-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, FpJ31SXVM7VPB2bZql7kvdLuXUl6SyEnLDfDIfPDZ95A9K2r1/u5xXRhT9scDzkY s9eR40kqjicpzGydIn11xA== 0000912057-95-004899.txt : 199506280000912057-95-004899.hdr.sgml : 19950628 ACCESSION NUMBER: 0000912057-95-004899 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19950331 FILED AS OF DATE: 19950627 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: STANFORD TELECOMMUNICATIONS INC CENTRAL INDEX KEY: 0000725727 STANDARD INDUSTRIAL CLASSIFICATION: RADIO & TV BROADCASTING & COMMUNICATIONS EQUIPMENT [3663] IRS NUMBER: 942207636 STATE OF INCORPORATION: DE FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-11473 FILM NUMBER: 95549646 BUSINESS ADDRESS: STREET 1: 1221 CROSSMAN AVENUE CITY: SUNNYVALE STATE: CA ZIP: 94089 BUSINESS PHONE: 4087450818 MAIL ADDRESS: STREET 1: 221 CROSSMAN AVENUE CITY: SUNNYVALE STATE: CA ZIP: 94088-3733 10-K 1 FORM 10-K ____________________________________________________________________________ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ____________________________________________________________________________ FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] For the fiscal year ended March 31, 1995 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period from to ------- ----- Commission file number 0-12734 STANFORD TELECOMMUNICATIONS, INC. (Exact name of registrant as specified in its charter) Delaware 94-2207636 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1221 Crossman Avenue 94089 Sunnyvale, California (Zip Code) (Address of principal executive offices) Registrant's telephone number, including area code: (408) 745-0818 Securities registered pursuant to section 12(b) of the Act: None Securities registered pursuant to section 12(g) of the Act: Common Stock Common Stock Purchase Rights (Title of Class) Indicate by check mark whether the registrant (l) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ---- ---- [X] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendments to this Form 10-K. As of May 1, 1995, the aggregate market value of voting stock held by non- affiliates of the registrant, based on the closing sale price of such stock on the National Market System as reported by NASDAQ, was $42,486,461. Shares of Common Stock held by each officer, director and ten percent stockholder of the registrant have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes. The number of shares of the Company's Common Stock outstanding on May 1, 1995 was 6,233,973. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Annual Report to Stockholders for the fiscal year ended March 31, 1995 (the "Annual Report to Stockholders") are incorporated in Parts II and IV. Portions of the proxy statement for the Annual Meeting of Stockholders to be held on June 28, 1995 (the "Proxy Statement") are incorporated by reference in Part III. PART I ITEM 1. BUSINESS Stanford Telecommunications, Inc. (the "Company") was incorporated in California in 1973 and reincorporated in Delaware in 1988. The Company designs, develops, manufactures, markets and supports advanced digital telecommunications systems and products for agencies of the U.S. Government and an increasing number of commercial customers. These systems and products are used in the areas of satellite communications, navigation and tracking, and wireless and digital cable telecommunications. The Company also provides network management and systems engineering services for many major government and commercial satellite programs. Stanford Telecom's systems, products and services utilize its advanced digital telecommunications technologies in a wide variety of applications, including TDMA and spread spectrum satellite communications, air traffic control, GPS instrumentation, wireless telephony and digital cable telecommunications. Principle business areas of the Company include: SATELLITE COMMUNICATIONS GROUND-BASED SYSTEMS: digital telecommunications systems for satellite communications, including ground terminals, satellite tracking and test equipment, and satellite transmission and receiving systems using TDMA, spread spectrum and other advanced technologies; secure voice digital interfaces; very small aperture terminal ("VSAT") receivers, and multiband SATCOM systems. NETWORK MANAGEMENT: network management systems; software, support and systems engineering for satellite communications; satellite signal monitoring and analysis systems. NAVIGATION AND TRACKING FAA air traffic control modernization and systems engineering; GPS instrumentation and equipment; systems for vehicle tracking and information services. WIRELESS AND DIGITAL CABLE Wireless telephony and digital cable telecommunications products for commercial applications, including voice and data over CATV, direct broadcast television, high-speed wireless LANs, and ASICs for digital signal processing telecommunications applications. -1- PRODUCTS, SYSTEMS, AND SERVICES. SATELLITE COMMUNICATIONS Applications related to digital satellite communications have been the major component of Stanford Telecom's business since its inception. The Company provides its customers with both ground-based systems and network management. GROUND-BASED SYSTEMS SINGLE CHANNEL TRANSPONDER INJECTION SUBSYSTEM ("SCTIS"). The Company has employed its spread spectrum technology in the design, production and installation of high performance anti-jam uplink transmission systems for the U.S. Air Force which protect emergency messages being sent through the Defense Satellite Communications System against jamming and