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____________________________________________________________________________
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
____________________________________________________________________________
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended March 31, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
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Commission file number 0-12734
STANFORD TELECOMMUNICATIONS, INC.
(Exact name of registrant as specified in its charter)
Delaware 94-2207636
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1221 Crossman Avenue 94089
Sunnyvale, California (Zip Code)
(Address of principal
executive offices)
Registrant's telephone number, including area code:
(408) 745-0818
Securities registered pursuant to section 12(b) of the Act:
None
Securities registered pursuant to section 12(g) of the Act:
Common Stock
Common Stock Purchase Rights
(Title of Class)
Indicate by check mark whether the registrant (l) has filed all reports required
to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
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[X] 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
amendments to this Form 10-K.
As of May 1, 1995, the aggregate market value of voting stock held by non-
affiliates of the registrant, based on the closing sale price of such stock on
the National Market System as reported by NASDAQ, was $42,486,461. Shares of
Common Stock held by each officer, director and ten percent stockholder of the
registrant have been excluded in that such persons may be deemed to be
affiliates. This determination of affiliate status is not necessarily a
conclusive determination for other purposes.
The number of shares of the Company's Common Stock outstanding on May 1, 1995
was 6,233,973.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report to Stockholders for the fiscal year ended March
31, 1995 (the "Annual Report to Stockholders") are incorporated in Parts II and
IV. Portions of the proxy statement for the Annual Meeting of Stockholders to
be held on June 28, 1995 (the "Proxy Statement") are incorporated by reference
in Part III.
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PART I
ITEM 1. BUSINESS
Stanford Telecommunications, Inc. (the "Company") was incorporated in
California in 1973 and reincorporated in Delaware in 1988. The Company designs,
develops, manufactures, markets and supports advanced digital telecommunications
systems and products for agencies of the U.S. Government and an increasing
number of commercial customers. These systems and products are used in the
areas of satellite communications, navigation and tracking, and wireless and
digital cable telecommunications. The Company also provides network management
and systems engineering services for many major government and commercial
satellite programs. Stanford Telecom's systems, products and services utilize
its advanced digital telecommunications technologies in a wide variety of
applications, including TDMA and spread spectrum satellite communications, air
traffic control, GPS instrumentation, wireless telephony and digital cable
telecommunications.
Principle business areas of the Company include:
SATELLITE COMMUNICATIONS
GROUND-BASED SYSTEMS: digital telecommunications systems for satellite
communications, including ground terminals, satellite tracking and test
equipment, and satellite transmission and receiving systems using TDMA,
spread spectrum and other advanced technologies; secure voice digital
interfaces; very small aperture terminal ("VSAT") receivers, and multiband
SATCOM systems.
NETWORK MANAGEMENT: network management systems; software, support and
systems engineering for satellite communications; satellite signal
monitoring and analysis systems.
NAVIGATION AND TRACKING
FAA air traffic control modernization and systems engineering; GPS
instrumentation and equipment; systems for vehicle tracking and information
services.
WIRELESS AND DIGITAL CABLE
Wireless telephony and digital cable telecommunications products for
commercial applications, including voice and data over CATV, direct
broadcast television, high-speed wireless LANs, and ASICs for digital
signal processing telecommunications applications.
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PRODUCTS, SYSTEMS, AND SERVICES.
SATELLITE COMMUNICATIONS
Applications related to digital satellite communications have been the
major component of Stanford Telecom's business since its inception. The Company
provides its customers with both ground-based systems and network management.
GROUND-BASED SYSTEMS
SINGLE CHANNEL TRANSPONDER INJECTION SUBSYSTEM ("SCTIS"). The Company
has employed its spread spectrum technology in the design, production and
installation of high performance anti-jam uplink transmission systems for
the U.S. Air Force which protect emergency messages being sent through the
Defense Satellite Communications System against jamming and interception.
Since the program commenced in 1978, the Company has delivered twelve SCTIS
systems plus spare parts to the U.S. Air Force. The Company is presently
under contract to develop enhancements that add receive and report-back
capability to all of the SCTIS systems. Installation of these enhancements
is expected to be completed at the SCTIS sites in fiscal year 1996. The
Company is currently working on an Enhanced Link Simulation in support of
SCTIS. The Company believes the U.S. Air Force is considering future
enhancements and the Company remains in a good position to support future
requirements.
MILSTAR SATELLITE COMMUNICATIONS. The Company has been involved since
1981 in development of the U.S. Government's MILSTAR satellite
communications program, designed to support stationary and mobile users in
the joint military services in the 1990's. In addition to performing
system engineering tasks, the Company has developed special test equipment
in support of the MILSTAR program, including a subcontract for the MILSTAR
EHF Test System to supply Lockheed with the ground terminals to test the
MILSTAR satellites in orbit. Presently, the Company is under contract to
upgrade its MILSTAR Test Terminal to support the Medium Data Rate (MDR)
communication capabilities being added to the Milstar Block II satellites.
The Company is currently engaged in development activities towards a
proprietary low-cost portable MILSTAR terminal.
TRACKING AND DATA RELAY SATELLITE SYSTEMS ("TDRSS"). The National
Aeronautics and Space Administration (NASA) has launched a new series of
spacecraft, the Tracking and Data Relay Satellites. These relay satellites
will, for the first time, enable NASA to maintain almost continuous
communications to the space shuttle and NASA satellites even when they are
not in direct line-of-sight to tracking stations in the continental United
States. The Company has several important roles in this billion dollar
satellite system, including study and system engineering support, a major
long-term subcontract for the support of the TDRSS network control, prime
contracts to develop space/ground segment architecture for upgrading the
TDRSS system, and assisting NASA in the design for a second TDRSS ground
terminal. The Company has developed a portable S-band, spread spectrum
transmitter and companion receiver designed for operation with TDRSS. The
Company believes the market may be significant for these products although
revenues from these products have not been material to date and there is no
assurance that these products will gain market acceptance.
VERY SMALL APERTURE TERMINAL ("VSAT") RECEIVERS. Stanford Telecom
designed and developed, using proprietary Application Specific Integrated
Circuits (ASICs), a digital satellite telecommunications receiver, namely,
the STEL 9236 for VSAT satellite systems. One of the first applications of
this product is for satellite broadcast of high quality music to stores and
offices. This product performs digital signal processing functions
required to receive the satellite signal and translate it into a stream of
decoded data. The Company has received orders for approximately 9,000 VSAT
receivers. The Company is also developing other subsystem-level VSAT
products for customers involved in weather monitoring and data
communications.
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The Company has entered into a joint agreement with TIW Systems to
develop and produce a VSAT communications subsystem for their next
generation VSAT terminal. SpaceCom Systems is using the Company's digital
PSK demodulator assemblies for a VSAT receiver for their M2000 satellite
communications system. Mainstream Data is using a Stanford Telecom "L-band
to data stream" receiver board for a VSAT Direct Broadcast Data application
that provides background music and digital information to businesses
worldwide.
DEFENSE INFORMATION INFRASTRUCTURE CONTINGENCY SATELLITE
COMMUNICATIONS TERMINAL ("DSAT"). During fiscal 1995, the Company received
a contract from the Defense Information Systems Agency for tri-band
transportable satellite terminals. The DSAT terminals are valued in excess
of $1 million each. The Company commenced delivery of the first units in
January 1995. These satellite terminals are self-contained trailer-mounted
with tri-band capability and can be configured for military, domestic and
international satellites operating in C, X or Ku bands. The Company is
under contract to deliver six DSAT terminals during fiscal 1996.
TDMA GROUND SYSTEMS. Stanford Telecom has developed a thin route,
point-to-multipoint TDMA ground system for satellite-based communications
which provides efficient use of the satellite transponders and can provide
substantial cost and flexibility advantages over conventional "time" or
"frequency" division multiple access systems. In a typical SATCOM network
the TDMA system will operate with a hub terminal and up to 32 remote
terminals providing capacity on demand Demand Assignment Multiple Access
services. Under contract with the U.S. Government, the Company developed
and manufactured its TDMA system, the STEL 1105A, and has delivered
approximately 330 systems to U.S. Government customers. The Company has
also developed an advanced version of the TDMA system, the STEL 1105B,
which has successfully completed customer field evaluation. The Company is
pursuing opportunities in both the government and commercial sectors for
its TDMA systems.
SATELLITE READOUT STATION UPGRADE ("SRSU"). The Company, as a
subcontractor to IBM for the U.S. Air Force, designed, developed and
produced a ground-based satellite transmitting and receiving system for the
SRSU program to transmit and receive signals through severe multipath
channels. The Company's SRSU equipment is a follow-on enhancement of a
project previously developed for the U.S. Air Force in the late 1980's.
The design and development contract and all production units have been
delivered. The Company's remaining contracts are for spare parts and depot
support. The Company believes that the technology developed on this
program is applicable to its high-speed wireless LAN products.
SECURE VOICE DIGITAL INTERFACE PRODUCTS. Stanford Telecom has
developed a line of standardized off-the-shelf digital interface products
that operate with secure telephone units ("STU III's") produced by other
vendors such as AT&T, General Electric, and Motorola. The Company's
digital interface products provide an interface between digital satellite
communications terminals and the public switched telephone network which is
connected to STU III telephones. The Company's secure voice digital
interfaces provide the voice compression, echo cancellation, signaling
tones, and other interface functions for interconnection of the STU III's
to the public switched telephone network. The Company has delivered
approximately 600 secure voice digital interface units to U.S. Government
customers since 1991, and is now applying this technology to the commercial
VSAT market.
SATELLITE-BASED CELLULAR SYSTEMS. In recent years a number of
worldwide satellite-based cellular systems have been proposed, including
TRW's Odyssey, INMARSAT-P, Motorola's IRIDIUM, and Loral-QUALCOMM's
Globalstar. The Company has been carrying out research and development on
the medium altitude Odyssey system being proposed by TRW. The Company
hopes to play a key role in the ground station terminals that interface
with the public switched telephone network. These are early stage
development programs and no
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assurance can be given that these programs will be completed or that the
Company's efforts in this area will be successful.
NETWORK MANAGEMENT
Stanford Telecom has been involved in a number of network management
contracts for customers including the U.S. Government, INTELSAT, Martin
Marietta, Hughes Network Systems, British Telecom, GTE Spacenet and
EUTELSAT.
INTELSAT COMMUNICATIONS SIGNAL MONITORING. In April 1993, the Company
was awarded a $13 million multi-year contract to provide a signal
monitoring system for the world's largest communication satellite network,
owned and operated by INTELSAT, an international consortium of over 100
nations. Development and testing of the initial systems is nearing
completion and the Company expects to ship and install the first of these
systems in fiscal 1996. Over the past two fiscal years the Company has
recognized losses totaling $3.5 million against the completion of this
contract.
DSCS OPERATIONAL CONTROL SYSTEM ("DOCS"). The Company developed,
installed and now assists in the operation of an extensive network of
computers and software which performs control and monitoring functions for
the Defense Satellite Communication System ("DSCS"). Control of DSCS is
complex due to the different types of multiple access techniques used and
the need to react quickly to communications requirements and to hostile
jamming actions. The task of optimizing and controlling the many thousands
of parameters in the DSCS network is a sophisticated computational problem
requiring both advanced computers and extensive information processing. In
September 1992, the Company was awarded a DOCS Support Services contract
with four one-year renewable options for an aggregate of $38 million for
operations, hardware, and software support. The Company has received
funding to continue work through government fiscal year 1995. The U.S.
Government has not yet provided funding beyond the end of government fiscal
year 1995 and the Company cannot be assured of additional funding for this
contract.
TRANSPONDER ACCESS CONTROL SYSTEMS ("TACS"). Stanford Telecom has
developed commercial satellite signal monitoring systems that monitor
various transponder performance including frequency, power, bandwidth,
interference and unauthorized use to ensure that the satellite is
functioning properly and efficiently. The Company has installed systems of
this type for British Telecom, GTE Spacenet, EUTELSAT, and others.
REPLACEMENT SATELLITE CONFIGURATION CONTROL ELEMENT ("RSCCE"). The
Company has been awarded a contract from the U.S. Army to provide the
configuration control element in support of network management for the U.S.
Government s Defense Satellite Communication System. Under this contract,
the Company will provide the software and hardware necessary to fully
configure, test, and deliver this element of the satellite system. This
contract will be performed throughout much of fiscal 1996 and 1997.
NAVIGATION AND TRACKING
Stanford Telecom is engaged in several projects dealing with
navigation and position tracking, including work with the FAA on
modernizing the nation's air traffic control system, GPS instrumentation,
and vehicle tracking and information services.
AIR TRAFFIC CONTROL SYSTEM MODERNIZATION. Since 1984, the Company has
been supporting an FAA program to upgrade and modernize the nation's air
traffic control and air transport navigation system. The Company s
activities include air traffic control (ATC) automation and communications
system engineering and support to FAA special projects
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activities such as the relocation of the Chicago O Hare ATC Tower Complex.
The Company is also supporting the FAA in its acquisition of the new
terminal area ATC automation system. The above activities are being
conducted under two separate contracts: one to GSA/FEDSIM for
communication system engineering and one to DOT for transportation system
engineering and R&D support.
In addition, the Company was awarded a long term contract to support
the FAA s implementation of a Global Positioning System (GPS) Wide Area
Augmentation System (WAAS). The FAA s WAAS Program is a central element of
the FAA s plans to move toward a satellite based Air Traffic Control
System. The WAAS, through supplementing the GPS system, will enable this
system to become a sole means navigation source for en route and terminal
area aviation navigation purposes. This will greatly enhance aircraft
navigation capability and allow the FAA to provide a more cost effective
navigation infrastructure for civil aviation in the National Airspace
System. The Company has performed a central role in the development of the
WAAS concept through support to concept definition, prototyping and field
testing. This contract will leverage the Company s substantial in-house
expertise in satellite navigation to the provision of technical support
services addressing communications, navigation, hardware, software and test
issues that surround development of the WAAS.
GPS INSTRUMENTATION. Stanford Telecom played an important role in the
development of the spread spectrum signal structure which is transmitted by
satellites for the U.S. Air Force's GPS Navigation Satellite System. The
Company also provides standardized off-the-shelf GPS navigation
instrumentation products, including the STEL 7200 and STEL 7220 GPS
Simulators, which allow laboratories, system integrators and manufacturers
of receivers to perform an automated test of GPS equipment by simulating a
wide range of vehicle motions, including aircraft flight, the motion of a
ship or the route of a vehicle along a road. Automated testing with the
Company's GPS simulators avoids time consuming dynamic testing on testbeds
such as aircraft and ships.
