<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------------
FORM 10-Q
(MARK ONE)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the quarterly period ended December 31, 1999
-----------------
OR
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from to
------ ------
COMMISSION FILE NUMBER 0-07428
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ADAPTIVE BROADBAND CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 94-1668412
(State or other jurisdiction of (I.R.S. Employer Identification
Incorporation or organization) Number)
1143 BORREGAS AVENUE
SUNNYVALE, CALIFORNIA 94089
(Address of principal executive offices)
(Zip Code)
(408) 732-4000
(Registrant's telephone number, including area code)
(Former name, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO
---- ----
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Classes Outstanding at January 31, 2000
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Common Stock $.10 Par Value (and related 16,879,000
share purchase rights)
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ADAPTIVE BROADBAND CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
--------------------------------- ---------------------------------
1999 1998 1999 1998
---------------- ---------------- ---------------- ---------------
<S> <C> <C> <C> <C>
REVENUE $ 2,198 $ - $ 3,300 $ -
Costs of revenue 2,405 - 3,775 -
Gross margin ---------------- ---------------- ---------------- ---------------
(207) - (475) -
EXPENSES:
Research and development 3,636 784 5,727 1,434
Sales, marketing and administration 5,165 2,706 9,875 5,580
Amortization of intangible assets 75 75 149 125
Purchased in-process research and development - - - 8,210
Total expenses ---------------- ---------------- ---------------- ---------------
8,876 3,565 15,751 15,349
---------------- ---------------- ---------------- ---------------
OPERATING LOSS (9,083) (3,565) (16,226) (15,349)
Interest income (expense), net 322 (1,104) 31 (1,977)
Premium on conversion of notes (1,093) - (1,093) -
---------------- ---------------- ---------------- ---------------
LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES (9,854) (4,669) (17,288) (17,326)
Benefit from income taxes (3,548) (1,678) (6,224) (4,263)
LOSS FROM CONTINUING OPERATIONS ---------------- ---------------- ---------------- ---------------
(6,306) (2,991) (11,064) (13,063)
DISCONTINUED OPERATIONS:
Income (loss) from discontinued operations,
net of income taxes 3,202 (645) 4,097 (424)
---------------- ---------------- ---------------- ---------------
NET LOSS $ (3,104) $ (3,636) $ (6,967) $ (13,487)
================ ================ ================ ===============
BASIC AND DILUTED EARNINGS (LOSS) PER SHARE:
Loss from continuing operations $ (0.40) $ (0.20) $ (0.72) $ (0.87)
Income (loss) from discontinued operations 0.21 (0.04) 0.27 (0.03)
---------------- ---------------- ---------------- ---------------
Net Loss
$ (0.19) $ (0.24) $ (0.45) $ (0.90)
================ ================ ================ ===============
WEIGHTED AVERAGE COMMON SHARES USED IN COMPUTING
BASIC AND DILUTED EARNINGS (LOSS) PER SHARE 15,947 14,968 15,333 15,041
</TABLE>
2
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ADAPTIVE BROADBAND CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
DECEMBER 31, 1999 JUNE 30, 1999
----------------------- -------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 30,299 $ 48,887
Accounts receivable, net 2,268 -
Inventories 209 1,116
Deferred income taxes 22,018 14,293
Prepaid expenses and other current assets 1,337 2,938
Net current assets of discontinued operations 55,488 42,057
----------------------- ------------------
Total current assets 111,619 109,291
----------------------- ------------------
Property, plant and equipment, net 4,439 3,088
Deferred income taxes - 3,805
Intangible assets, net 1,905 2,054
Other assets 3,075 3,017
Net long-term assets of discontinued operations 49,965 50,078
----------------------- ------------------
$ 171,003 $ 171,333
======================= ==================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 577 $ 2,132
Accrued liabilities 26,054 25,118
----------------------- ------------------
Total current liabilities 26,631 27,250
----------------------- ------------------
Convertible subordinated notes 23,352 57,500
Other long-term liabilities 600 1,590
Shareholders' equity:
Common stock 1,783 1,663
Capital in excess of par value 129,179 95,673
Treasury stock (22,476) (36,066)
Retained earnings 11,934 23,723
----------------------- ------------------
Total shareholders' equity 120,420 84,993
----------------------- ------------------
$ 171,003 $ 171,333
======================= ==================
</TABLE>
3
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ADAPTIVE BROADBAND CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
DECEMBER 31,
--------------------------------
1999 1998
------------- --------------
<S> <C> <C>
Operating activities:
Loss from continuing operations $ (11,064) $ (13,063)
Adjustments to reconcile to net cash
used in operating activities:
Purchased in-process research and development - 8,210
Premium on conversion of notes 1,093 -
Depreciation and amortization 326 142
Amortization of intangible assets 149 125
Deferred income taxes (6,224) (4,263)
Other 57 -
Net effect of change in:
Accounts receivable (2,268) (229)
Inventories 907 -
Prepaid expenses and other current assets 1,065 (1,840)
Accounts payable (1,555) 695
Other accrued liabilities (54) (1,530)
------------- --------------
Net cash used in continuing operations (17,568) (11,753)
------------- --------------
Investing activities:
Capital expenditures (1,677) (1,518)
Acquisitions and investments in businesses (1,000) (11,111)
Other - (155)
------------- --------------
Net cash used in continuing operations investing activities (2,677) (12,784)
Net cash used in discountinued operations activities (6,917) (10,109)
------------- --------------
Net cash used in investing activities (9,594) (22,893)
------------- --------------
Financing activities:
Proceeds from issuance of common stock 12,988 1,168
Proceeds from bank credit facilities - 20,542
Purchase of treasury stock (3,321) (10,391)
Premium paid on conversion of notes (1,093) -
------------- --------------
Net cash provided by financing activities 8,574 11,319
------------- --------------
Net decrease in cash and cash equivalents (18,588) (23,327)
Cash and cash equivalents at beginning of period 48,887 24,630
------------- --------------
Cash and cash equivalents at end of period $ 30,299 $ 1,303
============= ==============
Supplemental cash flow information:
Cash paid during the period for:
Interest $ 394 $ 1,793
Income taxes - -
Noncash transaction:
During the six months ended December 31, 1999, the company converted $34,148 of its subordinated notes into
1,200,693 shares of common stock.
