<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________to__________________
Commission file number 001-11473
Stanford Telecommunications, Inc.
---------------------------------
(Exact name of registrant as specified in its charter)
Delaware 94-2207636
-------- ----------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
1221 Crossman Avenue, Sunnyvale, CA 94089
------------------------------------------
(Address of principal executives offices)
(Zip Code)
408/745-0818
------------
(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.
13,280,610 as of November 11, 1999
<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. 1999 Annual Report.
The results of operations for the first six months of fiscal year 2000 ended
September 30, 1999 are not necessarily indicative of results to be expected for
the entire year ending March 31, 2000.
<PAGE>
STANFORD TELECOMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30,
--------------------------- ---------------------------
1999 1998 1999 1998
--------- -------- --------- --------
<S> <C> <C> <C> <C>
Revenues
Products and services $36,503 $33,443 $74,077 69,743
Licenses --- --- 17,750 ---
------- ------- ------- -------
Total revenues $36,503 $33,443 $91,827 $69,743
Cost of revenues 28,850 25,563 60,342 52,859
------- ------- ------- -------
Gross profit 7,653 7,880 31,485 16,884
Expenses
Research and development 2,854 3,417 5,608 7,126
Marketing and administrative 4,836 3,643 10,070 7,493
------- ------- ------- -------
Total expenses 7,690 7,060 15,678 14,619
Operating income (loss) (37) 820 15,807 2,265
Interest income 538 417 931 901
------- ------- ------- -------
Income from continuing operations
before provision for income taxes 501 1,237 16,738 3,166
Provision for income taxes (155) (383) (5,188) (981)
------- ------- ------- -------
Income from continuing operations 346 854 11,550 2,185
------- ------- ------- -------
Discontinued operations
Operating loss from discontinued
operations before income tax benefits (348) (741) (1,320) (1,165)
Income tax benefits 108 229 409 361
------- ------- ------- -------
Net loss from discontinued operations (240) (512) (911) (804)
------- ------- ------- -------
Net income $ 106 $ 342 $10,639 $ 1,381
======= ======= ======= =======
Earnings per share
Shares used in computing
basic earnings per share 13,214 12,993 13,177 12,984
Basic earnings per share
Continuing operations $ 0.03 $ 0.07 $ 0.88 $ 0.17
Discontinued operations (0.02) (0.04) (0.07) (0.06)
------- ------- ------- -------
$ 0.01 $ 0.03 $ 0.81 $ 0.11
======= ======= ======= =======
Shares used in computing
diluted earnings per share 13,721 13,122 13,608 13,146
Diluted earnings per share
Continuing operations $ 0.03 $ 0.07 $ 0.85 $ 0.17
Discontinued operations (0.02) (0.04) (0.07) (0.06)
------- ------- ------- -------
$ 0.01 $ 0.03 $ 0.78 $ 0.11
======= ======= ======= =======
</TABLE>
See accompanying notes
<PAGE>
STANFORD TELECOMMUNICATIONS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amount)
<TABLE>
<CAPTION>
ASSETS September 30, March 31,
1999 1999
-------------- ----------
Current assets: (Unaudited)
<S> <C> <C>
Cash and cash equivalents $ 7,767 $ 19,400
Short-term investments 29,149 9,934
Accounts receivable 21,966 25,414
Unbilled receivables 24,825 23,955
Inventories, net of related progress billings 6,494 6,782
Prepaid taxes and other 9,843 3,859
-------- ---------
Total current assets 100,044 89,344
-------- ---------
Property and equipment at cost:
Electronic test equipment 44,114 43,740
Furniture and fixtures 4,169 3,584
Leasehold improvements 4,613 4,472
-------- ---------
52,896 51,796
Less: Accumulated depreciation and amortization (42,664) (41,327)
-------- ---------
Net property and equipment 10,232 10,469
-------- ---------
Other assets 832 1,087
-------- ---------
Net assets of discontinued operation 8,164 12,089
-------- ---------
$119,272 $112,989
======== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term obligations $ 28 $ 40
Accounts payable 4,407 9,276
Advance payments from customers 1,649 2,051
Accrued liabilities 6,572 7,567
Accrued income taxes 3,685 3,961
-------- ---------
Total current liabilities 16,341 22,895
-------- ---------
Long-term obligations, less current maturities 62 73
-------- ---------
Other long-term liabilities 485 592
-------- ---------
Shareholders' equity:
Common shares - par value $.01; 25,000 shares authorized
Outstanding - 13,264 shares at September 30, 1999 133 131
- 13,067 shares at March 31, 1999
Paid-in capital 45,887 43,573
Retained earnings 56,364 45,725
-------- ---------
Total shareholders' equity 102,384 89,429
-------- ---------
$119,272 $112,989
======== =========
</TABLE>
See accompanying notes.