VEHICLE TRACKING AND INFORMATION SERVICES. The Company is developing
two vehicle tracking systems. In both cases, the Company is working with
other companies that will provide, install, and maintain the tracking
system infrastructure and will market the services and products to
potential end users. One system announced in April 1994 by NYNEX and Avis,
Project Northstar, utilizes a cellular/GPS based technology to provide a
variety of services to automobile users which include emergency roadside
assistance, traveler information, detailed route directions, and vehicle
theft alert. Car rental agencies believe that customer safety is a primary
concern of their customers and Project Northstar can provide much needed
security features. This system allows a service center to remotely monitor
a subscriber's location on a computer map display and provides a variety of
emergency and information services via the subscriber's cellular phone.
Stanford Telecom performed a major role as the system integrator in support
of NYNEX s Project Northstar and has developed significant portions of the
software for this system. During fiscal 1995, the Company successfully
completed a field trial associated with NYNEX s Project Northstar. NYNEX
is currently demonstrating the system to potential investors. If further
funding becomes available, the Company hopes to be selected as the overall
systems integrator for the fully operational system. Since NYNEX has
stated that it will not pursue the program without outside financing, there
is no assurance that the Company will receive any further revenues from
this program.
The second system is designed primarily to track stolen vehicles and
is not interactive. In this system, the vehicle transmits a spread
spectrum coded pulse and is tracked by terrestrial triangulation with a
number of fixed reference receivers using the Company's proprietary matched
filter, downconverter and timing receiver ASICs. The Company has received
a contract to apply this technology to a parolee tracking application. A
demonstration of this
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application is scheduled during fiscal 1996. No assurance can be made that
these systems will be completed and/or implemented or that they will gain
market acceptance.
The Company has also filed for a patent and is beginning to market a
Cellular Positioning System. The Company s system is a terrestrial based
navigation system designed to provide position location service for
wireless communication systems, such as cellular telephony. There is no
assurance that the Company s system will be completed and/or gain market
acceptance.
WIRELESS AND DIGITAL CABLE
Stanford Telecom designs, manufactures and markets highly integrated
digital communications products including ASICs, ASIC-based board level
assemblies, and subsystems for a wide range of commercial applications
including voice, data, and video over CATV, and digital wireless
communications systems. While these products address a variety of markets,
the applications are generally similar, that of performing the digital
signal processing required to transmit and receive information.
VOICE, DATA AND VIDEO OVER CATV SYSTEMS. Stanford Telecom works with
leaders in the CATV industry to design and build a wide range of products
for 2-way digital voice, data and video communications over hybrid
fiber/coax (HFC) networks. The Company's unique technology provides high
performance at low cost, thereby optimizing HFC distribution systems.
This product family includes modem equipment for both the headend and
subscriber portions of interactive CATV networks. Stanford Telecom
produces demodulator boards for this application which are built around
proprietary ASICs using either differential detection or burst coherent
detection architectures. The Company has developed a core technology for
burst QPSK demodulation which results in products that have very rapid
acquisition times as well as robust performance in the presence of impulse
noise. Stanford Telecom is currently supplying customized receivers for
headend applications to several major communications equipment companies,
and hopes to be producing such equipment for high volume production.
A major equipment manufacturer has adopted Stanford Telecom's ASIC
technology for use in its set-top box equipment for interactive
applications. The STel 1103 BPSK/QPSK modulator ASIC is incorporated into
systems being designed by several manufacturers for the subscriber portion
of their telephony-over-cable systems. Other telephony-over-cable
applications utilize the STel 2105 digital demodulator in the downstream
portion of the system.
SPREAD SPECTRUM WIRELESS SIGNAL PROCESSING. The Company has developed
an advanced OCDMA architecture for Wireless Local Loop and PCS. A major
initiative by DSC Communications uses this technology in a system which has
been selected by international customers for wireless telephony
applications. In June 1995 the Company and DSC signed a joint development
agreement in which the Company will provide its radio frequency and modem
technology, as well as its ASIC and waveform technology, to expand DSC s
wireless local loop access system.
In addition, the Company has developed an architecture for 20 Mbps-
plus Wireless LAN links currently being adopted in Europe by ETSI.
Stanford Telecom's spread spectrum technology is used for data transfer in
fleet management applications.
Stanford Telecom has integrated many complex digital signal processing
functions into a single ASIC architecture for its STel 2000A Wireless
Signal Processor. The STel 2000A can be used in a wide range of
applications including wireless LANs, cordless telephones and telephone key
systems.
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OTHER BUSINESS
In addition to its principle business areas, the Company is also engaged in
two other related business areas consisting of: (i) contract manufacturing
services for electronics assembly by the Company's Manufacturing and Quality
Assurance division ("MQA"); and (ii) specialized quick reaction services by the
Company's Applied Technology Operations division ("ATO"). ATO develops
specialized products and services primarily for the U.S. Government in the areas
of communications, signal intelligence and technical security with applications
such as specialized antennas, microwave amplifiers and receivers, and spread
spectrum transmitters. ATO also supports other areas of the Company in the
development of high technology programs such as microwave integrated circuits.
MANUFACTURING.
Stanford Telecom's products are generally manufactured from standard
components, its proprietary ASICs and other components or subsystems produced to
the Company's specifications. Most of the Company's current products contain
microprocessors for which proprietary software is designed and tested by the
Company's engineers. The Company does not have a semiconductor foundry or
fabrication facility. For the production of ASICs, the Company contracts with
companies that have foundry capability including Zilog (under a strategic
relationship), LSI Logic, Hitachi, and AT&T Microelectronics.
In many cases only a single source is available for specific components,
and thus there is a risk of delay in delivering finished systems within
contractual schedules. The Company attempts to minimize this risk by securing
second sources, finding alternate technologies to perform the same function and
maintaining adequate inventories of single source components. To date the
Company has experienced no material adverse impact due to component
unavailability, product returns or contract renegotiations. Many of the
Company's products are covered by a 90-day to one-year warranty under which the
Company will repair or replace defective parts. To date, warranty expense has
not been significant.
During fiscal 1993, the Company began to pursue opportunities in commercial
contract manufacturing. In January 1993, the Company acquired the assets of a
small electronics assembly firm in Fremont, California, which is now part of the
Company's MQA division. The Company offers its contract manufacturing services
to commercial customers. Revenues for the Company's contract manufacturing
business amounted to approximately 10% of total revenues for fiscal year 1995,
an increase from approximately 6% of revenues experienced during fiscal year
1994. The Company's Sunnyvale facilities received ISO-9002 certification during
fiscal year 1994. During fiscal year 1995, the MQA division expanded its
operations to a new facility adjacent to its existing Sunnyvale location.
MARKETING AND CUSTOMERS.
The Company markets its products and services to agencies of the U.S.
Government, prime contractors to these agencies and an increasing number of
commercial customers. The Company's marketing is conducted by its management
and technical staff, and in the case of its commercial business, domestic and
international sales representatives are also utilized. The Company's marketing
efforts for its government business consist of responding to requests for
proposals and solicitations for bids from U.S. Government agencies or prime
contractors to these agencies and direct marketing of its off-the-shelf,
standardized products. The Company markets its ASICs and commercial products
primarily through its direct sales personnel consisting of four full-time
employees, 22 independent sales representatives covering the U.S. and Canada and
17 other independent sales representatives covering other international
territories. The Company also places advertisements for commercial products,
particularly its ASIC products, in a number of trade magazines and participates
in trade shows and industry symposiums.
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During the fiscal years ended March 31, 1995, 1994 and 1993 approximately
69%, 73% and 82%, respectively, of the Company's revenues were attributable to
contracts with numerous agencies of the U.S. Government. No single contract
accounted for more than 10% of revenues during fiscal 1995, 1994 or 1993. Some
of the Company's U.S. Government sales are made under letter contracts in which
the final contract price is agreed upon after work has begun. To date, the
Company has had a small amount of revenue from international customers. Such
sales are often subject to U.S. State Department approval and export license
requirements.
COMPETITION.
Competition is intense among providers of digital telecommunications
equipment, products and services. In the Company's government business,
competitors include major defense contractors, telecommunications equipment and
electronics firms, and systems integrators, most of which have significantly
greater financial, marketing and operating resources than the Company, as well
as broader product lines and technological capabilities. As a result of reduced
defense spending by the U.S. and other governments, competition has become more
intense in the Company's government business. Although no single competitor
competes with the Company in all of its product lines, a number of competitors
such as California Microwave, General Electric, Harris Corporation, Raytheon,
Rockwell International and SPAR Aerospace, compete with the Company in various
market segments. Certain of the Company's customers have technological
capabilities in the Company's product areas and could choose to develop and
manufacture certain products themselves rather than purchase from suppliers such
as the Company. As the Company continues to transition to more commercial
business, it expects to face new and increasing competition with respect to its
commercially oriented products and services. The Company believes that, in its
highly specialized technical environment, price, performance, reputation,
reliability, on-time delivery and customer support are the primary competitive
factors among companies having similar technical capabilities.
BACKLOG AND BOOKINGS.
Funded backlog includes: (i) projects and orders covered by signed
contracts for which the government has specifically allocated funding; and (ii)
purchase orders from commercial customers. The Company's backlog is largely
attributable to agencies of the U.S. Government. In the case of certain long-
term contract awards, the U.S. Government typically makes the funds available
over the life of the contract as opposed to the time of the contract award. In
such cases the Company reports as funded bookings only the amount of the funds
specifically allocated and the resultant backlog as funded backlog. The Company
does not include unexercised options in backlog. The Company's funded bookings
for fiscal years 1995 and 1994 were $127.8 million and $106.6 million,
respectively, and the Company's backlog at the end of fiscal years 1995 and 1994
was $72.5 million and $59.1 million, respectively. At March 31, 1995 backlog
from the Company's government and commercial businesses were approximately $45.6
million and $26.9 million, respectively. There is no assurance that funded
backlog will be completed and booked as revenue. The Company's contracts
typically contain contingency provisions permitting termination by the customer
at any time. Cancellation of pending contracts or termination or reductions of
contracts in progress may have a material adverse effect on the Company's
results of operations.
RESEARCH AND DEVELOPMENT.
The telecommunications industry is characterized by rapid technological
change, requiring a continuous effort to enhance existing products and develop
new products. The Company believes that its continued success depends in large
part on its ability to develop new and enhanced digital telecommunications
products. The Company conducts extensive research, development and engineering
activities with the objective of developing products and systems that provide
for cost-effective, high-quality satellite communications and digital wireless
telecommunications. Since its
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inception, the Company has developed a number of innovative and proprietary
digital telecommunications technologies through a combination of customer and
internally funded research and development. A significant portion of these
expenditures include bid and proposal expenditures which are largely the initial
advanced technology development efforts directed toward a specific product or
technical task for which the Company must show technical viability. Company-
funded expenditures for research and development including bid and proposal
activities for fiscal years 1995, 1994, and 1993 were approximately $7.7
million, $6.4 million, and $6.9 million, respectively, which represented 6.8%,
6.5%, and 7.5% of total revenues, respectively.
The Company's revenues have historically been derived primarily from
performing contract research and development and engaging in limited production
contracts with agencies of the U.S. Government and their prime contractors. As
a result, a substantial portion of the digital telecommunications research and
development performed by the Company since its inception has been funded by its
customers and recorded as revenues by the Company. Accordingly, the cost of
performing this customer-funded research and development is included in "Direct
and Indirect Costs" in the Company's financial statements. The Company is
continually seeking to develop
new products for commercial applications to leverage its leading digital
telecommunications technologies that have been funded through many military and
government research and development contracts since the early 1970's.
EMPLOYEES.
As of March 31, 1995, the Company employed 865 full-time and 27 part-time
employees and 17 professional consultants. Of the full-time and part-time
employees, 432 are in technical operations, 181 in manufacturing operations,
and 279 in management and support for technical and corporate operations. The
majority of the Company's employees are highly skilled technical personnel.
Several are nationally known leaders in the field of digital telecommunications.
Over 490 employees hold advanced degrees, including approximately 27 with
doctoral degrees. None of the employees are represented by a labor union and
the Company has never had a work stoppage. The Company believes its employee
relations to be excellent. Due to the nature of the Company's business, a large
number of its technical employees must obtain security clearances from the U.S.
Government, which limits the available pool of eligible candidates for such
positions to those who can satisfy prerequisites for such clearances.
PATENTS AND PROPRIETARY RIGHTS.
The success of the Company's business depends in part upon its ability to
protect trade secrets, obtain or license patents and operate without infringing
on the rights of others. Although the Company has obtained patents covering
certain of its technologies, it believes that the ownership of patents has not
generally been a significant factor in its government business and that its
success depends primarily on innovative skills, technical competence, and the
marketing and managerial abilities of its personnel. The Company relies on a
combination of trade secrets, copyrights, patents, nondisclosure agreements and
technical measures to protect its proprietary rights in its products and
technology. Such protection may not preclude competitors from developing
products with features similar to the Company's products. The Company believes
that patents may play an increasingly important role in its commercially
oriented business and during the past two years has been active in expanding the
number of its patent applications filed with the U.S. Patent and Trademark
Office. The Company requires its employees to execute proprietary rights and
nondisclosure agreements and to maintain the confidentiality of the Company's
proprietary information.
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<PAGE>
GOVERNMENT REGULATION.
The Company's operations are subject to compliance with regulatory
requirements of federal, state and local authorities, including regulations
concerning employment obligations and affirmative action, workplace safety and
protection of the environment. In addition, many of the Company's products and
proposed products are or will be subject to various regulations including
regulations promulgated by the Federal Communications Commission, the FAA and
the DoD. While compliance with applicable regulations has not adversely
affected the Company's operations in the past, there can be no assurance that
the Company will continue to be in compliance in the future or that these
regulations will not change.
In addition, the Company must comply with detailed government procurement
and contracting regulations and with U.S. Government security regulations,
including those necessary to maintain required facility clearances. Certain of
these regulations carry substantial penalty provisions for nonperformance or
misrepresentation in the course of negotiations. Failure of the Company to
comply with its government procurement, contracting or security obligations
could result in penalties or suspension of the Company from government
contracting, which would have a material adverse effect on the Company's results
of operations.
The Company is required to maintain a U.S. Government facility clearance at
most of its locations. This clearance could be suspended or revoked if the
Company is found not to be in compliance with applicable security regulations.
Any such revocation or suspension would delay the Company's delivery of its
products to customers. Although the Company has adopted policies designed to
assure its compliance with applicable regulations and there have been no
suspensions or revocations of any of its facilities, there can be no assurance
that the approved status of the Company's facilities will continue without
interruption.
