UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
--------------- ------------------
Commission file number 0-12734
Stanford Telecommunications, Inc.
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(Exact name of registrant as specified in its charter)
Delaware 94-2207636
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(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
1221 Crossman Avenue, Sunnyvale, CA 94089
-----------------------------------------
(Address of principal executives offices)
(Zip Code)
408/745-0818
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(Registrant's telephone number, including area code)
------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
APPLICABLE ONLY TO CORPORATE USERS:
Indicate the number of outstanding shares of each of the issuer's
classes of common stock, as of the latest practical date.
12,973,404 as of October 30, 1998
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
STANFORD TELECOMMUNICATIONS, INC.
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The condensed consolidated financial statements included herein have been
prepared by the Company, without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations, although the Company believes the
disclosures which are made are adequate to make the information presented not
misleading. Further, the condensed consolidated financial statements have been
prepared in all material respects in conformity with the standards of accounting
measurement set forth in Accounting Principles Board Opinion No. 28 and reflect,
in the opinion of management, all adjustments (which include only normal
recurring adjustments) necessary to present fairly the financial position and
results of operations as of and for the periods indicated.
It is suggested that these condensed consolidated financial statements be read
in conjunction with the financial statements and the notes thereto included in
the Stanford Telecommunications, Inc. 1998 Annual Report.
The results of operations for the six months of fiscal year 1999 ended September
30, 1998 are not necessarily indicative of results to be expected for the entire
year ending March 31, 1999.
<PAGE>
<TABLE>
STANFORD TELECOMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(in thousands, except per share amount)
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30,
------------------------ ------------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues $ 40,705 $ 36,838 $ 85,067 $ 72,169
Cost of revenues 32,724 27,465 67,644 53,894
-------- -------- -------- --------
Gross profit 7,981 9,373 17,423 18,275
Expenses
Research and development 3,417 3,868 7,126 6,899
Marketing and administrative 4,485 4,602 9,197 8,854
-------- -------- -------- --------
Total expenses 7,902 8,470 16,323 15,753
Operating income 79 903 1,100 2,522
Interest income, net 417 492 901 951
-------- -------- -------- --------
Income before provision
for income taxes 496 1,395 2,001 3,473
Provision for income taxes (154) (467) (620) (1,164)
-------- -------- -------- --------
Net income $ 342 $ 928 $ 1,381 $ 2,309
======== ======== ======== ========
Basic shares outstanding 12,993 12,888 12,984 12,865
Basic EPS $ 0.03 $ 0.07 $ 0.11 $ 0.18
======== ======== ======== ========
Diluted shares outstanding 13,122 13,219 13,146 13,153
Diluted EPS $ 0.03 $ 0.07 $ 0.11 $ 0.18
======== ======== ======== ========
<FN>
See accompanying notes
</FN>
</TABLE>
<PAGE>
<TABLE>
STANFORD TELECOMMUNICATIONS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amount)
<CAPTION>
ASSETS September 30, March 31,
1998 1998
---------- ---------
<S> <C> <C>
Current assets: (Unaudited)
Cash and cash equivalents $ 22,793 $ 13,914
Short-term investments 7,868 19,493
Accounts receivable 25,612 26,958
Unbilled receivables 25,350 20,911
Inventories 13,323 14,276
Prepaid taxes and other 4,979 1,919
---------- ---------
Total current assets 99,925 97,471
---------- ---------
Property and equipment at cost:
Electronic test equipment 49,222 46,768
Furniture and fixtures 4,005 3,887
Leasehold improvements 4,174 3,996
---------- ---------
57,401 54,651
Less: Accumulated depreciation and amortization (43,249) (40,516)
---------- ---------
Net property and equipment 14,152 14,135
---------- ---------
Other assets 809 535
---------- ---------
$114,886 $112,141
========== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term obligations $ 57 $ 44
Accounts payable 8,953 10,739
Advance payments from customers 3,131 1,909
Accrued liabilities 9,026 8,218
Accrued and current deferred income taxes 4,356 3,462
---------- ---------
Total current liabilities 25,523 24,372
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Long-term obligations, less current maturities 80 41
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Other long-term liabilities 695 855
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Shareholders' equity:
Common shares - par value $.01; 25,000 shares authorized
Outstanding - 12,998 shares at September 30, 1998 130 130
- 12,975 shares at March 31, 1998
Paid-in capital 42,693 42,359
Retained earnings 45,765 44,384
---------- ---------
Total shareholders' equity 88,588 86,873
---------- ---------
$ 114,886 $ 112,141
========== =========
<FN>
See accompanying notes.