</TABLE>
4
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ADAPTIVE BROADBAND CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1. BASIS OF PRESENTATION
The unaudited condensed consolidated financial statements include the accounts
of Adaptive Broadband Corporation and its subsidiaries (the Company). All
significant intercompany balances and transactions have been eliminated. Certain
prior year amounts have been reclassified to conform to the current year
presentation. These unaudited condensed consolidated financial statements
include all adjustments (consisting only of normal recurring adjustments) which,
in the opinion of management, are necessary to fairly state the financial
position, results of operation and cash flows for the periods presented. Interim
results are not necessarily indicative of results for a full year. The condensed
consolidated interim financial statements should be read in conjunction with the
audited consolidated financial statements for the year ended June 30, 1999,
included in the Adaptive Broadband 1999 Annual Report to Shareholders.
NOTE 2. COMPREHENSIVE INCOME
The Company has adopted Statement of Financial Accounting Standards No. 130
(SFAS 130), "Reporting Comprehensive Income." SFAS 130 establishes standards for
the reporting and display of comprehensive income and its components and
requires restatement of all previously reported information for comparative
purposes. For the six months ended December 31, 1999 and December 31, 1998, the
Company's comprehensive loss was the same as its net loss.
NOTE 3. SEGMENT REPORTING
The Company adopted SFAS No. 131 in fiscal year 1998. SFAS No. 131 establishes
standards for disclosures about operating segments, products and services,
geographic areas and significant customers. The Company is organized and
operates as one operating segment: the design, development, manufacturing,
marketing and selling of broadband wireless communication systems.
NOTE 4. DISCONTINUED OPERATIONS
In January 2000, the Company's board of director's adopted a formal plan to
sell its EFData Satellite Products Division (EFData), Microwave Radio
Communications Division (MRC) and Microwave Data Systems Division (MDS).
These three divisions qualify as segments of business under APB 30 as each
operates in separate lines of businesses with separate customer classes. The
Company's continuing business, the AB-Access Division, does not operate in
these lines of businesses and sells to different customers. EFData is a
leading provider of satellite communication technology focused on addressing
the commercial, industrial and military markets. MRC provides the majority of
the US analog and digital point-to-point microwave systems for transporting
video signals for television broadcast operations, including electronic news
gathering, satellite backhauls, studio-transmitter links and regional
networks. MDS supplies data telemetry point-to-multipoint terrestrial radio
systems.
The operating results and financial position of EFData, MRC and MDS
divisions, together with 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 $46.9 million and
$42.9 million for the three months ended December 31, 1999 and 1998, and
$88.7 million and $77.6 million for the six months ended December 31, 1999
and 1998. The income/(loss) from EFData, MRC and MDS, net of income taxes,
was $3.2 million and $(1.5) million for the three months ended December 31,
1999 and 1998, and $4.1 million and $(2.4) million for the six months ended
December 31, 1999 and 1998. Total revenue from the Government Division was
$20.0 million and $39.8 million for the three and six months ended December
31, 1998. Income from the Government Division, net of income taxes, was $0.9
million and $2.0 million for the three and six months ended December 31, 1998.
In April 1999, the Company completed the sale of its Government Division to
Northrop Grumman Corporation (Northrop Grumman) for $93 million in cash, for a
net gain of approximately $36 million (net of income taxes). The Government
Division sale price includes up to an additional $5 million cash payment,
contingent upon the future performance of the divested business. The Company has
not recognized any benefit for this contingent future payment.
In April 1998, Microwave Networks (MN) was sold to Tadiran Ltd. (Tadiran) for
$31.5 million in cash. Final accounting for the Government Division and MN
divestitures are subject to completion of the post-closing procedures
provided for in the Northrop Grumman and Tadiran agreements. The Company has
accrued for future price adjustments that may occur in the post-closing
procedures for both divestitures. At December 31, 1999, the discontinued
operations reserves for the Government Division and MN divestitures are $6.6
million and $1.7 million, respectively. The Company believes that the
completion of these procedures will not have a material impact on the
Company's financial position, results of operations, or cash flows.