LITIGATION
The Company is involved from time to time in litigation incidental to its
business. Management believes that the outcome of current litigation will not
have a material adverse effect on its financial position or results of
operations.
In August 1993, Techsonic Industries, Inc. ("Techsonic") filed for
arbitration in Dallas, Texas, in a dispute concerning performance under a GPS
product development and marketing agreement entered into in July 1990 between
the Company and Techsonic. The Company filed a demand for arbitration of
counter-claim in September 1993 in Dallas against Techsonic, whereby the Company
was seeking relief for breach of contract, anticipatory breach, fraud, negligent
misrepresentation, punitive damages, costs and attorneys' fees in an amount
exceeding $2.3 million, but not exceeding $5 million. The arbitration hearing
was completed in November 1994. On December 16, 1994, Stanford Telecom was
informed that the Arbitrators ordered the Company to pay to Techsonic
approximately $1.6 million and denied the counterclaim submitted by the Company.
The total cost of the unsuccessful arbitration was approximately $2.1 million
and included all legal expenses, arbitration costs, and the write-off of a small
quantity of inventory and was reflected in the results of the third quarter of
fiscal year 1995.
ITEM 2. PROPERTIES
The Company's headquarters and principal engineering and manufacturing
facilities are currently located in four adjacent buildings in Sunnyvale,
California where it leases approximately 172,000 square feet. The Company's
Sunnyvale facility leases will expire in the year 2000. The leases contain
options for renewal under terms and conditions to be negotiated at the time of
expiration. The Company's Fremont, California facility of approximately 14,300
square feet is currently being subleased to another tenant. The lease will
expire in 1996. The sublease will
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<PAGE>
expire in 1995. The Company also leases approximately 84,000, 34,000, 30,900
and 11,300 square feet of office space in Reston, Virginia, Colorado Springs,
Colorado, Annapolis Junction, Maryland and Seabrook, Maryland, respectively,
which space is used primarily for the performance of study, system engineering
and special hardware contracts. The Reston facility leases expire in 1997
through 2001. The Colorado Springs, Annapolis Junction and Seabrook leases
expire in 1999, 2003 and 1995, respectively. The Company believes its current
facilities are suitable and adequate for the Company's operations over the next
fiscal year.
ITEM 3. LEGAL PROCEEDINGS.
See "Litigation" above.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Inapplicable.
PART II
ITEM 5. - MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS.
Incorporated by reference from page 24 of the Annual Report to Stockholders.
ITEM 6. SELECTED FINANCIAL DATA.
Incorporated by reference from page 24 of the Annual Report to Stockholders.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Incorporated by reference from pages 13 through 15 of the Annual Report to
Stockholders.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Financial statements of Stanford Telecommunications, Inc. as of March 31,
1995 and March 31, 1994 and for each of the three years in the period ended
March 31, 1995 and the report of independent public accountants thereon are
incorporated by reference from pages 16 through 23 of the Annual Report to
Stockholders.
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
Inapplicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Set forth below are the names and ages of the executive officers and directors
of the Company, their principal occupations at present and for the past five
years, certain directorships held by each, and the year in which each became a
director or executive officer of the Company.
Dr. James J. Spilker, Jr. (age 61), a founder of the Company, currently serves
as Chairman of the Board. From the Company's organization in May 1973 until
August 1981, Dr. Spilker was Chairman of the Board, Executive Vice President and
Technical Director. He served as President and Chief Executive Officer from
August 1981 to June 1995.
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<PAGE>
Dr. Val P. Peline (age 64) has served as President and Chief Executive Officer
of the Company since June 1995. Dr. Peline was elected as a Director of the
Company in October 1985. Dr. Peline served as President of Lockheed
Corporation's Electronic Systems Group from 1987 to March 1995. Dr. Peline had
been President of the Lockheed Space Division from 1984 to March 1987.
Mr. Michael Berberian (age 61), a private investor, was appointed to fill a
vacancy on the Board of Directors in December 1989. From 1973 to 1990 he served
on the Board of Directors of Lockheed Corporation.
Mr. John W. Brownie (age 61), a founder of the Company, served as Executive Vice
President from June 1982 to January 1985 and General Manager from July 1981 to
January 1985 when he retired from the Company. He was a Director and Vice
President commencing with the Company's organization in May 1973.
Dr. P. Marshall Fitzgerald (age 62), a founder of the Company, has served as a
Director since its organization in May 1973 and as President from May 1973 to
July 1981 when he retired from the Company.
Mr. Milton W. Holcombe (age 62) was appointed to fill a vacancy on the Board of
Directors in September 1990. Mr. Holcombe served as President of Chrysler
Technologies Airborne Systems, Inc. from 1988 to 1990. In 1970 he co-founded
Electrospace Systems, Inc. where he served as Group Vice President and Assistant
Treasurer.
Mr. Leonard Schuchman (age 58) was elected as a Director of the Company in April
1985. Mr. Schuchman joined the Company in January 1976 and became Vice
President in February 1977. In March 1982, he was promoted to Senior Vice
President responsible for directing the Company's Systems Engineering Division.
In March 1994 he was appointed President of the Company's Systems Integration
Group.
Dr. C. Jerome Waylan (age 53) was appointed to fill a vacancy on the Board of
Directors in May 1994. Dr. Waylan has served as Executive Vice President with
GTE Personal Communications since 1993. Prior to his current position, Dr.
Waylan served as President of GTE Spacenet Corporation from 1985 to 1993. Dr.
Waylan founded the Southern Pacific Satellite Company in 1981, which was
acquired by GTE in 1983.
Mr. Charles L. Gandy (age 63) joined the Company as Vice President in September
1986. In November 1990 he was elected Senior Vice President. Prior to joining
the Company he was employed by the National Security Agency for thirty-one years
and served most recently with NSA as Chief of the Special Programs Group.
Dr. John E. Ohlson (age 55) joined the Company in March 1981 as Director of
Telecommunications Programs Operations and became Vice President in January
1982. In February 1991 he was named Director of Military Ground Terminals and
in June 1991 elected Senior Vice President. Dr. Ohlson directed the Satellite
Communications Group from June 1992 to November 1994. Dr. Ohlson was named as
the Company's Chief Technical Officer in November 1994.
Mr. Gary S. Wolf (age 44) joined the Company in May 1978 and was elected Vice
President, Chief Financial Officer, Secretary and Treasurer in December 1984.
In November 1990, he was elected Senior Vice President.
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<PAGE>
Mr. Hatch Graham (age 34) joined the Company in August 1987 and was named as
Operational Vice President in December 1990. In July 1993 he was promoted to
Group Vice President and in March 1994 he was elected Corporate Vice President
and currently directs the Telecom Products Group.
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
officers, directors and certain shareholders to file reports of ownership and
changes in ownership of the Company's Common Stock with the Securities and
Exchange Commission. All Section 16(a) filing requirements were complied with
during the Company s fiscal year ended March 31, 1995. The Company's knowledge
is based on a review of the copies of such reports furnished to the Company and
written representations that no other reports were required during the Company's
fiscal year ended March 31, 1995.
ITEM 11. EXECUTIVE COMPENSATION.
The information set forth under the caption "Executive Compensation" of
Directors and Executive Officers in the Company's Proxy Statement is
incorporated herein by reference and made a part hereof in response to the
information required by this item.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information set forth under the caption "Stock Ownership" in the
Company's Proxy Statement is incorporated herein by reference and made a part
hereof in response to the information required by this item.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Inapplicable.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) The following documents are filed as a part of this report:
Reference Page
--------------
1995
Annual
Report Form 10-K
------ ---------
1. Financial Statements.
--------------------
Report of Independent Public
Accountants 16
Statements of income for each
of the three years in the period
ended March 31, 1995 16
Balance sheets at March 31, 1995 and
March 31, 1994 17
Statements of shareholders' equity for
each of the three years in the period
ended March 31, 1995 18
Statements of cash flow for each of
the three years in the period ended
March 31, 1995 19
Notes to financial statements 20
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<PAGE>
2. FINANCIAL STATEMENT SCHEDULES
II - Valuation and Qualifying Accounts 19
All other schedules have been omitted since the required information
is not present or not present in amounts sufficient to require submission of the
schedule or because the information required is included in the financial
statements or notes thereto.
With the exception of such information in the Annual Report to
Stockholders incorporated herein by reference, the Annual Report to Stockholders
is not deemed "filed" as part of this report.
3. EXHIBITS.
Exhibit Number Description
- -------------- -----------
3.1(3) Certificate of Incorporation, as amended (Exhibit 3.1).
3.2(3) Bylaws, as amended (Exhibit 3.2).
4.1(8) Rights Agreement dated as of May 9, 1995 between the Company and
The First National Bank of Boston.
10.1(7) Consolidated, Amended and Restated Deed of Lease for the premises
located at 1761 Business Center Drive, Reston, Virginia dated
October 1, 1993 between the Company and the Variable Annuity Life
Insurance Company.
10.2(2) 1982 Stock Option Plan, as amended, and form of Agreements
(Exhibit 10.6).
10.3(1) Series B Restricted Stock Plan. (Exhibit 10.7).
10.4(7) Bonus Plan (March 1993 revision).
10.5(4) Officer Incentive Compensation Plan (January 1990 revision).
(Exhibit 10.22).
10.6(5) 1992 Employee Stock Purchase Plan.
10.7(6) Lease dated November 19, 1992 for 480 Java Drive, Sunnyvale,
California, 440 Moffett Park Drive, Sunnyvale, California, and
1221 Crossman Avenue, Sunnyvale, California.
10.8(7) Office Lease Agreement for 141 National Business Parkway,
Annapolis Junction, Maryland dated March 1, 1993 between the
Company and Constellation Real Estate, Inc.
10.9(7) Credit Agreement (Including Overdraft Facility) dated July 31,
1993 between the Company and Bank of America National Trust and
Savings Association.
10.10 First Amendment to Credit Agreement dated September 19, 1994
between the Company and the Bank of America National Trust and
Savings Association.
10.11 Statement regarding computation of per share earnings
incorporated by reference to Note 4 to the Company's Financial
Statements contained in the Company's Annual Report to
Stockholders for the fiscal year ended March 31, 1995.
13.1 Annual Report to Stockholders for the fiscal year ended March 31,
1995.
24.1 Consent of Arthur Andersen LLP, independent public accountants.
25.1 Power of Attorney (included on page 16 hereof).
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<PAGE>
___________________________
(l) Incorporated by reference to the exhibit set forth in parenthesis from the
Company's Registration Statement on Form S-l, No. 2-85894.
(2) Incorporated by reference to the exhibit set forth in parenthesis from the
Company's Annual Report on Form l0-K for the fiscal year ended March 31,
1987.
(3) Incorporated by reference to the exhibit set forth in parenthesis from the
Company's Annual Report on Form l0-K for the fiscal year ended March 31,
1989.
(4) Incorporated by reference to the exhibit set forth in parenthesis from the
Company's Annual Report on Form l0-K for the fiscal year ended March 31,
1990.
(5) Incorporated by reference to the exhibit set forth in parenthesis from the
Company's Annual Report on Form l0-K for the fiscal year ended March 31,
1992.
(6) Incorporated by reference to the exhibit set forth in parenthesis from the
Company's Annual Report on Form l0-K for the fiscal year ended March 31,
1993.
(7) Incorporated by reference to the exhibit set forth in parenthesis from the
Company's Registration statement on Form S-1, No. 33-72720.
(8) Incorporated by reference to the exhibit set forth in parenthesis from the
Company's Registration statement on Form 8-A, dated May 24, 1995.
REPORTS OF FORM 8-K
No Form 8-K was filed with the Securities and Exchange Commission since January
3, 1994.
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<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
STANFORD TELECOMMUNICATIONS, INC.
Dated: June 23, 1995 /s/ J. Spilker
----------------------------------------
James J. Spilker, Jr.
Chairman of the Board
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints James J. Spilker, Jr. and Gary S. Wolf
and both of them, as his true and lawful attorneys-in-fact and agents, with full
power of substitution and resubstitution, for him and in his name, place and
stead, in any and all capacities, to sign any and all amendments to this Form
10-K and to file the same, with all exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorneys-in-fact and agents, and each of them, full power and authority to
do and perform each and every act and thing requisite and necessary to be done
in connection therewith, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said attorneys-in-
fact and agents, or either of them, or their or his substitute or substitutes,
may lawfully do or cause to be done by virtue hereof.
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 dates indicated:
Signature Title Date
--------- ----- ----
/s/ James J. Spilker, Jr. Chairman of the Board June 23, 1995
- -------------------------
James J. Spilker, Jr.
/s/ Val P. Peline President (Principal June 23, 1995
- ----------------------- Executive Officer) and
Val P. Peline Director
/s/ Gary S. Wolf Senior Vice President, June 23, 1995
- --------------------- Treasurer and Secretary
Gary S. Wolf (Principal Financial
and Accounting Officer)
/s/ Michael Berberian Director June 12, 1995
- ---------------------
Michael Berberian
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<PAGE>
/s/ John W. Brownie Director June 14, 1995
- -------------------
John W. Brownie
/s/ P. Marshall Fitzgerald Director June 14, 1995
- --------------------------
P. Marshall Fitzgerald
/s/ Milton W. Holcombe Director June 23, 1995
- ----------------------
Milton W. Holcombe
/s/ Leonard Schuchman Sr. Vice President June 23, 1995
- --------------------- and Director
Leonard Schuchman
/s/ C. J. Waylan Director June 23, 1995
- ----------------
C. J. Waylan
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<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
ON SCHEDULES
To Stanford Telecommunications, Inc.:
We have audited in accordance with generally accepted auditing standards, the
financial statements included in Stanford Telecommunications, Inc.'s annual
report to stockholders incorporated by reference in this Form l0-K, and have
issued our report thereon dated May 2, 1995 (except with respect to the matter
discussed in Note 9 as to which the date is May 9, 1995). Our audit was made
for the purpose of forming an opinion on those statements taken as a whole. The
schedule listed at Item 14(a)(2) is the responsibility of the Company's
management and is presented for purposes of complying with the Securities and
Exchange Commission's rules and is not part of the basic financial statements.
This schedule has been subjected to the auditing procedures applied in the audit
of the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
San Jose, California
May 2, 1995
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<PAGE>
SCHEDULE II
STANFORD TELECOMMUNICATIONS, INC.
