues as chairman and chief executive
officer. We are providing employees with growth opportunities within the company
in order to continue to implement our succession plan, when appropriate.
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Our success depends in part on our ability to attract, hire, train, retain
and motivate qualified technical, management and sales personnel with
appropriate levels of managerial and technical capabilities. We believe that a
significant level of expertise is required to develop and market products and
services effectively. Recruiting qualified personnel is an intensely competitive
and time-consuming process. We compete for such personnel with a number of other
companies, many of which have substantially greater resources than the company.
There can be no assurance that we will be successful in attracting and retaining
the technical, management and sales personnel we require to conduct and expand
our operations successfully on a timely basis. The failure to attract, hire,
train, retain and motivate qualified technical, management and sales personnel
in the future would have a material adverse effect on our business, financial
condition and results of operations. We are accelerating our hiring activities
in the areas of marketing, sales, and customer support and product development
in order to broaden the market penetration for our products and to continue to
refine our products to meet customer requirements.
In addition, during the same 36-month period, a new Board of Directors has
been elected, consisting of Frederick D. Lawrence, William B. Marx, Jr., Terry
W. Ward, Frederick W. Whitridge, Jr. George A. Joulwan and Leslie G. Denend. Two
of the current six members, William B. Marx and Terry W. Ward, will not be
standing for reelection at our annual meeting of shareholders in October 2000.
In April 2000, we announced the appointment of three new directors to the Board,
William L. Martin III, James T. Richardson and James C. Granger, all of who will
stand for election at the October 2000 meeting.
LIMITED PROTECTION OF PROPRIETARY RIGHTS
Our success and ability to compete effectively is dependent in part upon
our proprietary technology. We rely on a combination of patent, trademark,
copyright and trade secret laws, as well as nondisclosure agreements and other
contractual restrictions, to establish and protect our proprietary rights. We
generally enter into nondisclosure and invention assignment agreements with our
employees and consultants and into nondisclosure agreements with our customers
and suppliers. There can be no assurance that the measures we undertake will be
adequate to protect our proprietary technology.
RISKS OF THIRD-PARTY CLAIMS OF INFRINGEMENT
The telecommunications industry is characterized by a relatively high level
of litigation based on allegations of infringement of proprietary rights. While
to date, we have not been subject to any material claims of infringement or
misappropriation of intellectual property of third parties, there can be no
assurance that third parties will not assert infringement claims against us,
that any such assertion of infringement will not result in litigation or that we
would prevail in such litigation. Furthermore, any such claims, with or without
merit, could result in substantial cost to the company and diversion of its
personnel, require the company to develop new technology, or require the company
to enter into royalty or licensing arrangements. Such royalty or licensing
agreements, if required, may not be available on terms acceptable to us, or at
all. In the event of a successful claim of infringement or misappropriation
against us and our failure or inability to develop non-infringing technology or
to license the infringed, misappropriated or similar technology at a reasonable
cost, our business, results of operations and financial condition would be
materially adversely affected. In addition, we indemnify our customers against
claimed infringement of patents, trademarks, copyrights and other proprietary
rights of third parties. Any requirement for us to indemnify a customer could
have a material adverse effect on our business, results of operations and
financial condition.
RISKS RELATING TO POTENTIAL ACQUISITIONS
As part of our business strategy, we have in the past and may in the future
make acquisitions of, or significant investments in, companies, products or
technologies that we believe are complementary. Any such future transactions
would be accompanied by the risks commonly encountered in making acquisitions of
companies, products and technologies. Such risks include, among others, the
difficulties associated with assimilating the personnel and operations of
acquired companies, the potential disruption of our ongoing business, the
distraction of management and other resources, the integration of personnel and
technology of an acquired company, difficulties in evaluating the technology of
a potential target, inability to motivate and retain new personnel, the
maintenance of uniform standards, controls, procedures and policies, the
potential impairment of relationships with employees and customers and the risks
that we will otherwise not realize the expected benefits of the acquisitions.
There can be no assurance that we will be successful in overcoming these risks
or any other problems encountered in connection with
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any such acquisitions. Furthermore, our future acquisitions could result in the
issuance of dilutive equity securities, the incurrence of debt or contingent
liabilities or amortization expenses related to goodwill and other intangible
assets, any of which could have a material adverse effect on our business,
results of operations and financial condition or on the market price of our
Common Stock.
ACCOUNTING CHARGES RELATED TO ACQUISITIONS AND DISPOSITIONS
Many attractive acquisition candidates are high-technology companies that
tend to have small amounts of tangible assets and, as a result, if those
acquisitions were accounted for as purchases, our acquisition of such companies
could result in significant goodwill charges. In that event, a significant
amount of goodwill would be amortized, which would adversely affect our
financial results.
In connection with the acquisition of ABL, we allocated a significant
portion of the purchase price to purchased in-process research and development.
We received an inquiry from the SEC, dated December 31, 1998, related to our
Annual Report on Form 10-K for the fiscal year ended June 30, 1998 and Quarterly
Report on Form 10-Q for the quarter ended September 30, 1998. The primary focus
of the inquiry was to request additional information regarding our in-process
research and development costs from the purchase of ABL in August 1998. In
addition, the inquiry requested information about our fiscal year 1998
restructuring charge, intangible asset impairment charge and accounting for
discontinued operations, as well as certain other accounting and disclosure
clarifications. We responded on February 3, 1999. No additional communication or
inquiry from the SEC had been received. We believe that we have properly valued
and accounted for the in-process research and development and that the
accounting and disclosure related to the other inquiries are appropriate. There
can be no assurance, however, that such inquiry will not result in restatement
of our financial statements, including, for example, a reduction in the charge
for purchased research and development and an increase in the amount allocated
to intangible assets, such as goodwill, which would be amortized and could
adversely affect our future results of operations.
POST-CLOSING PROCEDURES AND LITIGATION RELATED TO DISCONTINUED OPERATIONS
In April 1999, we completed the sale of our Government Division to Northrop
Grumman Corporation (Northrop Grumman) for $93.0 million in cash, plus up to an
additional $5 million cash payment, contingent on performance of the divested
business. During fiscal year 1998, our STS Division was sold to L-3
Communications Corporation (L-3) for $27.0 million in cash, and our MN Division
was sold to Tadiran, Ltd. (Tadiran) for $31.5 million in cash. In July 2000,
EFData, MDS and MRC divisions were sold for $119 million in cash. We recorded an
estimated loss of $8.3 million (net of income taxes of $11.3 million) on
disposal of the three divisions in the fourth quarter of fiscal year 2000.
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 June 30, 2000, the
discontinued operations reserve for the Government Division was $3.5 million.
Final accounting for STS and MN has been completed. Final accounting for each of
the EFData, MDS, and MRC divisions are subject to completion of the post-closing
procedures provided for in the purchase agreements. We have accrued for
transaction costs and other adjustments of $8.3 million related to the EFData,
MDS, and MRC sales that may occur in the post-closing procedures for the three
divestitures.
In July 1999, Northrop Grumman filed a lawsuit against Adaptive Broadband
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 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 to pursue its counterclaims. No
provisions have been made for expenses that may be incurred to resolve the
lawsuit.
We believe that the completion of these post-closing procedures and
litigation related to discontinued operations will not have a material impact on
our financial position, results of operations or cash flows; however, no
assurance can be given that the actual outcome will be favorable.
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GOVERNMENT REGULATION
Radio communications are subject to regulation by the United States and
foreign laws and international treaties. Our products and systems must conform
to domestic and international requirements established to avoid interference
among users of microwave frequencies and to permit interconnection of equipment.
In addition, domestic and international authorities regulate the allocation of
the radio frequency spectrum. Products to support new services can be marketed
only if permitted by suitable frequency allocations and regulations, and the
process of establishing new regulations is complex and lengthy. Certain
customers have had difficulty obtaining allocation of spectrum for their
services, which adversely affects their demand for our products. Accordingly,
delay or failure of our customers to obtain suitable allocations of available
spectrum could have a material adverse effect on our business, results of
operations and financial condition.
COST OVERRUNS AND POSSIBLE CANCELLATION OF ORDERS
A growing proportion of our sales are made pursuant to contracts that
require delivery of products over several quarters or years. The prices of
products and systems sold under these contracts are based in part on our
estimate of our cost to produce these items. If we were to incur higher costs
than estimated in performing under these contracts, it could have a material
adverse effect on our results of operations and financial condition.
Our customers often enter into purchase orders in advance of manufacture of
the equipment ordered. Cancellations of orders by customers may, depending upon
the timing of the cancellation, leave us with unsaleable products or idle
capacity, which would adversely affect our business, results of operations and
financial condition.
NEED TO REDUCE COST OF PRODUCTS
Market acceptance of our products, and our future success will depend in
significant part on reductions in the per-unit cost of our products. Certain of
our competitors currently offer certain products at prices lower than those of
some of our products. While we have initiated cost reduction programs to offset
pricing pressures on our products, there can be no assurance that these cost
reduction efforts will continue to keep pace with competitive pricing pressures
or lead to improve gross margins. If we are unable to continue to obtain cost
reductions, our gross margins and profitability will be adversely affected.
ACCOUNTS RECEIVABLE
We may, under certain circumstances, be unable to enforce a policy of
receiving payment within a limited number of days of issuing invoices. For
example, customers may be unwilling or unable to pay for products on a timely
basis if they are dissatisfied with the product or if they are experiencing
financial difficulties. Any inability to timely collect our receivables could
cause us to be short of cash to fund operations or could ultimately require us
to write-off as uncollectible certain accounts receivable, which could have a
material adverse effect on our business, results of operations and financial
condition.
RISKS OF PRODUCT DEFECTS, PRODUCT RETURNS AND PRODUCT LIABILITY
Products as complex as ours frequently contain undetected errors, defects
or failures, especially when first introduced or when new versions are released.
In the past, such errors have occurred in our products, and there can be no
assurance that errors will not be found in our current and future products. The
occurrence of such errors, defects or failures could result in product returns
and other losses to our customers or us. Such occurrence could also result in
the loss of or delay in market acceptance of our products, which could have a
material adverse effect on our business, results of operations and financial
condition. Our products generally carry a one-year warranty period, which
includes factory services as needed for replacement of parts. Due to the
relatively recent introduction of the AB-Access product, we have limited
experience with the problems that could arise with these products. In addition,
our purchase agreements with our customers typically contain provisions designed
to limit our exposure to potential product liability claims. It is possible,
however, that the limitation of liability provisions contained in our purchase
agreements may not be effective as a result of federal, state or local laws or
ordinances or unfavorable judicial decisions. Although we have not experienced
any significant product liability claims to date, the sale and support of
9
<PAGE>
our products entail the risk of such claims. A successful product liability
claim brought against us could have a material adverse effect on our business,
results of operations and financial condition.
FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FINANCING
Our operations to date have required substantial amounts of capital. We
expect to spend substantial funds to support the growth of our products, to
develop new products and otherwise to implement our strategic plan. We
anticipate that our existing capital resources and credit facilities should
enable us to maintain our current and planned operations for at least the next
12 months.
Our capital requirements will depend on numerous factors, including
potential changes in strategic direction, the progress of our research and
development programs, the commercial acceptance of our products, the resources
we devote to advanced technologies and the demand for our products. To the
extent that funds are insufficient, we would have to raise additional funds to
meet our capital requirements. If additional funds are raised through the
issuance of equity securities, the percentage ownership of the stockholders of
the company will be reduced, stockholders may experience additional dilution and
such equity securities may have rights, preferences or privileges senior to
those of the holders of our Common Stock. No assurance can be given that
additional financing will be available on acceptable terms, if at all. If
adequate funds are not available, we may have to, among other things, reduce
substantially or eliminate expenditures for the development and marketing of our
products.
BROADBAND INDUSTRY OVERVIEW
BROADBAND MARKET. The demand for improved data communications is increasing
worldwide as emerging economies seek to modernize, as increasingly information-
intensive developed and developing countries introduce new data services and as
the spread of the Internet has accelerated and expanded. We believe that the
global markets for network computing, data communications and telecommunications
are converging, providing opportunities for new technologies in the area of
information access, transport and delivery over ubiquitous IP data networks.
Additionally, privatization, deregulation and regulatory initiatives have all
enhanced competition, permitted the opening of new markets and provided
incentives for the development of new products.
ALTERNATIVE TRANSMISSION MEDIA. Customers for data communications equipment
must weigh the relative costs and advantages of the four presently available
transmission media: legacy twisted-pair infrastructure (xDSL), cable, modem
technologies, fiber optic cable and wireless systems based on terrestrial
radio. --each medium has certain advantages over the others--and each suffers
certain disadvantages when compared to the others. Adaptive Broadband's focus is
on the wireless broadband access area, employing terrestrial radio.
By most accounts, cable modems and xDSL have captured the majority of
broadband "mind share". On a business level, however, market analysis indicates
that wireless presents a compelling business case for several reasons:
. Ability to serve untapped demand. xDSL distance limitations and the need
to upgrade cable plant have effectively denied many areas broadband access.