</FN>
</TABLE>
<PAGE>
<TABLE>
STANFORD TELECOMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
<CAPTION>
Six Months Ended
September 30,
<S> <C> <C>
Cash flows from operating activities: 1998 1997
-------- --------
Net income $ 1,381 $ 2,309
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 3,088 2,820
Issuances of stock to employees under bonus and award plans 9 5
Change in provision for losses on receivables, contracts
and inventories (520) (978)
Loss on disposition of property and equipment 44 1
(Increase) decrease in assets:
Receivables billed and unbilled (2,887) 1,829
Inventories 1,267 (2,209)
Prepaid taxes and other assets (3,123) (262)
Increase (decrease) in liabilities:
Accounts payable, advance payments, and accrued expenses 329 1,005
Other long-term liabilities (160) (46)
Accrued and deferred income taxes 894 (796)
-------- --------
Net cash provided by operating activities 322 3,678
-------- --------
Cash flows used in investing activities:
Proceeds from maturities (purchase) of short-term investments 11,625 2,110
Purchase of property and equipment (3,149) (2,574)
-------- --------
Net cash provided by (used in) investing activities 8,476 (464)
-------- --------
Cash flows from financing activities:
Payments on capital lease obligations (33) (38)
Common stock repurchases (598) 0
Proceeds from transactions under stock plans 712 938
-------- --------
Net cash provided by financing activities 81 900
-------- --------
Net increase in cash and cash equivalents 8,879 4,114
Cash and cash equivalents at beginning of period 13,914 8,235
-------- --------
Cash and cash equivalents at end of period $ 22,793 $ 12,349
======== ========
<FN>
See accompanying notes.
</FN>
</TABLE>
<PAGE>
STANFORD TELECOMMUNICATIONS, INC.
Notes to Condensed Financial Statements
(Unaudited)
September 30, 1998
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principals
for interim financial information.
2. Fiscal Year
The Company's fiscal year ending March 31, 1999 is comprised of one 14-week
quarter (quarter ended June 30, 1998) and three 13-week quarters. Fiscal
year ended March 31, 1998 was comprised of four 13-week quarters.
3. 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.
<TABLE>
The components of inventory are as follows (in thousands):
<CAPTION>
September 30, 1998 March 31, 1998
------------------ --------------
<S> <C> <C>
Work-in-progress $ 10,804 $11,176
Finished goods 3,004 3,066
Allocated general and administrative costs 66 136
Less: progress billings (551) (102)
---------- --------
$13,323 $14,276
========== ========
</TABLE>
4. Earnings per share
Basic earnings per share is computed based on the weighted average number
of common shares outstanding. Diluted earnings per share is computed based
on the weighted average number of common shares outstanding plus dilutive
potential common shares calculated in accordance with the treasury stock
method. The Company's dilutive potential common shares are represented by
shares issuable through the exercise of stock options. For the first six
months of fiscal 1999 and 1998 the dilutive potential common shares were
approximately 162,000 and 288,000 respectively. Options to purchase
approximately 676,000 and 87,000 weighted shares outstanding during the
first six months of fiscal 1999 and 1998, respectively were excluded from
the computation of diluted earnings per share because the options' exercise
prices were greater than the average market price of the Company's common
stock during those periods. Basic and diluted earnings per share for the
Company are substantially the same.