In July 1999, Northrop Grumman filed a lawsuit against the Company alleging that
the Company failed to disclose certain events and information as required by the
terms of the agreement pursuant to which Northrop Grumman acquired the
Government Division of the Company in April 1999. No damages have been
specified. In September 1999, the Company filed a cross-complaint against
Northrop Grumman seeking to recover in excess of $3.7 million, which represents
the amount that the Company contends Northrop Grumman appropriated from the
Company's bank accounts following the acquisition. The Company believes that it
has strong defenses and counterclaims and
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plans to vigorously defend the lawsuit filed by Northrop Grumman and pursue
its counterclaims. No provisions have been made for expenses that may be
incurred to resolve the lawsuit, and the Company believes final resolution of
the Northrop Grumman allegations will not have a material impact on the
Company's financial position, results of operations, or cash flows.
In May 1995, the Company's MN division entered into certain agreements with
Nokia Telecommunications Oy (Nokia) pursuant to which MN was to provide to Nokia
certain microwave radios and related software and services, and was to carry out
certain development programs. In September 1997, Nokia informed MN of a
purported failure of certain of the products sold to Nokia to meet certain
contractual specifications. MN was sold to Tadiran in April 1998 and under the
terms of the sale agreement, Tadiran assumed and indemnified the Company with
respect to the Nokia claims. Tadiran has now taken the position that the Company
is responsible for the Nokia claims, based upon allegations that the Company
failed to provide adequate disclosures and financial reserves with respect to
such claims. In September 1998, Nokia began arbitration proceedings to recover
damages, which were claimed to be $40.6 million. In January 2000, the Company
and Tadiran settled the Nokia claims for $2 million and reserved their rights
against each other. In May 1999, the Company began arbitration proceedings
against Tadiran, primarily to determine that Tadiran is responsible for the
Nokia claims, which now have been liquidated at $2 million. The Company believes
that it has strong claims against Tadiran. No accruals have been recorded for
expenses that may be incurred to resolve the dispute, and the Company believes
final resolution of this matter will not have a material impact on the Company's
financial position, results of operations or cash flows.
NOTE 5. INVENTORIES
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) DECEMBER 31, 1999 JUNE 30, 1999
---------------------- ----------------- -------------
<S> <C> <C>
Work-in-process and finished goods $ 209 $ 1,116
------- -------
Total Inventory $ 209 $ 1,116
======= =======
</TABLE>
NOTE 6. INTANGIBLE ASSETS OF BUSINESS ACQUIRED
For acquisitions accounted for under the purchase method, the excess purchase
price over the fair value of net tangible assets acquired is allocated to
intangible assets based on fair value. The carrying value of the intangible
assets are reviewed if the facts and circumstances suggest that the asset may be
impaired. If this review indicates that the intangible assets are not
recoverable, the carrying value is reduced appropriately. The following table
summarizes net intangible assets of business acquired:
<TABLE>
<CAPTION>
AMORTIZATION
(DOLLARS IN THOUSANDS) PERIOD DECEMBER 31, 1999 JUNE 30, 1999
---------------------- ------ ----------------- -------------
<S> <C> <C> <C>
Goodwill 10 years $ 1,888 $ 1,888
Assembled workforce 4 years 440 440
Accumulated amortization (423) (274)
--------- ---------
$ 1,905 $ 2,054
========= =========
</TABLE>
On August 20, 1998, the Company acquired Adaptive Broadband Limited (ABL), a
United Kingdom based company developing high-speed wireless Internet
connectivity technology. The acquisition was accounted for under the purchase
method. The initial purchase price was approximately $10.9 million including
cash payments, direct costs, and the assumption of ABL's net liabilities. The
assets and liabilities assumed by the Company were recorded based on their
fair values at the date of acquisition. The purchase price allocated $8.2
million to in-process research and development, $0.4 million to net tangible
assets, $0.4 million to identifiable intangible assets, and $1.9 million to
goodwill. The amount allocated to in-process research and development was
expensed at the time of acquisition. In January 2000, the Company paid $1.3
million as the first portion of the contingent purchase price, which was
accounted for as additional goodwill. The remaining contingent portion of the
purchase price will include payments up to $3.5 million and will be recorded
as goodwill.
NOTE 7. BORROWING ARRANGEMENTS
During the first quarter of fiscal 2000, the Company paid off the $1.6 million
outstanding balance of its industrial development bonds. The industrial
development bonds were payable in annual installments through June 2013, and
accrued interest at floating rates, based upon prevailing market conditions.
The Company originally issued $57.5 million of 5.25%, convertible
subordinated notes on December 15, 1993. The notes are due December 15, 2003.
These notes are convertible at any time prior to maturity, at the option of
the holder, into shares of the Company's common stock at a price of $28.4375
per share. These notes are redeemable any time at the option of the Company.
Interest is payable semi-annually. The notes are subordinated to all existing
and future senior indebtedness of the Company, and are quoted on the Nasdaq
National Market. During the quarter ended December 31, 1999, at the request
of certain note holders, the Company converted approximately $34 million of
its subordinated notes into approximately 1.2 million shares of common stock.
Upon the conversion, the Company paid a $1.1 million premium which is
equivalent to accrued interest on the converted notes plus 1.6%. Subsequent
to December 31, 1999, approximately $7 million of the notes were converted at
the request of certain note holders into 0.2 million shares of common stock.
The Company set March 2, 2000 as the redemption date for the remaining
principal amount outstanding, at the redemption price of 102.0% of the
principal amount, together with accrued interest to the redemption date. Note
holders have the option until March 2, 2000 to convert the notes into the
Company's common stock at a price of $28.4375 per share.