Wireless networks can be deployed quickly in urban or rural areas without the
dependency on legacy local loop infrastructure. Further, wireless has the
ability to provide portable or mobile access--a capability impossible for wired
solutions.
. Suitability to business "sweet-spot". Cable and xDSL offerings generally
provide a maximum of 2 Mbps per user, although guaranteed sustained rates are
typically below 1 Mbps asymmetrically (i.e., greater downstream traffic versus
upstream traffic). Generally fiber is cost prohibitive and sees a single digit
market penetration in the last-mile. Therefore, fiber generally provides
upwards of 45 Mbps to Multi-Tenant Units (MTU) within densely concentrated urban
area. Most small and medium-sized businesses require something in-between.
Wireless is designed to be flexible and to fill in this business market gap.
. Support for 2nd generation applications. Today, broadband Internet is
asymmetric in nature; most traffic is downstream from the net. The proliferation
of use of applications such as video conferencing, voice, multimedia and other
emerging Internet based applications will require dynamic symmetric and
asymmetric connections. Cable networks and xDSL are based on legacy copper
infrastructure and are generally asymmetric and will not support these
applications. Wireless, specifically when implemented with TDD (Time Division
Duplexing) technologies, is designed to dynamically allocate upstream/downstream
traffic and support all applications offering both symmetric and asymmetric
links depending on the demanded applications.
10
<PAGE>
. Quick, low-cost deployment. Wireless broadband deployments do not require
significant upgrades to installed network infrastructure. The result is a
quicker and less expensive network rollout.
. Incremental deployment. Cable and xDSL providers must deploy networks -
from a central office or headend -prior to signing up customers. With a quick
build-out, operators can establish wireless links as customers sign-up, while
keeping down up-front capital expenditures.
. National footprint. xDSL and cable operators, in particular, must pursue
complex sharing, swapping and/or leasing arrangements in order to provide
nationwide service. Through the availability of license and license-free radio
spectrum, wireless operators can have an immediate nationwide footprint. Even
more, xDSL and cable operators may use wireless technologies to augment their
services footprint to provide an ubiquitous footprint.
Rarely is a complete communications system based solely on one media.
Transmission is normally routed through a combination of media, each employed
where it fits most cost-effectively within the communications network.
STRATEGY
Adaptive Broadband's strategy is to provide wireless-based solutions to
send and receive complex data, through the design and manufacture of capital
equipment products for public and private communications systems. Historically,
we have concentrated our efforts on sales of products and services for
communications infrastructure rather than on consumer terminals and equipment.
In the future, we plan to introduce versions of our wireless broadband access
products to meet the markets' needs for portability and mobility.
GLOBAL INFORMATION TECHNOLOGY BANDWIDTH REQUIREMENTS. We believe that the
wireless broadband market offers numerous opportunities for new products because
of the growing need for increased bandwidth, or carrying capacity, for digital
data. In particular, continual improvements in computing technology create
increasingly sophisticated bandwidth requirements for moving data around the
world. For instance, data communications infrastructure requires ever-increasing
complex data types--such as audio, video and graphics files--for computer users.
Internet traffic is growing 1000% per year, fueling the demand for high-speed
access. Industry analysts project that by year 2003, 34% of U.S. households and
45% of U.S. businesses will be served by broadband wireless networks.
FOCUS ON ALIGNING WITH STRATEGIC PARTNERS. We consider partnering with
industry leaders to be a significant part of our strategy, as companies leverage
their combined strengths to exploit the opportunities resulting from the ways in
which the Internet is driving the new information-based economy. Adaptive
Broadband has strengthened its technology, manufacturing and market access
positions by forging strategic alliances to date with Solectron, Proxim,
JetStream, Telaxis, and CASTEL of China. We intend to continue forging new
alliances, especially for broadened market access.
ADDRESSING BUSINESS APPLICATIONS. Industry analysts predict that by year
2005, 80% of all Internet traffic will be business-to-business. Adaptive
Broadband believes that our AB-Access product platform is well-suited to address
this market due to its symmetrical high-speed data rates. Business applications,
such as video/voice conferencing and other emerging Internet applications
require symmetrical (same speed transmitting and receiving) data rates. We
employ TDD technology in our product, which allows total flexibility in
upstream/downstream traffic, as compared to most other fixed wireless
broadband offerings, which are based on FDD (Frequency Division Duplexing)
supporting low-speed upstream data rates. TDD offers the flexibility of
supporting asymmetric and symmetric traffic.
FIRST TO MARKET 5 GHz U-NII BAND. We recognized the market potential of the
U-NII (Unlicensed National Information Infrastructure) frequency band in the
U.S. and first developed product to address that largely untapped market. (The 5
GHz is used also in other parts of the world using licensed frequency, such as
in China.) While initial customers are emerging Internet Service Providers
(ISPs) and Competitive Local Exchange Carriers (CLECs), traditional data
communications carriers who have licensed spectrum, such as MMDS (Multi Media
Distribution System) and LMDS (Local Multimedia Distribution Service), are
realizing that to deploy a nationwide fixed wireless broadband network, they
will need to "gap fill" with U-NII. To date, AB-Access has generated over $1
billion in contracted five-year demand, giving Adaptive Broadband a leadership
position in the U-NII band.
INCREASING FOCUS ON DOMESTIC MARKET. Our products are marketed on a
worldwide basis. Domestic revenue in fiscal year 2000, the first year that
shipments commenced of AB-Access, was $24.4 million, or
11
<PAGE>
85% of total revenue. International revenue was $ 4.3 million, representing 15%
of total revenues of the continued operations. Adaptive Broadband has focused
initially on the U.S. domestic market for wireless broadband solutions to reduce
its dependence on volatile international economies. We believe that a
substantial portion of our sales in future years will come from the
international sector due to communications infrastructure requirements in
developing countries and the growing worldwide need for wireless-based bandwidth
solutions.
PRODUCTS
Adaptive Broadband develops products for the broadband wireless market. Our
AB-Access transceiver enables heavy data transmission for the final network
connection to an end user (the "last mile") at rates as high as 25 Mbps, a speed
in excess of 400 times those available with conventional modem networks. At this
bandwidth, users are able to download full-streaming video and data files, use
real-time video conferencing and surf the Worldwide Web - all at the same time
over a single connection. This wireless point-to-multipoint system for fixed
data networks enables users to bypass existing legacy telecommunications
infrastructure, so the initial investment is significantly lower than that
required for "wired" alternatives. This low-cost wireless infrastructure means
that a complete network can be installed as quickly as in days or weeks, instead
of the typical months or years. And because AB-Access' architecture is
expandable in increments, the network can grow as the business grows or as
bandwidth needs evolve.
Although our fundamental AB-Access platform addresses a wide frequency
spectrum - from 2.0 to 42.0 GHz -- the product strategy is targeted toward
markets that have low start-up costs and high potential for expansion,
specifically the U-NII and MMDS bands in the U.S. and 3.5 GHz in other areas of
the world. In response to customer demand, we developed, in partnership with
Telaxis, an LMDS version AB-Access.
We believe that AB-Access' advanced subscriber management features will
make the product particularly attractive to carriers, CLECs and ISPs because it
allows end users (new subscribers) to be brought on-line quickly with a single,
integrated unit. This feature is designed to reduce service providers' costs by
enabling fast and easy installation. Flexible tariffing will allow service
providers to bill subscribers not only for on-air time, but also by amount of
bandwidth usage, time-of-day, or other criteria.
SALES, MARKETING AND CUSTOMER SUPPORT
Adaptive Broadband's sales and marketing strategy varies with the
particular market served and involves direct sales by our own sales force, sales
through Original Equipment Manufacturers (OEMs), value-added resellers (VARs),
or a combination of the foregoing. We also have entered into sales distribution
agreements with respect to certain versions of our AB-Access fixed wireless
broadband products.
We consider our ability to create and maintain long-term customer
relationships an important component of our overall strategy in each of our
markets. Relationships with customers are established and maintained by our
technical and marketing staff. Our strategy also includes providing ongoing
customer support for our systems and products. This support involves providing
direct access to the company's engineering staff or trained technical
representatives located throughout the world. We intend to continue to expand
our marketing efforts and distribution channels worldwide. See "Risk Factors--
Dependence on Limited Number of Customers," "-Dependence on International Sales"
and "-Lengthy Sales Cycle."
MANUFACTURING
As part of our "Value Focused" operational strategy, Adaptive Broadband
outsources the manufacturing of its products. In August 1999, we announced a
contract with Solectron Corporation to manufacture Adaptive Broadband's AB-
Access equipment. This arrangement was intended to give us the capability to
meet high-volume demand in both the U-NII and MMDS frequency bands. See "Risk
Factors--Dependence on Third-Party Manufacturer."
In March 2000, we announced a contract with Casil Telecommunications
Holdings Limited (CASTEL) that will make CASTEL a manufacturing and market
access partner for our AB-Access fixed broadband wireless equipment in China.
CASTEL's equipment manufacturing subsidiary, China Southern Telecom (CST), will
assemble, manufacture, and test the product. We will transfer the product's
manufacturing technology to CASTEL,
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with the exception of our chip sets, which will be supplied as manufactured
components. We will retain all other intellectual property rights for AB-Access.
CASTEL will market the equipment to carriers in China under a private labeling
agreement with Adaptive Broadband.
Electronic components and raw materials used in the company's products are
obtained through its manufacturing partners, Solectron and CASTEL. Some
components are standard items and others are manufactured to our specifications
by subcontractors. We operate without a substantial inventory of components and
subsystems. Although no assurances can be given, we believe that we are
protected from component shortages due to the high-volume purchasing leverage
enjoyed by Solectron. We also believe that most components and subsystems are
available from alternative suppliers and subcontractors. See "Risk Factors--
Dependence on Component Availability, Subcontractor Performance and Key
Suppliers."
COMPETITION
Adaptive Broadband is engaged in a highly competitive business. Many of the
company's competitors have significantly greater financial, marketing and
operating resources than the company. In addition, certain of the our customers
have technological capabilities in our product areas and could choose to replace
our products with their own. The main competitors of AB-Access are suppliers of
other technologies, such as digital subscriber lines deployed over copper
telephone lines and cable modems. In addition, many competitors participate in
the wireless broadband market, but focus on different areas of the frequency
spectrum. Among the primary competition for our products are:ADC
Telecommunications, Alcatel, Breezecom, Cisco, Harris Corporation, Hybrid
Networks, Inc., Lucent, Netro, Nortel, and Wireless Inc.
We believe that competition in our markets is based primarily on price,
performance, reputation, on-time delivery, reliability and customer support. See
"Risk Factors--Competition."
RESEARCH AND DEVELOPMENT
Research and development expenses were $17.1 million, $4.7 million and $0.3
million in fiscal years 2000, 1999 and 1998, respectively. The increase in
research and development spending in fiscal year 2000 was mainly attributable to
our investment in research and development of AB-Access products, including
prototype expenses and the development of technology that spans the frequency
range for the global market. We expect to continue to commit substantial
resources to product development and engineering in future periods. As a result,
we anticipate that research and development expenses will increase in future
periods as we continue to focus our efforts on developing wireless broadband
data network products to address the digital voice, video and data markets. In
addition, we may consider acquiring additional technologies complementary to our
business through strategic acquisitions. See "Risk Factors--Rapid Technological
Change" and "-Dependence on Product Acceptance."
INTELLECTUAL PROPERTY
The company relies on a combination of patent, copyright, trademark and
trade secret laws, as well as non-disclosure agreements and licensing
arrangements, to establish and protect our intellectual property rights. We
presently have 12 patent applications pending, and more are in process. Adaptive
Broadband, AB-Access and the Adaptive Broadband logo are the company's
trademarks. See "Risk Factors--Limited Protection of Proprietary Rights" and "-
Risks of Third-Party Claims of Infringement."
EMPLOYEES
At June 30, 2000, Adaptive Broadband had in its continuing operations 183
employees, 18 of whom were engaged in production support, 78 in research and
development and other engineering support, 46 in marketing and 41 in general and
administration functions. None of the employees are represented by a labor
union. The company believes that its employee relations are good.
REGULATION
Radio communications are subject to regulation by the United States and
foreign laws and international treaties. Our products and systems must conform
to domestic and international requirements established to avoid interference
among users of the radio frequency spectrum. In some markets, particularly in
the United States and
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Canada, prior government certification must be obtained before placing certain
of our products on the market. Accordingly, delay or failure of the company to
obtain such certification could have a material adverse effect on our business,
results of operations and financial condition.