Valuation and Qualifying Accounts
Three years ended March 31, 1995
(In Thousands)
ALLOWANCE FOR DOUBTFUL ACCOUNTS
Bal. at Beg. Charged to Bal. at End
Year of period expense Deductions of Period
---- ---------- ---------- ---------- -----------
1993 $100 $ 75 0 $175
1994 $175 375 (307) $243
1995 $243 541 (134) $650
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<PAGE>
FIRST AMENDMENT TO CREDIT AGREEMENT
THIS FIRST AMENDMENT TO CREDIT AGREEMENT (the "AMENDMENT"), dated as of
September 19, 1994 is entered into by and between STANFORD TELECOMMUNICATIONS,
INC. (the "BORROWER") and BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION
(the "BANK").
RECITALS
A. The Borrower and the Bank are parties to a Credit Agreement (Including
Overdraft Facility) dated as of July 31, 1993 (as in effect as of the date of
this agreement, the "CREDIT AGREEMENT") pursuant to which the Bank has extended
certain credit facilities to the Borrower.
B. The Borrower and the Bank have agreed to extend the period in which the
credit is available under the Credit Agreement and to certain other changes to
the terms and conditions of the Credit Agreement and that no new credit will be
extended under the Credit Agreement after July 31, 1994, until execution of this
Amendment and compliance with the provisions of Paragraph 4 of this Amendment.
C. The Bank is willing to amend the Credit Agreement, subject to the terms
and conditions of this Amendment.
NOW, THEREFORE, for valuable consideration, the receipt and adequacy of
which are hereby acknowledged, the parties hereto hereby agree as follows:
1. DEFINED TERMS. Unless otherwise defined herein, capitalized terms used
herein shall have the meanings, if any, assigned to them in the Credit
Agreement.
2. AMENDMENTS TO CREDIT AGREEMENT.
(a) Paragraph 1.1 of the Credit Agreement shall be amended in the
first sentence thereof by deleting the date "July 31, 1994" and inserting in
lieu thereof the date "September 30, 1995".
(b) Paragraph 1.2(b) of the Credit Agreement shall be amended in the
last sentence thereof by deleting the date "July 31, 1994" and inserting in lieu
thereof the date "September 30, 1995".
(c) Paragraph 1.3(a) of the Credit Agreement shall be amended by
deleting it in its entirety and restating it in full, as follows:
1
<PAGE>
"(a) Each Offshore Rate related advance shall be in an amount not
less than One Million and 00/100 Dollars ($1,000,000.00).".
(d) Paragraph 1.3(b) of the Credit Agreement shall be amended by
inserting in the first sentence thereof after the phrase "at a rate per annum
equal to the Offshore Rate" the phrase "plus 1.25 percentage points (1.25%)".
(e) The definition "Offshore Rate Interest Period" in Paragraph
1.3(f) of the Credit Agreement shall be amended in the last line thereof by
deleting the date "January 30, 1995" and inserting in lieu thereof the date
"March 31, 1996".
(f) Paragraph 1.4(b) of the Credit Agreement shall be amended by
inserting in the first sentence thereof after the phrase "at a rate per annum
equal to the Fixed Rate" the phrase "plus 1.25 percentage points (1.25%)".
(g) The definition "Fixed Rate Interest Period" in Paragraph 1.4(e)
of the Credit Agreement shall be amended in the last line thereof by deleting
the date "January 30, 1995" and inserting in lieu thereof the date "March 31,
1996".
(h) Paragraph 1.5(c)(i) of the Credit Agreement shall be amended by
deleting the date "January 30, 1995" and inserting in lieu thereof the date
"March 31, 1996".
(i) Paragraph 1.5(d) of the Credit Agreement shall be amended by
deleting it in its entirety and restating it in full, as follows:
"(d) The discount and commission for each draft shall be at the
Bank's 'all-in-rate' for acceptances in effect on the date of
acceptance and discount plus 1.25 percentage points (1.25%)."
(j) Paragraph 1.6(b)(ii) of the Credit Agreement shall be amended by
deleting the date "January 30, 1995" and inserting in lieu thereof the date
"March 31, 1996".
(k) Paragraph 1.7(b)(i) of the Credit Agreement shall be amended by
deleting the date "July 31, 1995" and inserting in lieu thereof the date
"September 30, 1996".
(l) Paragraph 1.7(c) of the Credit Agreement shall be amended by
deleting it in its entirety and restating it in full, as follows:
"(c) Borrower shall pay Bank the following issuance fees:
2
<PAGE>
"If the face amount of the letter of credit is:
"$-0- to $249,999 $250,000 to $1,000,000 Over $1,000,000
---------------- ---------------------- ---------------
"1.75% per annum 1.50% per annum 1.00% per annum
"With a minimum fee of $250.00 and other such fees at the times and in the
amounts Bank advises Borrower from time to time as being applicable to
standby letters of credit.".
(m) Paragraph 1.8(b) through Paragraph 1.8(f) of the Credit Agreement
shall be amended in its entirety to provide as follows:
"(b) At the Borrower's request, the Bank shall make, on or after the
First Amendment Effective Date (as defined in the First Amendment to this
Agreement) and prior to September 30, 1995, one or more term loans to the
Borrower (the 'Term Loan' or 'Term Loans') in an aggregate amount (net of
any existing terms loans made by the Bank to the Borrower and outstanding
as of the date of this Agreement) not exceeding the lesser of:
"(i) $5,000,000; or
"(ii) An amount equal to the purchase price of fixed assets
purchased by the Borrower during the twelve months prior to the date the
Term Loan is made (and not included in computing any Term Loan previously
made under this Agreement) but excluding sales taxes, freight charges, and
installation costs incurred by the Borrower with respect to such assets.
If requested by the Bank, the Borrower shall submit invoices to the Bank
documenting the foregoing.
"(c) The Bank's obligation to make any Term Loan is subject to the
following conditions precedent at the time the Term Loan is made:
"(i) The Borrower shall have maintained on a consolidated basis,
for two consecutive fiscal quarters (each commencing after September 30,
1994), a Debt Coverage ratio of not less than 2.00 to 1.00. For the
purpose of this Agreement, 'Debt Coverage ratio' means the ratio of (1)
quarterly net profits after taxes, minus interest income, plus depreciation
and amortization, to (2) 25% of the current portion of long-term debt
(including lease debt). In calculating this ratio, the components of Debt
Coverage shall be determined in accordance with generally accepted
accounting principles consistently applied; and
"(ii) The Borrower shall have provided the Bank with a financial
forecast, including a balance sheet and
3
<PAGE>
profit and loss statement for the same period as the requested Term Loan.
"All terms and provisions of this Agreement, including the Covenants
contained in Paragraphs 6.5 through 6.9 must be complied with so long as
any Term Loan is outstanding.
"(d) At the time the Borrower requests a Term Loan, it shall specify
which of the following (i), (ii), or (iii) applies to such Term Loan:
"(i) REFERENCE RATE OPTION.
"(aa) Under this option, the Term Loan (the 'Reference Rate
Term Loan' shall bear interest until payment is due (computed daily on the
basis of a 360 day year and actual days elapsed, which results in more
interest than if a 365 day year were used) at a rate per annum equal to the
rate of interest publicly announced from time to time by the Bank in San
Francisco, California, as its Reference Rate plus one-half of one
percentage point (0.50%). The Reference Rate is set by the Bank and is
based on various factors, including the Bank's costs and desired return,
general economic conditions, and other factors, and is used as a reference
point for pricing some loans. The Bank may price loans at, above, or below
the Reference Rate. Any change in the Reference Rate shall take effect on
the day specified in the public announcement of such change. The Borrower
shall pay interest on each Reference Rate Term Loan on the last day of the
calendar month in which the Reference Rate Term Loan is made, on the last
day of each successive month thereafter, and upon payment in full of
principal of the Reference Rate Term Loan.
"(bb) Borrower may prepay the Reference Rate Term Loan at
any time in full or in part.
"(cc) Principal of each Reference Rate Term Loan shall be
repaid in 36 substantially equal monthly instalments on the last day of
each month (commencing on the month in which the Reference Rate Term Loan
is made) and all unpaid principal, together with all accrued and unpaid
interest, shall be due on the date which is three years less one day after
the date the Reference Rate Term Loan is made and not after September 30,
1998.
"(dd) Principal and interest owing to the Bank on each
Reference Rate Term Loan shall be evidenced by entries in records
maintained by the Bank.
4
<PAGE>
"(ii) FIXED RATE OPTION.
"(aa) Under this option, the Term Loan (the 'Fixed Rate
Term Loan' shall bear interest until payment is due (computed daily on the
basis of a 360 day year and actual days elapsed, which results in more
interest than if a 365 day year were used) at a rate per annum equal to the
sum of a rate chosen by the Bank plus two percentage points, which
aggregate rate of interest shall be agreed to between the Bank and the
Borrower as applicable to such Fixed Rate Term Loan (the 'Fixed Rate').
Each Fixed Rate Term Loan shall be for an amount not less than $500,000 and
for a period of at least 12 months and if longer, for the number of months
divisible by three but not more than 36 months, as agreed to between the
Bank and the Borrower.
"(bb) The Borrower shall pay interest on each Fixed Rate
Term Loan on the last day of the calendar month in which the Fixed Rate
Term Loan is made, on the last day of each successive month thereafter, and
upon payment in full of principal of the Fixed Rate Term Loan.
"(cc) The Borrower may at any time prepay any Fixed Rate
Term Loan in full or in part. Each prepayment shall be accompanied by the
payment of accrued interest on the amount prepaid. The Borrower shall, on
demand, pay to the Bank the amount (if any) by which (i) the additional
interest which would have been payable on the amount prepaid had it not
been paid until the maturity date for such Fixed Rate Term Loan exceeds
(ii) the interest which would have been recoverable by the Bank by placing
the amount prepaid on deposit in the certificate of deposit markets for a
period starting on the date on which it was prepaid and ending on the
maturity date for such Fixed Rate Term Loan.
"(dd) Principal and interest owing to the Bank under the
Fixed Rate Term Loan shall be evidenced by entries in records maintained by
the Bank.
"(ee) For purposes of this Agreement:
'Fixed Rate Interest Period' of a Fixed Rate Term Loan means the period
commencing on the date the Fixed Rate Term Loan is made and ending on the
maturity date of such Fixed Rate Term Loan (which maturity date cannot
occur after September 30, 1998).
"(ff) Principal of each Fixed Rate Term Loan shall be
repaid in substantially equal quarterly installments commencing on the last
day of the second month after the month in which the Fixed Rate Term Loan
is made, on the last day of each three month period (commencing on
5
<PAGE>
the day on which the prior principal installment was made) thereafter until
the last day of the Fixed Rate Interest Period of the Fixed Rate Term Loan,
on which day the entire unpaid principal balance of the Fixed Rate Term
Loan together with accrued and unpaid interest thereon shall be due and
payable.
"The number of quarterly installments of each Fixed Rate Term Loan shall be
the quotient resulting from dividing the number of months in the term of
such Term Loan by three and any remained in the form of a fraction shall be
counted as one.
"(iii) OFFSHORE RATE OPTION.
"(aa) Under this option, the Term Loan (the 'Offshore Rate
Term Loan') shall bear interest until payment is due (computed daily on the
basis of a 360 day year and actual days elapsed, which results in more
interest than if a 365 day year were used) at a rate per annum equal to the
Offshore Rate plus two percentage points. Each Offshore Rate Term Loan
shall be in a minimum amount of $1,000,000 and not less than 15,000,000 in
Dollar Days. For purposes of this Agreement, 'Dollar Days' means the
product of the amount of the Offshore Rate Term Loan times the number of
days in the term of the Offshore Rate Term Loan. Each Offshore Rate Term
Loan shall be for a period of at least 12 months and if longer, for the
number of months divisible by three but not more than 36 months (and in no
event maturing after September 30, 1998), as agreed to between the Bank and
the Borrower.
"(bb) The Borrower shall pay interest on each Offshore Rate
Term Loan on the last day of each month starting with the month in which
such Offshore Rate Term Loan is made and on the last day of each Offshore
Rate Interest Period for such Offshore Rate Term Loan. The Borrower shall
pay the principal amount of each Offshore Rate Term Loan in substantially
equal quarterly instalments on the last day of each Offshore Rate Interest
Period of such Offshore Rate Term Loan.
"The number of quarterly installments of each Offshore Rate Term Loan shall
be the number of Interest Periods in such Offshore Rate Term Loan.
"(cc) The Borrower may at any time prepay any Offshore Rate
Term Loan, in full or in part. Each prepayment shall be accompanied by the
payment of accrued interest on the amount prepaid. The Borrower shall, on
demand, pay the Bank the amount (if any) by which (i) the additional
interest which would have been payable on the amount prepaid had it not
been paid until the last day of
6
<PAGE>
the Offshore Rate Interest Period in which such prepayment was made exceeds
(ii) the interest which would have been recoverable by the Bank by placing
the amount prepaid on deposit in the Offshore Dollar inter-bank markets for
a period starting on the date on which it was prepaid and ending on the
last day of such Offshore Rate Interest Period.
"(dd) The Bank shall have no obligation to make Offshore
Rate Term Loan, or to continue any Offshore Rate Term Loan if the Bank and
the Borrower are unable to agree on an Offshore Rate for an Interest Period
for such Term Loan or if any of the following described events has occurred
and is continuing:
"(i) Dollar deposits in the principal amount of the
Offshore Rate Term Loan and for periods equal to the Offshore Rate
Interest Period are not available in the Offshore Dollar inter-bank
markets; or
"(ii) The Offshore Rate does not accurately reflect the
cost of making the affected Offshore Rate Term Loan or Loans.
"If the Bank shall not have any obligation to make or continue any Offshore
Rate Term Loan, such Offshore Rate Term Loan shall be converted into a
Reference Rate Term Loan subject to the provisions of Paragraph 1.8(d)(i).
"(ee) Principal and interest owing to Bank under each
Offshore Rate Term Loan shall be evidenced by entries in records maintained
by Bank.
"(ff) For purposes of this Agreement:
'Offshore Rate' means for each Offshore Rate Interest Period for
an Offshore Rate Loan the rate of interest which Bank and Borrower
agree, at the time Borrower requests the Offshore Rate Term Loan
(which request must be received by the Bank not later than three
banking days prior to the first day of such Offshore Rate Interest
Period), will be applicable to such Offshore Rate Interest Period.
'Offshore Rate Interest Period' means for each Offshore Rate Term
Loan the period commencing on the date the Offshore Rate Term Loan is
made and ending on the last day of the second month after the Offshore
Rate Term Loan is made and each successive three month period
thereafter; provided, however, that the last day of each Offshore Rate
Interest Period shall be (a) determined in accordance with the
practices of the
7
<PAGE>
Offshore Dollar inter-bank markets as from time to time in effect and
(b) on or prior to September 30, 1998.