<PAGE>
STANFORD TELECOMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
<TABLE>
<CAPTION>
Six Months Ended
September 30,
--------------------
Operating activities: 1999 1998
--------- ---------
<S> <C> <C>
Income from continuing operations $ 11,550 $ 2,185
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 2,557 1,748
Issuances of stock to employees under award plans 24 9
Change in provision for losses on receivables, contracts and inventories 1,319 (520)
Loss on disposition of property and equipment 18 44
(Increase) decrease in assets:
Receivables billed and unbilled 2,027 (3,798)
Inventories (480) (692
Prepaid taxes and other assets (5,729) (2,837)
Increase (decrease) in liabilities:
Accounts payable, advance payments, and accrued liabilities (6,266) (128)
Other long-term liabilities (107) (160)
Accrued income taxes (276) 894
-------- --------
Net cash provided by (used in) operating activities 4,637 (3,255)
-------- --------
Investing activities:
Proceeds from maturities of short-term investments 9,934 25,363
Purchases of short-term investments (29,149) (13,738)
Purchases of property and equipment (2,338) (3,078)
-------- --------
Net cash (used in) provided by investing activities (21,553) 8,547
-------- --------
Financing activities:
Payments on capital lease obligations (23) (33)
Common stock repurchases 0 (598)
Proceeds from transactions under stock plans 2,292 712
-------- --------
Net cash provided by financing activities 2,269 81
-------- --------
Net (decrease) increase in cash and cash equivalents (14,647) 5,373
Net increase in cash and cash equivalents from discontinued operations 3,014 3,506
-------- --------
Cash and cash equivalents at beginning of period 19,400 13,914
-------- --------
Cash and cash equivalents at end of period $ 7,767 $ 22,793
======== ========
</TABLE>
See accompanying notes.
<PAGE>
STANFORD TELECOMMUNICATIONS, INC.
Notes to Condensed Consolidated Interim Financial Statements
(Unaudited)
September 30, 1999
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, 2000 is comprised
of four 13-week quarters. Fiscal year ended March 31, 1999 was comprised of
one 14-week quarter (quarter ended June 30, 1998) and three 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.
The components of inventory of continuing operations are as follows (in
thousands):
<TABLE>
<CAPTION>
September 30, 1999 March 31, 1999
------------------- ---------------
<S> <C> <C>
Work-in-progress $ 3,257 $ 4,059
Finished goods 3,209 2,696
Allocated general and administrative costs 105 83
Less: progress billings (77) (56)
------- -------
$ 6,494 $ 6,782
======= =======
</TABLE>
4. Earnings per share: Basic earnings per share (EPS) is computed by dividing
net income by the weighted average number of common shares outstanding.
Diluted EPS is computed by dividing net income by the diluted weighted
average number of common shares outstanding. Diluted EPS reflects the
potential dilution that could occur upon exercise of outstanding stock
options.
The following is a summary of the calculation of the number of shares used
in calculating basic and diluted EPS (in thousands):
<TABLE>
<CAPTION>
Second Quarter Second Quarter Six months ending Six months ending
-------------- -------------- ------------------ ------------------
of FY 2000 of FY 1999 September 30, 1999 September 30, 1998
---------- ---------- ------------------ ------------------
<S> <C> <C> <C> <C>
Shares used to compute basic EPS 13,214 12,993 13,177 12,984
Add effect of dilutive securities:
Stock options 507 129 431 162
------ ------ ------ ------
Shares used to compute diluted EPS 13,721 13,122 13,608 13,146
====== ====== ====== ======
</TABLE>
Options to purchase approximately 5,000 and 686,000 weighted shares
outstanding during the first six months of fiscal years 2000 and 1999
respectively were excluded from the computation of diluted EPS because the
options' exercise prices were greater than the average market price of the
Company's common stock during those periods.
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 first six months of fiscal years 2000 and 1999, the
Company's net income was equal to comprehensive income as defined in SFAS
130.
6. Segment reporting: On March 31, 1999 Stanford Telecommunications, Inc.
adopted statement of Financial Accounting Standard (SFAS) Number 131
"Disclosures about segments of an Enterprise and Related Information." SFAS
131 establishes standards for
<PAGE>
public companies relating to the reporting of financial and descriptive
information about their operating segments in financial statements.