In addition, domestic and international authorities regulate the allocation
of the radio frequency spectrum. Products to support new services can be
marketed only if permitted by suitable frequency allocations and regulations,
and the process of establishing new regulations is complex and lengthy. Certain
customers have had difficulty obtaining allocation of spectrum for their
services, which adversely affects their demand for our products. Accordingly,
delay or failure of our customers to obtain suitable allocations of available
spectrum could have a material adverse effect on our business, results of
operations and financial condition. Several of the our products are designed to
operate in license-exempt frequency bands which have already been allocated,
particularly in the United States and Canada, and which relieves customers of
the need to obtain government licenses or approval. See "Risk Factors--
Government Regulation."
BACKLOG
We define backlog as orders received for products shippable within twelve
months. At June 30, 2000, our backlog of undelivered orders was $66.6 million
(unaudited) and was solely for the AB-Access product . In our experience,
backlog at any given time is not necessarily indicative of prospective period
revenues. We generally record an order in backlog when we receive a firm
contract or purchase order which identifies product quantities and delivery
dates (which are required to be within 12 months as mandated by Adaptive
Broadband policy). While from time to time a substantial portion of our backlog
has been comprised of large orders, the cancellation of any of the purchase
orders could have a material adverse effect on our operating results.
Historically, we have not experienced significant changes in our backlog from
cancellations or revisions of orders. See "Risk Factors - Dependence on Limited
Number of Customers" and "- Cash Overruns and Potential Cancellation of Orders."
EXECUTIVE OFFICERS OF THE REGISTRANT
The names and ages of all executive officers of the Company, and all
positions with the Company held by such persons, are as follows:
<TABLE>
<CAPTION>
Name Age Position
------------------------------ ------- -------------------------------------------------------------------------
<S> <C> <C>
Frederick D. Lawrence 52 Chairman of the Board and Chief Executive Officer
Daniel L. Scharre 49 President and Chief Operating Officer and Chief Executive Officer of
Adaptive Broadband Limited, a wholly owned subsidiary
Donna S. Birks 44 Executive Vice President and Chief Financial Officer
Kenneth J. Wees 57 Vice President, General Counsel and Secretary
</TABLE>
Frederick D. Lawrence joined the Company as Chairman of the Board,
President and Chief Executive Officer in July 1997. In June 2000, Dr. Daniel L.
Scharre was promoted to President and Chief Operating Officer and Mr. Lawrence
remains Chairman and Chief Executive Officer. From May 1996 to July 1997, Mr.
Lawrence served as Chief Executive Officer of ComStream, Inc., an international
supplier of satellite communications networks and products and from February
1994 to April 1996, he served as President of the Transmission Group for ADC
Telecommunications, which included five independent business units producing
products for high speed video, voice, data and wireless communications. From
1982 to 1994, Mr. Lawrence held executive positions in networks operations and
engineering at Sprint Corporation and its operating companies, dealing in local
telephone, cellular and long distance. Prior to this, Mr. Lawrence worked at
AT&T from 1970 to 1982 in a variety of positions. He holds a BSEE degree from
Western Michigan University.
Daniel L. Scharre joined the Company in September 1997 as Vice President
and Chief Technology Officer. In April 1998, Mr. Scharre became Executive Vice
President of the Company and in August 1998, he was appointed
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<PAGE>
Chief Executive Officer of the Company's U.K.-based wholly owned subsidiary,
Adaptive Broadband Limited. In June 2000, Mr. Scharre was appointed President
and Chief Operating Officer of Adaptive Broadband Corporation. From November
1996 to September 1997, Mr. Scharre was Vice President and Chief Technical
Officer of ComStream, Inc. From February 1994 to November 1996, Mr. Scharre was
Vice President and General Manager of Ilex Systems, a satellite communications
and equipment company. From June 1988 to December 1993, he held executive
positions at Loral Western Development Labs, where he led and managed the
development of a digital satellite communications system. He has a B.S. degree
in physics from Caltech, a Ph.D. in physics from the University of California at
Berkeley and a M.B.A. from Santa Clara University.
Donna S. Birks joined the Company in December 1997 as Executive Vice
President and Chief Financial Officer. From August 1994 to June 1997, Ms. Birks
was Vice President, Administration and Chief Financial Officer of ComStream
Inc., an international supplier of satellite communications networks and
products. From January 1992 to August 1994, Ms. Birks was Vice President and
Chief Financial Officer of Macrovision Corporation, a video technology licensing
company and she currently serves as a director of Macrovision. From December
1982 to January 1992, Ms. Birks served in several senior executive positions at
Contel ASC (purchased by GTE Spacenet in 1991), a satellite communications
transmission company. She holds a B.S. degree in Business Administration from
George Mason University, a M.S. degree in Finance from American University and
is a Certified Public Accountant.
Kenneth J. Wees joined the Company in May 1998 as Vice President and
General Counsel, and became Secretary in September 1998. From September 1991 to
May 1998, Mr. Wees served as General Counsel of Cable & Wireless, Inc., the
American subsidiary of Cable and Wireless plc, an international supplier of
voice, data, messaging and Internet services. Prior to this, he worked at GTE
and Booz Allen & Hamilton in a variety of legal positions. Mr. Wees holds a B.A.
degree from Marquette University and a Juris Doctor degree from American
University's Washington College of Law.
ITEM 2. PROPERTIES
The table below lists the location and general character of our continuing
operations' material real properties that are owned or leased as of June 30,
2000:
<TABLE>
<CAPTION>
Lease No. of Square
Occupant Expires Buildings Footage Location
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1. Corporate Headquarters 2005 1 41,472 Sunnyvale, CA
2. Operations 2009 1 16,988 Cambridge, UK
2003 1 12,030 Fishers, NY
2002 1 2,721 Beijing, China
2001 1 18,660 Billerica, MA
</TABLE>
We believe that our facilities are adequate for our present needs.
ITEM 3. LEGAL PROCEEDINGS
In July 1999, Northrop Grumman filed a lawsuit against Adaptive Broadband
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, Adaptive Broadband 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 its 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 to pursue its counterclaims. No provisions have
been made for expenses that may be incurred to resolve the lawsuit, and
15
<PAGE>
Adaptive Broadband believes final resolution of the Northrop Grumman allegations
will not have a material impact on its 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,
Adaptive Broadband Corporation and Tadiran settled the Nokia claims for $2
million, and reserved rights against each other. In May 1999, Adaptive Broadband
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, Adaptive Broadband and Tadiran settled all claims
against each other. The Nokia and Tadiran settlements had no impact on the
Company's financial position, results of operations or cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
FINANCIAL RESULTS BY FISCAL QUARTERS (UNAUDITED)
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Basic and Diluted Earnings Per Share
Fiscal Revenue Gross Income (Loss) Income (Loss) Net Continuing Discontinued Net Income
Quarter Margin from from Income Operations Operations (Loss)
Continuing Discontinued (Loss)
Operations Operations
-------------------------------------------------------------------------------------------------------------------------
2000[A]
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Q1 $ 1,102 $ (268) $ (4,758) $ 895 $ (3,863) $(0.16) $ 0.03 $(0.13)
Q2 2,198 (207) (6,306) 3,202 (3,104) (0.20) 0.10 (0.10)
Q3 8,304 50 (7,973) 0 (7,973) (0.23) 0 (0.23)
Q4 17,100 2,546 (7,668) (8,263) (15,931) (0.20) (0.22) (0.43)
------------------------------------------------------------------------------------------------------------------
$28,704 $2,121 $(26,705) $(4,166) $(30,871) $(0.80) $(0.12) $(0.92)
1999[B]
-------------------------------------------------------------------------------------------------------------------------
Q1 $ 0 $ 0 $(10,072) $ 221 $ (9,851) $(0.33) $ 0.01 $(0.33)
Q2 0 0 (2,991) (645) (3,636) (0.10) (0.02) (0.12)
Q3 0 0 (3,978) (3,532) (7,510) (0.13) (0.12) (0.25)
Q4 0 0 (3,753) 36,370 32,617 (0.13) 1.24 1.11
------------------------------------------------------------------------------------------------------------------
$ 0 $ 0 $(20,794) $32,414 $ 11,620 $(0.70) $ 1.09 $ 0.39
</TABLE>
[A] Fiscal year 2000 second-quarter loss from continuing operations includes a
pre-tax non-recurring charge of $1.1 million for premium paid on conversion
of notes.
Fiscal year 2000 third-quarter loss from continuing operations includes
pre-tax non-recurring charges of $2.2 million related to the realignment of
resources driven by the divestiture of the legacy businesses.
Fiscal year 2000 fourth-quarter loss from continuing operations includes a
pre-tax charge of $1.8 million for the write off of an investment.
[B] Fiscal year 1999 first-quarter loss from continuing operations includes a
pre-tax charge of $8.2 million for write off of in-process research and
development costs.
STOCK AND QUARTERLY DATA (UNAUDITED)
We have one series of $.10 par value common stock. Holders of common stock have
full voting rights and have the right to cumulate votes for the election of
directors. We reinvest earnings to finance expansion of our business, have paid
no cash dividends, and do not anticipate changing our dividend policy in the
foreseeable future. At June 30, 2000, the number of our shareholders totaled
approximately 19,000, of which approximately 1,057 were holders of record. Our
stock is traded in the Nasdaq National Market under the trading symbol ADAP. The
following table sets forth, for the fiscal periods indicated, the high and low
stock prices giving effect to the stock dividend.
Stock Prices By Quarter Fiscal Years 2000 and 1999
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
2000 1999
--------------------------------------------------------------------------------------------------------------
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
High $19.25 $38.31 $104.88 $55.00 $8.88 $7.00 $7.00 $10.94
Low 8.25 15.69 33.25 17.13 3.50 3.38 4.19 4.78
</TABLE>
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ITEM 6. SELECTED FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
Five years ended June 30, 2000
(Dollars in thousands, except per share data)
2000[A] 1999[B] 1998 1997 1996
---------------------------------------------------------------------
Operations:
<S> <C> <C> <C> <C> <C>
Revenue of continuing operations $ 28,704 $ - $ - $ - $ -
Operating loss of continuing operations (39,608) (25,373) (15,808) - -
Loss from continuing operations (26,705) (20,794) (12,565) - -
Basic and diluted loss per share from continuing (0.80) (0.70) (0.38) - -
operations
Weighted average shares and dilutive equivalents 33,424 29,774 32,726 32,452 32,400
Financial position:
Cash, Cash equivalents and short-term investments $ 16,486 $ 48,887 $ 27,226 $ 7,071 $ 6,064
Total assets 198,848 171,333 161,079 220,909 280,622
Working Capital[C] 73,104 82,041 73,380 111,506 141,452
Long-term debt - 59,090 59,500 73,190 77,133
Total shareholders' equity 151,062 84,993 84,553 118,024 170,012
Other (continuing operations only):
Year-end backlog $ 66,609 $ - $ - $ - $ -
Year-end employees 183 70 25 - -
Year-end facilities (thousands of square feet) 92 25 11 - -
</TABLE>
[A] In fiscal year 2000, the loss from continuing operations included pre-tax
non-recurring charges of $1.1 million for premium paid on conversion of
notes, $2.2 million related to the realignment of resources driven by the
divestiture of the legacy businesses, and $1.8 million for the write-off of
an investment. Excluding these items, fiscal year 2000 loss from continuing
operations, after tax, was $23.5 million, or $0.70 per share on a diluted
basis.
[B] Fiscal year 1999, the loss from continuing operations included a pre-tax
charge of $8.2 million for write off of in-process research and development
costs. Excluding this item, fiscal year 1999 loss from continuing operations
was $13.5 million, or $0.46 per share on a diluted basis.
[C] Working capital is current assets less current liabilities.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with our Consolidated
Financial Statements and Notes thereto which are included in this Report.
In order to focus on the high-growth wireless broadband access equipment 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 2 -
Discontinued Operations and Divestitures, 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.
INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
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Statements made below and elsewhere in this 2000 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,
data communications 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 and expectations for fiscal year 2001 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. 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, the pace of 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, 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
"Risk Factors" in our Annual Report on Form 10-K for the fiscal year ended
June 30, 2000.
OVERVIEW- RESULTS OF OPERATIONS
We are a supplier of data communications transmission equipment that is
developing leading-edge technology for the deployment of broadband wireless
communications over the Internet. Our AB-Access/TM/ 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 two-way 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.
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
June 30, 2000, we have generated over $1.5 billion of contracted five-year
demand for the AB-Access product. These contracts generally required
twelve-month rolling forecasts of product purchases, including penalty
provisions in the event of a purchase order cancellation. Solectron Corporation
(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.
Since our acquisition of Adaptive Broadband Limited (ABL) in August 1998, our
operating activities related primarily to developing a research and development
organization, testing prototype designs and commencing the staffing of our
sales, marketing, field services, and technical support organizations. We have
incurred operating losses in the last three fiscal years due to our investments
in research and development, as well as sales and marketing of the AB-Access
technology and product offerings. The substantial increase in our operating
expenses in fiscal year 2000 over fiscal years 1999 and 1998 was primarily due
to our organizational expansion in fiscal year 2000 to provide support for the
growth of our business.