"(e) On the date each Term Loan is made, the Borrower shall pay the
Bank a fee in an amount equal to 0.125% of the amount of the Term Loan.
"(f) The maximum amount which may be outstanding under Paragraph 1.1
shall be reduced in an amount equal to the aggregate amount of the Term
Loans made."
(n) Paragraph 1.9 of the Credit Agreement shall be amended,
respectively, in the first, second, and third sentences thereof by deleting the
date "July 31, 1994" and inserting in lieu thereof the date "September 30,
1995".
(o) Article 2 of the Credit Agreement shall be amended by deleting it
in its entirety and inserting in lieu thereof the term "Reserved".
(p) Paragraph 6.4 of the Credit Agreement shall be amended by
deleting the amount "Five Hundred Thousand and 00/100 Dollars ($500,000.00)" and
inserting in lieu thereof the amount "One Million and 00/100 Dollars
($1,000,000.00)".
(q) Paragraph 6.5 of the Credit Agreement shall be amended by
deleting it in its entirety and restating it in full, as follows:
"6.5 Maintain at all times on a consolidated basis a ratio of (a) the
sum of cash, cash equivalents, short-term cash investments, and billed
accounts receivable to (b) current liabilities of at least 1.00 to 1.00.
Current liabilities shall be determined in accordance with generally
accepted accounting principles consistently applied;"
(r) Paragraph 6.6 of the Credit Agreement shall be amended by
deleting it in its entirety and restating it in full, as follows:
"6.6 Not suffer or incur on a consolidated basis any quarterly
net or operating loss in any two consecutive quarters;"
(s) Paragraph 6.7 of the Credit Agreement shall be amended by
deleting it in its entirety and restating it in full, as follows:
"6.7 (a) Maintain on a consolidated basis a Tangible Net Worth
of at least $53,000,000.00 plus 75% of net profit after taxes as of
each quarter starting with the quarter ending on June 30, 1994 plus
100% of new equity as of each quarter starting with the quarter
8
<PAGE>
ending on June 30, 1994; (b) not permit Borrower's total liabilities not
subordinated in a manner satisfactory to Bank to all of Borrower's
indebtedness to Bank to exceed Tangible Net Worth. For purposes of this
Agreement, 'Tangible Net Worth' means the gross book value of the assets of
Borrower (exclusive of goodwill, patents, trademarks, trade names,
organization expense, treasury stock, unamortized debt discount and
expense, deferred charges and other like intangibles) less (i) reserves
applicable thereto and (ii) all liabilities including accrued and deferred
income taxes other than indebtedness subordinated, in a manner satisfactory
to Bank, to all of Borrower's indebtedness to Bank; total liabilities and
the components of Tangible Net Worth shall be determined in accordance with
generally accepted accounting principles consistently applied;"
(t) Exhibit A of the Credit Agreement shall be deleted in its
entirety.
3. REPRESENTATIONS AND WARRANTIES. The Borrower hereby represents and
warrants to the Bank as follows:
(a) No event which is, or with the lapse of time or notice or both
would be, an Event of Default has occurred and is continuing.
(b) The execution, delivery and performance by the Borrower of this
Amendment have been duly authorized by all necessary corporate and other action
and do not and will not require any registration with, consent or approval of,
notice to or action by, any person (including any governmental regulatory
authority) in order to be effective and enforceable. The Credit Agreement as
amended by this Amendment constitutes the legal, valid and binding obligations
of the Borrower, enforceable against it in accordance with its respective terms,
without defense, counterclaim or offset.
(c) All representations and warranties of the Borrower contained in
the Credit Agreement are true and correct.
(d) The Borrower is entering into this Amendment on the basis of its
own investigation and for its own reasons, without reliance upon the Bank or any
other person.
4. EFFECTIVE DATE. This Amendment will become effective as of August ,
1994 (the "FIRST AMENDMENT EFFECTIVE DATE"), PROVIDED THAT each of the following
conditions precedent has been satisfied:
(a) The Bank has received from the Borrower a duly executed original
of this Amendment.
9
<PAGE>
(b) The Bank has received from the Borrower a copy of a resolution
passed by the board of directors of such corporation, certified by the Secretary
or an Assistant Secretary of such corporation as being in full force and effect
on the date hereof, authorizing the execution, delivery and performance of this
Amendment.
On the First Amendment Effective Date, Bank and Borrower agree that the Credit
Agreement shall be in full force and effect as of such date, as amended by this
Amendment.
5. RESERVATION OF RIGHTS. The Borrower acknowledges and agrees that the
execution and delivery by the Bank of this Amendment shall not be deemed to
create a course of dealing or otherwise obligate the Bank to forbear or execute
similar amendments under the same or similar circumstances in the future.
6. MISCELLANEOUS.
(a) Except as herein expressly amended, all terms, covenants and
provisions of the Credit Agreement are and shall remain in full force and effect
and all references therein to such Credit Agreement shall henceforth refer to
the Credit Agreement as amended by this Amendment. This Amendment shall be
deemed incorporated into, and a part of, the Credit Agreement.
(b) This Amendment shall be binding upon and inure to the benefit of
the parties hereto and thereto and their respective successors and assigns. No
third party beneficiaries are intended in connection with this Amendment.
(c) This Amendment shall be governed by and construed in accordance
with the law of the State of California.
(d) This Amendment may be executed in any number of counterparts,
each of which shall be deemed an original, but all such counterparts together
shall constitute but one and the same instrument.
(e) This Amendment, together with the Credit Agreement, contains the
entire and exclusive agreement of the parties hereto with reference to the
matters discussed herein and therein. This Amendment supersedes all prior
drafts and communications with respect thereto. This Amendment may not be
amended except in accordance with the provisions of Paragraph 8.3 of the Credit
Agreement.
(f) If any term or provision of this Amendment shall be deemed
prohibited by or invalid under any applicable law, such provision shall be
invalidated without affecting the remaining provisions of this Amendment or the
Credit Agreement, respectively.
10
<PAGE>
(g) Borrower covenants to pay to or reimburse the Bank, upon demand,
for all costs and expenses (including allocated costs of in-house counsel)
incurred in connection with the development, preparation, negotiation, execution
and delivery of this Amendment, including without limitation appraisal, audit,
search and filing fees incurred in connection therewith.
IN WITNESS WHEREOF, the parties hereto have executed and delivered
this Amendment as of the date first above written.
STANFORD TELECOMMUNICATIONS, INC.
By: /s/ James J. Spilker, Jr.
-----------------------------
Name: James J. Spilker, Jr.
--------------------------
Title: Chairman, President
--------------------------
By: /s/ Gary Wolf
-----------------------------
Name: Gary Wolf
--------------------------
Title: Senior Vice President, CFO
--------------------------
BANK OF AMERICA NATIONAL TRUST
AND SAVINGS ASSOCIATION
By: /s/ Allen B. Miner
-------------------------
Title: Vice President
11
<PAGE>
MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Since the Company's inception in 1973, revenues have been generated primarily
from sales to agencies of the U.S. Government, including the DoD, the U.S. Air
Force, Army and Navy, NASA and the FAA, or their prime contractors. Such
revenues are generated from many contracts including programs requiring
multi-year hardware and software development and limited production of products
and systems. The Company's contracts often require the design, production,
operation and maintenance of sophisticated equipment and systems and provision
of system integration services in the digital telecommunications and satellite
communications fields. A substantial portion of the digital telecommunications
and satellite communications research and development performed by the Company
since its inception has been funded by its customers and recorded as revenues by
the Company. Accordingly, the cost of performing this customer-funded research
and development is included in "Direct and Indirect Costs" in the Company's
financial statements. The Company's government contracts are generally
cost-reimbursement plus profit or fixed-price contracts. The Company generally
recognizes revenues from its long-term government contracts on a
percentage-of-completion basis.
Commencing in the late 1980s, the Company began to pursue commercial
opportunities utilizing its digital telecommunications technology developed and
enhanced by the Company since its inception. Commercial revenues have risen from
less than 6% of total revenues in fiscal 1989 to approximately 31% of total
revenues in fiscal 1995. During fiscal 1995, commercial revenues which amounted
to approximately $35.6 million included: (i) contract manufacturing revenues
from the Company's electronics assembly business ($12.1 million); (ii) sales
of ASICs, circuit boards and subsystems to the telecommunications industry ($9.1
million); (iii) sales of off-the-shelf products for secure voice transmissions
and GPS instrumentation ($7.5 million); (iv) development programs for INTELSAT
and for a vehicle tracking and information services system ($4.0 million); and
(v) other commercial systems and product business ($2.9 million). The Company
includes in commercial revenues sales of standardized or off-the-shelf products
such as the digital interfaces for secure voice transmissions or GPS simulators
to any customers, including government customers.
The Company's operating results have from time to time been adversely affected
by non-recoverable cost overruns on certain fixed-price contracts, primarily
fixed-price development contracts which have included significant software and
hardware development. The Company's net income in fiscal 1993, 1994 and 1995
was adversely affected due to losses on a number of fixed-price development
contracts. The Company has been instituting additional management controls to
more closely monitor its bidding process and costs incurred on fixed-price
development contracts, however, no assurance can be given that the Company will
not incur losses on future fixed-price contracts or additional losses on
existing contracts. The Company believes that development contracts are an
important element in maintaining its technological leadership position in
digital telecommunications. The Company plans to selectively bid on programs
where it would be the sole provider or its technology leadership provides a
competitive advantage. In addition, in order to position itself in the
commercial marketplace, the Company may selectively enter into contracts with
customers to deliver products where the Company will be funding a portion of the
development costs. As a result, the Company may incur losses on certain
fixed-price contracts. Such losses will be charged against results of operations
in the period when they first become known, typically near the initiation of the
contract and may have a material adverse effect on the Company's results of
operations.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain items from
the Company's Statements of Income expressed as a percentage of the Company's
total revenues:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31
------------------------
1993 1994 1995
------ ------ ------
<S> <C> <C> <C>
Revenues . . . . . . . . . . . . . . . . . . . . . . . . 100.0% 100.0% 100.0%
Costs and expenses:
Direct and indirect costs . . . . . . . . . . . . . . 83.7 82.0 83.6
General and administrative . . . . . . . . . . . . . 6.3 6.9 8.2
Research and development . . . . . . . . . . . . . . 7.5 6.5 6.8
------ ------ ------
97.5 95.4 98.6
------ ------ ------
Income from operations . . . . . . . . . . . . . . . 2.5 4.6 1.4
Interest (expense) income net . . . . . . . . . . . . . (0.5) (0.1) .6
Arbitration settlement expenses . . . . . . . . . . . . -- -- (1.8)
------ ------ ------
Income before provision
for income taxes and accounting change . . . . . . . 2.0 4.5 .2
Provision for income taxes . . . . . . . . . . . . . . . (0.8) (1.6) (.1)
------ ------ ------
Income before change in accounting method . . . . . . . 1.2 2.9 .1
Cumulative effect of change in accounting method . . . . -- 0.7 --
------ ------ ------
Net income . . . . . . . . . . . . . . . . . . . . . . . 1.2% 3.6% .1%
------ ------ ------
------ ------ ------
</TABLE>
13
<PAGE>
COMPARISON OF FISCAL YEARS
1993, 1994 AND 1995
REVENUES. Revenues were $92.8 million, $98.1 million and $114.4 million in
fiscal 1993, 1994 and 1995, respectively, representing year-to-year increases
of 6% in fiscal 1994 and 17% in fiscal 1995. The increase in revenues from
fiscal 1993 to fiscal 1994 is primarily attributable to an increase in the
Company's commercial operations. The increase in revenues from fiscal 1994 to
fiscal 1995 is attributable to increases in both the Company's commercial
operations as well as its government business sectors. Fiscal 1995 commercial
and government business revenues of approximately $35.6 million and $78.8
million, respectively, compares with fiscal 1994 commercial and government
business revenues of $26.9 million and $71.2 million, respectively and fiscal
1993 commercial and government business revenues of $36.5 million and $76.3
million, respectively. Although the Company experienced an increase in its
government business revenues during fiscal 1995, budgetary pressures continue
to affect Department of Defense and NASA budgets. The Company anticipates
that its revenues from these government customers may not increase at the
same level as experienced during fiscal 1995 and may remain flat and could
decline in future periods. All contracts with the government are cancelable
at any time for the convenience of the government. The Company is not aware
of the cancellation or proposed cancellation of any of its current contracts.
The Company plans to continue to selectively pursue government business where
it has a competitive advantage, can be the sole provider or can be a prime
contractor rather than a subcontractor. Over the past three years, the
Company's commercial business represented approximately 18% of total revenues
in fiscal 1993, 27% in fiscal 1994 and 31% in fiscal 1995. During this
period, the volume of commercial business has increased as a result of the
expansion of its contract manufacturing operations which followed the
acquisition of a small electronics assembly facility in fiscal 1993, the
organization of a separate division in fiscal 1991 to pursue opportunities
for selling ASICs, circuit boards and subsystems to the telecommunications
industry, the sale of of-the-shelf products and development programs for
INTELSAT and for NYNEX Assurance Services.
DIRECT AND INDIRECT COSTS. Direct and indirect costs were $77.7 million, $80.4
million and $95.7 million in fiscal 1993, 1994 and 1995, respectively,
representing 83.7%, 82.0% and 83.6% of revenues, respectively. The decrease in
direct and indirect costs as a percentage of revenues in fiscal 1994 relative to
fiscal 1993 is attributable primarily to a reduction in non-recoverable cost
overruns on certain fixed-price development contracts. The increase in direct
and indirect costs as a percentage of revenues in fiscal 1995 relative to fiscal
1994 is attributable primarily to an increase in reserves and non-recoverable
cost overruns on certain fixed-price contracts. In fiscal 1993, 1994 and 1995,
the Company experienced losses totaling $5.3 million, $2.4 million and $4.2
million, respectively on a number of fixed-price development contracts. For
fiscal 1995, the company recorded a reserve of $2.8 million against the
completion of a development contract with INTELSAT and incurred losses on
several other development contracts totaling $1.4 million. The largest loss
contract, other than INTELSAT, was a $.4 million loss taken against the
completion of a U.S. Navy contract.
GENERAL AND ADMINISTRATIVE. General and administrative expenses were $5.9
million, $6.8 million and $9.4 million, respectively, representing year-to-year
increases of 15% in fiscal 1994 and 38% in fiscal 1995. These increases were
primarily a result of hiring additional technical marketing personnel and
increased marketing expenses in pursuit of commercial opportunities. In
addition, the Company has expanded its patent activities and has experienced
increased legal costs associated with the protection of its intellectual
property.
