UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 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
------------
(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.
13,032,035 as of February 4, 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. 1998 Annual Report.
The results of operations for the nine months of fiscal year 1999 ended December
31,1998 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 OPERATIONS (UNAUDITED)
(in thousands, except per share amount)
<CAPTION>
Three Months Ended Nine Months Ended
December 31, December 31,
--------------------------- --------------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues $ 37,132 $ 40,713 $122,198 $112,881
Cost of revenues 29,858 30,778 97,499 84,673
-------- -------- -------- --------
Gross profit 7,276 9,935 24,699 28,208
Expenses
Research and development 3,363 3,814 10,489 10,712
Marketing and administrative 5,002 4,463 14,199 13,316
-------- -------- -------- --------
Total expenses 8,365 8,277 24,688 24,028
Operating (loss) income (1,089) 1,658 11 4,180
Interest income 395 502 1,296 1,453
-------- -------- -------- --------
(Loss) income before income taxes (694) 2,160 1,307 5,633
Provision (benefit) for income taxes (215) 583 405 1,746
-------- -------- -------- --------
Net (loss) income $ (479) $ 1,577 $ 902 $ 3,887
======== ======== ======== ========
Basic shares outstanding 12,974 12,926 12,981 12,886
Basic earnings (loss) per share $ (0.04) $ 0.12 $ 0.07 $ 0.30
======== ======== ======== ========
Diluted shares outstanding 12,974 13,226 13,126 13,173
Diluted earnings (loss) per share $ (0.04) $ 0.12 $ 0.07 $ 0.30
======== ======== ======== ========
<FN>
See accompanying notes
</FN>
</TABLE>
<PAGE>
<TABLE>
STANFORD TELECOMMUNICATIONS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amount)
<CAPTION>
December 31, March 31,
1998 1998
--------- ---------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 18,684 $ 13,914
Short-term investments 9,886 19,493
Accounts receivable 23,872 26,958
Unbilled receivables 25,753 20,911
Inventories 13,763 14,276
Prepaid taxes and other 4,818 1,919
--------- ---------
Total current assets 96,776 97,471
--------- ---------
Property and equipment at cost:
Electronic test equipment 49,997 46,768
Furniture and fixtures 4,053 3,887
Leasehold improvements 4,241 3,996
--------- ---------
58,291 54,651
Less: Accumulated depreciation and amortization (44,900) (40,516)
--------- ---------
Net property and equipment 13,391 14,135
--------- ---------
Other assets 818 535
--------- ---------
$ 110,985 $ 112,141
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term obligations $ 46 $ 44
Accounts payable 5,958 10,739
Advance payments from customers 2,633 1,909
Accrued liabilities 9,953 8,218
Accrued and deferred income taxes 3,402 3,462
--------- ---------
Total current liabilities 21,992 24,372
--------- ---------
Long-term obligations, less current maturities 77 41
--------- ---------
Other long-term liabilities 645 855
--------- ---------
Shareholders' equity:
Common shares - par value $.01; 25,000 shares authorized
Outstanding - 13,009 shares at December 31, 1998 130
- 12,975 shares at March 31, 1998 130
Paid-in capital 42,855 42,359
Retained earnings 45,286 44,384
--------- ---------
Total shareholders' equity 88,271 86,873
--------- ---------
$ 110,985 $ 112,141
========= =========
<FN>
See accompanying notes
</FN>
</TABLE>
<PAGE>
<TABLE>
STANFORD TELECOMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
<CAPTION>
Nine Months Ended
December 31,
----------------------------
1998 1997
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 902 $ 3,887
Adjustments to reconcile net income to net cash used in operating
activities:
Depreciation and amortization 4,747 4,303
Issuances of stock to employees under bonus and award plans 16 22
Change in provision for losses on receivables, contracts
and inventories (429) (963)
Loss on disposition of property and equipment 34 11
(Increase) decrease in assets:
Receivables billed and unbilled (1,550) (7,417)
Inventories 736 (7,527)
Prepaid taxes and other assets (2,866) 293
Increase (decrease) in liabilities:
Accounts payable, advance payments, and accrued expenses (2,237) 3,527
Other long-term liabilities (210) (90)
Accrued and deferred income taxes (60) (759)
-------- --------
Net cash used in operating activities (917) (4,713)
-------- --------
Cash flows used in investing activities:
Proceeds from maturities of short-term investments 9,607 6,853
Purchase of property and equipment (4,037) (4,520)
-------- --------
Net cash provided by investing activities 5,570 2,333
-------- --------
Cash flows from financing activities:
Payments on capital lease obligations (47) (66)
Common stock repurchases (858) --
Proceeds from transactions under stock plans 1,022 1,340
-------- --------
Net cash provided by financing activities 117 1,274
-------- --------
Net increase (decrease) in cash and cash equivalents 4,770 (1,106)
Cash and cash equivalents at beginning of period 13,914 8,235
-------- --------
Cash and cash equivalents at end of period $ 18,684 $ 7,129
======== ========
<FN>
See accompanying notes.