NOTE 8. SHAREHOLDERS' EQUITY
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On February 5, 1998, the Company announced that its Board of Directors
authorized the repurchase of up to three million shares of its common stock on
the open market. On October 6, 1998, the Company announced that its Board of
Directors had increased the number of shares authorized for repurchase to six
million. During the six months ended December 31, 1999, the Company acquired
126,250 shares of common stock for $3.3 million, bringing the total shares
repurchased after February 5, 1998 to approximately 2.8 million.
The following table summarizes the changes in shareholders' equity for the six
months ended December 31, 1999:
<TABLE>
<CAPTION>
CAPITAL IN TOTAL SHARE-
SHARES EXCESS OF TREASURY RETAINED HOLDERS'
(DOLLARS IN THOUSANDS) ISSUED AMOUNT PAR VALUE STOCK EARNINGS EQUITY
- -------------------------------------- ----------- ----------- ------------ ------------ ------------ ---------------
<S> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1999 16,629,031 $ 1,663 $ 95,673 $ (36,066) $ 23,723 $ 84,993
Treasury stock repurchased (3,321) (3,321)
Common stock issued from
treasury shares for stock option
and stock purchase plans 16,911 (4,822) 12,089
Conversion of notes 1,200,693 120 33,506 33,626
Net loss (6,967) (6,967)
----------- ----------- ------------ ------------ ------------ ---------------
Balance at December 31, 1999 17,829,724 $ 1,783 $ 129,179 $ (22,476) $ 11,934 $ 120,420
=========== =========== ============ ============ ============ ===============
</TABLE>
NOTE 9. SHAREHOLDER RIGHTS
In July 1999, upon the expiration of the Company's current stockholder rights
plan, the Board of Directors approved the adoption of a new three-year
Stockholder Rights Plan under which all stockholders of record as of July 26,
1999, will receive rights to purchase shares of common stock. The rights will be
distributed as a non-taxable dividend and will expire on June 30, 2002. The
rights also will be exercisable only if a person or a group acquires 20% or more
of the Company's common stock or announces a tender offer for 50% or more of the
common stock. In October 1999, the stockholders of the Company approved an
amendment to the Company's certificate of incorporation adding a
stockholder-friendly "chewable" feature for the Rights Plan. This chewable
feature requires the Company to redeem or otherwise make the Rights Plan
inapplicable if the Company receives certain types of acquisition proposals and
the stockholders vote to require it to do so. Also, the stockholders of the
Company approved the use of preferred stock in connection with the Rights Plan
instead of common stock.
NOTE 10. INCOME TAXES
At December 31, 1999, the Company had net deferred tax assets of $22.0 million,
after a valuation allowance of $5.7 million. Realization of the majority of the
net deferred tax assets is dependent on the Company's ability to generate
approximately $55 million of future taxable income. Management believes that it
is more likely than not that the assets will be realized based on forecasted
income and the expected gain from the sale of the EFData, MRC and MDS Divisions.
However, there is no assurance that the Company will meet its expectations of
future income. Management will evaluate the realizability of the deferred tax
assets quarterly and assess the need for additional valuation allowance.
NOTE 11. CONTINGENT LIABILITIES
The Company is subject to legal proceedings and claims that arise in the normal
course of its business. The Company believes these proceedings will not have a
material adverse effect on the financial position, results of operations or cash
flows of the Company.
NOTE 12. SUBSEQUENT EVENT
In January 2000, the Company's board of directors authorized, subject to
stockholder approval, an increase in the Company's authorized common stock from
30 million to 250 million shares. The board also authorized a special meeting of
stockholders for the purposes of approving the proposed share increase. The
special stockholders' meeting will be held in March 2000. If the stockholders
approve the proposed increase in the authorized number of shares, the board
intends to implement a 2-for-1 common stock split as soon as practicable by
declaring a special common stock dividend of one share of common stock for each
outstanding common share.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
STATEMENTS MADE BELOW AND IN THE ADAPTIVE BROADBAND CORPORATION 1999 ANNUAL
REPORT TO SHAREHOLDERS CONTAIN FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES, INCLUDING STATEMENTS REGARDING OUR MARKETS, THE ABILITY TO BE A
LEADER IN OUR MARKETS AND TO ACHIEVE OUR GROWTH OBJECTIVES, THE FUTURE OF
NETWORK COMPUTING, TELECOMMUNICATIONS AND BROADCASTING AND OTHER MATTERS, AS
WELL AS STATEMENTS ABOUT THE RESULTS OF LITIGATION OR DISPUTES, THE RESULTS OF
POST-CLOSING PROCEDURES IN CONNECTION WITH DISCONTINUED OPERATIONS SALE
AGREEMENTS, PRODUCT MIX AND INTERNATIONAL OPERATIONS, THE EFFECT OF NEW
ACCOUNTING PRONOUNCEMENTS, THE REALIZATION OF CERTAIN TAX ASSETS, ADEQUACY OF
FUNDS FOR THE FORESEEABLE FUTURE, EXPECTATIONS FOR FISCAL YEAR 2000 AND BEYOND.