Operating segments are defined as components of an enterprise about which
separate financial information is available that is evaluated regularly by
the chief operating decision-maker when deciding how to allocate resources
and when assessing performance. The Company's chief operating decision
making group is the Executive Staff, which is comprised of the Chief
Executive Officer and Executive Vice Presidents. The adoption of SFAS 131
did not have a material effect on the company's primary financial
statements, but has expanded the disclosure of segment information
contained elsewhere herein.
The Company classifies its business into two reportable segments: Base
Business and Wireless Broadband. The Base Business segment primarily
includes multi-year hardware and software engineering services for data and
voice communications. The primary customer for the Base Business segment is
the U.S. Government, however, 30.5% of the revenues during the first six
months of fiscal year 2000 were derived from the sale of commercial
products and services including $17.8 million of licensing fees for certain
patents and products associated with the Company's cable modem technology.
The Wireless Broadband segment develops and produces hardware for broadband
wireless applications for the two-way, high-speed transmission of voice and
data.
Information as to the operation of the company in different business
segments is set forth below based on the nature of the products and
services offered. The company evaluates performances based on several
functions of which the primary financial measure is business segment
operating income. The accounting polices of the segments are the same as
those described in the summary of significant accounting policies within
the notes within the consolidated financial statements. Intersegment sales
are generally accounted for at cost.
The following summarize selected financial information of continuing
operations by segment:
<TABLE>
<CAPTION>
Non Segment
Operating Segments Base Wireless Property &
------------------ Business Broadband Equipment Total
(in thousands) -------- --------- --------- -----
<S> <C> <C> <C> <C>
September 30, 1999
Revenues before elimination $90,892 $ 3,274 $94,166
Revenues-Other segments (2,339) -- (2,339)
Revenues-Unaffiliated customers 88,553 3,274 91,827
Operating Income (loss) 22,095 (6,288) 15,807
Net Property and Equipment 7,731 1,992 $509 10,232
Capital Expenditures 1,631 653 54 2,338
September 30, 1998
Revenues before elimination 69,487 2,050 71,537
Revenues-Other segments (1,794) -- (1,794)
Revenues-Unaffiliated customers 67,693 2,050 69,743
Operating Income (loss) 8,416 (6,151) 2,265
Net Property and Equipment 8,379 2,306 726 11,411
Capital Expenditures $ 1,697 $ 847 $534 $ 3,078
</TABLE>
The Company's assets are located in the United States. Through September
30, 1999, the Company has derived its revenues primarily from customers
located in the United States.
7. On June 22, 1999 the Company entered into an agreement and plan of merger
with Newbridge Networks Corporation, a Canadian corporation ("Newbridge"),
which provides for the acquisition of the Company by Newbridge in a tax-
free, stock-for-stock exchange valued at approximately $490 million. On
November 10, 1999 the board of directors of Newbridge Networks and Stanford
Telecommunications approved a renegotiated agreement and plan of merger by
which Newbridge will purchase all of the outstanding common stock of
Stanford Telecom. Under the agreement, Newbridge will pay Stanford Telecom
stockholders US$34.22 for each common stock of Stanford Telecom. Newbridge
will be withdrawing its registration statement and not issuing any
additional shares. Newbridge will pay for the acquisition from its existing
cash balance.
<PAGE>
Consummation of the merger is subject to approval by the Company's
stockholders at a special meeting of Stanford Telecom shareholders
scheduled for the second week of December 1999. The exact date will be
announced once regulatory authorities clear the proxy statement.
Pursuant to the merger agreement, the Company has granted Newbridge an
option to acquire a non-exclusive license to the Company's wireless
broadband technology (the "Technology Option Agreement"), which option
would be exercisable at $69 million if a third party acquired control of
the Company. Also pursuant to the merger agreement, the Company has granted
Newbridge an option to purchase shares of the Company's common stock equal
to 19.9% of its issued and outstanding common stock at the time the option
becomes exercisable (the "Stock Option Agreement"). The option becomes
exercisable only in specified circumstances that could result in
termination of the merger agreement. The option has an exercise price of
$35 per share.
Certain officers and directors of the Company have entered into voting
agreements with Newbridge providing that they will vote, in their capacity
as stockholders, in favor of the adoption of the merger agreement and
approval of the merger.