</FN>
</TABLE>
<PAGE>
STANFORD TELECOMMUNICATIONS, INC.
Notes to Condensed Financial Statements
(Unaudited)
December 31, 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.
The components of inventory are as follows (in thousands):
December 31, 1998 March 31, 1998
----------------- --------------
Work-in-progress $ 10,927 $ 11,176
Finished goods 2,859 3,066
Allocated general and administrative costs 87 136
Less: progress billings (110) (102)
-------- --------
$ 13,763 $ 14,276
======== ========
4. Earnings (loss) 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 nine
months of fiscal 1999 and 1998, the dilutive potential common shares were
approximately 150,000 and 308,000 respectively. Options to purchase
approximately 677,000 and 86,000 of weighted shares outstanding during the
first nine months in fiscal years 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. Loss per share is
computed using the weighted average number of common shares outstanding
during the quarter.
<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 third
quarter and the first nine months of fiscal years 1999 and 1998, the
Company's net income (loss) was equal to comprehensive income (loss) 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 nine months of fiscal year 1999,
commercial revenues amounted to approximately 37% 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.
<TABLE>
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
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
<PAGE>
table shown below provides a summary of the financial performance for the base
business operations and Stanford Wireless Broadband, Inc. for the third quarter
of fiscal 1999 and nine months ended December 31, 1998:
<CAPTION>
Three months ended Nine months ended
December 31, 1998 December 31, 1998
-------------------------------- --------------------------------
Base Stanford Base Stanford
Business Wireless Business Wireless
Operations Broadband, Inc Operations Broadband, Inc.
---------- -------------- ---------- ---------------
<S> <C> <C> <C> <C>
Revenues from unaffiliated customers $ 31,434 $ 5,698 $ 99,126 $ 23,072
Cost of revenues 23,824 6,032 75,268 22,231
-------- -------- -------- --------
Gross profit (loss) 7,610 (334) 23,858 841
Expenses
Research and development 731 2,632 2,685 7,804
Marketing and administrative 3,323 1,679 9,201 4,998
-------- -------- -------- --------
Total expenses 4,054 4,311 11,886 12,802
-------- -------- -------- --------
Operating income (loss) $ 3,556 $ (4,645) $ 11,972 $(11,961)
======== ======== ======== ========
</TABLE>
For the third quarter of fiscal year 1999, revenues for Base Business Operations
consisted of $24.0 million and $7.4 million of Government and commercial
revenues, respectively. Of the $5.7 million of revenues realized by Stanford
Wireless Broadband during the third quarter approximately $5.1 million were
derived from the subsidiary's commercial manufacturing operations. For the first
nine months of fiscal year 1999, revenues for Base Business Operations consisted
of $76.4 million and $22.7 million of Government and commercial revenues
respectively. Revenues for Stanford Wireless Broadband consisted primarily of
commercial contract manufacturing revenues amounting to $20.4 million. The
Company's wireless broadband subsidiary's operating loss for the third quarter
and the first nine months of fiscal year 1999, was 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 an operating loss associated
with the manufacturing operation.