<PAGE>
5. Comprehensive Income
Effective April 1, 1998 the Company adopted Statement of Financial
Accounting Standards No. 130 ("SFAS 130") "reporting Comprehensive Income",
which establishes standards for reporting and displaying comprehensive
income and its components in the financial statements. For the second
quarter and the first six months of fiscal years 1998 and 1997, the Company
did not have any components of comprehensive income as defined in SFAS 130.
ITEM 2. 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 "Cost of Revenues" 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 1980's, 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 year 1989 to approximately 38% of total
revenues in fiscal year 1998. During the first six months of fiscal year 1999,
commercial revenues amounted to approximately 39% of the total revenues
reported. The Company includes in commercial revenues sales of standard or
off-the-shelf products to any customers, including government customers.
Over the past four years the Company has invested heavily in the development of
a family of products to deliver telephone and data services over wireless
broadband links. The high level of R&D expenses associated with the development
of the wireless broadband family impacted the earnings results for the Company's
base business over the past several years. In order to provide further detail as
to the level of revenues, cost of revenues, and operating expenses incurred by
the base business and the corresponding financial performance of the broadband
wireless business, the Company established a wholly owned subsidiary, Stanford
Wireless Broadband, Inc. in June 1998. In addition to providing financial
visibility, the establishment of the subsidiary allows the Company's wireless
broadband customers the benefit of working with a unique and separate entity
dedicated to the development, manufacturing, sales and support of its broadband
family of products. The table shown below provides a summary
<PAGE>
<TABLE>
of the financial performance for the base business operations and Stanford
Wireless Broadband, Inc. for the second quarter of fiscal 1999 and six months
ended September 30, 1998:
<CAPTION>
Three months ended Six months ended
September 30, 1998 September 30,1998
Base Stanford Base Stanford
Business Wireless Business Wireless
Operations Broadband, Inc Operations Broadband, Inc.
---------- -------------- ---------- ---------------
<S> <C> <C> <C> <C>
Revenues from unaffiliated customers $ 32,883 $ 7,822 $ 67,693 $ 17,374
Cost of revenues 24,783 7,941 51,445 16,199
-------- -------- -------- --------
Gross profit 8,100 (119) 16,248 1,175
Expenses
Research and development 964 2,453 1,954 5,172
Marketing and administrative 2,820 1,665 5,878 3,319
-------- -------- -------- --------
Total expenses 3,784 4,118 7,832 8,491
-------- -------- -------- --------
Operating income (loss) $ 4,316 $ (4,237) $ 8,416 $ (7,316)
======== ======== ======== ========
</TABLE>
For the second quarter of fiscal year 1999, revenues for Base Business
Operations consisted of $24.4 million and $8.5 million of Government and
commercial revenues, respectively. Of the $7.8 million of revenues realized by
Stanford Wireless Broadband during the second quarter approximately $7.3 million
were derived from the subsidiary's commercial manufacturing operations. For the
first six months of fiscal year 1999, revenues for the Base Business Operations
consisted of $52.4 million and $15.3 million of Government and commercial
revenues respectively. Revenues for Stanford Wireless Broadband consisted
primarily of commercial contract manufacturing revenues amounting to $15.3
million. The Company's wireless broadband subsidiary operating loss for the
second quarter and the first six months of fiscal year 1999, were attributable
to a continued high level of research and development in the wireless broadband
family of products, the increased level of cost associated with activities
necessary to support worldwide LMDS and MMDS field trials, and implementation of
process changes within the manufacturing operation to support future production
requirements.
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. The Company has management controls to
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. 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.
Year 2000 issue
The "Year 2000 Issue", also known as "Y2K", exists because many computer
programs store and process dates using only the last two digits of the year in
the date field. If not corrected, many computer applications could create
miscalculations or erroneous results causing disruptions of operations.