The foregoing summaries of the Merger Agreement, Technology Option
Agreement, Stock Option agreement and Voting Agreements are not complete
and are qualified in their entirety by reference to the Agreements. Copies
of the Merger Agreement are filed in Form 8-K.
8. On September 22, 1999 the Company entered into a definitive asset purchase
agreement (the "ITT Agreement") with ITT Industries, Inc., an Indiana
corporation. Pursuant to the ITT Agreement, ITT will purchase substantially
all of the assets of Stanford Telecom's government business for $191
million in cash, subject to adjustment for an increase or decrease in the
net book value of the assets and liabilities of the government business
between March 31, 1999 and the closing, which is expected to take place in
December 1999. Completion of the Asset Purchase is subject to the
satisfaction of certain conditions, including the expiration or termination
of the waiting period under the Hart-Scott-Rodino Antitrust Improvements
Act of 1976, approval of the Asset Purchase by the stockholders of Stanford
Telecom and consummation of the pending merger with Newbridge Networks
Corporation.
9. Subsequent events - On October 26, 1999 the Company entered into a
definitive asset purchase agreement (the "DII Agreement") with the Dii
Group, Inc. of Colorado. Pursuant to the DII Agreement, DII will purchase
substantially all of the assets of Stanford Wireless Broadband's contract
manufacturing business ("MQA") and associated supply agreement with
Newbridge Networks. The DII agreement was completed on October 29,
1999.Accordingly, because the disposition plans were finalized before the
Company's Form 10Q was filed for the second quarter, the Company's
consolidated condensed financial statements and notes included herein
reflect MQA business as a discontinued operation in accordance with
Accounting Principle Board Opinion No. 30.
<PAGE>
Net revenue and loss from MQA operation, which include results through
September 30, 1999, are summarized below. The sale of the MQA operation is
expected to exceed the net asset value of the discontinued operation.
<TABLE>
<CAPTION>
Three months ending Six months ending
September 30, September 30,
------------- -------------
(in thousands) 1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Revenues $5,145 $7,262 $10,817 $15,324
Operating loss (348) (741) (1,320) (1,165)
------ ------ ------- -------
Income tax benefits 108 229 409 361
------ ------ ------- -------
Net loss from discontinued operations,
net of tax $ (240) $ (512) $ (911) $ (804)
====== ====== ======= =======
</TABLE>
Net assets of discontinued operation as of September 30, 1999 and March 31,
199 are summarized below:
<TABLE>
<CAPTION>
(in thousands) September 30, 1999 March 31, 1999
<S> <C> <C>
Assets:
Total current assets $10,055 $11,967
Net property and equipment 1,582 2,196
Liabilities:
Total current liabilities (3,470) (2,071)
Long term obligations (3) (3)
------- -------
Net assets of discontinued operations $ 8,164 $12,089
======= =======
</TABLE>
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. During the first six months of
fiscal year 2000, commercial revenues amounted to approximately 34% of the total
revenues reported. These commercial revenues include approximately $17.8 million
in licensing fees for certain patents and products associated with the Company's
cable modem technology. The Company includes in commercial revenues sales of
standard or off-the-shelf products to any customers, including government
customers.
<PAGE>
On October 26, 1999 the Company entered into a definitive asset purchase
agreement (the "DII Agreement") with the Dii Group, Inc. of Colorado. Pursuant
to the DII Agreement, DII will purchase substantially all of the assets of
Stanford Wireless Broadband's contract manufacturing business ("MQA") and
associated supply agreement with Newbridge Networks. The DII agreement was
completed on October 29, 1999.Accordingly, because the disposition plans were
finalized before the Company's Form 10Q was filed for the second quarter, the
Company's consolidated condensed financial statements and notes included herein
reflect MQA business as a discontinued operation in accordance with Accounting
Principle Board Opinion No. 30.
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 that have included significant software and
hardware development. The Company has instituted 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.
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.
PARENT-SUBSIDIARY OVERVIEW
- --------------------------
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. During the first six months of fiscal year 2000, the Company
delivered initial LMDS/MMDS production units and anticipates that production
revenues will continue to increase as the demand in the broadband wireless
market materializes. 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
<PAGE>
establishment of the subsidiary allows the Company's wireless broadband
customers the benefit of working with a unique and separate entity dedicated to
the broadband family of products. The table shown below provides a summary of
the financial performance for the continuing operations in the base business
operations and Stanford Wireless Broadband, Inc. for the second quarters and six
months of fiscal years 2000 and 1999:
<TABLE>
<CAPTION>
Three months ended Three months ended
September 30, 1999 September 30,1998
Base Stanford Base Stanford
Business Wireless Business Wireless
(in thousands) Operations Broadband, Inc Operations Broadband, Inc.