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, 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.
<PAGE>
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 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 Company has completed the first phase
which was to identify and assess the risks of various aspects of the Y2K issue
and the second phase which was 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 end of June 1999. 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.
<PAGE>
For further information on the foregoing, reference is made to the Company's
Securities and Exchange Commission report on Form 10-K.
<TABLE>
Quarterly Results
The following table presents the Company's financial results by quarter for
fiscal 1998 and the first three 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.
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 Dec. 31
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues $ 35,331 $ 36,838 $ 40,713 $ 40,378 $ 44,362 $ 40,705 $ 37,132
Cost of revenues 26,430 27,465 30,778 31,956 34,919 32,724 29,856
-------- -------- -------- -------- -------- -------- --------
Gross profit 8,901 9,373 9,935 8,422 9,443 7,981 7,276
-------- -------- -------- -------- -------- -------- --------
Expenses:
Research and development 3,031 3,868 3,814 2,934 3,709 3,417 3,363
Marketing and administrative 4,251 4,602 4,463 4,005 4,712 4,485 5,002
-------- -------- -------- -------- -------- -------- --------
Total expenses 7,282 8,470 8,277 6,939 8,421 7,902 8,365
Operating income (loss) 1,619 903 1,658 1,483 1,022 79 (1,089)
Interest income 459 492 502 443 484 417 395
-------- -------- -------- -------- -------- -------- --------
(Loss) income before income taxes 2,078 1,395 2,160 1,926 1,506 496 (694)
(Provision) benefit for income taxes (696) (467) (583) (597) (467) (154) 215
-------- -------- -------- -------- -------- -------- --------
Net income (loss) $ 1,382 $ 928 $ 1,577 $ 1,329 $ 1,039 $ 342 $ (479)
======== ======== ======== ======== ======== ======== ========
Basic shares outstanding 12,841 12,888 12,927 12,953 12,976 12,993 12,974
Basic earnings (loss) per share $ 0.11 $ 0.07 $ 0.12 $ 0.10 $ 0.08 $ 0.03 $ (0.04)
======== ======== ======== ======== ======== ======== ========
Diluted shares outstanding 13,073 13,219 13,226 13,199 13,171 13,122 12,974
Diluted earnings (loss) per share $ 0.11 $ 0.07 $ 0.12 $ 0.10 $ 0.08 $ 0.03 $ (0.04)
======== ======== ======== ======== ======== ======== ========
</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.
<PAGE>
These requests for proposals are not received evenly during the year or in any
predictable pattern.
Comparison of the Third Quarter Ended December 31, 1998 and 1997
Revenues. Revenues were $37.1 million and $40.7 million for the third quarter of
fiscal years 1999 and 1998, respectively, representing a decrease of
approximately 9%. Government revenues during the third quarter of fiscal year
1999 totaled $24.0 million, a decrease of 6% from Government revenues of $25.4
million recorded during the third quarter of fiscal year 1998. Commercial
revenues during the third quarter of fiscal year 1999 totaled $13.1 million, a
decrease of 14% from commercial revenues of $15.3 million recorded during the
third quarter of fiscal year 1998. The decrease can be partially attributed to
the Christmas Holiday shutdown wherein the majority of the Company facilities
are closed for a week. During fiscal 1999, the shutdown occurred during the
third accounting quarter while during fiscal 1998 the shutdown occurred during
the fourth accounting quarter. The revenue decrease is also attributable to
lower revenues derived from the Company's commercial contract manufacturing
services. Revenues from commercial contract manufacturing services were $5.1
million and $7.0 million for the third quarter of fiscal years 1999 and 1998,
respectively. The sale of commercial telecommunication chip and board level
products for the third quarter of fiscal years 1999 and 1998 were $3.3 million
and $4.7 million respectively.
Cost of Revenues. Cost of revenues were $29.9 million and $30.8 million for the
third quarter of fiscal 1999 and 1998, respectively, representing a 3% decrease.