interception. Since the program commenced in 1978, the Company has delivered twelve SCTIS systems plus spare parts to the U.S. Air Force. The Company is presently under contract to develop enhancements that add receive and report-back capability to all of the SCTIS systems. Installation of these enhancements is expected to be completed at the SCTIS sites in fiscal year 1996. The Company is currently working on an Enhanced Link Simulation in support of SCTIS. The Company believes the U.S. Air Force is considering future enhancements and the Company remains in a good position to support future requirements. MILSTAR SATELLITE COMMUNICATIONS. The Company has been involved since 1981 in development of the U.S. Government's MILSTAR satellite communications program, designed to support stationary and mobile users in the joint military services in the 1990's. In addition to performing system engineering tasks, the Company has developed special test equipment in support of the MILSTAR program, including a subcontract for the MILSTAR EHF Test System to supply Lockheed with the ground terminals to test the MILSTAR satellites in orbit. Presently, the Company is under contract to upgrade its MILSTAR Test Terminal to support the Medium Data Rate (MDR) communication capabilities being added to the Milstar Block II satellites. The Company is currently engaged in development activities towards a proprietary low-cost portable MILSTAR terminal. TRACKING AND DATA RELAY SATELLITE SYSTEMS ("TDRSS"). The National Aeronautics and Space Administration (NASA) has launched a new series of spacecraft, the Tracking and Data Relay Satellites. These relay satellites will, for the first time, enable NASA to maintain almost continuous communications to the space shuttle and NASA satellites even when they are not in direct line-of-sight to tracking stations in the continental United States. The Company has several important roles in this billion dollar satellite system, including study and system engineering support, a major long-term subcontract for the support of the TDRSS network control, prime contracts to develop space/ground segment architecture for upgrading the TDRSS system, and assisting NASA in the design for a second TDRSS ground terminal. The Company has developed a portable S-band, spread spectrum transmitter and companion receiver designed for operation with TDRSS. The Company believes the market may be significant for these products although revenues from these products have not been material to date and there is no assurance that these products will gain market acceptance. VERY SMALL APERTURE TERMINAL ("VSAT") RECEIVERS. Stanford Telecom designed and developed, using proprietary Application Specific Integrated Circuits (ASICs), a digital satellite telecommunications receiver, namely, the STEL 9236 for VSAT satellite systems. One of the first applications of this product is for satellite broadcast of high quality music to stores and offices. This product performs digital signal processing functions required to receive the satellite signal and translate it into a stream of decoded data. The Company has received orders for approximately 9,000 VSAT receivers. The Company is also developing other subsystem-level VSAT products for customers involved in weather monitoring and data communications. -2- The Company has entered into a joint agreement with TIW Systems to develop and produce a VSAT communications subsystem for their next generation VSAT terminal. SpaceCom Systems is using the Company's digital PSK demodulator assemblies for a VSAT receiver for their M2000 satellite communications system. Mainstream Data is using a Stanford Telecom "L-band to data stream" receiver board for a VSAT Direct Broadcast Data application that provides background music and digital information to businesses worldwide. DEFENSE INFORMATION INFRASTRUCTURE CONTINGENCY SATELLITE COMMUNICATIONS TERMINAL ("DSAT"). During fiscal 1995, the Company received a contract from the Defense Information Systems Agency for tri-band transportable satellite terminals. The DSAT terminals are valued in excess of $1 million each. The Company commenced delivery of the first units in January 1995. These satellite terminals are self-contained trailer-mounted with tri-band capability and can be configured for military, domestic and international satellites operating in C, X or Ku bands. The Company is under contract to deliver six DSAT terminals during fiscal 1996. TDMA GROUND SYSTEMS. Stanford Telecom has developed a thin route, point-to-multipoint TDMA ground system for satellite-based communications which provides efficient use of the satellite transponders and can provide substantial cost and flexibility advantages over conventional "time" or "frequency" division multiple access systems. In a typical SATCOM network the TDMA system will operate with a hub terminal and up to 32 remote terminals providing capacity on demand Demand Assignment Multiple Access services. Under contract with the U.S. Government, the Company developed and manufactured its TDMA system, the STEL 1105A, and has delivered approximately 330 systems to U.S. Government customers. The Company has also developed an advanced version of the TDMA system, the STEL 1105B, which has successfully completed customer field evaluation. The Company is pursuing opportunities in both the government and commercial sectors for its TDMA systems. SATELLITE READOUT STATION UPGRADE ("SRSU"). The Company, as a subcontractor to IBM for the U.S. Air Force, designed, developed and produced a ground-based satellite