Revenues from unaffiliated customers FY2000 FY2000 FY1999 FY1999
------ ------ ------ ------
<S> <C> <C> <C> <C>
Products and services $34,797 $ 1,706 $32,883 $ 560
Licenses --- --- --- ---
------- ------- ------- -------
Total revenues $34,797 $ 1,706 $32,883 $ 560
------- ------- ------- -------
Cost of revenues 26,231 2,619 24,783 780
------- ------- ------- -------
Gross profit 8,566 (913) 8,100 (220)
Expenses
Research and development 1,684 1,170 964 2,453
Marketing and administrative 3,962 874 2,820 823
------- ------- ------- -------
Total expenses 5,646 2,044 3,784 3,276
------- ------- ------- -------
Operating income (loss) $ 2,920 $(2,957) $ 4,316 $(3,496)
======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
Six months ended Six months ended
September 30, 1999 September 30,1998
Base Stanford Base Stanford
Business Wireless Business Wireless
(in thousands) Operations Broadband, Inc Operations Broadband, Inc.
Revenues from unaffiliated customers FY2000 FY2000 FY1999 FY1999
------ ------ ------ ------
<S> <C> <C> <C> <C>
Products and services $70,803 $ 3,274 $67,693 $ 2,050
Licenses 17,750 --- --- ---
------- ------- ------- -------
Total revenues $88,553 $ 3,274 $67,693 $ 2,050
------- ------- ------- -------
Cost of revenues 54,913 5,429 51,445 1,414
------- ------- ------- -------
Gross profit 33,640 (2,155) 16,248 636
Expenses
Research and development 3,010 2,598 1,954 5,172
Marketing and administrative 8,535 1,535 5,878 1,615
------- ------- ------- -------
Total expenses 11,545 4,133 7,832 6,787
------- ------- ------- -------
Operating income (loss) $22,095 $(6,288) $ 8,416 $(6,151)
======= ======= ======= =======
</TABLE>
For the second quarter of fiscal year 2000, revenues for Base Business
Operations consisted of $29.4 million and $5.4 million of Government and
commercial revenues, respectively. For the first six months of fiscal year 2000,
revenues of the Base Business operations consisted of $70.8 and $17.8 million
products/services and licensing fees, respectively. The $70.8 million of
revenues realized by the Base Business Operations products and services
consisted of $60.6 million and $10.2 million of Government and commercial
revenues, respectively. The Company's wireless broadband subsidiary operating
loss for the second quarter and the first six months of fiscal year 2000, was
attributable to lower margins on the initial LMDS product deliveries. Operating
income for the base business segment of $22.1 million was primarily derived from
$17.8 million in licensing fees for certain patents and products associated with
the Company's cable modem technology.
<PAGE>
Comparison of the Second Quarter Ended September 30, 1999 and 1998 for
- ----------------------------------------------------------------------
continuing operations
- ---------------------
Revenues. Revenues from continuing operations of the Company were $36.5 million
and $33.4 million for the second quarter of fiscal years 2000 and 1999,
respectively. Base business operations revenues increased by 6% from $32.8
million in the second quarter of fiscal year 1999 to $34.8 million in the second
quarter of fiscal year 2000. The increase in revenues for the Base Business
operations was primarily the result of a 20% increase in Government revenues
from $24.4 million recorded in the second quarter of fiscal year 1999 to $29.4
million for the second quarter of fiscal year 2000. This increase in Government
revenues was offset by a decrease in Base Business operations commercial
revenues mainly in the commercial systems engineering services. The Wireless
Broadband operations revenues increased from $0.6 million in the second quarter
of fiscal 1999 to $1.7 million in the second quarter of fiscal year 2000 mainly
due to the shipment of $1.1 million of LMDS production hardware.
Cost of Revenues. Cost of revenues of continuing operations were $28.9 million
and $25.6 million for the second quarter of fiscal year 2000 and 1999,
respectively. The Base Business segment increase in cost of revenues during the
second quarter of fiscal year 2000 was the result of the recognition of costs on
a higher revenue base. The continuing operations of the Wireless Broadband
operations increase in the cost of revenues second quarter of fiscal year 2000
was the result of recognition of costs on a higher revenue base and higher cost
of goods associated with LMDS production units.