WORDS SUCH AS "BELIEVES," "ANTICIPATES," "EXPECTS," "INTENDS," AND SIMILAR
EXPRESSIONS ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS, BUT ARE NOT THE
EXCLUSIVE MEANS OF IDENTIFYING SUCH STATEMENTS. YOU SHOULD NOT PLACE UNDUE
RELIANCE ON THESE FORWARD-LOOKING STATEMENTS AND THAT THESE STATEMENTS REFLECT
MANAGEMENT'S ANALYSIS ONLY AS OF THE DATE THEREOF, AND WE ASSUME NO OBLIGATION
TO UPDATE THESE STATEMENTS. ACTUAL EVENTS OR RESULTS MAY DIFFER MATERIALLY FROM
THE EVENTS OR RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT
COULD CAUSE OUR ACTUAL RESULTS TO DIFFER MATERIALLY FROM THESE FORWARD-LOOKING
STATEMENTS INCLUDE, BUT ARE NOT LIMITED TO, THE LEVEL OF DEMAND FOR PRODUCTS,
COMPETITION, NEW PRODUCT INTRODUCTIONS BY COMPETITORS, MARKET ACCEPTANCE OF OUR
NEW PRODUCTS, OUR ABILITY TO PARTICIPATE AND RESPOND TO RAPID TECHNOLOGICAL
CHANGE, CHALLENGES IN IMPLEMENTING THE PLAN TO DIVEST OUR LEGACY BUSINESSES,
AVAILABILITY OF QUALIFIED PERSONNEL, RISKS RELATED TO INTERNATIONAL SALES,
DELAYS IN THE RECEIPT OF ORDERS OR IN THE SHIPMENT OF PRODUCTS, CHANGES IN
DEMAND FOR PRODUCTS, COST OVERRUNS, FOREIGN CURRENCY EXCHANGE RATE FLUCTUATIONS,
TIMELY AVAILABILITY OF SUPPLY OF COMPONENTS, DEPENDENCE ON MAJOR ORDERS FROM A
SMALL NUMBER OF CUSTOMERS, LIMITATIONS ON OUR ABILITY TO REDUCE INVENTORY AND
EXPENSES IF FORECASTS AND EXPECTED DEMAND ARE NOT REALIZED, GENERAL ECONOMIC
CONDITIONS, THE IMPACT OF YEAR 2000 AND WHETHER OUR CLAIMS AND DEFENSES IN
LITIGATION AND DISPUTES ARE VIEWED AS MERITORIOUS. FOR A MORE DETAILED
DISCUSSION OF THESE AND OTHER FACTORS, SEE "INFORMATION REGARDING FORWARD
LOOKING STATEMENTS" IN THE OUR ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR
ENDED JUNE 30, 1999, AND IN OUR CONSOLIDATED FINANCIAL STATEMENTS AND NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS. THE CONSOLIDATED FINANCIAL STATEMENTS SHOULD
BE READ IN CONJUNCTION WITH THIS MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS.
In January 2000, our board of directors adopted a formal plan to sell our EFData
Satellite Products Division (EFData), Microwave Radio Communications Division
(MRC) and Microwave Data Systems Division (MDS). The operating results and
financial position of these divisions, together with the operating results and
financial position of the Government Division that was sold in April 1999, have
been classified separately as discontinued operations for all periods presented
in the accompanying Condensed Consolidated Financial Statements. See Note 4 -
Discontinued Operations, of Notes to Condensed Consolidated Financial Statements
for further discussion.
RESULTS OF OPERATIONS
OVERVIEW
We are a data networking solutions company that is developing leading-edge
technology for the deployment of broadband wireless communications over the
Internet. Our AB-Access-TM- fixed wireless broadband system (AB-Access)
provides a high-speed means to bridges the "last mile" for business and
residential subscribers by replacing or supplementing the traditional
telephone company local loop. It offers data transmission at rates up to
25Mbps, 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 December 31, 1999, we generated $460 million of contracted
five-year demand for the AB-Access product. Contract signings are converted
into bookings when the orders received for product will be shipped within 12
months. We have contracted Solectron Corporation of Milpitas, California
(Solectron), to manufacture the AB-Access product line and with Science
Applications International Corporation (SAIC) of San Diego, California, to
provide AB-Access integrated services into next-generation networks for large
commercial clients and government applications around the world.
Our continuing operations, which reflect solely the results of our AB-Access
business, reported a loss of $6.3 million, or $0.40 per share, for the three
months ended December 31, 1999, compared to a loss of $3.0 million, or $0.20 per
share for the three months ended December 31, 1998. Excluding a $1.1 million
premium on conversion of notes, net loss from continuing operations for the
three months ended December 31, 1999 was $5.6 million, or $0.36 per share.
Net loss from continuing operations was $11.1 million, or $0.72 per share, for
the six months ended December 31, 1999, compared to $13.1 million, or $0.87 per
share for the same period in 1998, including a $8.2 million pre-tax in process
research and development charge for the acquisition of Adaptive Broadband
Limited (ABL).
REVENUE
For the three and six months ended December 31, 1999, we recorded revenue of
$2.2 million and $3.3 million for AB-Access products. Revenue for the second
quarter of fiscal year 2000 represents the initial units shipped from Solectron
and the revenue level was subjected to AB-Access products available only in
limited initial quantities. We have recently completed the process of
transferring volume manufacturing to Solectron Corporation and expect
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<PAGE>
revenue to improve in future periods. Solectron currently has the
manufacturing capacity to supply the AB-Access product for our current
contracted demand.