transmitting and receiving system for the SRSU program to transmit and receive signals through severe multipath channels. The Company's SRSU equipment is a follow-on enhancement of a project previously developed for the U.S. Air Force in the late 1980's. The design and development contract and all production units have been delivered. The Company's remaining contracts are for spare parts and depot support. The Company believes that the technology developed on this program is applicable to its high-speed wireless LAN products. SECURE VOICE DIGITAL INTERFACE PRODUCTS. Stanford Telecom has developed a line of standardized off-the-shelf digital interface products that operate with secure telephone units ("STU III's") produced by other vendors such as AT&T, General Electric, and Motorola. The Company's digital interface products provide an interface between digital satellite communications terminals and the public switched telephone network which is connected to STU III telephones. The Company's secure voice digital interfaces provide the voice compression, echo cancellation, signaling tones, and other interface functions for interconnection of the STU III's to the public switched telephone network. The Company has delivered approximately 600 secure voice digital interface units to U.S. Government customers since 1991, and is now applying this technology to the commercial VSAT market. SATELLITE-BASED CELLULAR SYSTEMS. In recent years a number of worldwide satellite-based cellular systems have been proposed, including TRW's Odyssey, INMARSAT-P, Motorola's IRIDIUM, and Loral-QUALCOMM's Globalstar. The Company has been carrying out research and development on the medium altitude Odyssey system being proposed by TRW. The Company hopes to play a key role in the ground station terminals that interface with the public switched telephone network. These are early stage development programs and no -3- assurance can be given that these programs will be completed or that the Company's efforts in this area will be successful. NETWORK MANAGEMENT Stanford Telecom has been involved in a number of network management contracts for customers including the U.S. Government, INTELSAT, Martin Marietta, Hughes Network Systems, British Telecom, GTE Spacenet and EUTELSAT. INTELSAT COMMUNICATIONS SIGNAL MONITORING. In April 1993, the Company was awarded a $13 million multi-year contract to provide a signal monitoring system for the world's largest communication satellite network, owned and operated by INTELSAT, an international consortium of over 100 nations. Development and testing of the initial systems is nearing completion and the Company expects to ship and install the first of these systems in fiscal 1996. Over the past two fiscal years the Company has recognized losses totaling $3.5 million against the completion of this contract. DSCS OPERATIONAL CONTROL SYSTEM ("DOCS"). The Company developed, installed and now assists in the operation of an extensive network of computers and software which performs control and monitoring functions for the Defense Satellite Communication System ("DSCS"). Control of DSCS is complex due to the different types of multiple access techniques used and the need to react quickly to communications requirements and to hostile jamming actions. The task of optimizing and controlling the many thousands of parameters in the DSCS network is a sophisticated computational problem requiring both advanced computers and extensive information processing. In September 1992, the Company was awarded a DOCS Support Services contract with four one-year renewable options for an aggregate of $38 million for operations, hardware, and software support. The Company has received funding to continue work through government fiscal year 1995. The U.S. Government has not yet provided funding beyond the end of government fiscal year 1995 and the Company cannot be assured of additional funding for this contract. TRANSPONDER ACCESS CONTROL SYSTEMS ("TACS"). Stanford Telecom has developed commercial satellite signal monitoring systems that monitor various transponder performance including frequency, power, bandwidth, interference and unauthorized use to ensure that the satellite is functioning properly and efficiently. The Company has installed systems of this type for British Telecom, GTE Spacenet, EUTELSAT, and others. REPLACEMENT SATELLITE CONFIGURATION CONTROL ELEMENT ("RSCCE"). The Company has been awarded a contract from the U.S. Army to provide the configuration control element in support of network management for the U.S. Government s Defense Satellite Communication System. Under this contract, the Company will provide the software and hardware necessary to fully configure, test, and deliver this element of the satellite system. This contract will be performed throughout much of fiscal 1996 and 1997. NAVIGATION AND TRACKING Stanford Telecom is engaged in several projects dealing with navigation and position tracking, including work with the FAA on modernizing the nation's air traffic control system, GPS instrumentation, and vehicle tracking and information services. AIR TRAFFIC CONTROL SYSTEM MODERNIZATION. Since 1984, the Company has been supporting an FAA program to upgrade and modernize the nation's air traffic control and air transport navigation system. The Company s activities include air traffic control (ATC) automation and communications system engineering and support to FAA special projects -4- activities such as the relocation of the Chicago O Hare ATC Tower Complex. The Company is also supporting