The Company has made this issue a significant priority and has formed an
Interdisciplinary Steering Committee, which has been meeting regularly since
January 1998, dedicated to the
<PAGE>
evaluation and mitigation of any Y2K issues. The Committee is responsible for
determining the overall structure and approach for addressing the Y2K issue, and
coordinating the Company's legal, financial and business resources towards
remediation of any Y2K issues. This Committee is also responsible for overseeing
and providing guidelines for four sub-task forces whose function is to focus on
specific areas of the Y2K issue, namely products, software, customers and
suppliers.
In March of 1998, the Corporate Steering Committee implemented a remediation
plan to address mission-critical software (mission-critical is defined as
software or systems that can seriously impair the Company's ability to conduct
its business) and products impacted by the Y2K issue including Information
Technology "IT" systems, such as financial reporting systems, and non-IT systems
such as building security systems. The first phase is to identify and assess the
risks of various aspects of the Y2K issue. The second phase is to test
mission-critical software and IT systems. The third phase is to correct and
replace any software and products impacted by the Y2K issue. The final phase is
to draft and put into effect any contingency plan necessary to mitigate any Y2K
issues. The Company expects this project to be completed by the first quarter of
fiscal year 2000. The Company does not anticipate the costs associated with the
implementation of this plan or its findings on the Y2K issue will have a
material impact to the Company's financial position, capital resources, or
results of operation.
The above statements describing the Company's plans and objectives for handling
the Y2K Issue and the expected impact involve risks and uncertainties that could
cause actual results to differ materially from the results discussed above,
therefore having an adverse effect on future results of operations.
Uncertainties that might cause such a difference include, but are not limited
to, delays in executing the plan or unforeseen costs associated with
implementation of the plan. Further, even if the Company successfully implements
the plan, there is no assurance that the company will not be adversely affected
by the failure of others to become Year-2000-Compliant.
Cautionary Statements
In the interest of providing the Company's shareholders and potential investors
with certain Company information, including management's assessment of the
Company's future potential, certain statements set forth herein (a) contain or
are based on projections of revenue, income, earnings per share and other
financial items or (b) relate to management's future plans, expectations, and
objectives or to the Company's future economic performance. Such statements are
forward-looking statements within the meaning of Section 27A(i) of the
Securities Act of 1933, as amended, and in Section 21E(i) of the Securities
Exchange Act of 1934, as amended.
Although any forward-looking statements contained herein or otherwise expressed
by or on behalf of the Company are to the knowledge and in the judgment of the
officers and directors of the Company, expected to prove true and to come to
pass, management is not able to predict the future with absolute certainty.
Accordingly, shareholders and potential investors are hereby cautioned that
certain events or circumstances could cause actual results to differ materially
from those projected or predicted herein. In addition, the forward-looking
statements herein are based on management's knowledge and judgment as of the
date hereof, and the Company does not intend to update any forward-looking
statements to reflect events occurring or circumstances existing hereafter.
For further information on the foregoing, reference is made to the Company's
Securities and Exchange Commission report on Form 10-K.