Our continuing operations, which reflect solely the results of our AB-Access
business, reported a loss from continuing operations of $26.7 million or $0.80
per share, $20.8 million or $0.70 per share, and $11.9 million or $0.36 per
share, for fiscal years 2000, 1999 and 1998, respectively. Operating results
for fiscal year 2000 include nonrecurring pre-tax charges of $2.2 million
relating to the realignment of our resources driven by the divestitures of the
discontinued operations, a premium on conversion of notes of $1.1 million and
$1.8 million loss on investment. Excluding these items, net loss from
continuing operations for fiscal year 2000 would have been $23.5 million, or
$0.70 per share. Operating results for fiscal year 1999 include pre-tax
charges of $8.2 million for in-process research and development related to the
acquisitions of ABL. Excluding this item, the net loss from continuing
operations for fiscal year 1999 would have been $13.6 million, or $ 0.46 per
share.
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REVENUE
The quarter ended September 30, 1999 was our first quarter of revenue for
continuing operations. Net revenue was $28.7 million for the fiscal year 2000. A
substantial portion of our fiscal year 2000 revenue was generated from a limited
number of customers. While we are seeking to diversify our customer base, there
can be no assurance that these efforts will be successful.
The majority of our bookings and revenue in fiscal year 2000 were domestic;
however, as we expand our product offerings to other frequency ranges useable in
foreign countries, international revenue could increase significantly in the
future. In fiscal year 2000, international revenue accounted for approximately
15% of our total revenue. Of the total revenue in fiscal year 2000, 85% is from
the U.S., 14% from Asia, and 1% from Latin America, Africa, and Middle East.
Currently, all of our international revenues are denominated in U.S. dollars.
During fiscal year 2000, four customers each accounted for 10% or more of our
revenue and all four combined accounted for 75% of the fiscal year 2000 revenue.
At June 30, 2000, we had 40 customers.
We generally record bookings for new orders received under existing supply
contracts if the product will be shipped to the customer within twelve months.
New orders booked from continuing operations were $95.3 million for fiscal year
2000 with backlog at June 30, 2000 of $66.6 million. Based on the existing
contracted demand, new bid activity and expected wireless broadband deployment
plans of existing customers, we expect fiscal year 2001 revenue to be
significantly higher than fiscal year 2000.
GROSS MARGIN
We outsource our manufacturing function; thus, a significant portion of our
costs of revenue consists of payments to Solectron, our contract manufacturer.
We conduct supply chain management, quality assurance, manufacturing
engineering, documentation control and repairs at our facilities in Billerica,
Massachusetts and Rochester, New York. During fiscal year 2000, our gross
margin had improved from (24%) in the first quarter to 15% in the fourth
quarter, largely attributable to increased efficiency on higher volume shipments
and better manufacturing capacity utilization. We expect gross margin to
continue to improve in future periods as higher production volume is achieved,
and as we complete the transition to manufacturing a lower-cost ASIC
(Application Specific Integrated Circuit) chip for the AB-Access product
platform. The ASIC chip replaces four other high-cost chips, thus reducing the
cost of the AB-Access product. Shipping of ASIC units in volume will commence
in the quarter ending September 30, 2000.
OPERATING EXPENSES
Research and development expenses consist principally of our investments related
to the design, development, testing and enhancement of our broadband products.
Research and development expenses for continuing operations were $17.1 million,
$4.7 million, and $0.3 million for fiscal years 2000, 1999 and 1998. The
increase in research and development expenses in fiscal year 2000 was mainly
attributable to an increase in research and development personnel and outside
consultants, as well as prototype charges for developing technology for products
in multiple frequency bands for both the domestic and international markets. We
believe that the continual and rapid introduction of new products and
technologies is critical to sustaining growth within our current and future
target markets, and we expect to continue to commit substantial resources to
product development and engineering in future periods. In addition, we may
consider acquiring additional technologies complementary to our business through
strategic acquisitions.
Selling and marketing expenses consist of salaries, commissions and related
expenses for personnel engaged in marketing, sales and field service support
functions, as well as trade shows and promotional expenses. General and
administrative expenses consist primarily of salaries and related expenses for
executives, finance and administrative personnel, professional fees and other
general corporate expenses. Sales, marketing and administrative expenses for
continuing operations were $24.3 million, $12.2 million, and $13.9 million, for
fiscal years 2000, 1999, and 1998, respectively. Sales, marketing and
administrative expenses for fiscal year 2000 included a $2.2 million of
non-recurring pre-tax charges 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 ensure that we have adequate retention incentives. The charges also included
relocation and recruiting costs incurred, for certain employees that were
necessary due to the transfers of facilities during the divestiture process. In
addition to the
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nonrecurring charges, the increase for fiscal year 2000 was primarily due to the
expansion in our sales and marketing staffing 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 believe that continued investment
in sales and marketing is critical to our success and expect these expenses to
increase in the future.
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 of up to $3.5 million and
will be recorded as goodwill. Our results of operations for the first nine
months of fiscal year 1999 included ABL's results from August 20, 1998.
In connection with the acquisition of ABL, we allocated a significant portion of
the purchase price to purchased 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 projects
had not yet reached technological feasibility and had no alternative future
uses. Accordingly, the value allocated to these projects was expensed at
acquisition.
The amortization of intangible assets, which consist of assembled workforce and
goodwill, was $0.4 million, $0.3 million and none for fiscal years 2000, 1999
and 1998, respectively. 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.
INTEREST INCOME (EXPENSE) AND OTHER
Net interest income (expense) was $0.7 million, $(4.0) million, and $(3.8)
million for fiscal years 2000, 1999 and 1998. The increase in interest income
during fiscal year 2000 was 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. In addition, interest expense was lowered due to
the conversion of our $57.5 million 5.25% subordinated notes into common stock,
and the payoff of our credit facility in early fiscal year 2000.
We issued $57.5 million of 5.25% convertible subordinated notes on December 15,
1993, due on 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 second 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
incurred a $1.1 million premium charge, which was equivalent to accrued interest
on the converted notes plus 1.6%. During the third 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.
In January 2000, we invested $2 million in Radio Local Area Networks, Inc., a
privately held technology company supplying wireless Local Area Networks (LAN).
During the fourth quarter of fiscal year 2000, we ceased our support of the
wireless LAN initiative and wrote off the outstanding amount of our investment
of $1.8 million.
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During fiscal years 1999 and 2000, we had invested a total of $1.5 million in a
privately held company developing infrared and laser communications
technologies, Astro Terra Corporation (Astro Terra). On July 7, 2000, we sold
our interest in Astro Terra to a publicly held company, MRV Communications, Inc.
(MRVC), in exchange for 185,000 shares of MRVC's common stock. We expect to
recognize approximately a $8 million gain from the sale of the MRVC stock in the
quarter ended September 30, 2000.
PROVISION FOR INCOME TAXES
The income tax benefit from continuing operations was $15.0 million, $8.6
million, and $6.7 million for fiscal years 2000, 1999 and 1998. The effective
income tax rate for 2000, 1999 (excluding the impact of the partial valuation
allowance recorded against future deductions from the amortization of intangible
assets in the ABL acquisition) and 1998 was 36%.
At June 30, 2000, we had a cumulative net deferred income tax asset of $21.1
million that will be available to reduce payments on future federal and state
income tax liabilities. At June 30, 2000, we had gross deferred tax assets
arising from deductible temporary differences, tax losses and tax credits of
$86.3 million. The gross deferred tax assets are offset by a valuation
allowance of $65.1 million and deferred tax liabilities of $0.2 million. $59.4
million of the valuation allowance represents future stock deductions that will
be credited to additional paid-in capital when released. Realization of the
majority of the net deferred tax assets is dependent on our ability to generate
approximately $53 million of future United States taxable income. Based on
contracted demand and forecasted product performances, we believe that it is
more likely than not that the assets will be realized based on forecasted
income. However, there can be no assurance that we will meet the expectations of
future income. We plan to evaluate the realizability of the deferred tax assets
quarterly and assess the need for additional valuation allowance.
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,
MRC and MDS divisions. The operating results and financial position of these
three 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 financial statements.
Total revenue from EFData, MRC and MDS was $175.0 million, $156.7 million and
$175.3 million for fiscal years 2000, 1999 and 1998, respectively. The income
(loss) from EFData, MRC and MDS, was $4.1 million net of income taxes of $2.3
million, $(3.9) million net of income tax benefit of $1.9 million, and $15.8
million net of income taxes of $6.3 million for fiscal years 2000, 1999 and
1998, respectively. Total revenue from the Government Division discontinued
operations was $67.7 million for fiscal year 1999 for the period prior to
disposal, and $85.7 million for fiscal 1998. A loss of $8.3 million was
recorded on the disposal of the three divisions in the fourth quarter of fiscal
year 2000. Income from the Government Division discontinued operations (net of
income taxes) was $2.0 million for fiscal year 1999 for the period prior to
disposal, and $3.5 million for fiscal year 1998.
In July 2000, all three remaining divisions of the businesses included in the
discontinued operation were sold. EFData was sold to Comtech Telecommunications
Corp for $61.5 million in cash. MDS was sold to Moseley Associates Incorporated
for $38.6 million in cash and MRC was sold to Vislink for $19.3 million in cash.
We recorded an estimated loss of $8.3 million (net of income taxes of $11.3
million) on disposal of the three divisions in the fourth quarter of fiscal year
2000. Final accounting for the three discontinued divisions is subject to
completion of the post-closing procedures provided for in the purchase
agreements. We have accrued for transaction costs related to the EFData, MDS,
and MRC sales that may occur in the post-closing procedures for the
three divestitures. 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 April 1999, we completed the sale of our 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
provided specialized products and services principally in the areas of
communications, reconnaissance, and surveillance systems used in low-altitude
airplanes. 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 for 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 June 30, 2000, the
discontinued operations reserve for the
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Government Division divestiture was $3.5 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 February 1998, Satellite Transmission Systems (STS) was sold to L-3
Communications Corporation (L-3) for $27 million in cash, and in April 1998,
Microwave Networks (MN) was sold to Tadiran Ltd. (Tadiran) for $31.5 million in
cash. STS was a systems integrator supplying turnkey satellite transmit/receive
earth stations and networks for domestic, international and government
applications. MN was engaged in the design, manufacture, sale and installation
of high performance digital and analog microwave radios and transmission
products for cellular, personal communications network applications and private
communications network markets. During the second half of fiscal year 1998, we
recorded additional provisions of $15.1 million (net of income taxes) for
additional losses on disposal of these divisions. These provisions were
primarily for adjustments to the combined losses on sale and for higher than
anticipated operating losses prior to disposal of both divisions. The operating
results, loss on disposal, and financial position of these divisions have been
classified as discontinued operations in our financial statements through the
divestiture dates. Revenue from the MN and STS discontinued operations was
$83.2 million in fiscal year 1998 for the period prior to disposal. The loss
from discontinued operations (net of income taxes) for MN and STS was accrued as
part of the net loss on disposal.
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 subsequently took 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 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.
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.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2000, our net working capital was $73.1 million, which included cash
and cash equivalents of $16.5 million, as compared to net working capital of
$82.0 million, which included cash and cash equivalents of $48.9 million, at
June 30, 1999. The decrease in cash and cash equivalents was primarily due to
cash used for continuing operations and the stock repurchase plan, offset by
proceeds from the issuance of treasury and common stock.
Cash used for continuing operating activities was $48.8 million in fiscal
year 2000, compared with cash used for continuing operating activities of
$15.6 million and $21.4 million in fiscal years 1999 and 1998. Cash used in
fiscal 2000 was primarily due to a loss from operations, increase in accounts
receivable and inventories, offset by increases in accounts payable and other
accrued liabilities.
Cash used in investing activities for fiscal year 2000 was $22.2 million,
primarily for $9.3 million of capital expenditures, $1.3 million for the first
portion of the contingent purchase price for ABL, $1.0 million for an investment
in Cambridge Broadband Limited, and $1.0 million for an investment in Astro
Terra. In addition, $9.7 million was used in discontinued operations
activities. Cash generated from investing activities for fiscal year 1999
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was $48.4 million, primarily from proceeds of $80.6 million (net of transaction
costs) from the sale of our Government Division, offset by cash used in
discontinued operations of $19.0 million, the acquisition of ABL for $10.6
million, and capital expenditures of $2.1 million. Cash generated from investing
activities for fiscal year 1998 was $79.9 million, primarily from the sale of
MN, STS and the Services Division for approximately $66.7 million.
Our fiscal year 2000 financing activities included the receipt of $43.0 million
from the sale of our common stock under on-going stock option and stock purchase
plans offset by a $1.1 million premium paid by us on the conversion of notes,
which is described in the section titled "Interest Income (Expense) and Other".