The decrease during the third quarter of fiscal 1999 was the result of the
recognition of costs on a lower revenue base. The increase in cost of revenues
as a percentage of revenues from the third quarter of fiscal year 1998 to the
third quarter of fiscal year 1999 is attributable to the Company's wireless
broadband subsidiary's lower margin contracts associated with field trials of
LMDS and MMDS and a gross loss associated with the contract manufacturing
operation. 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 a
large portion of 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 $3.8 million during the third quarter of
fiscal 1999 and 1998, respectively. Excluding bid and proposal expenses, the
Company's research and development expenses which are primarily applied to the
development of products such as wireless broadband communications were
substantially the same at $3.0 million during the third quarter of fiscal 1999
and 1998. Bid and proposal expenses were $0.4 million and $0.8 million for the
third quarter of fiscal years 1999 and 1998 respectively. The decrease in bid
and proposal expenses is mainly attributable to the timing and release of
request for proposals from the Company's Government customers. The Company
expects the level of bid and proposal to increase in the fourth quarter of
fiscal year 1999.
Marketing and Administrative. Marketing and Administrative expenses were $5.0
million and $4.5 million for the third quarter of fiscal 1999 and 1998,
respectively. The increase can be partially attributed to an increase in
marketing expenses associated with the Company's base business operations. The
increase is also attributed to the Company's active marketing in pursuit of
commercial opportunities as well as increased legal fees primarily associated
with a patent infringement case brought by the Company in December 1996 against
Broadcom Corporation. The case has been scheduled to go to trial in May of 1999.
<PAGE>
Operating Income (Loss). The Company incurred an operating loss for the third
quarter of fiscal year 1999 of $1.1 million compared to an operating income of
$1.7 million for the third quarter of fiscal year 1998. The operating loss
during the third quarter of fiscal 1999 was primarily attributable to the lower
margin contracts 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 an operating loss associated with the
manufacturing operation.
Interest Income. Interest income for the third quarter of fiscal year 1999 was
$0.4 million compared to $0.5 million for the third quarter of the previous
fiscal year. The decrease in interest income is the result of the Company
maintaining lower average balances in U.S. treasury instruments and money market
accounts.
Provision/Benefit for Income Taxes. During the third quarter of fiscal year
1999, the Company recognized a benefit for income taxes of $215 thousand as
compared to a provision for income taxes of $583 thousand for the third quarter
of fiscal year 1998. This represents a provisional tax rate of 31% and 27% for
the third quarter of fiscal 1999 and 1998, respectively. The effective tax rate
for all of fiscal year 1998 was 31%. The Company does not expect the effective
tax rate to increase over the next several quarters.
Comparison of Nine Months Ended December 31, 1998 and 1997
Revenues. Revenues were $122.2 million and $112.9 million for the nine months
ended December 31, 1998 and 1997, respectively, representing an increase of 8%.
Government revenues during the nine months of fiscal year 1999 totaled $76.4
million, an increase of 9% from Government revenues of $70.2 million recorded
during the first nine months of fiscal year 1998. Commercial revenues during the
first three quarters of fiscal 1999 totaled $45.8 million, an increase of 7%
from commercial revenues of $42.6 million recorded during the first nine months
of fiscal 1998. During the first nine months of fiscal 1999, revenues from the
Company's commercial contract manufacturing services totaled $20.4 million up
from $18.4 million recorded for the first nine months of fiscal 1998. The
Company's other commercial activities increased by $4.5 million from the first
nine 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 $8.0 million for the first nine months of fiscal
1999, down from $11.4 million achieved during the nine months of the previous
fiscal year.
Cost of Revenues. Cost of revenues were $97.5 million and $84.7 million for the
first nine months of fiscal 1999 and 1998, respectively. The increase was a
result of the recognition of costs on a higher revenue base. The increase in
cost of revenues as a percentage of revenues for the first nine months of fiscal
year 1998 to the first nine months of fiscal year 1999 can be 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 the contract manufacturing operation.