RESEARCH AND DEVELOPMENT. A substantial portion of the Company's research and
development expenses consist of bid and proposal expenses associated with
government contracts and certain large commercial programs. Bid and proposal
expenditures are largely the initial advanced technology development efforts
directed toward a specific product or technical task for which the Company must
show technical viability. Research and development expenses were $6.9 million,
$6.4 million and $7.7 million in fiscal 1993, 1994 and 1995, respectively. The
fluctuation in these expenses is attributable primarily to the timing and
magnitude of bid and proposal activity and the Company's decisions as to which
opportunities to pursue. The Company expects research and development expenses
as a percentage of revenues to increase in the future as it pursues additional
commercial activities.
INCOME FROM OPERATIONS. Income from operations was $2.3 million, $4.5 million
and $1.6 million for fiscal 1993, 1994 and 1995 respectively, representing a
year-to-year increase of 94% in fiscal 1994 and a decrease of 64% in fiscal
1995. The increase in fiscal 1994 was primarily attributable to increased
revenues and reduced losses on certain fixed-price development contracts. The
decrease in fiscal 1995 was primarily attributable to an increase in reserves
and non-recoverable cost overruns on certain fixed-price contracts and the
recognition of revenues on certain large system level contracts at zero or
minimal operating margins. The Company has entered into and may continue to
enter into certain fixed-price development contracts with zero or minimal
operating margin which it believes are essential to maintain and strengthen its
competitive market position.
INTEREST INCOME (EXPENSE), NET. Interest expense, net was $.4 million, and $.1
million and interest income, net was $.7 million in fiscal 1993, 1994 and 1995,
respectively. The reduction in interest expense, net from fiscal 1993 to 1994
reflects the combination of lower interest rates, decreased average borrowings
and the effect of interest earned on short-term investments during the fourth
quarter of fiscal 1994 resulting from the proceeds generated from the Company's
secondary public offering of its common stock. During fiscal 1995 the Company
earned interest from the proceeds generated from the Company's secondary public
offering completed in January 1994 by investing the proceeds in interest bearing
short-term investments.
ARBITRATION SETTLEMENT EXPENSES. During the third quarter of fiscal 1995, the
Company received an unfavorable decision in an arbitration hearing involving an
alleged default under a 1990 joint product development agreement. A charge of
$1.6 million associated with the award to the prevailing party and other direct
arbitration costs of $.5 million were recognized.
PROVISION FOR INCOME TAXES. Provision for income taxes was $.7 million, $1.5
million and $.1 million in fiscal 1993, 1994 and 1995, respectively. This
represents an effective tax rate of 38.7% for fiscal 1993 and 35.0% for fiscal
1994 and 1995. The decrease in the effective tax rate during fiscal 1994 and
1995 compared with fiscal 1993 results primarily from the effect of the Omnibus
Budget Reconciliation Act of 1993 and increased research and development tax
credits.
ACCOUNTING CHANGE. Effective April 1, 1993, the Company adopted the provisions
of Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes." The cumulative effect of this change in accounting principle was an
increase in net income of $.7 million in the first quarter of fiscal 1994. This
item is non-recurring and does not affect any prior or later periods.
BOOKINGS AND BACKLOG. Funded bookings were $78.8 million, $106.6 million and
$127.8 million in fiscal 1993, 1994 and 1995, respectively, representing
year-to-year increases of 35% in fiscal 1994 and 20% in fiscal 1995. The
increase in bookings were derived from both the Company's commercial operations
as well as its government business sectors. During the past two fiscal years,
the Company has increased its commercial bookings through expanded commercial
offerings and has successfully pursued government business requiring development
and delivery of fixed and mobile satellite terminals. The increase in bookings
has resulted in the Company's backlog increasing from from $50.6 million at the
end of fiscal 1993 to $59.1 million at the end of fiscal 1994, and to $72.5
million at the end of fiscal 1995.
QUARTERLY RESULTS
The Company's revenues and results of operations are subject to fluctuation
from period to period. Factors that could cause the Company's revenues and
operating results to vary from period to period include: underestimating
costs on fixed-price contracts particularly for software and hardware
development; timing, bidding activity and delivery of significant contracts
and orders; termination of contracts; mix of products and systems sold, and
services provided; historically reduced levels of operation during the
holidays which occur primarily in the Company's third fiscal quarter;
disruptions in delivery of components or subsystems; regulatory developments;
and general economic conditions. Revenues have
14
<PAGE>
QUARTERLY RESULTS
The following table presents the Company's financial results by quarter for
fiscal 1993, 1994 and 1995. These quarterly financial results are unaudited. In
the opinion of management, however, they have been prepared on the same basis as
the audited financial information and include all adjustments necessary for a
fair presentation of the information set forth therein. The operating results
for any quarter are not necessarily indicative of the results that may be
expected for any future period.
<TABLE>
<CAPTION>
QUARTER ENDED
(IN THOUSANDS, EXCEPT PER SHARE DATA)
-----------------------------------------------------------------------------------
FISCAL 1993 FISCAL 1994
---------------------------------------- -----------------------------------------
JUNE 30 SEPT. 30 DEC. 31 MAR. 31 JUNE 30 SEPT. 30 DEC. 31 MAR. 31
------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF INCOME DATA:
Revenues . . . . . . . . . . . . . . $20,788 $24,224 $21,609 $26,200 $24,322 $25,260 $23,445 $25,028
Costs and expenses:
Direct and indirect costs . . . . 18,097 19,992 17,815 21,811 19,607 20,983 19,575 20,277
General and administrative . . . . 1,360 1,628 1,354 1,529 1,411 1,793 1,631 1,925
Research and development . . . . . 1,961 1,720 1,275 1,960 2,102 1,202 1,120 1,931
------- -------- -------- -------- -------- -------- -------- --------
Total costs and expenses . . . 21,418 23,340 20,444 25,300 23,120 23,978 22,326 24,133
------- -------- -------- -------- -------- -------- -------- --------
Income (loss) from
operations . . . . . . . . . . . (630) 884 1,165 900 1,202 1,282 1,119 895
Interest (expense) income net . . . (82) (89) (137) (120) (70) (88) (77) 100
Arbitration settlement expenses . . -- -- -- -- -- -- -- --
------- -------- -------- -------- -------- -------- -------- --------
Income (loss) before income
taxes and accounting chang . . . (712) 795 1,028 780 1,132 1,194 1,042 995
(Provision) credit for income
taxes . . . . . . . . . . . . . . 279 (311) (398) (302) (442) (404) (378) (303)
------- -------- -------- -------- -------- -------- -------- --------
Income (loss) before change
in accounting method . . . . . . (433) 484 630 478 690 790 664 692
Cumulative effect of change
in accounting method . . . . . . -- -- -- -- 700 -- -- --
------- -------- -------- -------- -------- -------- -------- --------
Net income (loss) . . . . . . . . . $ (433) $ 484 $ 630 $ 478 $ 1,390 $ 790 $ 664 $ 692
------- -------- -------- -------- -------- -------- -------- --------
------- -------- -------- -------- -------- -------- -------- --------
Net income (loss) per spare . . . . $ (.09) $ .10 $ .13 $ .10 $ .28 $ .16 $ .13 $ .12
------- -------- -------- -------- -------- -------- -------- --------
------- -------- -------- -------- -------- -------- -------- --------
Weighted average common
shares and equivalents . . . . . 4,860 4,857 4,853 4,869 4,900 4,976 5,058 5,867
<CAPTION>
QUARTER ENDED
(IN THOUSANDS, EXCEPT PER SHARE DATA)
----------------------------------------
FISCAL 1995
-----------------------------------------
JUNE 30 SEPT. 30 DEC. 31 MAR. 31
-------- -------- -------- --------
<S> <C> <C> <C> <C>
STATEMENTS OF INCOME DATA:
Revenues . . . . . . . . . . . . . . $24,645 $28,319 $26,499 $34,921
Costs and expenses:
Direct and indirect costs . . . . 19,244 22,633 24,689 29,113
General and administrative . . . . 2,000 2,423 2,166 2,773
Research and development . . . . . 2,032 2,302 1,345 2,044
-------- -------- -------- --------
Total costs and expenses . . . 23,276 27,358 28,200 33,930
-------- -------- -------- --------
Income (loss) from
operations . . . . . . . . . . . 1,369 961 (1,701) 991
Interest (expense) income net . . . 180 156 191 130
Arbitration settlement expenses . . -- -- (2,075) --
-------- -------- -------- --------
Income (loss) before income
taxes and accounting chang . . . 1,549 1,117 (3,585) 1,121
(Provision) credit for income
taxes . . . . . . . . . . . . . . (557) (403) 1,282 (393)
-------- -------- -------- --------
Income (loss) before change
in accounting method . . . . . . 992 714 (2,303) 728
Cumulative effect of change
in accounting method . . . . . . -- -- -- --
-------- -------- -------- --------
Net income (loss) . . . . . . . . . $ 992 $ 714 $(2,303) $ 728
-------- -------- -------- --------
-------- -------- -------- --------
Net income (loss) per spare . . . . $ .16 $ .11 $ (.37) $ .12
-------- -------- -------- --------
-------- -------- -------- --------
Weighted average common
shares and equivalents . . . . . 6,221 6,244 6,256 6,252
</TABLE>
generally increased on a quarterly basis since fiscal 1993 as a result of
increasing commercial activities during the past three years and increased
government related activities experienced during fiscal 1995. Revenues are
generally lower during the third fiscal quarter ending December 31 because the
Company reduces operations during the holiday period, and it expects to
continue to reduce activities in future holiday periods. The Company's results
of operation are adversely affected by losses on fixed-price development
contracts. Direct and indirect costs were adversely affected throughout fiscal
1993, 1994 and 1995, by cost overruns on certain fixed-price development
contracts. Research and development expenses include both research and
development costs as well as bid and proposal expenses. Bid and proposal
expenses, which often make up a substantial portion of this expense category,
vary significantly from period to period based on the number of proposals being
prepared at any time. These requests for proposals are not received evenly
during the year or in any predictable pattern.
LIQUIDITY AND CAPITAL RESOURCES
Working capital increased from $26.2 million to $48.7 million at March 31, 1993
and 1994, respectively, and decreased to $48.0 million at March 31, 1995. The
increase in working capital of $22.5 million from March 31, 1993 to March 31,
1994 was largely attributable to the Company's secondary offering of its common
stock completed during January 1994. The decrease in working capital at March
31, 1995 was primarily attributable to a cash award paid to the prevailing party
in an arbitration dispute and the need to fund certain contract losses.
Net cash provided by operating activities for the years ended March 31, 1993,
1994 and 1995 was $3.2 million, $9.8 million and $1.2 million, respectively. The
increase in net cash provided by operating activities from fiscal 1994 to 1994
was largely attributable to an increase in net income and a decrease in unbilled
receivables. The decrease from fiscal 1994 to fiscal 1995 was largely
attributable to an increase in receivables, an increase in inventories
associated with commercial contracts and a decrease in net income, associated
with the cost overruns on fixed price development contracts and the arbitration
settlement expenses.
The Company utilized its cash for the purchase of property and equipment
totaling $4.7 million, $5.8 million and $6.2 million in fiscal 1993, 1994 and
1995. The Company has a bank credit commitment of $15.0 million which it has
utilized to augment cash flow needs and to secure standby letter of credit or
term loans not to exceed the lesser of $5.0 million, or the amount of fixed
assets purchased during the preceding twelve months. Available borrowings under
this line at March 31, 1995 were $15.0 million. Under this line of credit the
Company must maintain certain financial covenants, including a minimum debt
coverage for two consecutive fiscal quarters. As a result of not maintaining the
minimum debt coverage during the third quarter of fiscal 1995, the Company is
prohibited from utilizing the long term loan provision of its credit agreement
for a minimum of six months unless a waiver is requested by the Company and
granted by the bank. As of March 31, 1995 a waiver has not been requested. The
credit arrangment expires on September 30, 1995. At March 31, 1995, the
Company's long-term obligations (including current maturities) and capital lease
obligations totaled approximately $.3 million. At March 31, 1995, cash and cash
equivalents of $2.9 million were held in money market accounts and short-term
investments of $9.9 million were held in U.S. Government Treasury instruments.
The Company believes that its current cash position, funds generated from
operations and funds available from its existing bank credit agreement, will be
adequate to meet the Company's requirements for working capital, capital
expenditures and debt service for the foreseeable future.
15
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Stanford Telecommunications, Inc.:
We have audited the accompanying balance sheets of Stanford Telecommunications,
Inc. (a Delaware Corporation) as of March 31, 1995 and 1994, and the related
statements of income, shareholders' equity and cash flows for each of the three
years in the period ended March 31, 1995. 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 generally accepted auditing
standards. 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 financial position of Stanford Telecommunications,
Inc. as of March 31, 1995 and 1994 and the results of its operations and its
cash flows for each of the three years in the period ended March 31, 1995 in
conformity with generally accepted accounting principles.
As discussed in Note 6 of the notes to financial statements, effective April 1,
1993, the Company changed its method of accounting for income taxes.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
San Jose, California
May 2, 1995 (except with respect to the matter discussed in Note 9, as to which
the date is May 9, 1995).
STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31
-------------------------------
1995 1994 1993
--------- -------- --------
<S> <C> <C> <C>
Revenues . . . . . . . . . . . . . . . . . . . . . . . . $114,384 $ 98,055 $ 92,821
--------- -------- --------
Costs and expenses:
Direct and indirect costs . . . . . . . . . . . . . . 95,679 80,442 77,715
General and administrative . . . . . . . . . . . . . . 9,362 6,760 5,871
Research and development . . . . . . . . . . . . . . 7,723 6,355 6,916
--------- -------- --------
112,764 93,557 90,502
--------- -------- --------
Income from operations . . . . . . . . . . . . . . . . 1,620 4,498 2,319
Interest income (expense), net . . . . . . . . . . . . . 657 (135) (428)
Arbitration settlement expenses . . . . . . . . . . . . (2,075) -- --
--------- -------- --------
Income before provision for income taxes and
change in accounting method . . . . . . . . . . . . 202 4,363 1,891
Provision for income taxes . . . . . . . . . . . . . . . (71) (1,527) (732)
--------- -------- --------
Income before change in accounting method . . . . . . . 131 2,836 1,159
Cumulative effect of change in accounting method . . . . -- 700 --
--------- -------- --------
Net income . . . . . . . . . . . . . . . . . . . . . . . $ 131 $ 3,536 $ 1,159
--------- -------- --------
--------- -------- --------
Earnings per share:
Income before change in accounting method . . . . . . $ .02 $ .54 $ .24
Cumulative effect of change in accounting method . . . -- .14 --
--------- -------- --------
Net Income . . . . . . . . . . . . . . . . . . . . . . $ .02 $ .68 $ .24
--------- -------- --------
--------- -------- --------
Weighted average number of common and
common equivalent shares outstanding . . . . . . . . 6,242 5,197 4,865
--------- -------- --------
--------- -------- --------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
16
<PAGE>
BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNT)
<TABLE>
<CAPTION>
MARCH 31
-----------------
1995 1994
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 2,910 $ 5,840
Short-term investments 9,907 11,466
Accounts receivable 22,930 15,911
Unbilled receivables 16,891 16,593
Inventories, net of related progress billings 15,798 8,745
Prepaid expenses and other 3,558 1,570
-------- --------
Total current assets 71,994 60,125
-------- --------
Property and equipment at cost:
Electronic test equipment 38,108 33,949
Furniture and fixtures 2,889 3,225
Leasehold improvements 3,052 2,550
-------- --------
44,049 39,724
Less: Accumulated depreciation and amortization (28,441) (25,719)
-------- --------
Net property and equipment 15,608 14,005
-------- --------
Other assets 403 373
-------- --------
$ 88,005 $ 74,503
-------- --------
-------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term obligations $ 158 $ 171
Accounts payable 11,268 3,420
Advance payments from customers 963 791
Accrued liabilities 10,183 6,519
Accrued and current deferred income taxes 1,463 565
-------- --------
Total current liabilities 24,035 11,466
-------- --------
Long-term obligations, less current maturites 161 235
-------- --------
Other long-term liabilities 927 626
-------- --------
Deferred income taxes 785 809
-------- --------
Commitments and contingencies (Notes 3 and 8)
Shareholders' equity:
Common shares - par value $.01; 10,000 shares
authorized
Common stock -
Authorized - 9,000 shares
Outstanding - 6,234 shares in 1995; 6,181
shares in 1994 62 62
Series B Common Stock -
Authorized - 800 shares
Outstanding - none --- ---
Paid-in capital 37,051 36,452
Retained earnings 24,984 24,853
-------- --------
Total shareholders' equity 62,097 61,367
-------- --------
$ 88,005 $ 74,503
-------- --------
-------- --------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
17
<PAGE>
STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
----------------- PAID-IN RETAINED SHAREHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS EQUITY
------ ------ ------- -------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE, MARCH 31, 1992 4,870 $ 48 $16,294 $ 20,158 $36,500
Sale of common stock under
Employee Stock Option Plan,
net of shares exchanged 34 1 119 --- 120
Issuance of common stock
as awards to employees 2 --- 8 --- 8
Repurchase of common stock (42) (1) (215) --- (216)
Net income --- --- --- 1,159 1,159
------ ----- ------- ------ -------
BALANCE, MARCH 31, 1993 4,864 48 16,206 21,317 37,571
Sale of common stock, net
of issuance costs 1,150 12 17,985 --- 17,997
Sale of common stock under
Employee Stock Purchase Plan 8 --- 182 --- 182
Sale of common stock under
Employee Stock Option Plan,
net of shares exchanged 155 2 1,582 --- 1,584
Issuance of common stock
as awards to employees 4 --- 50 --- 50
Tax benefits from employee
stock transactions --- --- 447 --- 447
Net income --- --- --- 3,536 3,536
------- ------- ------- ------- -------
BALANCE, MARCH 31, 1994 6,181 62 36,452 24,853 61,367
Sale of common stock under
Employee Stock Purchase Plan 36 --- 430 --- 430
Sale of common stock under
Employee Stock Option Plan,
net of shares exchanged 14 --- 86 --- 86
Issuance of common stock
as awards to employees 3 --- 42 --- 42
Tax benefits from employee
stock transactions --- --- 41 --- 41
Net income --- --- --- 131 131
------- ------- ------- ------- -------
BALANCE, MARCH 31, 1995 6,234 $ 62 $37,051 $24,984 $62,097
------- ------- ------- ------- -------
------- ------- ------- ------- -------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
18
<PAGE>
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31
--------------------------
1995 1994 1993
------- ------- -------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 131 $ 3,536 $ 1,159
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 4,330 3,960 3,983
Issuances of stock to employees under bonus
and award plans 42 50 8
Provision for losses on receivables and contracts 3,073 202 172
Loss on retirements of property and equipment 210 159 ---
Change in accounting method --- (700) ---
(Increase) decrease in assets:
Receivables billed and unbilled (8,355) 5,251 (3,302)
Inventories (6,888) (3,467) 723
Prepaid expenses and other assets (2,018) (84) 766
Increase (decrease) in liabilities:
Accounts payable, advance payments and accrued expenses 9,484 (488) 230
Other long-term liabilities 301 601 25
Accrued and deferred income taxes 874 798 (533)
-------- -------- -------
Net cash provided by operating activities 1,184 9,818 3,231
-------- -------- -------
Cash used in investing activities:
Purchase of short-term investments (9,907) (11,466) ---
Proceeds from maturities of short-term investments 11,466 --- ---
Purchase of property and equipment (6,210) (5,846) (4,733)
Proceeds from sale of property and equipment 67 --- ---
-------- -------- -------
Net cash used in investing activities (4,584) (17,312) (4,733)
-------- -------- -------
Cash flows from financing activities:
Payments on capital lease obligations (87) (176) (108)
Payments on notes payable to bank --- (14,925) (11,219)
Proceeds from term notes --- 7,800 13,500
Proceeds from transactions under stock plans 557 1,766 120
Proceeds from sale of common stock --- 17,997 ---
Repurchase of common stock --- --- (216)
------- -------- -------
Net cash provided by financing activities 470 12,462 2,077
------- -------- -------
Net increase (decrease) in cash and cash equivalents (2,930) 4,968 575
Cash and cash equivalents at beginning of year 5,840 872 297
------- -------- -------
Cash and cash equivalents at end of year $ 2,910 $ 5,840 $ 872
------- -------- -------
------- -------- -------
SUPPLEMENTAL CASH FLOW INFORMATION (IN THOUSANDS)
Cash paid during the year for interest and income taxes was as follows:
1995 1994 1993
------- -------- -------
Interest $ 51 $ 264 $ 464
Income taxes $ 769 $ 1,353 $ 448
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
19
<PAGE>
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION
The Company designs, develops, manufactures, markets and supports digital
telecommunications systems for satellite communications, navigation and
tracking, wireless and digital cable telecommunications. The Company's revenues
are generated from U.S. Government contracts where the Company may be either the
prime contractor or a subcontractor or from commercial customers. The Company
principally uses the percentage-of-completion method of accounting for contract
revenues. The percentage-of-completion method is based on total costs incurred
to date compared with estimated total costs upon completion of contracts.
Revenues for fixed price contracts, which do not have progress payment clauses,
are recognized at the time of delivery of the finished product. Certain
contracts provide for milestone billings which are recorded as revenues when the
defined milestones are met. The company recognizes revenues for standard, off
the shelf products and certain commercial products upon shipment to the
customer. The Company charges all losses on contracts to cost of sales in the
period when the loss is known. Furthermore, the Department of Defense accounted
for 44%, 47%, and 53% of total revenues in 1995, 1994, and 1993, respectively.
FISCAL YEAR
The Companys fiscal year is composed of four 13-week quarters, each of which
ends on the Thursday closest to the corresponding calendar quarter end. For
convenience, the Company has presented its fiscal year as ending on March 31.
RECEIVABLES
The Company provides a reserve for doubtful accounts where circumstances
indicate that one is necessary. As of March 31, 1995 and 1994, the Company's
reserve for doubtful accounts was $650,000 and $243,000, respectively.
UNBILLED RECEIVABLES
Unbilled receivables represent differences between billings and revenues
recognized on fixed price and cost plus contracts. On fixed price contracts, the
unbilled amounts represent revenues recognized under the
percentage-of-completion method of accounting which exceed the amounts that are
billable according to contract terms. In general, the Company is authorized to
bill between 80% to 100% of the costs expended on a contract. The remaining
portion (if any) is billable as contract deliverables are accepted by the
customer. On cost plus contracts, the unbilled amounts mainly represent (a) a
portion (generally 15%) of the negotiated contract fees which are not billable
until the completion of the contract and (b) differences between actual indirect
rates and government approved billing rates which are not billable until
approval of final indirect rates by the respective governmental agencies. As of
March 31, 1995, the Company has received final indirect rate approval for
charges through fiscal 1988.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or market.
Cost includes materials, labor and related indirect expenses. General and
administrative costs are only included in inventory for government contracts, as
such costs are reimbursed by the government. Work in-process mainly represents
costs incurred on short-term contracts. The components of inventory are (in
thousands):
<TABLE>
<CAPTION>
March 31
-------------------------
1995 1994
------ ------
<S> <C> <C>
Raw materials and supplies $ 175 $ 179
Work-in-process 13,027 6,401
Finished goods 1,820 1,303
Allocated general and administrative costs 938 867
Less progress billings (162) (5)
-------- -------
$15,798 $8,745
-------- -------
-------- -------
</TABLE>
Total general and administrative expenses incurred during the fiscal years
ended March 31, 1995, 1994 and 1993 are $9,362,000, $6,953,000 and $5,901,000,
respectively.
CAPITALIZED COMPUTER SOFTWARE
Effective April 1, 1994, the Company began capitalizing certain software
development costs in compliance with Statement of Financial Accounting Standards
No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased or
Otherwise Marketed". Prior to that date, eligible costs had not been
significant.
Capitalization of Computer software development costs begins upon the
establishment of technological feasibility of the product. The establishment
of technological feasibility and the ongoing assessment of the recoverability
of these costs require considerable judgment by management with respect to
certain external factors, including, but not limited to, anticipated future
gross product revenues, estimated economic life and changes in software and
hardware technology. The Company capitalizes direct costs incurred in
connection with the software development subsequent to the establishment of
technological feasibility for the products. Capitalized software development
costs amounted to $367,000 in 1995 and are included in property and equipment
in the accompanying balance sheet. Amortization of capitalizated software
begins upon initial product shipment and extends over the estimated economic
life of the product. As of March 31, 1995 $30,000 has been amortized and the
net value is $337,000.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization are provided over the estimated useful lives of
the assets (5 to 7 years or the term of the lease), using the straight-line
method for financial reporting purposes and accelerated methods for certain
depreciable assets for tax purposes.
20
<PAGE>
ACCRUED LIABILITIES
Accrued liabilities consist of the following (in thousands):
<TABLE>
<CAPTION>
MARCH 31
-----------------------
1995 1994
------ ------
<S> <C> <C>
Compensation and employee benefits. . $5,710 $5,296
Accrued contract cost . . . . . . . . 3,595 525
Other . . . . . . . . . . . . . . . . 878 698
------- -------
$10,183 $6,519
------- -------
------- -------
</TABLE>
INVESTMENTS IN DEBT AND EQUITY SECURITIES
Effective April 1, 1994, the Company adopted the provisions of "SFAS" No.
115. "Accounting for Certain Investments in Debt and Equity Securities."
The Adoption of SFAS No. 115 did not have a material impact on the Company's
financial statements. As of March 31, 1995 the aggregate cost basis, fair
market value and unrealized holding gain on short term investments consisted
of $9,907,000, $10,090,000 and $183,000, respectively. Short term investments
consist entirely of U.S. Treasury Notes and are classified as held to
maturity. The securities mature at various dates within one year.
2. LINE OF CREDIT
The Company has a bank credit commitment of $15,000,000 which it has utilized to
augment cash flow needs and standby letter of credit and to secure term loans
not to exceed the lesser of $5,000,000 or the amount of fixed assets purchased
during the preceding twelve months. Available borrowings under this line at
March 31, 1995 were $15,000,000. Under this line of credit the Company must
maintain certain financial covenants, including a minimum debt coverage for two
consecutive fiscal quarters. As a result of not maintaining the minimum debt
coverage during the third quarter of fiscal 1995, the Company is prohibited from
utilizing the long term loan provision of its credit agreement for a minimum of
six months unless a waiver is requested by the Company and granted by the bank.
As of March 31, 1995, a waiver was not requested. The credit commitment expires
on September 30, 1995.
3. COMMITMENTS
The Company leases its buildings and other equipment under noncancellable
operating lease agreements that expire at various dates through 2003. The
Company also leases certain office equipment under capital leases which expire
during 2000. The terms of several of the Company's leases provide for deferral
of cash rental payments over various periods. Rental expense under these
agreements is recognized on a straight-line basis. As of March 31, 1995 the
Company has accrued approximately $877,000 in related expense which is included
in other long-term liabilities in the accompanying balance sheet. Approximate
future minimum lease payments under these leases are as follows (in
thousands):
<TABLE>
<CAPTION>
Year Ending March 31 Operating Leases Capital Leases
---------------- --------------
<S> <C> <C>
1996 . . . . . . . . . . . . . $ 3,228 $161
1997 . . . . . . . . . . . . . 2,960 90
1998 . . . . . . . . . . . . . 2,967 67
1999 . . . . . . . . . . . . . 3,012 22
2000 . . . . . . . . . . . . . 2,538 7
Thereafter . . . . . . . . . . 2,764 --
------- ----
Total minimum lease payments . $17,469 347
-------
-------
Less: interest . . . . . . . . (28)
----
319
Less current portion . . . . . (158)
-----
$161
-----
-----
</TABLE>
Rental expenses charged to operations totalled approximately $3,432,000,
$3,387,000, and $4,358,000 for the years ended March 31, 1995, 1994 and 1993,
respectively. During 1995, 1994, and 1993 the Company acquired equipment under
capital leases in the amounts of $81,000, $52,000, and $357,000, respectively.
4. EARNINGS PER SHARE
Earnings per share is computed using the weighted average number of shares of
common stock and common stock equivalents outstanding during the periods. Common
stock equivalents consist of the dilutive effect of outstanding options to
purchase common stock. Fully diluted earnings per share are substantially the
same as reported earnings per share.