On October 6, 1998, our Board of Directors increased the number of shares
authorized for repurchase on the open market to 12 million. We acquired
approximately 0.3 million shares of common stock for $3.3 million, 2.2 million
shares of common stock for $15.7 million, and 3.2 million shares of common stock
for $34.1 million, in fiscal years 2000, 1999, and 1998, respectively. The
shares repurchased subsequent to February 1998 totaled 5.6 million. We are not
currently repurchasing on an active basis.
During the third quarter of fiscal year 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 10.0% at June 30, 2000. The net borrowing
capacity under our credit facility was $25 million as of June 30, 2000.
We believe that our current cash position, funds generated from operations,
available credit facility and proceeds from the sale of EFData, MRC and MDS in
July 2000, will be adequate to meet our requirements for working capital and
capital expenditures for at least the next 12 months.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, Financial Accounting Standard Board (FASB) issued Statement of
Financial Accounting Standards No. 133 (SFAS 133), "Accounting for Derivative
Instruments and Hedging Activities," which will be effective for the fiscal year
2001. Management does not anticipate that the adoption of the new Statement will
have a material impact on our financial position, results of operations or cash
flow.
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.
SAB 101 is required to be adopted by December 31, 2000. We are currently
evaluating the impact of SAB 101. Based on presently available guidance, we do
not anticipate the adoption of SAB 101 to have any material impact on our
financial position, results of operations and cash flows.
In March 2000, the FASB issued Interpretation No. 44, ("FIN 44"), "Accounting
for Certain Transactions Involving Stock Compensation--an Interpretation of APB
Opinion No. 25." This Interpretation clarifies (a) the definition of employee
for purposes of applying Opinion 25, (b) the criteria for determining whether a
plan qualifies as a noncompensatory plan, (c) the accounting consequence of
various modifications to the terms of a previously fixed stock option or award,
and (d) the accounting for an exchange of stock compensation awards in a
business combination. This Interpretation is effective July 1, 2000, but certain
conclusions in this Interpretation cover specific events that occur after either
December 15, 1998, or January 12, 2000. To the extent that this Interpretation
covers events occurring during the period after December 15, 1998, or January
12, 2000, but before the effective date of July 1, 2000, the effects of applying
this Interpretation are recognized on a prospective basis from July 1, 2000. The
adoption of FIN 44 is not expected to have a material impact on our financial
statements.
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk:
Our exposure to market risk for changes in interest rates relate primarily
to our investment portfolio. We do not use derivative financial instruments in
our investment portfolio. We maintain a strict investment policy designed for
the safety and preservation of our invested funds by limiting default risk,
market risk, and reinvestment risk. Our investments consist primarily of
commercial paper, U.S. Treasury notes and money market funds, all with
maturities at the date of purchase of 90 days or less. Floating rate investments
may produce less income than expected if interest rates fall. We are also
exposed to interest rate risk to the extent of our borrowings under our
revolving credit facility. At June 30, 2000, we had no borrowings under this
credit facility and, therefore, no exposure to interest rate movement on our
debt.
The table below presents principal amounts and related weighted-average
interest rates by year of maturity for our investment portfolio (in thousands,
except percentages).
<TABLE>
<S> <C> <C> <C> <C>
2001 2002 2003 2004
Cash and cash equivalents $16,486 -- -- --
Average rate 6.1% -- -- --
Total investment securities $16,486 -- -- --
Average rate 6.1% -- -- --
</TABLE>
We mitigate default risk by attempting to invest in high credit quality
securities and by positioning our portfolio to respond to a significant
reduction in a credit rating of any investment issuer or guarantor. Our
portfolio includes only marketable securities with active secondary or resale
markets to ensure portfolio liquidity and maintains a prudent amount of
diversification.
Foreign Currency Exchange Risk:
We transact business in foreign currencies and, accordingly, are subject to
exposure from adverse movements in foreign currency exchange rates. The primary
foreign currency risk exposure is related to U.S. dollar to British pound, and
U.S. dollar and British pound to Euro conversions. To date, the effect of
changes in foreign currency exchange rates on revenues and operating expenses
have not been material. All of our revenues are earned in U.S. dollars while
operating expenses incurred by our United Kingdom office are denominated
primarily in European currencies. We currently do not use financial instruments
to hedge these operating expenses. We intend to assess the need to utilize
financial instruments to hedge currency exposures on an ongoing basis. We do not
use derivative financial instruments for speculative trading purposes.
25
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ADAPTIVE BROADBAND CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Report of Ernst & Young LLP, Independent Auditors......................... 27
Consolidated Statements of Operations..................................... 29
Consolidated Balance Sheets............................................... 28
Consolidated Statements of Stockholders' Equity........................... 30
Consolidated Statements of Cash Flow...................................... 31
Notes to Consolidated Financial Statements................................ 32
26
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Adaptive Broadband Corporation
We have audited the accompanying consolidated balance sheets of Adaptive
Broadband Corporation at June 30, 2000 and 1999, and the related consolidated
statements of operations, shareholders' equity and cash flows for each of the
three years in the period ended June 30, 2000. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Adaptive Broadband
Corporation at June 30, 2000 and 1999, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
June 30, 2000, in conformity with accounting principles generally accepted in
the United States.
/s/ ERNEST & YOUNG LLP
Palo Alto, California
July 24, 2000
27
<PAGE>
<TABLE>
<CAPTION>
ADAPTIVE BROADBAND CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share data)
<S> <C> <C> <C>
Years ended June 30, 2000 1999 1998
------------ -------------- ------------
Revenue $ 28,704 $ - $ -
Costs of revenue 26,583 - -
------------ -------------- ------------
Gross margin 2,121 - -
Expenses:
Research and development 17,109 4,731 329
Sales, marketing and administration 24,259 12,157 13,874
Amortization of intangible assets 361 275 -
Purchased in-process research and development - 8,210 -
Restructuring and other charges - - 624
------------ -------------- ------------
Total expenses 41,729 25,373 14,827
------------ -------------- ------------
Operating loss (39,608) (25,373) (14,827)
Interest expense (1,054) (4,503) (4,007)
Interest income 1,802 469 182
Premium on conversion of notes (1,093) - -
Write-down of investment (1,775) - -
------------ -------------- ------------
Loss from continuing operations before income taxes (41,728) (29,407) (18,652)
Benefit from income taxes (15,023) (8,613) (6,715)
------------ -------------- ------------
Loss from continuing operations (26,705) (20,794) (11,937)
Discontinued operations:
Income (loss) from discontinued operations, net of income tax 4,097 (3,867) 15,838
Gain (loss) on disposal, net of income taxes (8,263) 36,281 (11,661)
------------ -------------- ------------
(4,166) 32,414 4,177
------------ -------------- ------------
Net income (loss) $(30,871) $ 11,620 $ (7,760)
============ ============== ============
Basic and diluted earnings (loss) per share:
Loss from continuing operations $(0.80) $ (0.70) $ (0.36)
Income (loss) from discontinued operations $(0.12) $ 1.09 $ 0.13
------------ -------------- ------------
Net income (loss) $(0.92) $ 0.39 $ (0.24)
============ ============== ============
Weighted average shares used in computing basic and diluted 33,424 29,774 32,726
earnings (loss) per share
See accompanying notes.
</TABLE>
28
<PAGE>
<TABLE>
<CAPTION>
ADAPTIVE BROADBAND CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)
June 30, 2000 June 30, 1999
------------------------ -----------------------
<S> <C> <C>
Assets
------
Current Assets:
Cash and cash equivalents $ 16,486 $ 48,887
Accounts receivable, less allowance for doubtful
accounts of $1,352 in 2000 16,312 -
Inventories 14,870 1,116
Deferred income taxes 6,839 14,293
Prepaid expenses and other current assets 2,124 2,938
Net current assets of discontinued operations 64,259 42,057
------------------------ -----------------------
Total current assets 120,890 109,291
------------------------ -----------------------
Property, plant and equipment, net 9,994 3,088
Deferred income taxes 14,235 3,805
Intangible assets, net 2,943 2,054
Other assets 3,765 3,017
Net long-term assets of discontinued operations 47,021 50,078
------------------------ -----------------------
$198,848 $171,333
======================== =======================
Liabilities and Shareholders' Equity
-----------------------------------
Current Liabilities:
Accounts payable $ 9,664 $ 2,132
Accrued liabilities 38,122 25,118
------------------------ -----------------------
Total current liabilities 47,786 27,250
------------------------ -----------------------
Long-term Liabilities:
Convertible subordinated notes - 57,500
Other long-term liabilities - 1,590
Commitments and Contingencies (see Note 8)
Shareholders' Equity:
Preferred stock, $0.10 par value, 5,000,000 shares
authorized; zero shares issued - -
Common stock, $0.10 par value, 249,200,000 shares
authorized; 37,489,615 shares issued in 2000
and 33,258,062 issued in 1999 3,749 3,326
Capital in excess of par value 153,060 94,010
Treasury stock, no shares held in 2000;
4,071,408 shares held in 1999 - (36,066)
Retained earnings (deficit) (5,747) 23,723
------------------------ -----------------------
Total shareholders' equity 151,062 84,993
------------------------ -----------------------
$198,848 $171,333
======================== =======================
See accompanying notes.
</TABLE>
29
<PAGE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Three years ended June 30, 2000
(Dollars in thousands)
<TABLE>
<CAPTION>
Unamortized Total
Capital in Retained restricted share-
Common Stock excess of Treasury earnings stock plan holders'
Shares Amount par value stock (deficit) expense equity
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1997 32,812,946 $3,282 $ 91,608 $ - $ 23,577 $ (443) $ 118,024
Common stock issued under:
Stock option, restricted stock
and stock purchase plans 445,116 44 2,402 443 2,889
Treasury stock purchases
(3,191,000 shares) (34,104) (34,104)
Common stock issued from treasury shares for
stock option and stock purchase plans
(620,840 shares) 6,273 (769) 5,504
Net loss (7,760) (7,760)
-----------------------------------------------------------------------------------
Balance at June 30, 1998 33,258,062 3,326 94,010 (27,831) 15,048 - 84,553
-----------------------------------------------------------------------------------
Treasury stock purchases
(2,155,000 shares) (15,706) (15,706)
Common stock issued from treasury shares for
stock option and stock purchase plans
(653,752 shares) 7,471 (2,945) 4,526
Net income 11,620 11,620
-----------------------------------------------------------------------------------
Balance at June 30, 1999 33,258,062 3,326 94,010 (36,066) 23,723 - 84,993
-----------------------------------------------------------------------------------
Common stock issued under:
Stock option and stock purchase plans 188,917 19 2,799 2,818
Treasury stock purchases -
(252,500 shares) (3,321) (3,321)
Common stock issued from treasury shares for
stock option and stock purchase plans
(4,323,908 shares) 39,387 1,401 40,788
Conversion of notes 4,042,636 404 56,251 56,655
Net loss (30,871) (30,871)
-----------------------------------------------------------------------------------
Balance at June 30, 2000 37,489,615 $ 3,749 $153,060 $ - $ (5,747) $ - $ 151,062
===================================================================================
</TABLE>
See accompanying notes.
30
<PAGE>
ADAPTIVE BROADBAND CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
2000 1999 1998
------------ ------------- ------------
<S> <C> <C> <C>
Operating activities:
Loss from continuing operations $(26,705) $(20,794) $(11,937)
Adjustments to reconcile loss from continuing
operations to net cash used in operating activities:
Purchased in-process research and development - 8,210 -
Loss on investment 1,775 - -
Premium on conversion of notes 1,093 - -
Depreciation and amortization 2,362 499 940
Amortization of intangible assets 361 274 -
Deferred income taxes (16,608) (8,613) (6,715)
Net effect of change in:
Income tax refunds - - 10,085
Accounts receivable (16,312) - -
Inventories (13,754) (1,116) -
Prepaid expenses and other assets (554) (3,331) -
Accounts payable 7,532 379 (1,312)
Accrued and other liabilities 12,013 8,925 (12,486)
Net cash used in continuing operations (48,797) (15,567) (21,425)
----------- ------------- ------------
Investing activities:
Capital expenditures (9,268) (2,118) (70)
Acquisitions and investments in businesses (3,250) (11,111) -
Proceeds from sale of discontinued operations, net - 80,619 66,726
----------- ------------- ------------
Net cash used in continuing operations investing activities (12,518) 67,390 66,656
Net cash provided by (used in) discontinued operations activities (9,679) (19,022) 13,222
Net cash provided by (used in) investing activities (22,197) 48,368 79,878
----------- ------------- ------------
Financing activities:
Payments on long-term debt - - (6,000)
Proceeds from issuance of common stock 43,007 4,526 7,546
Purchase of treasury stock (3,321) (15,706) (34,104)
Premium paid on conversion of notes (1,093) - -
Repayment of convertible subordinated notes - - (5,700)
Net cash provided by (used in) financing activities 38,593 (11,180) (38,258)
----------- ------------- ------------
Net increase (decrease) in cash and cash equivalents (32,401) 21,621 20,195
Cash and cash equivalents at beginning of period 48,887 27,266 7,071
Cash and cash equivalents at end of period $ 16,486 $ 48,887 $ 27,266
----------- ------------- ------------
Supplemental cash flow information:
Cash paid during the period for:
Interest $ 32 $ 4,485 $ 3,868
Income taxes 1,118 5 -
Noncash transaction:
Conversion of Notes to Common Stock $ 57,500 $ - $ -
See accompanying notes.