We generally record bookings into backlog for new orders received if the
product will be shipped to the customer within 12 months. During the three
and six months ended December 31,1999, we received $19.7 million and $32.2
million in new orders shippable over the next twelve months. AB-Access
backlog at December 31, 1999 was $28.9 million.
The frequency band of our current commercial units are designed for the
frequency range in the US, thus all bookings and revenue for fiscal year 2000
were domestic. We plan to introduce an AB-Access product for the
Multi-channel, Multi-point Distribution Service (MMDS) market which is
initially targeted for the US and will be available internationally.
Additionally, we plan to introduce a 3.5GHz version of the AB-Access product
that is targeted for international markets, primarily in Europe.
GROSS MARGIN
For the three and six months ended December 31, 1999, gross margin was $ (0.2)
million and $ (0.5) million. The negative gross margin was due to high
manufacturing costs associated with low volume production. We have recently
completed the process of transferring volume manufacturing to Solectron
Corporation and expect manufacturing capacity utilization to improve.
OPERATING EXPENSES
Research and development expenses for continuing operations were $3.6 million
for the three months ended December 31, 1999, compared to $0.8 million for the
same period in the prior year. Research and development expenses for
continuing operations were $5.7 million for the six months ended December 31,
1999, compared to $1.4 million for the same period in the prior year. The
increase in research and development expenses is primarily due to an expansion
in our research and development investment for AB-Access including personnel,
outside professional consulting expertise, and additional usage of prototype
materials for AB-Access. We believe that further development of AB-Access is
critical to sustain growth within our current and future target markets, and
therefore we will continue to commit substantial resources to product
development and engineering in future periods. As a result, we anticipate that
research and development expenses will increase in future periods. In addition,
we may consider strategic acquisition of additional technologies complimentary
to our business.
Sales, marketing and administrative expenses for continuing operations were
$5.2 million for the three months ended December 31, 1999, compared to $2.7
million for the same period in the prior year. Sales, marketing and
administrative expenses for continuing operations were $9.9 million for the
six months ended December 31, 1999, compared to $5.6 million for the same
period in the prior year. The increase was primarily due to the expansion in
our sales and marketing personnel to support the growing level of bid and
proposal activities for the new AB-Access products, increased sales
commission associated with generating initial AB-Access revenue and increased
promotional and product marketing expenses. We expect to continue to focus
our sales, marketing and administrative investments in our high-growth
wireless broadband data network markets.
The amortization of intangible assets, which consist of assembled workforce and
goodwill, was $75,000 for the three months ended December 31, 1999 and 1998, and
$0.1 million for the six months ended December 31, 1999 and 1998. These
intangible assets relate to the August 1998 acquisition of ABL.
On August 20, 1998, we acquired ABL, a United Kingdom based company
developing high-speed wireless Internet connectivity technology. We accounted
for the acquisition under the purchase method. The initial purchase price was
approximately $10.9 million including cash payments, direct costs, and the
assumption of ABL's net liabilities. We recorded the assets and liabilities
assumed based on their fair values at the date of acquisition. The purchase
price was allocated $8.2 million to in-process research and development, $0.4
million to net tangible assets, $0.4 million to identifiable intangible
assets, and $1.9 million to goodwill. The amount allocated to in-process
research and development was expensed at the time of acquisition. In January
2000, we paid $1.3 million as the first portion of the contingent purchase
price, which was accounted for as additional goodwill. The remaining
contingent portion of the purchase price will include payments up to $3.5
million and will be recorded as goodwill. Our results of operations for the
first six months of fiscal year 1999 include ABL's results from August 20,
1998.
In connection with the acquisition of ABL, we allocated a significant portion of
the purchase price to purchase in-process research and development. We estimated
the fair value of the in-process research and development using the income
approach, which discounts expected future after-tax cash flows generated by the
purchased in-process research and development to present value, using an
appropriate risk-adjusted discount rate and revenue forecasts. The discount rate
was derived based on consideration of the weighted average cost of capital as
well as other factors, including the useful life of the technology,
profitability levels of the technology, the uncertainty of technological
advances that were known at the time and the stage of completion of the
technology. We believe that the estimated in-process research and development
amount so determined represents fair value and does not exceed the amount a
third party would pay for the project.
At the date of the acquisition, the in-process research and development project
had not yet reached technological feasibility and had no alternative future
uses. Accordingly, the value allocated to the project was expensed at
acquisition.
-9-
<PAGE>
INTEREST INCOME OR EXPENSE, NET
We reported net interest income of $0.3 million for the three months ended
December 31, 1999, compared to $1.1 million net interest expense for the three
months ended December 31, 1998. The net interest income in the second quarter of
fiscal year 2000 was primarily due to interest earned on higher average cash
balances resulting from the sales proceeds of our Government division in April
1999. Additionally, interest expense from the convertible notes was lower due to
$34 million of notes converted during the second quarter of fiscal year 2000, as
well as our credit facility was paid off during the first quarter of fiscal year
2000.
PREMIUM ON CONVERSION OF NOTES
We originally issued $57.5 million of 5.25%, convertible subordinated notes
on December 15, 1993. The notes are due December 15, 2003. Note holders may
convert these notes at any time prior to maturity into shares of our common
stock at a price of $28.4375 per share, and we have the option to redeem
these notes at any time. Interest is payable semi-annually. The notes are
subordinated to all of our existing and future senior indebtedness, and are
quoted on the Nasdaq National Market. During the quarter ended December 31,
1999, at the request of certain note holders, we converted approximately $34
million of the subordinated notes into approximately 1.2 million shares of
common stock. Upon the conversion, we paid a $1.1 million premium which is
equivalent to accrued interest on the converted notes plus 1.6%. Subsequent
to December 31, 1999, approximately $7.0 million of the notes were converted at
the request of certain note holders into 0.2 million shares of common stock.