Research and Development. Research and development expenses of continuing
operations, including bid and proposal expenses, were $2.8 million and $3.4
million during the second quarter of fiscal years 2000 and 1999, respectively.
Excluding bid and proposal expenses, the Company's research and development
applied to the development of its products was $2.3 million and $3.0 million
during the second quarter of fiscal years 2000 and 1999, respectively. The
decrease in research and development is mainly attributable to a decrease in
expenses within the continuing operations of Wireless Broadband operations as
the LMDS/MMDS products transition from development to production. Base Business
segment research and development, including bid and proposal expenses, increased
from $1.0 million in the second quarter of fiscal year 1999 to $1.7 million in
the second quarter of fiscal year 2000. The increase in expenses is attributable
to higher levels of expenditures in both research and development and bid and
proposals associated with the Base Business segment. The Company anticipates
that bid and proposal expenses in each of the remaining two quarters of fiscal
year 2000 will be approximately equal to the expense for the second quarter of
fiscal year 2000 as the Company continues to pursue Government related business
opportunities in the Base Business operations.
Marketing and Administrative. Marketing and administrative expenses of
continuing operations were $4.8 million and $3.6 million for the second quarter
of fiscal year 2000 and 1999, respectively. The $1.1 million increase in
expenses from the second quarter of fiscal year 1999 to the second quarter of
fiscal year 2000 in the Base Business operations was primarily the result of
increased legal, consulting and other expenses associated with the merger and
increased marketing expenses in pursuit of Government business. Marketing and
administrative expenses for the Wireless Broadband operations for the second
quarter of fiscal year 2000 were substantially equal to the expenses recorded in
the second quarter of fiscal year 1999.
Operating Income. The Company recorded an operating loss from continuing
operations of $37 thousand for the second quarter of fiscal year 2000 compared
to an operating income of $0.8 million for the second quarter of fiscal year
1999. The overall decrease in operating income was primarily due to a $1.9
million increase in marketing, administrative and research and development
expenses in the Base Business operations in the second quarter of fiscal year
2000 offset partially by a $1.2 million reduction in research and development
expenses in the Wireless Broadband operations.
<PAGE>
Interest Income. Interest income for the second quarter of fiscal 2000 increased
to $0.5 million compared to $0.4 million of the second quarter of the previous
fiscal year due to an increase in cash accounts primarily due to licensing fee
received in the first quarter of fiscal year 2000.
Provision for Income Taxes. For continuing operations, provision for income
taxes was $0.2 million and $0.4 million for the second quarter of fiscal years
2000 and 1999, respectively. Discontinued operations had tax benefits of $0.1
and $0.2 for the second quarter of fiscal years 2000 and 1999, respectively.
These represent a provisional tax rates of 31.0% for the second quarter of
fiscal years 2000 and 1999.
Comparison of Six Months Ended September 30, 1999 and 1998 for continuing
- -------------------------------------------------------------------------
operations
- ----------
Revenues. Revenues were $91.8 million and $69.7 million for the six months ended
September 30, 1999 and 1998, respectively, representing an increase of 32%. Base
business operations revenues increased by 31% from $67.7 million in the first
six months of fiscal year 1999 to $88.5 million in the first six months of
fiscal year 2000. The increase in revenues for the Base Business operations was
primarily the result of $17.8 million in licensing fee, and the sale of
commercial telecommunication chip and board level products totaled $8.3 million
for the first six months of fiscal 2000, up from $4.7 million achieved during
the first half of the previous fiscal year. This increase was significantly
offset by a $6.0 million decrease in commercial engineering services. The
Wireless Broadband operations revenues increased from $2.0 million in the first
six months of fiscal 1999 to $3.2 million in the first six months of fiscal 2000
mainly due to the second quarter shipment of $1.1 million of LMDS production
hardware.
Cost of Revenues. Cost of revenues were $60.3 million and $52.9 million for the
first half of fiscal 2000 and 1999, respectively. Base Business operations
recorded cost of revenues of $54.9 million and $51.4 million for the first six
months of fiscal year 2000 and 1999, respectively. The Base Business operations
increase in cost of revenues during the first six months of fiscal year 2000 was
the result of the recognition of costs on a higher revenue base. The Wireless
Broadband operations increase in the cost of revenues in the first six months of
fiscal year 2000 was the result of recognition of costs on a higher revenue base
and higher cost of goods associated with initial LMDS production units.