</TABLE>
31
<PAGE>
ADAPTIVE BROADBAND CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Description of Business
Adaptive Broadband Corporation (ADAP or the "Company") is a supplier of data
communications transmission equipment that is developing leading-edge technology
for the deployment of broadband wireless communication over the Internet. The
Company operates in one business segment.
Principles of Consolidation and Reclassification
The consolidated financial statements include the accounts of Adaptive Broadband
Corporation and its subsidiaries. All significant intercompany balances and
transactions have been eliminated. Certain prior year amounts have been
reclassified to conform to the current year presentation.
Comprehensive Income or Loss
For fiscal years 2000, 1999 and 1998, the Company's comprehensive loss
approximates its net loss.
Use of Estimates; Risks and Uncertainties
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Significant estimates are used in determining amounts reported in the financial
statements and accompanying notes such as the accounting for income taxes,
amounts to be realized on the sale of discontinued operations and contingencies.
Actual results could differ from estimates.
Fiscal Year
During fiscal year 1998, the Company changed its fiscal year end to June 30 from
a 52 - 53 week fiscal year ending on the Saturday closest to June 30. For
clarity, all fiscal periods are reported on a calendar month end. This change
did not have a significant impact on the Company's consolidated financial
statements.
In July 2000 the Board of Directors approved a resolution to change the
Company's fiscal year end from June 30 to December 31. Changing the fiscal
year, effective December 31, 2000, will align the Company's reporting periods
with more companies in its peer group, making financial comparisons more readily
apparent.
Cash Equivalents and Short-Term Investments
Cash equivalents are carried at fair value and consist of highly liquid
investments, primarily commercial paper and money market funds, with original
maturities of 90 days or less. These investments are carried at cost which
approximates fair value. The Company has established guidelines relative to
diversification and maturities that attempt to maintain safety and liquidity.
The Company has not experienced losses from these cash equivalents and
short-term investments.
Inventories
Inventories are stated at the lower of cost (which approximates first-in,
first-out) or market and consist primarily of finished goods.
Property, Plant and Equipment
Property, plant and equipment are stated at cost, less accumulated depreciation
and amortization. Depreciation and amortization charges are computed under the
straight-line method based on the estimated useful lives of the related assets.
Leasehold improvements are amortized over the shorter of the estimated useful
life or the lease term.
The Company capitalizes costs to develop internal use software in accordance
with Statement of Position 98-1 "Accounting for Costs of Computer Software
Developed or Obtained for Internal Use" (SOP 98-1). SOP 98-1 requires that all
costs related to the development of internal use software be expensed as
incurred, other than those incurred during the application development stage.
Costs incurred and capitalized in continuing operations during the application
development stage were $2.9 million at June 30, 2000.
As of June 30, property, plant and equipment consisted of the following (in
thousands):
32
<PAGE>
<TABLE>
Life 2000 1999
-----------------------------------------------------
<S> <C> <C> <C>
Office and computer equipment 2-7 years $ 5,473 $ 2,102
Engineering and test equipment 3-10 years 4,066 554
Software 5 years 2,887 858
Leasehold improvements Lease term 937 581
---------------------------------
13,363 4,095
Less: accumulated depreciation and amortization (3,369) (1,007)
---------------------------------
$ 9,994 $ 3,088
=================================
</TABLE>
Depreciation and amortization expense on property, plant and equipment was $2.4
million, $0.5 million, and $0.9 million for fiscal years 2000, 1999 and 1998,
respectively.
Intangible Assets of Acquired Business
For acquisitions accounted for under the purchase method (see Note 11), 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 is 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 June 30, 2000 June 30, 1999
------------------------------------------ ---------------- --------------------- ------------------------
<S> <C> <C> <C>
Goodwill 10 years $3,138 $1,888
Assembled workforce 4 years 440 440
Less: accumulated amortization (635) (274)
------ ------
$2,943 $2,054
====== ======
</TABLE>
Revenue Recognition, Credit and Supplier Risk
Product revenue is generally recognized upon shipment to a credit-worthy
customer. The Company performs ongoing credit evaluations of its customers and
generally requires no collateral, but may require letters of credit, deposits,
or prepayments denominated in U.S. dollars from certain of its domestic and
international customers. The Company also maintains a credit insurance program
to insure international receivables where a confirmed letter of credit may
neither be cost effective nor available. Provisions are made at the time of
revenue recognition for estimated warranty costs. The Company also maintains
reserves for estimated credit losses.
Revenue from international customers was approximately 15% of total revenue in
fiscal year 2000. Due to the early stage of product shipment of AB-Access, a
substantial portion of revenue and bookings in fiscal year 2000 was from a
limited number of customers. During fiscal year 2000, four customers each
accounted for 10% or more of the Company's revenue and all four combined
accounted for 75% of the Company's fiscal year 2000 revenue. While we are
seeking to diversify our customer base, there can be no assurance that these
efforts will be successful.
Currently, the Company relies on single source suppliers of materials and labor
for the significant majority of its product inventory but is actively pursuing
additional supplier alternatives.
The Company has outsourced its manufacturing and relies on its contract
manufacturer, Solectron Corporation, for the production of its product. The
inability of the contract manufacturer to fulfill supply requirements of the
Company could negatively impact future results.
Earning (Loss) Per Share
Basic earning (loss) per share are calculated using the weighted average number
of common shares outstanding during the period. Diluted earning (loss) per
common share are calculated using the weighted average number of common shares
outstanding during the period and the dilutive effect of stock options
calculated using the treasury stock method. Options to purchase 3,875,401,
5,773,940 and 4,721,150 shares of common stock at June 30, 2000, 1999 and 1998,
respectively, and common equivalent shares for the convertible notes were
excluded from the calculation of diluted earning (loss) per share as their
effect is antidilutive with respect to continuing operations.
33
<PAGE>
Segment Information
The Company operates in one operating segment: the design, development,
manufacturing, marketing and selling of broadband wireless communication
systems.
New Accounting Pronouncements
In June 1998, Financial Accounting Standard Board (FASB) issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities," which will be effective for the Company's fiscal year
2001. The Company's management does not anticipate that the adoption of the new
Statement will have a material impact on the Company's financial position,
results of operations or cash flow.
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.
SAB 101is required to be adopted by December 31, 2000. The Company is currently
evaluating the impact of SAB 101. Based on presently available guidance, the
Company does not anticipate the adoption of SAB 101 to have any material impact
on the Company's financial position, results of operations and cash flows.
In March 2000, the FASB issued Interpretation No. 44, ("FIN 44"), "Accounting
for Certain Transactions Involving Stock Compensation--an Interpretation of APB
Opinion No. 25." This Interpretation clarifies (a) the definition of employee
for purposes of applying Opinion 25, (b) the criteria for determining whether a
plan qualifies as a noncompensatory plan, (c) the accounting consequence of
various modifications to the terms of a previously fixed stock option or award,
and (d) the accounting for an exchange of stock compensation awards in a
business combination. This Interpretation is effective July 1, 2000, but certain
conclusions in this Interpretation cover specific events that occur after either
December 15, 1998, or January 12, 2000. To the extent that this Interpretation
covers events occurring during the period after December 15, 1998, or January
12, 2000, but before the effective date of July 1, 2000, the effects of applying
this Interpretation are recognized on a prospective basis from July 1, 2000. The
adoption of FIN 44 is not expected to have a material impact on the Company's
financial statements.
2. DISCONTINUED OPERATIONS AND DIVESTITURES
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 a business under Accounting Principles Board Opinion No.
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.
In July 2000, all three divisions included in discontinued operations at June
30, 2000 were sold. EFData was sold to Comtech Telecommunications Corp for
$61.5 million in cash. MDS was sold to Moseley Associates Incorporated for
$38.6 million in cash and MRC was sold to Vislink for $19.3 million in cash.
The Company recorded an estimated loss of $8.3 million (net of income taxes of
$11.3 million) on disposal of the three divisions in the fourth quarter of
fiscal year 2000. Final accounting for these three divisions is subject to
completion of the post-closing procedures provided for in the purchase
agreements. The Company has accrued for transaction and other costs related to
the EFData, MDS, and MRC sales that may occur in the post-closing procedures for
the three divestitures of $8.3 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 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 provided specialized products and services principally in the areas of
communications, reconnaissance, and surveillance systems used in low-altitude
airplanes. 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. Final accounting for the Government Division is subject to completion
of the post-closing procedures provided for in the Northrop Grumman
34
<PAGE>
agreement. The Company has accrued for future price adjustments that may occur
in the post-closing procedures for the Government Division divestiture. At June
30, 2000, the discontinued operations reserve for the Government Division
divestiture was $3.5 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 February 1998, Satellite Transmission Systems (STS) was sold to L-3
Communications Corporation (L-3) for $27 million in cash, and in April 1998,
Microwave Networks (MN) was sold to Tadiran Ltd. (Tadiran) for $31.5 million in
cash. STS was a systems integrator supplying turnkey satellite transmit/receive
earth stations and networks for domestic, international and government
applications. MN was engaged in the design, manufacture, sale and installation
of high performance digital and analog microwave radios and transmission
products for cellular, personal communications network applications and private
communications network markets. During the second half of fiscal year 1998, the
Company recorded additional provisions of $15.1 million (net of income taxes)
for additional losses on disposal of these divisions. These provisions were
primarily for adjustments to the combined losses on sale and for higher than
anticipated operating losses prior to disposal of both divisions. The operating
results, loss on disposal, and financial position of these divisions have been
classified as discontinued operations in the Company's financial statements
through the divestiture dates. Revenue from the MN and STS discontinued
operations was $83.2 million in fiscal year 1998 for the period prior to
disposal. The loss of $59.4 million from discontinued operations (net of income
taxes) for MN and STS was accrued as part of the net loss on disposal.
In July 1999, Northrop Grumman filed a lawsuit against Adaptive Broadband
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, Adaptive Broadband 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 its 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 to pursue its counterclaims. No provisions have
been made for expenses that may be incurred to resolve the lawsuit, and Adaptive
Broadband believes final resolution of the Northrop Grumman allegations will not
have a material impact on its 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,
Adaptive Broadband Corporation and Tadiran settled the Nokia claims for $2
million, and reserved rights against each other. In May 1999, Adaptive
Broadband 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, Adaptive Broadband and Tadiran settled
all claims against each other. The Nokia and Tadiran settlements had no impact
on the Company's financial position, results of operations or cash flows.
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 $175.0 million, $156.7
million and $175.3 million for fiscal years 2000, 1999 and 1998, respectively.
The income (loss) from EFData, MRC and MDS, was $4.1 million net of income tax
of $2.3 million, $(3.9) million net of income tax benefit of $1.9 million, and
$15.8 million net of income taxes of $6.3 million for fiscal years 2000, 1999
and 1998, respectively. Total revenue from the Government Division discontinued
operations was $67.7 million for fiscal year 1999 for the period prior to
disposal, and $85.7 million for fiscal year 1998. Income from the Government
Division discontinued operations (net of income taxes) was $2.0 million for
fiscal year 1999 for the period prior to disposal, and $3.5 million for fiscal
year 1998.
35
<PAGE>
3. ACCRUED AND OTHER LIABILITIES
As of June 30, accrued liabilities consisted of the following:
<TABLE>
<CAPTION>
(Dollars in thousands)
2000 1999
---------------------------------
<S> <C> <C>
Discontinued operations reserves $14,352 $ 7,226
Accrued payroll and payroll related 12,167 4,832
Discounted receivable liability 1,729 7,055
Income taxes payable 1,084 655
Warranties 1,559 -
Restructuring reserves - 2,803
Other 7,231 2,547
---------------------------------
$38,122 $25,118
=================================
</TABLE>
In addition, accrued restructuring expenses applicable to non-utilized
facilities of $1.1 million at June 30, 1999 are included in other long-term
liabilities.
4. 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 10.0% at June 30, 2000. The net borrowing capacity under the
Company's credit facility was $25 million as of June 30, 2000.
The Company issued $57.5 million of 5.25%, convertible subordinated notes on
December 15, 1993, due on 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 second quarter of fiscal year 2000, 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 was equivalent to accrued interest on
the converted notes plus 1.6%. The premium was charged to expense. During the
third quarter of fiscal year 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.
During the fiscal year 1998, the Company repaid a $5.7 million, five-year, 5%
convertible subordinated note. The note was issued for cash to Motorola, Inc.
concurrent with the close of a 1993 acquisition.