the FAA in its acquisition of the new terminal area ATC automation system. The above activities are being conducted under two separate contracts: one to GSA/FEDSIM for communication system engineering and one to DOT for transportation system engineering and R&D support. In addition, the Company was awarded a long term contract to support the FAA s implementation of a Global Positioning System (GPS) Wide Area Augmentation System (WAAS). The FAA s WAAS Program is a central element of the FAA s plans to move toward a satellite based Air Traffic Control System. The WAAS, through supplementing the GPS system, will enable this system to become a sole means navigation source for en route and terminal area aviation navigation purposes. This will greatly enhance aircraft navigation capability and allow the FAA to provide a more cost effective navigation infrastructure for civil aviation in the National Airspace System. The Company has performed a central role in the development of the WAAS concept through support to concept definition, prototyping and field testing. This contract will leverage the Company s substantial in-house expertise in satellite navigation to the provision of technical support services addressing communications, navigation, hardware, software and test issues that surround development of the WAAS. GPS INSTRUMENTATION. Stanford Telecom played an important role in the development of the spread spectrum signal structure which is transmitted by satellites for the U.S. Air Force's GPS Navigation Satellite System. The Company also provides standardized off-the-shelf GPS navigation instrumentation products, including the STEL 7200 and STEL 7220 GPS Simulators, which allow laboratories, system integrators and manufacturers of receivers to perform an automated test of GPS equipment by simulating a wide range of vehicle motions, including aircraft flight, the motion of a ship or the route of a vehicle along a road. Automated testing with the Company's GPS simulators avoids time consuming dynamic testing on testbeds such as aircraft and ships. VEHICLE TRACKING AND INFORMATION SERVICES. The Company is developing two vehicle tracking systems. In both cases, the Company is working with other companies that will provide, install, and maintain the tracking system infrastructure and will market the services and products to potential end users. One system announced in April 1994 by NYNEX and Avis, Project Northstar, utilizes a cellular/GPS based technology to provide a variety of services to automobile users which include emergency roadside assistance, traveler information, detailed route directions, and vehicle theft alert. Car rental agencies believe that customer safety is a primary concern of their customers and Project Northstar can provide much needed security features. This system allows a service center to remotely monitor a subscriber's location on a computer map display and provides a variety of emergency and information services via the subscriber's cellular phone. Stanford Telecom performed a major role as the system integrator in support of NYNEX s Project Northstar and has developed significant portions of the software for this system. During fiscal 1995, the Company successfully completed a field trial associated with NYNEX s Project Northstar. NYNEX is currently demonstrating the system to potential investors. If further funding becomes available, the Company hopes to be selected as the overall systems integrator for the fully operational system. Since NYNEX has stated that it will not pursue the program without outside financing, there is no assurance that the Company will receive any further revenues from this program. The second system is designed primarily to track stolen vehicles and is not interactive. In this system, the vehicle transmits a spread spectrum coded pulse and is tracked by terrestrial triangulation with a number of fixed reference receivers using the Company's proprietary matched filter, downconverter and timing receiver ASICs. The Company has received a contract to apply this technology to a parolee tracking application. A demonstration of this -5- application is scheduled during fiscal 1996. No assurance can be made that these systems will be completed and/or implemented or that they will gain market acceptance. The Company has also filed for a patent and is beginning to market a Cellular Positioning System. The Company s system is a terrestrial based navigation system designed to provide position location service for wireless communication systems, such as cellular telephony. There is no assurance that the Company s system will be completed and/or gain market acceptance. WIRELESS AND DIGITAL CABLE Stanford Telecom designs, manufactures and markets highly integrated digital communications products including ASICs, ASIC-based board level assemblies, and subsystems for a wide range of commercial applications including voice, data, and video over CATV, and digital wireless communications systems. While these products address a variety of markets, the applications are generally similar, that of performing the digital signal processing required to transmit and receive information. VOICE, DATA AND VIDEO OVER CATV SYSTEMS. Stanford Telecom works with leaders in the CATV industry to design and build a wide range of products for 2-way digital voice, data and video communications over hybrid fiber/coax (HFC) networks. The Company's unique technology provides high performance at low cost, thereby optimizing HFC distribution systems. This product family includes