Research and Development. Research and development expenses, including bid and
proposal expenses were $5.6 million and $7.1 million for the first half of
fiscal 2000 and 1999, 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 $4.4 million and $6.2 million for the first six
months of fiscal 2000 and 1999, respectively. The decrease in research and
development is mainly attributable to a decrease in expenses within the Wireless
Broadband operations as the LMDS/MMDS products transition from development to
production. Base Business operations research and development expenses increased
from $2.0 million in the first half of fiscal year 1999 to $3.0 million in the
first half of fiscal year 2000. The increase in expenses is attributable to
higher levels of expenditures in both research and development and bid and
proposals associated with the Government related opportunities in the Base
Business operations.
Marketing and Administrative. Marketing and administrative expenses were $10.1
million and $7.5 million for the first six months of fiscal 2000 and 1999,
respectively. The increase in cost was primarily in the Base Business operations
as a result of increased legal expenses associated with a patent infringement
case brought by the Company against Broadcom Corporation and legal, consulting
and other expenses related to the merger and increased marketing expenses in
pursuit of Government business. The patent infringement case was settled during
the latter part of the first quarter of fiscal 2000. Marketing and
administrative expenses for the Wireless Broadband operations for the first six
months of fiscal year 2000 were substantially equal to the expenses recorded in
the first six months of fiscal year 1999.
Operating Income. Operating income was $15.8 million and $2.3 million for the
first half of fiscal 2000 and 1999, respectively. The increase in operating
income was primarily the result of
<PAGE>
recording $17.8 million in license fees for certain patents associated with the
Base Business operations' cable modem technology offset by increased costs in
marketing and administrative expenses.
Interest Income. Interest income for the six months of fiscal 2000 remained
unchanged at approximately $0.9 million.
Provision for Income Taxes. For continuing operations, provision for income
taxes was $5.2 million and $1.0 million for the first half of fiscal years 2000
and 1999, respectively. Discontinued operations had tax benefits of $0.4 for the
first half of both fiscal years 2000 and 1999. These represent a provisional tax
rates of 31.0% for the first half of fiscal year 2000 and 1999.
Bookings and Backlog
- --------------------
Funded bookings of continuing operations were $36.4 million and $22.3 million
for the second quarter of fiscal 2000 and 1999, respectively, and $91.1 million
and $57.3 million for the six months ended September 30, 1999 and 1998,
respectively. Bookings were derived from both the Company's commercial
operations as well as its government business operations. At the end of the
second quarter of fiscal 2000 and 1999, backlog stood at $89.9 million and $66.9
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 $66.4 million to $83.7 million at March 31, 1999
and September 30, 1999, respectively. The increase in working capital is
attributable to cash generated from net income related to the revenues for
licensing fees for certain patents and products associated with its cable modem
technology. Licensing fees recognized during the first half of fiscal year 2000,
totaled $17.8 million.
During the first six months ending September 30, 1999 $4.6 million of cash was
provided by continuing operations compared to cash used in continuing operating
activities of $3.2 million during the first six months ending September 30,
1998. This increase resulted from the licensing fees collected and the decrease
in accounts receivable partly offset by estimated tax payments and reduced
accounts payable. The decrease in accounts receivable is related to the payment
of $2.5 million against a $3.9 million secured note receivable. Accounts
receivable as of September 30, 1999 includes the unpaid balance of $1.4 million
against this secured note. The Company expects to recover the full value of the
note receivable. Discontinued operations generated approximately $3.0 million
for the first six months of fiscal years 2000 and 1999.
The Company has a bank credit commitment of $15.0 million, which it has used to
augment cash flow needs and to secure term loans or standby letters of credit.
Available borrowings under this line at September 30, 1999, were $15.0 million.
Under this credit line, the Company must maintain certain financial covenants.
The Company was in compliance with all covenants throughout fiscal year 1999 and
the first six months of fiscal year 2000. At September 30, 1999, the Company's
long-term obligations (including current maturities) and capital lease
obligations totaled approximately $0.1 million. At September 30, 1999, cash and
cash equivalents of $7.8 million were held in money market accounts. In
addition, short-term investments of $29.1 million were held in U.S. Government
Treasury securities.
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
expenditure and debt service for this fiscal year.