5. CAPITAL STOCK
Common Stock
On March 13, 2000, the Company's shareholders approved an increase in the
authorized number of common shares from 29.2 million to 249.2 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. 18.7 million of these shares were used in
connection with the stock dividend.
Stock Split
In March 2000, the Company's Board of Directors approved a stock-split in the
form of a one-for-one common stock dividend. The dividend was applicable to
shareholders of record on March 23, 2000, and effective on March 30, 2000. All
references to share and per-share data for all periods presented have been
adjusted to give effect to this one-for-one stock dividend, resulting in a two-
for-one stock split.
36
<PAGE>
Stock Repurchase Program
On February 5, 1998, the Company announced that its Board of Directors
authorized the repurchase of up to 6 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 12
million shares. The Company acquired approximately 252,500 shares of common
stock for $3.3 million, 2.2 million shares of common stock for $15.7 million,
and 3.2 million shares of common stock for $34.1 million, in fiscal years 2000,
1999, and 1998, respectively. The shares repurchased subsequent to February 1998
totaled 5.6 million. The Company is not currently repurchasing on an active
basis.
Stockholder 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 (Rights Plan) under which all stockholders of record as
of July 26, 1999, would receive rights to purchase shares of common stock. The
rights would be distributed as a non-taxable dividend and would expire on June
30, 2002. The rights also would 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 the authorized 5.0 million preferred stock in
connection with the Rights Plan instead of common stock.
Options and Other Stock Plans
Stock options have been granted to officers, directors and employees under the
Company's stock option plans with exercise prices equal to the fair market value
of the Company's common stock on the date of grant. Certain options outstanding
vest upon attainment of specified increases in the stock price or after five
years. Options granted prior to September 1997 and after December 1999 become
exercisable in annual installments of 25% beginning one year after the date of
grant. Options granted to the Company's directors become 100% exercisable upon
grant. Options granted under the 1986 and 1992 stock option plans expire after
ten years.
A summary of activity for 2000, 1999 and 1998 is presented below:
<TABLE>
<CAPTION>
Outstanding shares under option
Years ended June 30
2000 1999 1998
---------------------------------------------------------------
<S> <C> <C> <C>
Beginning of year 5,773,940 4,721,150 3,384,836
Granted 2,707,000 2,787,500 2,975,600
Exercised (4,319,564) (394,246) (798,908)
Canceled (285,975) (1,340,464) (840,378)
---------------------------------------------------------------
End of year 3,875,401 5,773,940 4,721,150
===============================================================
Weighted average fair value on date of grant $ 25.83 $ 6.43 $ 3.98
Exercisable 1,844,877 1,232,182 1,499,072
Available for grant 218,155 183,966 1,671,954
<CAPTION>
Weighted Average Exercise
Price Per Share
2000 1999 1998
---------------------------------------------------------------
Beginning of year $ 8.33 $ 8.94 $ 8.83
Granted $ 41.69 $ 7.74 $ 8.83
Exercised $ 9.69 $ 7.12 $ 7.25
Cancelled $ 16.82 $ 9.60 $ 9.76
End of year $ 29.53 $ 8.33 $ 8.94
</TABLE>
37
<PAGE>
The following table summarizes information about the Company's stock options
outstanding at June 30, 2000.
<TABLE>
<CAPTION>
Options
Outstanding
Weighted
Average Options Exercisable
Remaining
Range of Number Contractual Weighted Average Number Weighted Average
Exercise Price Outstanding Life Exercise Price Exercisable Exercise Price
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 0.32 - $8.00 371,157 7.84 $ 6.37 347,633 $ 6.32
$8.125 - $10.72 1,531,296 7.61 8.82 1,030,796 9.16
$11.625 - $33.00 434,058 9.49 24.30 242,808 17.93
$34.53 - $40.50 269,390 9.52 36.23 223,640 35.54
$60.94 - $73.56 1,269,500 9.62 61.66 - -
----------------- ---------------
3,875,401 8.63 29.53 1,844,877 12.98
</TABLE>
The Company has an employee stock purchase plan under which employees may
purchase shares, subject to certain limitations, at 85% of the lower of the fair
market value of the shares at the beginning or end of a six-month purchase
period. During fiscal year 2000, 185,546 shares were issued for $1,094,000,
259,506 shares were issued for $1,360,000 in fiscal year 1999, and 312,802
shares were issued for $1,924,000 in fiscal year 1998. Shares available for
future issuance at June 30, 2000 were 161,454.
The Company has adopted the disclosure only provisions of Statement of Financial
Accounting Standard No. 123 (SFAS 123) "Accounting for Stock Based
Compensation". Accordingly, no compensation expense has been recognized for the
stock plans. Had compensation expense for the Company's stock option and
purchase plans been determined based on the fair value at the grant date for all
options granted after June 30, 1995 under SFAS No. 123, the Company's net loss
and net loss per share would have been increased and net income and net income
per share decreased to the pro forma amounts below:
<TABLE>
<CAPTION>
(Dollars in thousands, except per share amounts)
2000 1999 1998
-------------------------------------------
<S> <C> <C> <C>
Net income (loss) - as reported $(30,871) $11,620 $ (7,760)
Net income (loss) - pro forma $(51,222) $ 5,833 $(10,837)
Diluted net income (loss) per share - as reported $ (0.92) $ 0.39 $ (0.23)
Diluted net income (loss) per share - pro forma $ (1.53) $ 0.19 $ (0.32)
</TABLE>
The assumptions used to estimate the fair value of these options and the 15%
discount on the employee stock purchase plan using the Black-Scholes option
pricing model were:
<TABLE>
2000 1999 1998
------------------------------
<S> <C> <C> <C>
Risk free interest rate 5.8% 5.8% 5.75%
Expected volatility 0.99 0.91 0.51
Expected life for options in years 2.55 4.12 4.15
Expected life for stock purchase plan in years 0.5 0.5 0.5
</TABLE>
6. EMPLOYEE BENEFIT PLANS
Defined Contribution Retirement Plan
The Company's defined contribution retirement plan covers substantially all
employees. One part of the plan is a 401(k) savings plan, which allows employees
to contribute pre-tax compensation up to the lesser of 20% of total annual
compensation or the statutory calendar year limit, currently $10,000. The
Company contributes up to $2,000 to each employee based on employee
contributions up to $3,500. The second part of the plan arises out of the
conversion by the Company of its previous cash profit sharing plan to a defined
contribution plan. Contributions are allocated based on each employee's salary
and length of employment. No profit sharing amounts were authorized for fiscal
year 2000, 1999 or 1998. All of the above employer contributions are determined
by and subject to the approval of the Company's Board of Directors.
Contributions to these plans for employees of the continuing operations were
$150,000 in 2000, $62,000 in 1999, and $20,000 in 1998.
38
<PAGE>
Supplemental Executive Deferred Compensation Plan
The Company offers an executive deferred compensation plan, which permits
participating executives to defer up to 70% of their salary and 80% of their
bonus until termination from the Company, thereafter receiving a payout over a
period of up to ten years. Such deferrals are not deemed to be protected by the
Employee Retirement Income Security Act of 1974 (ERISA) fiduciary regulations
and are thereby at risk, being assets of the Company. Plan participants may
direct the investment of such monies into various investment vehicles. In 1999,
the Company added a phantom stock alternative that allows investment in phantom
shares of the Company's stock. The shares are valued at 100% of the closing
price of the stock at the end of each month of directed contribution. In March
2000, the phantom stock plan was amended to require distributions from this
option to be made in the form of the Company's stock. Prior to the amendment,
the Company re-measured the liability at each reporting period based on changes
in the Company's common stock price. The Company matches contributions at the
rate of 100 shares for the first 400 employee shares and 200 shares for the next
400 employee shares purchased in a given calendar year. All Company matching
contributions are vested over a period of two years. Purchase of phantom stock
in this plan is credited toward attainment of executive stock ownership
requirements but confers no rights of ownership, including voting rights, for
the underlying phantom shares.
7. INCOME TAXES
The benefit from income taxes for continuing operations consisted of the
following:
<TABLE>
<CAPTION>
(Dollars in thousands)
2000 1999 1998
-------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $ - $ - $ -
State - - -
Foreign 1,585 - -
-------------------------------------------------------
Subtotal 1,585 - -
Deferred:
Federal $(14,332) $(7,297) $(5,857)
State (2,276) (1,316) (858)
-------------------------------------------------------
Subtotal (16,608) (8,613) (6,715)
Total $(15,023) $(8,613) $(6,715)
=======================================================
</TABLE>
The differences between the U.S. federal statutory income tax rate and the
Company's effective rate for continuing operations were as follows:
<TABLE>
2000 1999 1998
---------------------------------------------
<S> <C> <C> <C>
U.S. federal statutory income tax rate 35.0% 35.0% 35.0%
State income taxes, net of federal benefit 3.4% 3.6% 3.0%
Intangible assets - (0.3%) -
Foreign loss (2.4%) - -
Debt conversion premium (0.9%) - -
In-process research and development reserve - (6.5%) -
Other 0.9% (2.5%) (2.0%)
---------------------------------------------
Total 36.0% 29.3% 36.0%
=============================================
</TABLE>
Deferred taxes reflect the net effects of temporary differences between the
carrying amounts of assets and liabilities used for financial reporting purposes
and the amounts used for income tax purposes. The components of net deferred tax
assets are as follows:
39
<PAGE>
<TABLE>
2000 1999
-------------------------------------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforward $ 70,333 $ 7,280
Discontinued operations 2,287 13,571
Tax credits 3,276 2,348
Compensation related 5,090 289
Inventory 1,269 -
Warranty 1,606 -
Allowance for doubtful accounts 737 -
Other 1,740 799
-------------------------------------------
Deferred tax assets $ 86,338 $24,287
Valuation allowance (65,063) (5,687)
-------------------------------------------
Deferred tax assets $ 21,275 $18,600
Deferred tax liabilities:
Other (201) (502)
-------------------------------------------
Net deferred tax assets $ 21,074 $18,098
===========================================
</TABLE>
At June 30, 2000, the Company had net deferred tax assets arising from
deductible temporary differences, tax losses and tax credits of $21.1 million,
after being offset by a valuation allowance of $65.1 million and deferred tax
liabilities of $ 0.2 million. Realization of the majority of the net deferred
tax assets is dependent on the Company's ability to generate approximately $53
million of future United States taxable income. Of the valuation allowance,
$59.4 million represents future stock deductions that will be credited to
additional paid-in capital when released. Management believes that it is more
likely than not that the assets will be realized based on forecasted income
including contractual commitments of customers. However, there can be no
assurance that the Company will meet its expectations of future income.
Management evaluates the realizability of the deferred tax assets quarterly and
assesses the need for additional valuation allowance.
At June 30, 2000, the Company had federal net operating loss carry forwards of
approximately $200 million to offset future taxable income, including $154
million arising from stock option exercises, benefit of which will be credited
to additional paid-in capital when realized. These net operating loss carry
forwards begin to expire in the year 2013 through 2020. The Company has
alternative minimum tax and research credit carryforwards of approximately $1.9
million and $1.9 million, respectively. The alternative minimum tax credits can
be carried forward indefinitely. The research tax credit carryforwards begin to
expire in the year 2012 through 2020.
A deferred income tax asset was not recorded for a $2.9 million loss incurred by
the Company's Irish subsidiary as it is intended that the subsidiary's future
earnings be indefinitely invested in operations outside the United States.
8. COMMITMENTS AND CONTINGENCIES
Lease Commitments
All of the buildings occupied by the Company are occupied under operating leases
that expire in one to nine years. Certain of these leases contain escalation
clauses. Rent expense for continuing operations for the three years ended June
30, 2000, 1999 and 1998 was $846,000, $336,000, and $88,000. Lease commitments
which are payable by the Company, exclusive of property taxes, will be due as
follows: 2001--$2,319,000; 2002--$2,482,000; 2003--$2,504,000; 2004--$2,556,000;
2005--$2,657,000, and thereafter--$2,790,000.
Purchase Order Commitments
As of June 30, 2000, the Company had outstanding purchase order commitments for
materials of approximately $9.4 million to its manufacturing suppliers. The
Company expects the fiscal year 2000 purchase orders to be fulfilled and the
related invoices to be paid in fiscal year 2001.
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 or results of operations of
the Company.
40
<PAGE>
9. LITIGATION SETTLEMENT
The Company announced in November 1995 that a shareholders' class action lawsuit
had been filed in the United States District Court for the northern District of
California against it and certain of its former officers on behalf of persons
who purchased shares of the Company's common stock between September 6, 1994 and
June 29, 1995. The complaint filed in the lawsuit alleged certain violations of
the federal securities laws by the Company and certain of its former officers
and sought damages in an unspecified amount. Although the Company did not
believe that it or its former officers committed any securities law violations
and considered the allegations made in the class action suit to be without
merit, in order to avoid the expense and distraction of protracted litigation,
the Company reached an agreement to settle the lawsuit in its fiscal year 1998
second quarter. During its fiscal year 1998 second quarter, the Company recorded
an expense for the settlement (including defense costs), in the amount of $1.9
million, before income taxes. The court approved the settlement on March 23,
1998.