modem equipment for both the headend and subscriber portions of interactive CATV networks. Stanford Telecom produces demodulator boards for this application which are built around proprietary ASICs using either differential detection or burst coherent detection architectures. The Company has developed a core technology for burst QPSK demodulation which results in products that have very rapid acquisition times as well as robust performance in the presence of impulse noise. Stanford Telecom is currently supplying customized receivers for headend applications to several major communications equipment companies, and hopes to be producing such equipment for high volume production. A major equipment manufacturer has adopted Stanford Telecom's ASIC technology for use in its set-top box equipment for interactive applications. The STel 1103 BPSK/QPSK modulator ASIC is incorporated into systems being designed by several manufacturers for the subscriber portion of their telephony-over-cable systems. Other telephony-over-cable applications utilize the STel 2105 digital demodulator in the downstream portion of the system. SPREAD SPECTRUM WIRELESS SIGNAL PROCESSING. The Company has developed an advanced OCDMA architecture for Wireless Local Loop and PCS. A major initiative by DSC Communications uses this technology in a system which has been selected by international customers for wireless telephony applications. In June 1995 the Company and DSC signed a joint development agreement in which the Company will provide its radio frequency and modem technology, as well as its ASIC and waveform technology, to expand DSC s wireless local loop access system. In addition, the Company has developed an architecture for 20 Mbps- plus Wireless LAN links currently being adopted in Europe by ETSI. Stanford Telecom's spread spectrum technology is used for data transfer in fleet management applications. Stanford Telecom has integrated many complex digital signal processing functions into a single ASIC architecture for its STel 2000A Wireless Signal Processor. The STel 2000A can be used in a wide range of applications including wireless LANs, cordless telephones and telephone key systems. -6- OTHER BUSINESS In addition to its principle business areas, the Company is also engaged in two other related business areas consisting of: (i) contract manufacturing services for electronics assembly by the Company's Manufacturing and Quality Assurance division ("MQA"); and (ii) specialized quick reaction services by the Company's Applied Technology Operations division ("ATO"). ATO develops specialized products and services primarily for the U.S. Government in the areas of communications, signal intelligence and technical security with applications such as specialized antennas, microwave amplifiers and receivers, and spread spectrum transmitters. ATO also supports other areas of the Company in the development of high technology programs such as microwave integrated circuits. MANUFACTURING. Stanford Telecom's products are generally manufactured from standard components, its proprietary ASICs and other components or subsystems produced to the Company's specifications. Most of the Company's current products contain microprocessors for which proprietary software is designed and tested by the Company's engineers. The Company does not have a semiconductor foundry or fabrication facility. For the production of ASICs, the Company contracts with companies that have foundry capability including Zilog (under a strategic relationship), LSI Logic, Hitachi, and AT&T Microelectronics. In many cases only a single source is available for specific components, and thus there is a risk of delay in delivering finished systems within contractual schedules. The Company attempts to minimize this risk by securing second sources, finding alternate technologies to perform the same function and maintaining adequate inventories of single source components. To date the Company has experienced no material adverse impact due to component unavailability, product returns or contract renegotiations. Many of the Company's products are covered by a 90-day to one-year warranty under which the Company will repair or replace defective parts. To date, warranty expense has not been significant. During fiscal 1993, the Company began to pursue opportunities in commercial contract manufacturing. In January 1993, the Company acquired the assets of a small electronics assembly firm in Fremont, California, which is now part of the Company's MQA division. The Company offers its contract manufacturing services to commercial customers. Revenues for the Company's contract manufacturing business amounted to approximately 10% of total revenues for fiscal year 1995, an increase from approximately 6% of revenues experienced during fiscal year 1994. The Company's Sunnyvale facilities received ISO-9002 certification during fiscal year 1994. During fiscal year 1995, the MQA division expanded its operations to a new facility adjacent to its existing Sunnyvale location. MARKETING AND CUSTOMERS. The Company markets its products and services to agencies of the U.S. Government, prime contractors to these agencies and an increasing number of commercial customers. The Company's marketing is conducted by its management and technical staff, and in the case of its commercial business, domestic and international sales representatives are also utilized. The Company's marketing efforts for its government business consist of responding to requests for proposals and solicitations for bids from