We have set March 2, 2000 as the redemption date for the remaining principal
amount outstanding, at the redemption price of 102.0% of the principal
amount, together with accrued interest to the redemption date. Note holders
have until March 2, 2000 to exercise the option to convert the notes into our
common stock at a price of $28.4375 per share.
PROVISION FOR INCOME TAXES
The income tax benefit from continuing operations was $3.5 million and $6.2
million for the three and six months ended December 31, 1999 compared to $1.7
million and $4.3 million for the three and six months ended December 31, 1998.
The effective income tax rate for the three months ended December 31, 1999 and
1998 was consistent at 36%. The effective income tax rate for the six months
ended December 31, 1999 was consistent with the 36% rate for the six months
ended December 31, 1998, excluding the impact of the partial valuation allowance
recorded against future deductions from the amortization of intangible assets
acquired in the ABL acquisition.
DISCONTINUED OPERATIONS
In January 2000, our board of director's adopted a formal plan to sell our
EFData Satellite Products Division, Microwave Radio Communications Division
and Microwave Data Systems Division. The operating results and financial
position of these divisions, together with 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
$46.9 million and $42.9 million for the three months ended December 31, 1999
and 1998, and $88.7 million and $77.6 million for the six months ended
December 31, 1999 and 1998. The income/(loss) from EFData, MRC and MDS, net
of income taxes, was $3.2 million and $(1.5) million for the three months
ended December 31, 1999 and 1998, and $4.1 million and $(2.4) million for the
six months ended December 31, 1999 and 1998. Total revenue from the
Government Division was $20.0 million and $39.8 million for the three and six
months ended December 31, 1998. Income from the Government Division, net of
income taxes, was $0.9 million and $2.0 million for the three and six months
ended December 31, 1998.
In April 1999, we completed the sale of the Government Division to Northrop
Grumman Corporation (Northrop Grumman) for $93 million in cash, for a net gain
of approximately $36 million (net of income taxes). The Government Division sale
price includes up to an additional $5 million cash payment, contingent upon the
future performance of the divested business. We have not recognized any benefit
for this contingent future payment.
In April 1998, Microwave Networks (MN) was sold to Tadiran Ltd. (Tadiran) for
$31.5 million in cash. Final accounting for the Government Division and MN
divestitures are subject to completion of the post-closing procedures
provided for in the Northrop Grumman and Tadiran agreements. We have accrued
for future price adjustments that may occur in the post-closing procedures
for both divestitures. At December 31, 1999, the discontinued operations
reserves for the Government Division and MN divestitures are $6.6 million and
$1.7 million, respectively. We believe that the completion of these
procedures will not have a material impact on our financial position, results
of operations, or cash flows.
In July 1999, Northrop Grumman filed a lawsuit against us alleging that we
failed to disclose certain events and information as required by the terms of
the agreement pursuant to which Northrop Grumman acquired the Government
Division of the Company in April 1999. No damages have been specified. In
September 1999, we filed a cross-complaint against Northrop Grumman seeking to
recover in excess of $3.7 million, which represents the amount that we contend
Northrop Grumman appropriated from our bank accounts following the acquisition.
We believe that we have strong defenses and counterclaims and plan to vigorously
defend the lawsuit filed by Northrop Grumman and to pursue our counterclaims. No
provisions have been made for expenses that may be incurred to resolve the
lawsuit, and we believe final resolution of the Northrop Grumman allegations
will not have a material impact on our financial position, results of
operations, or cash flows.
In May 1995, our MN division entered into certain agreements with Nokia
Telecommunications Oy (Nokia) pursuant to which MN was to provide to Nokia
certain microwave radios and related software and services, and was
-10-
<PAGE>
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 has now taken the position that we
are 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 now have been liquidated at $2
million. We believe that we have strong claims against Tadiran. No accruals
have been recorded for expenses that may be incurred to resolve the dispute,
and we believe final resolution of this matter will not have a material
impact on our financial position, results of operations or cash flows.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1999, our net working capital was $85.0 million, which includes
$30.3 million of cash and cash equivalents, as compared to net working capital
of $82.0 million, which includes cash and cash equivalents of $48.9 million, at
June 30, 1999.
For the six months ended December 31, 1999, we used $17.6 million of cash for
continuing operating activities, primarily due to a loss from operations, an
increase in accounts receivable of $2.3 million and a decrease in accounts
payables of $1.6 million. For the same period in the prior year, we used $11.8
million of cash for continuing operating activities, primarily due to a loss
from operations and an increase of $1.8 million in prepaid expenses and other
assets and a decrease of $ 1.5 million in accrued liabilities.
For the six months ended December 31, 1999, we used $9.6 million of cash for
investing activities, including an additional $1.0 million investment in
AstroTerra Corporation (AstroTerra) bringing our ownership interest to 12%,
$1.7 million for capital expenditures and $6.9 million used for discontinued
operations. For the same period in the prior year, we used $22.9 million for
investing activities, including $10.6 million for the acquisition of ABL,
$0.5 million for the initial investment in AstroTerra, $1.5 million for
capital expenditures and $10.1 million used for discontinued operations.