<PAGE>
Quarterly Results
The following table presents the Company's financial results by quarter for
fiscal 1998 and the first two quarters of fiscal 1999. 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>
Quarter Ended
Statement of Operations Data
(in thousands, except per share data)
<CAPTION>
Fiscal 1998 Fiscal 1999
----------------------------- ------------------------------
June 30 Sept. 30 Dec. 31 Mar. 31 June 30 Sept. 30
------- -------- ------- ------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Revenues $35,331 $36,838 $ 40,713 $40,378 $44,362 $40,705
Cost of revenues 26,430 27,465 30,778 31,956 34,919 32,724
------- ------- --------- ------- ------- -------
Gross profit 8,901 9,373 9,935 8,422 9,443 7,981
------- ------- --------- ------- ------- -------
Expenses:
Research and development 3,031 3,868 3,814 2,934 3,709 3,417
Marketing and administrative 4,251 4,602 4,463 4,005 4,712 4,485
------- ------- -------- ------- ------- -------
Total expenses 7,282 8,470 8,277 6,939 8,421 7,902
Operating income 1,619 903 1,658 1,483 1,022 79
Interest income 459 492 502 443 484 417
------- ------- --------- ------- -------- -------
Income before provision for 2,078 1,395 2,160 1,926 1,506 496
income taxes
Provision for income taxes (696) (467) (583) (597) (467) (154)
------- ------- --------- ------- ------- -------
Net income $ 1,382 $ 928 $ 1,577 $ 1,329 $ 1,039 $ 342
======= ======= ========= ======= ======= =======
Basic shares outstanding 12,841 12,888 12,927 12,953 12,976 12,993
Basic EPS $ 0.11 $ 0.07 $ 0.12 $ 0.10 $ 0.08 $ 0.03
======= ======= ========= ======= ======== =======
Diluted shares outstanding 13,073 13,219 13,226 13,199 13,171 13,122
Diluted EPS $ 0.11 $ 0.07 $ 0.12 $ 0.10 $ 0.08 $ 0.03
======= ======= ========= ======= ======== =======
</TABLE>
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, 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. Research
and development expenses include both research and development costs as well as
bid and proposal expenses. Bid and proposal expenses 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.
<PAGE>
Comparison of the Second Quarter Ended September 30, 1998 and 1997
Revenues. Revenues for the second quarter of fiscal 1999 increased by 10% to
$40.7 million from the second quarter of the previous fiscal year. Government
revenues during the second quarter of fiscal year 1999 totaled $24.4 million, an
increase of 6% from Government revenues of $23.1 million recorded during the
second quarter of fiscal year 1998. Commercial revenues during the second
quarter of fiscal year 1999 totaled $16.3 million, an increase of 19% from
commercial revenues of $13.7 million recorded during the second quarter of
fiscal year 1998. This increase is mainly attributable to revenues derived from
the Company's commercial system engineering service contracts. Revenues from
commercial contract manufacturing services and the sale of commercial
telecommunication chip and board level products for the second quarter of fiscal
year 1999 totaling $7.3 million and $2.8 million respectively, were
approximately equal to the second quarter of the previous fiscal year.
Cost of Revenues. Cost of revenues were $32.7 million and $27.5 million for the
second quarter of fiscal 1999 and 1998, respectively, representing a 19%
increase. The increase during the second quarter of fiscal 1999 was the result
of the recognition of costs on a higher revenue base. The increase in cost of
revenues as a percentage of revenues from the second quarter of fiscal year 1998
to the second quarter of fiscal year 1999 can be significantly attributable to
the lower margin contracts associated with field trials of LMDS and MMDS. The
Company anticipates it will continue to expend resources in support of on-going
and anticipated field trials of its wireless broadband products over the next
several quarters.
Research and Development. During recent quarters, the Company has focused its
available research and development funds on the development of commercial
products. Research and development expenses, including bid and proposal expenses
were $3.4 million and $3.9 million during the second quarter of fiscal 1999 and
1998, respectively. Excluding bid and proposal expenses, the Company's research
and development expenses which primarily applied to the development of products
such as wireless broadband communications were $3.0 million and $3.2 million
during the second quarter of fiscal 1999 and 1998, respectively. The decrease in
research and development expenses in the second quarter can be attributable to a
reduction in development expenses associated with the Company's
telecommunication chip and board level products as those development programs
transition to production programs. Bid and proposal expenses are largely the
initial advanced technology development efforts directed toward a specific
product or technical task for which the Company must show technical viability.
The decrease in bid and proposal expenses during the second quarter of fiscal
year 1999 compared to the second quarter of the previous fiscal year is mainly
attributable to the timing and release of request for proposals from the
Company's Government customers.
Marketing and Administrative. Marketing and Administrative expenses were $4.5
million and $4.6 million for the second quarter of fiscal 1999 and 1998,
respectively. The Company continues its active marketing in pursuit of
commercial opportunities and continues to incur legal fees primarily associated
with a patent infringement case brought by the Company in December 1996 against
Broadcom Corporation.