5. RETIREMENT PLAN
The Employee Retirement Plan, a defined contribution plan covering
substantially all employees, provides for future Company contributions of 3%
of eligible employees annual compensation. The Company's combined
contributions totaled approximately $1,037,000 in 1995, $1,006,000 in 1994
and $1,123,000 in 1993. The Employee Retirement Plan permits eligible
employees to make voluntary before-tax salary deferral contributions
6. INCOME TAXES
Through March 31, 1993, the Company accounted for income taxes pursuant to
Accounting Principles Board (APB) Opinion 11. Effective April 1, 1993, the
Company adopted Statement of Financial Accounting Standards No. 109 (SFAS
109), Accounting for Income Taxes. This statement provides for a liability
approach under which
21
<PAGE>
deferred income taxes are provided based on enacted tax laws and rates
applicable to the periods in which the taxes become payable. SFAS 109 was
adopted on a prospective basis and amounts presented for prior years have not
been restated. The cumulative effect of this change in accounting method
increased earnings in fiscal 1994 by $700,000 or $0.14 per share.
Income before provision for income taxes and the provision for income taxes
charged to operations were comprised of the following (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31
1995 1994 1993
------ ------ ------
<S> <C> <C> <C>
Income before provision for income taxes $ 202 $4,363 $1,891
------ ------ ------
------ ------ ------
Provision for (benefit from) income taxes:
Current
Federal . . . . . . . . . . . . 1,870 $ 984 $ (71)
State . . . . . . . . . . . . . 503 212 (14)
Deferred, net
Federal . . . . . . . . . . . . (1,817) 210 676
State . . . . . . . . . . . . . (485) 121 141
------ ------ ------
Net tax provision . . . . . . . . . $ 71 $1,527 $ 732
------ ------ ------
------ ------ ------
</TABLE>
The principal components of the deferred income tax provision computed under APB
11 for the year ended March 31,1993 is as follows (in thousands):
<TABLE>
<CAPTION>
1993
-------
<S> <C>
Percentage-of-completion contract accounting . . . . . . . . . $ 1,215
State income taxes . . . . . . . . . . . . . . . . . . . . . . 77
Expenses recognized for income tax (financial statements)
but not for financial statements (income tax ) . . . . . . . (433)
Accelerated depreciation . . . . . . . . . . . . . . . . . . . (92)
Other 50
-------
Total deferred provision . . . . . . . . . . . . . . . . $ 817
-------
-------
</TABLE>
The provision for income taxes for the three years ended March 31, 1995 differs
from the U.S. statutory rate principally as follows:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Statutory Federal income tax rate . . . . . . 34.0% 34.0% 34.0%
State income taxes, net of Federal benefit. . 5.3 5.3 5.8
Research and development credits . . . . . . (5.0) -- (3.0)
Other. . . . . . . . . . . . . . . . . . . . .7 2.4 1.9
Change in valuation allowance . . . . . . . . -- (6.7) --
----- ------ ------
Effective income tax rate . . . . . . . . . . 35.0% 35.0% 38.7%
----- ----- ------
----- ----- ------
</TABLE>
The major components of deferred tax assets and liabilities as computed under
SFAS 109 consisted of the following (in thousands):
<TABLE>
<CAPTION>
MARCH 31 MARCH 31
1995 1994
-------- ---------
<S> <C> <C>
Deferred tax asset:
Reserves and accruals not currently
deductible for tax purposes . . . . . . . . $ 3,489 $ 2,273
Tax credits . . . . . . . . . . . . . . . . . 256 --
------- -------
Total deferred tax asset. . . . . . . . . . 3,745 2,273
Valuation allowance . . . . . . . . . . . . . (206) (206)
------- -------
Deferred tax asset net of allowance . . . . 3,539 2,067
------- -------
Deferred tax liability:
Accelerated depreciation . . . . . . . . . . . (785) (809)
Percentage of completion contract accounting . (419) (881)
------- -------
Total deferred tax liability . . . . . . . . (1,204) (1,690)
-------- -------
Net deferred tax asset . . . . . . . . . . . $ 2,335 $ 377
------- -------
------- -------
</TABLE>
The $2,335,000 net deferred tax asset as of March 31, 1995 was allocated on
the accompanying balance sheet with $785,000 classified as a long term
liability, and the remaining $3,120,000 classified as prepaid expenses and
other.
7. COMMON STOCK
In January 1994, the Company issued an additional 1,150,000 shares of common
stock at a price of $17.00 per share through a secondary public offering,
resulting in net proceeds of approximately $18 million.
22
<PAGE>
In August 1990, the Board of Directors authorized the purchase of up to
$2,500,000 of the Company's common stock on the open market. During 1995 and
1994 no shares were repurchased. Since August 1990 the Company has
repurchased 272,500 shares at an average price of $5.51 per share.
The 1982 Stock Option Plan expired on January 26, 1991 precluding the
issuance of option grants under that plan. However, existing and non-expired
options may be exercised in accordance with the terms of the option
agreement.
Under the 1991 Stock Option Plan (the "1991 Plan"), a total of 500,000 shares
of common stock were reserved for future issuance to employees. In February
1995, the Board of Directors, subject to shareholder approval, passed a
resolution to amend and restate the Company's 1991 Stock Option Plan. The
amended and restated plan (a) increases the number of shares subject to the
plan by 500,000 to 1,000,000, (b) permits the grant of options to certain
non-employee directors, (c) adds individual grant limitations required under
Internal Revenue Code section 162(m), allowing option income for certain
individuals to be tax deductible by the Corporation and (d) to make other
administrative changes. The 1991 Plan provides for the issuance of either
incentive or non-qualified options. Incentive options can be granted at an
exercise price not less than fair market value of the stock on the date of
grant. Non-qualified options can be granted at an exercise price not less
than 85% of the fair market value of the stock on the date of the grant.
Options granted under the 1991 Plan become exercisable over such periods as
determined by the Board of Directors. The 1991 Plan will expire in the year
2001.
Information with respect to these plans is as follows:
<TABLE>
<CAPTION>
1982 Stock Option Plan 1991 Stock Option Plan
----------------------------- -----------------------------------------------
Option Available Option
Outstanding Prices for Grant Outstanding Prices
----------------------------- -----------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at March 31, 1992 563,052 $2.00 - $13.80 478,500 21,500 $ 8.00 - $10.00
Granted (53,250) 53,250 $ 5.00 - $10.00
Exercised (79,715) $2.00 - $ 7.50 -- -- --
Terminated (256,792) $1.40 - $12.50 -- -- --
---------- --------------- --------- -------- -----------------
Balance at March 31, 1993 226,545 $4.50 - $13.80 425,250 74,750 $ 5.00 - $10.00
Granted -- -- (107,684) 107,684 $ 9.25 - $21.25
Exercised (136,743) $4.50 - $13.80 -- (24,062) $ 5.00 - $10.00
Terminated (50,302) $9.25 - $11.60 4,936 (4,936) $ 9.25 - $ 9.50
---------- --------------- --------- -------- -----------------
Balance at March 31, 1994 39,500 $4.50 - $12.00 322,502 153,436 $ 5.00 - $21.25
Granted -- -- (128,167) 128,167 $12.50 - $19.75
Exercised (15,750) $4.75 - $11.30 (4,661) $ 5.50 - $11.25
Terminated -- -- 2,400 (2,400) $ 9.25 - $17.38
---------- --------------- --------- -------- -----------------
Balance at March 31, 1995 23,750 $4.50 - $12.00 196,735 274,542 $ 5.00 - $21.25
---------- --------------- --------- -------- -----------------
---------- --------------- --------- -------- -----------------
</TABLE>
Options to purchase 23,750 and 36,750 shares were exercisable on March 31,
1995 and March 31, 1994, respectively, under the 1982 Stock Option Plan.
Under the 1991 Stock Option Plan options to purchase 39,420 shares were
exercisable on March 31, 1995, and there were no options to purchase shares
exercisable on March 31, 1994.
The Company's Series B Restricted Common Stock Plan (the "Series B Plan")
provides for the granting of certain stock purchase rights to key employees,
officers and directors. The terms of payment, vesting provisions, conditions
of purchase (including repurchase rights in favor of the Company) and
consideration (which may be promissory notes or outstanding shares of the
Company's common stock) for shares sold under the plan are to be determined
by the Board of Directors ("Board"). The Series B common stock will be sold at
no less than its fair market value. The Series B Plan is administered by the
Board or by a committee of the Board. Because of the subordination of such
shares to common stock as to certain matters and the uncertainty of the
conversion of such shares into common stock, it is anticipated that the price
for such shares will be substantially below the market price for the common
stock. No purchase rights have been granted and no shares have been issued
under the Series B Plan.
Under the 1992 Employee Stock Purchase Plan (the "1992 Purchase Plan"), a total
of 200,000 shares of common stock have been reserved for issuance. The
Company makes offerings at such time and of such duration as its Board
determines. As of March 31, 1995, 151,480 shares remained available for
purchase.
8. LITIGATION AND CONTINGENCIES
Results for 1995 include a third quarter charge of approximately $2.1 million
to reflect an unfavorable arbitration award and related costs. The
arbitration case relates to an alleged default under a 1990 joint product
development agreement with Techsonic Industries, Inc. Under the arbitration
decision Techsonic was awarded approximately $1.6 million based on
allegations that the Company had failed to successfully complete the product
called for by the agreement. The Company is also party to other disputes
incidental to its business. The Company has prepared and presented
documentation and support to the U.S. Government addressing post-award audit
recommendations made by the Defense Contract Audit Agency. Management
believes that the outcome of such contingencies will not have a materially
adverse effect on the Company's financial position or results of operations.
9. SUBSEQUENT EVENT
On May 9, 1995 the Board of Directors adopted a Stockholder Rights Plan and
declared a dividend of one Common Share Purchase Right (the "Right") for each
share of the Company's common stock outstanding on May 25, 1995.
Each Right entitles the holder thereof to purchase one share of the Company's
common stock for $60. The Rights will be exercisable if a person or group
acquires 15% or more of the Company's common stock. Upon such acquisition, each
Right (other than those held by the acquiring person) will be exercisable for
the number of shares of the Company's common stock having a market value at that
time of twice the exercise price of the Right. If the Company subsequently
enters into certain business combinations, each Right (other than those held by
the acquiring person or group) will be exercisable for that number of shares of
common stock of the other party to the business combination having a market
value of two times the exercise price of the Right. The Rights are subject to
redemption at the option of the Board of Directors at a price of $.01 per Right.
The Rights expire on May 9, 2005.
23
<PAGE>
SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SUMMARY OF OPERATIONS FOR THE FISCAL YEAR
YEAR ENDED MARCH 31
--------------------------------------------------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- -----
<S> <C> <C> <C> <C> <C>
Revenues $114,384 $98,055 $92,821 $94,908 $102,537
Income from Operations 1,620 4,498 2,319 5,601 6,963
Income before change
in accounting method 131 2,836 1,159 3,105 3,678
Cumulative effect of change
in accounting method -- 700 -- -- --
Net Income 131 3,536 1,159 3,105 3,678
Income per Share before change in
accounting method .02 .54 .24 .63 .75
Cumulative effect of changes in
accounting method -- .14 -- -- --
Weighted Average Shares 6,242 5,197 4,865 4,913 4,917
Net Income
as a Percent of Revenues .1% 3.6% 1.3% 3.3% 3.6%
FINANCIAL POSITION AT END OF FISCAL YEAR
Current Assets $ 71,994 $60,125 $45,007 $42,791 $ 41,875
Current Liabilities 24,035 11,466 18,792 16,716 19,145
Working Capital 47,959 48,659 26,215 26,075 22,730
Current Ratio 3.0 5.2 2.4 2.6 2.2
Property and Equipment, net 15,608 14,005 12,226 11,038 11,736
Total Assets 88,005 74,503 57,492 54,088 53,729
Long -Term Debt 161 235 358 246 470
Shareholders' Equity $ 62,097 $61,367 $37,571 $36,500 $ 33,355
Common Stock Outstanding 6,234 6,181 4,864 4,870 4,800
Book Value per Share $ 9.96 $ 9.93 $ 7.72 $ 7.50 $ 6.95
</TABLE>
SELECTED COMMON STOCK DATA
Stanford Telecommunications, Inc. Common Stock was offered to the public on
October 6, 1983, and since that date has been traded on the Nasdaq stock market
under the symbol STII. During January 1994, the Company completed a secondary
offering of its common stock. The price per share reflected in the table
represents the closing prices in the Nasdaq National Market System. The
quotations represent inter-dealer quotations, without retail markups, markdowns
or commissions, and may not necessarily represent actual transactions.
The Company has not paid dividends on its Common Stock since its incorporation
and anticipates that for the foreseeable future it will continue to retain its
earnings for use in its business. A covenant under the current Line of Credit
would require prior approval of any dividend by the Bank.
On March 31, 1995, there were approximately 1,427 holders of record of the
Company's Common Stock.
<TABLE>
<CAPTION>
FISCAL 1995 HIGH LOW
------ -----
<S> <C> <C>
First Quarter 18 3/4 11
Second Quarter 20 1/4 12 1/2
Third Quarter 20 13 1/8
Fourth Quarter 15 1/2 12 1/2
FISCAL 1994
First Quarter 14 3/4 8
Second Quarter 20 1/4 12 1/4
Third Quarter 27 1/2 15 3/4
Fourth Quarter 21 1/2 15 1/2
</TABLE>
NASDAQ MARKET MAKERS
Oppenheimer & Co * Volpe Welty & Co. * Herzog, Heine, Geduld * Prudential
Securities * Troster Singer * Mayer & Schweitzer * Dain, Bosworth * Sherwood
Securities Corp.
NASDAQ TRADING VOLUME
Fiscal 1995 - 6,160,978 shares / Fiscal 1994 - 16,480,929 shares
24
<PAGE>
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
reports included in or incorporated by reference in this Form 10-K, into the
Company's previously filed Registration Statements on Forms S-8 (file nos.
2-88852, 2-88853, 33-00714, 33-11743, 33-22956, 33-36977, 33-45090 and
33-68534).
/s/ Arthur Andersen LLP
San Jose, California
June 16, 1995
-20-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S ANNUAL REPORT FOR FISCAL YEAR 1995 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1995
<PERIOD-END> MAR-31-1995
<CASH> 2,910
<SECURITIES> 9,907
<RECEIVABLES> 39,821
<ALLOWANCES> 650
<INVENTORY> 15,798
<CURRENT-ASSETS> 71,994
<PP&E> 44,049
<DEPRECIATION> 28,441
<TOTAL-ASSETS> 88,005
<CURRENT-LIABILITIES> 24,035
<BONDS> 0
<COMMON> 37,113
0
0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 88,005
<SALES> 114,384
<TOTAL-REVENUES> 114,384
<CGS> 95,679
<TOTAL-COSTS> 112,764
<OTHER-EXPENSES> 2,075
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 202
<INCOME-TAX> 71
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 131
<EPS-PRIMARY> .02
<EPS-DILUTED> .02
</TABLE>