10. RECEIVABLES FROM OFFICERS
In July 1997, the Company's Chief Executive Officer, Frederick D. Lawrence,
received two loans totaling $466,667. The interest rates on both loans were
equal to the Company's incremental borrowing rate on the loan origination date
(9.0%). For both loans, one-half of accrued interest was forgiven on each of the
first two anniversary dates of Mr. Lawrence's employment with the Company. In
addition, one-half of the principal amount of the $316,667 loan was forgiven on
Mr. Lawrence's first two anniversary dates of employment. The principal amount
of the $150,000 loan was due in a balloon payment in July 1999 which due date,
upon approval by the Board of Directors, was extended to July 2001.
In January 1998, the Company's Executive Vice President and Chief Financial
Officer, Donna S. Birks, received an interest-free loan of $500,000 subject to
various employment criteria. The principal amount is due in a balloon payment on
the fifth anniversary of Ms. Birks' employment. The annual interest rate is
6.0%.
11. AQUISITIONS
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 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. In the third quarter of fiscal year 2000, the Company 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. The Company's results of operations for fiscal year 1999 include
ABL's results from August 20, 1998.
In connection with the acquisitions 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 risk adjusted discount rates 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, future profitability levels of the
technology, the uncertainty of technological advances that were known at the
time and the stage of completion of the technology. The Company believes that
the estimated in-process research and development amount so determined
represents fair value and does not exceed the amount a third party would pay for
the project.
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 these projects was expensed at
acquisition.
41
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information relating to directors of Adaptive Broadband required to be
furnished pursuant to this item is incorporated by reference from portions of
the Company's definitive Proxy Statement for its annual meeting of shareholders
to be filed with the Securities and Exchange Commission pursuant to Regulation
14A within 120 days after June 30, 2000 (the "Proxy Statement") under the
caption "Election of Directors." Certain information relating to executive
officers of the Company is set forth in Item 1 of Part I of this Form 10-K under
the caption "Executive Officers of the Registrant."
ITEM 11. EXECUTIVE COMPENSATION
Incorporated by reference from portions of the Proxy Statement under the
captions "Compensation of Directors and Executive Officers," "Compensation
Committee Interlocks and Insider Participation" and "Certain Stockholders-
Section 16(a) Beneficial Ownership Reporting Compliance."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OF
ADAPTIVE BROADBAND CORPORATION
Incorporated by reference from portions of the Proxy Statement under the
captions "Certain Stockholders" and "Compensation of Directors and Executive
Officers."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated by reference from portion of the Proxy Statement under the
caption "Compensation of Directors and Executive Officers-Employment
Arrangements."
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. FINANCIAL STATEMENTS
Included in Part II of this report:
Report of Ernst & Young LLP, Independent Auditors
Consolidated statements of operations for each of the three years in
the period ended June 30, 2000
Consolidated balance sheets as of June 30, 2000 and 1999
Consolidated statements of shareholders' equity for each of the
three years in the period ended June 30, 2000
Consolidated statements of cash flows for each of the three years in
the period ended June 30, 2000
Notes to Consolidated Financial Statements
42
<PAGE>
(a) 2. FINANCIAL STATEMENT SCHEDULES
Included in Part IV of this report:
Schedules for the three years ended June 30, 2000 Schedule II --
Valuation and Qualifying Accounts
All other schedules are omitted because they are not required, or are
not applicable, or the information is included in the consolidated
financial statements or notes to the consolidated financial
statements.
(a) 3. EXHIBITS
3.1 Restated Certificate of Incorporation, as amended.
3.2 Bylaws. (Exhibit to the Company's Form 10-K for its fiscal year
ended June 30, 1994; incorporated herein by reference.)
4.4 Amended and Restate Rights Agreement dated as of February 10, 2000
among Adaptive Broadband Corporation and BankBoston, N.A. (Exhibit
to the Company's Form 8-K filed on March 2, 2000; incorporated
herein by reference.)
4.5 Form of Indenture, including form of Convertible Subordinated
Note, relating to $57,500,000 of Convertible Subordinated Notes.
(Exhibit to the Company's Form S-3 filed on November 17, 1993;
incorporated herein by reference.)
10.1 Employee Stock Purchase Plan, as amended through August 1998.**
(Exhibit to the Company's Form 10-K for its fiscal year ended
June 30, 1998; incorporated herein by reference.)
10.2 1986 Stock Option Plan, as amended.** (Exhibit to the Company's
Form 10-K for its fiscal year ended June 30, 1991; incorporated
herein by reference.)
10.3 Lease of the property located at 2105 West Fifth, Tempe, Arizona.
(Exhibit to the Company's Form 10-K for its fiscal year ended
June 30, 1991; incorporated herein by reference.)
10.4 Lease of the premises located at 20 Alpha Road, Chelmsford, MA.
(Exhibit to the Company's Form 10-K for the fiscal year ended
June 30, 1992; incorporated herein by reference.)
10.5 Lease of premises located at 2114 West 7th Street, Tempe, Arizona.
(Exhibit to the Company's Form 10-K for the fiscal year ended
June 30, 1996; incorporated herein by reference.)
10.6 Lease of premises located at 175 West Wall Street, Glendale
Heights, Illinois. (Exhibit to the Company's Form 10-K for its
fiscal year ended June 30, 1996; incorporated herein by
reference.)
10.7 1992 Stock Option Plan, as amended. ** (Exhibit to Company's Form
S-8 filed on March 29, 2000; incorporated herein by reference.)
10.8 Letter Agreement with Frederick D. Lawrence**, dated July 16,
1997. (Exhibit to Company's Form 10-K for its fiscal year ended
June 30, 1997; incorporated herein by reference).
10.9 Letter Agreement with Donna S. Birks, dated December 12, 1997.**
(Exhibit to Company's Form 10-K for its fiscal year ended June 30,
1998; incorporated herein by reference).
10.10 Severance Agreement entered into in March 2000 with Donna S.
Birks.**
10.11 Severance Agreement entered into in March 2000 with Daniel
Scharre.**
10.12 Severance Agreement entered into in March 2000 with Ken Wees.**
43
<PAGE>
10.13 Promissory Note issued to Frederick D. Lawrence, as amended
through September 21, 1999. (Exhibit to the Company's Form 10-K
for its fiscal year ended June 30, 1999; incorporated herein by
reference.)
10.14 Severance agreement entered into in February 2000 with George
Arena**
10.15 Asset Purchase Agreement between L-3 Communications Corporation
and California Microwave, Inc. dated as of December 19, 1997 and
amendment thereto. (Exhibits to the Company's Form 8-K filed on
February 13, 1998; incorporated herein by reference.)
10.16 Amendment to Retention and Severance Agreement with George Arena
dated July 5, 2000.
10.17 Asset Purchase Agreement between Tadiran Ltd. and California
Microwave, Inc., dated as of March 1, 1998 and amendment thereto.
(Exhibit to the Company's Form 8-K filed on April 27, 1998;
incorporated herein by reference.)
10.18 Stock Purchase Agreement Telscape International, Inc., California
Microwave Service Division, Inc. and California Microwave, Inc.
dated as of May 8, 1998. (Exhibit to the Company's Form 8-K filed
on June 5, 1998; incorporated herein by reference.)
10.19 Agreement, dated August 20, 1998, between (1) Olivetti Research
Limited, Olivetti Telemedia S.p.A. and Oracle Corporation and (2)
Pitcomp 174 Limited (a wholly-owned subsidiary of the Company), to
be renamed Adaptive Broadband Limited. (Exhibit to the Company's
Form 10-Q for the period September 30, 1998; incorporated herein
by reference.)
10.20 Asset Purchase Agreement, dated November 19, 1998, between
California Microwave, Inc. and Crown International, Inc. (Exhibit
to the Company's Form 10-Q for the period ended 31, 1998;
incorporated herein by reference.)
10.21 Asset Purchase Agreement dated March 10, 1999 between Northrop
Grumman Corporation and California Microwave, Inc. (Exhibit to the
Company's Form 8-K filed on March 17, 1999; incorporated herein by
reference.)
10.22 Asset Purchase Agreement dated June 14, 2000 between Microwave
Data Systems, Inc., Moseley Associates Incorporated and Adaptive
Broadband Corporation. (Exhibit to the Company's Form 8-K filed on
July 25, 2000; incorporated herein by reference.)
10.23 Amended and Restated Asset Purchase Agreement dated July 10, 2000,
between Comtech Telecommunications Corp. and Adaptive Broadband
Corporation (Exhibit to the Company's Form 8-K filed on July 25,
2000l incorporated herein by reference.)
10.24 Asset Purchase Agreement dated June 27, 2000, between RF
Technology, Inc. and Adaptive Broadband Corporation. (Exhibit to
the Company's Form 8-K filed on August 10, 2000; incorporated
herein by reference.)
10.25 Lease of premises located in The Westbrook Center, Milton Road,
Cambridge, England.
10.26 Lease of premises located in Moffett Park, I & II Industrial
Center, Sunnyvale, California.
21 List of subsidiaries.
23 Consent of Ernst & Young LLP, Independent Auditors.
24 Power of Attorney.
27 Financial Data Schedule for the fiscal year ended June 30, 2000.
44
<PAGE>
Exhibits are available from the Registrant upon request.
** Compensatory plan or arrangement.
(b) REPORTS ON FORM 8-K
The following reports on Form 8-K were filed during the last fiscal
quarter of fiscal 2000:
Form 8-K filed on March 2, 2000 relating to adoption of a Rights
Plan.
45
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Dated: August 29, 2000 ADAPTIVE BROADBAND CORPORATION
By /s/ FREDERICK D.LAWRENCE
------------------------
Frederick D. Lawrence
Chairman, and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
<TABLE>
<CAPTION>
<S> <C> <C>
/s/ Frederick D. Lawrence Chief Executive Officer (principal 2000 August 29, 2000
------------------------------------------ executive officer) and Director
FREDERICK D. LAWRENCE
/s/ Daniel L. Scharre President and Chief Operating Officer and August 29, 2000
------------------------------------------ Chief Executive Officer of Adaptive
DANIEL L. SCHARRE Broadband Limited, a wholly owned
subsidiary
/s/ Donna S. Birks Executive Vice President and Chief August 29, 2000
------------------------------------------ Financial Officer (principal financial
DONNA S. BIRKS and accounting officer)
/s/ William B. Marx, Jr.* Director August 29, 2000
------------------------------------------
WILLIAM B. MARX, JR.
/s/ Terry W. Ward* Director August 29, 2000
------------------------------------------
TERRY W. WARD
/s/ Frederick W. Whitridge, Jr.* Director August 29, 2000
------------------------------------------
FREDERICK W. WHITRIDGE, JR.
/s/ George A. Joulwan* Director August 29, 2000
------------------------------------------
GEORGE A. JOULWAN
/s/ Leslie G. Denend* Director August 29, 2000
------------------------------------------
LESLIE G. DENEND
/s/ James C. Granger* Director August 29, 2000
------------------------------------------
JAMES C. GRANGER
/s/ William L. Martin III* Director August 29, 2000
------------------------------------------
WILLIAM L. MARTIN III
/s/ James T. Richardson* Director August 29, 2000
------------------------------------------
JAMES T. RICHARDSON
*By /s/ KENNETH J. WEES
------------------------------------------
KENNETH J. WEES
Attorney-in-fact
</TABLE>
46
<PAGE>
ADAPTIVE BROADBAND CORPORATION
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Years ended June 30, 2000, 1999, 1998
(Dollars in thousands)
<TABLE>
<CAPTION>
Balance at Additions Other Balance
beginning Charged Additions at end
of year to income (transfers) Deductions of year
------------- ------------- -------------- --------------- -------------
<S> <C> <C> <C> <C> <C>
2000
----
Allowance for doubtful accounts $ 0 $ 1,352 $0 $ 0 $ 1,352
Inventory reserves 0 650 0 0 650
Estimated liability for warranties 0 1,559 0 0 1,559
Discontinued operations reserve (1) 7,226 8,300 0 (1,174) 14,352
1999
----
Allowance for doubtful accounts 0 0 0 0 0
Inventory reserves 0 0 0 0 0
Estimated liability for warranties 0 0 0 0 0
Discontinued operations reserve (1) 6,748 7,000 0 (6,522) 7,226
1998
----
Allowance for doubtful accounts 0 0 0 0 0
Inventory reserves 0 0 0 0 0
Estimated liability for warranties 0 0 0 0 0
Discontinued operations reserve (1) 12,538 25,214 0 (31,004) 6,748
</TABLE>
All amounts reflect activity in continuing operations.
(1) Represents reserves provided for losses on sales of discontinued operations,
transaction costs and costs which may be incurred as a result of post-closing
procedures.
47