Operating Income. Operating income was $79 thousand and $903 thousand for the
second quarter of fiscal 1999 and 1998, respectively. The decrease in operating
income during the second quarter of fiscal 1999 compared to second quarter of
fiscal 1998 was primarily attributable to the lower margins experienced by the
Company's wireless broadband subsidiary due to the increased level of cost
associated with
<PAGE>
activities necessary to support worldwide LMDS and MMDS field trials and
increase costs associated with implementation of changes within its
manufacturing operations to support future production requirements.
Interest Income. Interest income for the second quarter of fiscal 1999 remained
unchanged at approximately $0.4 million.
Provision for Income Taxes. Provision for income taxes was $154 thousand and
$467 thousand for the second quarter of fiscal years 1999 and 1998,
respectively. This represents a provisional tax rate of 31% and 33.5% for the
second quarter of fiscal 1999 and 1998, respectively. The decrease in the
effective tax rate was primarily from increased Research and Development (R&D)
tax credits and other state income tax credits. The effective tax rate for all
of fiscal year 1998 was 31%.
Comparison of Six Months Ended September 30, 1998 and 1997
Revenues. Revenues were $85.1 million and $72.2 million for the six months ended
September 30, 1998 and 1997, respectively, representing an increase of 18%.
Government revenues during the six months of fiscal year 1999 totaled $52.4
million, an increase of 17% from Government revenues of $44.9 million recorded
during the first six months of fiscal year 1998. Commercial revenues during the
first half of fiscal 1999 totaled $32.7 million, an increase of 20% from
commercial revenues of $27.3 million recorded during the first six months of
fiscal 1998. During the first six months of fiscal 1999, revenues from the
Company's commercial contract manufacturing services totaled $15.3 million up
from $11.4 million recorded for the first half of fiscal 1998. Revenues from the
Company's other commercial activities increased by $3.5 million from the first
six months of fiscal year 1998 to fiscal year 1999 mainly attributable to the
Company's commercial systems engineering services and wireless broadband
activities. Revenues from the sale of commercial telecommunication chip and
board level products totaled $4.7 million for the first six months of fiscal
1999, down from $6.7 million achieved during the first half of the previous
fiscal year.
Cost of Revenues. Cost of revenues were $67.6 million and $53.9 million for the
first half of fiscal 1999 and 1998, respectively. The increase during the first
six months of fiscal 1999 was a result of the recognition of costs on a higher
revenue base. The increase in cost of revenues as a percentage of revenues from
the second quarter of fiscal year 1998 to the second quarter of fiscal year 1999
can be significantly attributable to the lower margin contracts associated with
field trials of LMDS and MMDS. The Company anticipates it will continue to
expend resources in support of on-going and anticipated field trials of its
wireless broadband products over the next several quarters.
Research and Development. Research and development expenses, including bid and
proposal expenses were $7.1 million and $6.9 million for the first half of
fiscal 1999 and 1998, respectively. Excluding bid and proposal expenses, the
Company's research and development expenses applied to the development of
products such as wireless broadband communications and telecommunication chip
and board level products were $6.2 million and $5.6 million for the first six
months of fiscal 1999 and 1998, respectively.
<PAGE>
Marketing and Administrative. Marketing and administrative expenses were $9.2
million and $8.9 million for the first six months of fiscal 1999 and 1998,
respectively. The Company continues its active marketing in pursuit of
commercial opportunities and continues to incur legal fees primarily associated
with a patent infringement case brought by the Company in December 1996 against
Broadcom Corporation.
Operating Income. Operating income was $1.1 million and $2.5 million for the
first half of fiscal 1999 and 1998, respectively. The decrease in operating
income during the first half of fiscal 1999 was primarily attributable to the
lower margins experienced by the Company's wireless broadband subsidiary due to
the increased level of cost associated with activities necessary to support
worldwide LMDS and MMDS field trials and increased costs associated with
implementation changes within its manufacturing operations to support future
production requirements. The Company also incurred increased R&D and increased
marketing and administrative expenses.