<PAGE>
Year 2000 Issues
- ----------------
In March 1998, the Company's Corporate Steering Committee implemented a
remediation plan to address mission-critical software (mission-critical is
defined as software of systems that can seriously impair the Company's ability
to conduct its business) and products impacted by the Y2K issue. This plan
included Information Technology "IT" systems, as well as "non-IT" systems such
as building security systems. The Company's IT system is compliant and currently
operating without any significant problems for the Company's fiscal year 2000,
which commenced on April 2, 1999. Other mission-critical software has been
tested or is in the process of being tested, updated or replaced. This was the
first two phases of the Company's plan. At this time, the costs associated with
these phases have been less than $100,000, and software that has been replaced
has been done so in conjunction with planned changes not in connection with the
Y2K issue.
The third phase of the Company's plan involves the assessment of its products
that might be impacted by the Y2K issue. At this time, 96% of the Company's
products over the last 10 years have been reviewed. The remaining 4% are being
reviewed, as well as the Company's current products. Based upon the Company's
assessment of these products the Company estimates that it will complete this
review by the end of November 1999.
The final phase of the Company's plan is to draft and put into effect any
contingency plan necessary to mitigate any Y2K issues. The Company has completed
its contingency plan for its primary IT systems and expects to complete, if
necessary any other contingency plans during November 1999. This phase is to be
completed by the end of November 1999.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's interest income is sensitive to changes in the general level of
U.S. interest rates, particularly since the majority of the Company's
investments are in short-term instruments. Due to the nature of the short-term
investments, the Company has concluded that there is no material interest rate
risk exposure. Therefore, no quantitative tabular disclosures are required.
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
No. Description
--- -----------
2.1 Agreement and Plan of Merger, dated as of June 22, 1999, by and
between Stanford Telecom, Newbridge Networks Corporation and
Saturn
<PAGE>
Acquisition Corp. (incorporated by reference from the Current
Report on Form 8-K dated June 22, 1999, filed on June 25, 1999)
2.2 Asset Purchase Agreement, dated as of September 22, 1999 by and
between Stanford Telecom and ITT Industries, Inc., (incorporated
by reference from the Current Report on Form 8-K dated September
22, 1999, filed on September 28, 1999)
3.1 Certificate of Incorporation, as amended (incorporated by
reference from the Quarterly Report on Form 10-Q for the fiscal
quarter ended June 30, 1999)
3.2 Bylaws, as amended (incorporated by reference from the Annual
Report on Form 10-K for the fiscal year ended March 31, 1999)
27.1 Financial Data Schedule
(b) Reports on Form 8-K
A current report on Form 8-K dated September 22, 1999, relating to the
Asset Purchase Agreement entered into by the Company with ITT Industries,
Inc., which provides for the sale of the Company's government business
assets, was filed by the Company with the Securities and Exchange
Commission on September 28, 1999. Information regarding the Asset Purchase
Agreement was reported in the Form 8-K under Items 5 and 7. No financial
statements were filed with the Current Report.
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, 1999
<PAGE>
EXHIBIT INDEX
No. Description
--- -----------
2.1 Agreement and Plan of Merger, dated as of June 22, 1999, by and
between Stanford Telecom, Newbridge Networks Corporation and
Saturn Acquisition Corp. (incorporated by reference from the
Current Report on Form 8-K dated June 22, 1999, filed on June 25,
1999)
2.2 Asset Purchase Agreement, dated as of September 22, 1999 by and
between Stanford Telecom and ITT Industries, Inc., (incorporated
by reference from the Current Report on Form 8-K dated September
22, 1999, filed on September 28, 1999)
3.1 Certificate of Incorporation, as amended (incorporated by
reference from the Quarterly Report on Form 10-Q for the fiscal
quarter ended June 30, 1999)
3.2 Bylaws, as amended (incorporated by reference from the Annual
Report on Form 10-K for the fiscal year ended March 31, 1999)
27.1 Financial Data Schedule
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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>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> APR-01-1999
<PERIOD-START> MAR-31-2000
<PERIOD-END> SEP-30-1999
<CASH> 7,767
<SECURITIES> 29,149
<RECEIVABLES> 46,791
<ALLOWANCES> 0
<INVENTORY> 6,006
<CURRENT-ASSETS> 100,044
<PP&E> 52,890
<DEPRECIATION> 42,664
<TOTAL-ASSETS> 119,272
<CURRENT-LIABILITIES> 16,341
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0
0
<COMMON> 133
<OTHER-SE> 102,251
<TOTAL-LIABILITY-AND-EQUITY> 119,272
<SALES> 91,827
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<CGS> 60,342
<TOTAL-COSTS> 76,020
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