U.S. Government agencies or prime contractors to these agencies and direct marketing of its off-the-shelf, standardized products. The Company markets its ASICs and commercial products primarily through its direct sales personnel consisting of four full-time employees, 22 independent sales representatives covering the U.S. and Canada and 17 other independent sales representatives covering other international territories. The Company also places advertisements for commercial products, particularly its ASIC products, in a number of trade magazines and participates in trade shows and industry symposiums. -7- During the fiscal years ended March 31, 1995, 1994 and 1993 approximately 69%, 73% and 82%, respectively, of the Company's revenues were attributable to contracts with numerous agencies of the U.S. Government. No single contract accounted for more than 10% of revenues during fiscal 1995, 1994 or 1993. Some of the Company's U.S. Government sales are made under letter contracts in which the final contract price is agreed upon after work has begun. To date, the Company has had a small amount of revenue from international customers. Such sales are often subject to U.S. State Department approval and export license requirements. COMPETITION. Competition is intense among providers of digital telecommunications equipment, products and services. In the Company's government business, competitors include major defense contractors, telecommunications equipment and electronics firms, and systems integrators, most of which have significantly greater financial, marketing and operating resources than the Company, as well as broader product lines and technological capabilities. As a result of reduced defense spending by the U.S. and other governments, competition has become more intense in the Company's government business. Although no single competitor competes with the Company in all of its product lines, a number of competitors such as California Microwave, General Electric, Harris Corporation, Raytheon, Rockwell International and SPAR Aerospace, compete with the Company in various market segments. Certain of the Company's customers have technological capabilities in the Company's product areas and could choose to develop and manufacture certain products themselves rather than purchase from suppliers such as the Company. As the Company continues to transition to more commercial business, it expects to face new and increasing competition with respect to its commercially oriented products and services. The Company believes that, in its highly specialized technical environment, price, performance, reputation, reliability, on-time delivery and customer support are the primary competitive factors among companies having similar technical capabilities. BACKLOG AND BOOKINGS. Funded backlog includes: (i) projects and orders covered by signed contracts for which the government has specifically allocated funding; and (ii) purchase orders from commercial customers. The Company's backlog is largely attributable to agencies of the U.S. Government. In the case of certain long- term contract awards, the U.S. Government typically makes the funds available over the life of the contract as opposed to the time of the contract award. In such cases the Company reports as funded bookings only the amount of the funds specifically allocated and the resultant backlog as funded backlog. The Company does not include unexercised options in backlog. The Company's funded bookings for fiscal years 1995 and 1994 were $127.8 million and $106.6 million, respectively, and the Company's backlog at the end of fiscal years 1995 and 1994 was $72.5 million and $59.1 million, respectively. At March 31, 1995 backlog from the Company's government and commercial businesses were approximately $45.6 million and $26.9 million, respectively. There is no assurance that funded backlog will be completed and booked as revenue. The Company's contracts typically contain contingency provisions permitting termination by the customer at any time. Cancellation of pending contracts or termination or reductions of contracts in progress may have a material adverse effect on the Company's results of operations. RESEARCH AND DEVELOPMENT. The telecommunications industry is characterized by rapid technological change, requiring a continuous effort to enhance existing products and develop new products. The Company believes that its continued success depends in large part on its ability to develop new and enhanced digital telecommunications products. The Company conducts extensive research, development and engineering activities with the objective of developing products and systems that provide for cost-effective, high-quality satellite communications and digital wireless telecommunications. Since its -8- inception, the Company has developed a number of innovative and proprietary digital telecommunications technologies through a combination of customer and internally funded research and development. A significant portion of these expenditures include bid and proposal expenditures which are largely the initial advanced technology development efforts directed toward a specific product or technical task for which the Company must show technical viability. Company- funded expenditures for research and development including bid and proposal activities for fiscal years 1995, 1994, and 1993 were approximately $7.7 million, $6.4 million, and $6.9 million, respectively, which represented 6.8%, 6.5%, and 7.5% of total revenues, respectively. The Company's revenues have historically