Interest Income. Interest income for the six months of fiscal 1999 remained
unchanged at approximately $0.9 million.
Provision for Income Taxes. Provision for income taxes was $0.6 million and $1.2
million for the first six months of fiscal years 1999 and 1998, respectively.
This represents a provisional tax rate of 31% and 33.5% for the first half of
fiscal 1999 and 1998, respectively. The decrease in the effective tax rate was
primarily from increased Research and Development (R&D) tax credits and other
state income tax credits. The effective tax rate for all of fiscal year 1998 was
31%.
Booking and Backlog
Funded bookings were $25.9 million and $40.2 million for the second quarter of
fiscal 1999 and 1998, respectively, and $68.9 million and $85.5 million for the
six months ended September 30, 1998 and 1997, respectively. Bookings were
derived from both the Company's commercial operations as well as its government
business sectors. At the end of the second quarter of fiscal 1999 and 1998,
backlog stood at $77.3 million and $97.3 million, respectively. The Company's
bookings and backlog are largely dependent upon the timing of funding by its
Government customers. The Company anticipates that the Government will provide
additional funding on several of its contracts in future quarters.
Liquidity and Capital Resources
Working capital increased from $69.8 million as of September 30, 1997 to $74.4
million as of September 30, 1998, and increased by $1.3 million from the end of
fiscal 1998. The increase is due significantly to an increase in receivables
resulting from increased revenues.
Net cash provided by operating activities for the first six months of fiscal
year 1999, was $0.3 million compared to $3.7 million for the first six months of
the previous fiscal year. This decrease is attributable to lower net income,
higher receivables, and lower inventory.
The Company utilized its cash for the purchase of property and equipment
totaling $3.1 million and $2.6 million during the first half of fiscal 1999 and
1998 respectively. At September 30, 1998 the Company's long-term obligations
(including current maturities) and other long-term liabilities totaled
approximately $.8 million compared to September 30, 1997 of $.9 million. At
September
<PAGE>
30, 1998, cash and cash equivalents of $22.8 million were substantially held in
money market accounts and short term investments of $7.9 million were held in
U.S. treasury instruments with maturities not exceeding 365 days.
During the second quarter of fiscal year 1999, the Company announced a plan to
repurchase the Company's common stock in open-market transactions. The plan
authorizes the purchase of up to 1,000,000 shares of STII Common Stock. During
the second quarter ended September 30, 1998 the Company repurchased 54,000
shares in open market transactions at an average price of $11.07 per share.
The Company has a bank credit commitment of $15.0 million that it can utilize to
augment cash flow needs and to secure standby letters of credit. Available
borrowings under this line at September 30, 1998 were $15.0 million. Under this
line of credit the Company must maintain certain financial covenants, including
a covenant prohibiting the Company from incurring a quarterly loss in any two
consecutive quarters. The Company is in compliance with all covenants throughout
the first six months of fiscal 1999. The credit agreement expires on December
18, 1998.
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 requirement for working capital, capital
expenditures and debt service for the next several fiscal quarters.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
No current Reports on Form 8-K were filed with the Securities and Exchange
Commission during the period covered by this Form 10-Q.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Stanford Telecommunications, Inc.
(Registrant)
/s/ Jerome F. Klajbor
- --------------------------------------------
Jerome F. Klajbor
Vice-President and Chief Financial Officer
(Principal Financial and Accounting Officer)
November 12, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED STATEMENT OF INCOME AND THE CONSOLIDATED BALANCE SHEET AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000725727
<NAME> Stanford Telecommunications, Inc.
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> SEP-30-1998
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<SECURITIES> 7,868
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<INVENTORY> 13,323
<CURRENT-ASSETS> 99,925
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