The Company anticipates it will continue to expend resources in support of
on-going and anticipated field trials of its wireless broadband products into
fiscal year 2000.
Research and Development. Research and development expenses, including bid and
proposal expenses were $10.5 million and $10.7 million for the first nine months
of fiscal 1999 and 1998,
<PAGE>
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 $9.1 million and $8.6 million for the first nine months of fiscal 1999 and
1998, respectively. Bid and proposal expenses were $1.4 million and $2.1 million
for the three quarters of fiscal years 1999 and 1998, respectively. The decrease
in bid and proposal expenses 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 $14.2
million and $13.3 million for the first nine months of fiscal 1999 and 1998,
respectively. The Company continues its active marketing in pursuit of
commercial and base business opportunities as well as increased legal fees
primarily associated with a patent infringement case brought by the Company in
December 1996 against Broadcom Corporation.
Operating Income. Operating income was $11 thousand and $4.1 million for the
first nine months of fiscal 1999 and 1998, respectively. The decrease in
operating income during the first nine months of fiscal 1999 was primarily
attributable to the operating loss sustained by the Company's wireless broadband
subsidiary.
Interest Income. Interest income for the nine months of fiscal year 1999 was
$1.3 million compared to $1.5 million recorded in the previous fiscal year. The
decrease in interest income is the result of the Company maintaining lower
average balances in U.S. treasury instruments and money market accounts.
Provision for Income Taxes. Provision for income taxes was $0.4 million and $1.7
million for the first nine months of fiscal years 1999 and 1998, respectively.
This represents a provisional tax rate of 31%.
Bookings and Backlog
Funded bookings were $40.0 million and $38.0 million for the third quarter of
fiscal 1999 and 1998, respectively, and $108.9 million and $123.5 million for
the nine months ended December 31, 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 third quarter of fiscal 1999 and 1998,
backlog stood at $80.3 million and $94.5 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 $71.4 million as of December 31, 1997 to $74.8
million as of December 31, 1998, and increased by $1.7 million from the end of
fiscal 1998. The increase is due significantly to an increase in receivables
resulting from increased revenues. Accounts receivable as of December 31, 1998,
includes a $3.6 million secured note receivable for one of the Company's
customers. Due to the customer's short-term liqudity condition, the Company
agreed to extended payment terms. The note matures in May of 1999. The Company
expects to recover the full value of the note.
<PAGE>
Net cash used in operating activities for the first nine months of fiscal year
1999, was $0.9 million compared to $4.7 million for the first nine months of the
previous fiscal year. This decrease is attributable to smaller growth in
receivables and utilization versus building of inventory.
The Company utilized its cash for the purchase of property and equipment
totaling $4.0 million and $4.5 million during the first nine months of fiscal
1999 and 1998 respectively. At December 31, 1998 the Company's long-term
obligations (including current maturities) and other long-term liabilities
totaled approximately $.7 million compared to December 31, 1997 of $.9 million.
At December 31, 1998, cash and cash equivalents of $18.7 million were
substantially held in money market accounts and short term investments of $9.9
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. Since
the authorization of this plan, the Company repurchased 84,000 shares in open
market transactions at an average price of $10.22 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 December 31, 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 nine months of fiscal 1999. The credit agreement expires on December
17, 1999.
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)
February 11, 1999
<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>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> APR-01-1998
<PERIOD-START> MAR-31-1999
<PERIOD-END> DEC-31-1998
<CASH> 18,684
<SECURITIES> 9,886
<RECEIVABLES> 49,625
<ALLOWANCES> 0
<INVENTORY> 13,763
<CURRENT-ASSETS> 96,776
<PP&E> 58,291
<DEPRECIATION> 44,900
<TOTAL-ASSETS> 110,985
<CURRENT-LIABILITIES> 21,992
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0
0
<COMMON> 130
<OTHER-SE> 88,141
<TOTAL-LIABILITY-AND-EQUITY> 110,985
<SALES> 122,198
<TOTAL-REVENUES> 122,198
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