During the first half of fiscal year 2000, we acquired 126,250 shares of our
common stock for $3.3 million, bringing the total shares repurchased to
approximately 2.8 million shares under the board of directors authorized six
million share common stock repurchase plan.
Offsetting the common stock repurchases, for the six months ended December 31,
1999, we received $13.0 million from the sale of common stock under our stock
option and stock purchase plans. Additionally, we paid $1.1 million for the
premium on conversion of notes, which is described in the section titled
"Premium on Conversion of Notes" above. For the same period in the prior year,
we used $10.4 million for common stock repurchases, received $1.2 million from
the sale of common stock under stock option and stock purchase plan, and
borrowed $20.5 million on our credit facility.
We believe that our current cash position, funds generated from operations and
expected proceeds from the sale of our legacy businesses, will be adequate to
meet our requirements for working capital, capital expenditures and debt service
for the next 12 months.
YEAR 2000
State of Readiness
We have completed all Year 2000 readiness work and did not experience any
problems with Year 2000 date change.
Costs
The total costs of Year 2000 readiness program were not material to our
financial condition or results of operation. All costs were charged to expense
as incurred, and did not include potential costs related to any customers or
other claims or the cost of internal software or hardware replaced in the normal
course of business.
Risks / Contingency Plans
We have taken appropriate steps to assess and address the Year 2000 issues and
do not believe we have any continued exposure to the Year 2000 date change.
-11-
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS
Market risk disclosures set forth in our 1999 Annual Report to Shareholders have
not changed significantly.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In July 1999, Northrop Grumman filed a lawsuit against us alleging that we
failed to disclose certain events and information as required by the terms of
the agreement pursuant to which Northrop Grumman acquired our Government
Division in April 1999. No damages have been specified. In September 1999, we
filed a cross-complaint against Northrop Grumman seeking to recover in excess of
$3.7 million, which represents the amount that we contend Northrop Grumman
appropriated from our bank accounts following the acquisition. We believe that
we have strong defenses and counterclaims and plans to vigorously defend the
lawsuit filed by Northrop Grumman and pursue its counterclaims. No provisions
have been made for expenses that may be incurred to resolve the lawsuit, and we
believe final resolution of the Northrop Grumman allegations will not have a
material impact on our financial position, results of operations, or cash flows.
In May 1995, our MN division entered into certain agreements with Nokia
Telecommunications Oy (Nokia) pursuant to which MN was to provide to Nokia
certain microwave radios and related software and services, and was to carry
out certain development programs. In September 1997, Nokia informed MN of a
purported failure of certain of the products sold to Nokia to meet certain
contractual specifications. MN was sold to Tadiran in April 1998 and under
the terms of the sale agreement, Tadiran assumed and we were indemnified with
respect to the Nokia claims. Tadiran has now taken the position that we are
responsible for the Nokia claims, based upon allegations that we failed to
provide adequate disclosures and financial reserves with respect to such
claims. In September 1998, Nokia began arbitration proceedings to recover
damages, which were claimed to be $40.6 million. In January 2000, Tadiran and
we settled the Nokia claims for $2 million, and Tadiran and we reserved
rights against each other. In May 1999, we began arbitration proceedings
against Tadiran, primarily to determine that Tadiran is responsible for the
Nokia claims, which now have been liquidated at $2 million. We believe that
we have strong claims against Tadiran. No accruals have been recorded for
expenses that may be incurred to resolve the dispute, and we believe final
resolution of this matter will not have a material impact on our financial
position, results of operations or cash flows.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 27.1 Financial Data Schedule
(b) Reports on Form 8-K.
No reports on Form 8-K were filed by the Company during the quarter ended
December 31, 1999.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
ADAPTIVE BROADBAND CORPORATION
(Registrant)
February 14, 2000 BY /S/ Donna S. Birks
- ---------------------------- --------------------------------
Date DONNA S. BIRKS
EXECUTIVE VICE PRESIDENT
CHIEF FINANCIAL OFFICER
-12-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from this Form
10-Q and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> JUL-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 30,299
<SECURITIES> 0
<RECEIVABLES> 2,268
<ALLOWANCES> 0
<INVENTORY> 209
<CURRENT-ASSETS> 111,619
<PP&E> 5,757
<DEPRECIATION> 1,318
<TOTAL-ASSETS> 171,003
<CURRENT-LIABILITIES> 26,631
<BONDS> 23,352
0
0
<COMMON> 1,783
<OTHER-SE> 118,637
<TOTAL-LIABILITY-AND-EQUITY> 171,003
<SALES> 3,300
<TOTAL-REVENUES> 3,300
<CGS> 3,775
<TOTAL-COSTS> 19,526
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (31)
<INCOME-PRETAX> (17,288)
<INCOME-TAX> (6,224)
<INCOME-CONTINUING> (11,064)
<DISCONTINUED> 4,097
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,967)
<EPS-BASIC> (0.45)<F1><F2>
<EPS-DILUTED> (.45)<F2>
<FN>
<F1>For the purposes of this exhibit, primary means basic.
<F2>Amounts have been restated to comply with the provisions of the Statements of
Financial Accounting Standards No. 128, "Earning per Share."
</FN>
</TABLE>