been derived primarily from performing contract research and development and engaging in limited production contracts with agencies of the U.S. Government and their prime contractors. As a result, a substantial portion of the digital telecommunications research and development performed by the Company since its inception has been funded by its customers and recorded as revenues by the Company. Accordingly, the cost of performing this customer-funded research and development is included in "Direct and Indirect Costs" in the Company's financial statements. The Company is continually seeking to develop new products for commercial applications to leverage its leading digital telecommunications technologies that have been funded through many military and government research and development contracts since the early 1970's. EMPLOYEES. As of March 31, 1995, the Company employed 865 full-time and 27 part-time employees and 17 professional consultants. Of the full-time and part-time employees, 432 are in technical operations, 181 in manufacturing operations, and 279 in management and support for technical and corporate operations. The majority of the Company's employees are highly skilled technical personnel. Several are nationally known leaders in the field of digital telecommunications. Over 490 employees hold advanced degrees, including approximately 27 with doctoral degrees. None of the employees are represented by a labor union and the Company has never had a work stoppage. The Company believes its employee relations to be excellent. Due to the nature of the Company's business, a large number of its technical employees must obtain security clearances from the U.S. Government, which limits the available pool of eligible candidates for such positions to those who can satisfy prerequisites for such clearances. PATENTS AND PROPRIETARY RIGHTS. The success of the Company's business depends in part upon its ability to protect trade secrets, obtain or license patents and operate without infringing on the rights of others. Although the Company has obtained patents covering certain of its technologies, it believes that the ownership of patents has not generally been a significant factor in its government business and that its success depends primarily on innovative skills, technical competence, and the marketing and managerial abilities of its personnel. The Company relies on a combination of trade secrets, copyrights, patents, nondisclosure agreements and technical measures to protect its proprietary rights in its products and technology. Such protection may not preclude competitors from developing products with features similar to the Company's products. The Company believes that patents may play an increasingly important role in its commercially oriented business and during the past two years has been active in expanding the number of its patent applications filed with the U.S. Patent and Trademark Office. The Company requires its employees to execute proprietary rights and nondisclosure agreements and to maintain the confidentiality of the Company's proprietary information. -9- GOVERNMENT REGULATION. The Company's operations are subject to compliance with regulatory requirements of federal, state and local authorities, including regulations concerning employment obligations and affirmative action, workplace safety and protection of the environment. In addition, many of the Company's products and proposed products are or will be subject to various regulations including regulations promulgated by the Federal Communications Commission, the FAA and the DoD. While compliance with applicable regulations has not adversely affected the Company's operations in the past, there can be no assurance that the Company will continue to be in compliance in the future or that these regulations will not change. In addition, the Company must comply with detailed government procurement and contracting regulations and with U.S. Government security regulations, including those necessary to maintain required facility clearances. Certain of these regulations carry substantial penalty provisions for nonperformance or misrepresentation in the course of negotiations. Failure of the Company to comply with its government procurement, contracting or security obligations could result in penalties or suspension of the Company from government contracting, which would have a material adverse effect on the Company's results of operations. The Company is required to maintain a U.S. Government facility clearance at most of its locations. This clearance could be suspended or revoked if the Company is found not to be in compliance with applicable security regulations. Any such revocation or suspension would delay the Company's delivery of its products to customers. Although the Company has adopted policies designed to assure its compliance with applicable regulations and there have been no suspensions or revocations of any of its facilities, there can be no assurance that the approved status of the Company's facilities will continue without interruption. LITIGATION The Company is involved from time to time in litigation incidental to its business. Management believes that the outcome of current litigation will not have a material adverse effect on its financial position or results of operations. In August 1993, Techsonic Industries, Inc. ("Techsonic") filed for arbitration in Dallas, Texas, in a dispute concerning performance under a GPS product development and marketing agreement entered into in July 1990 between the Company and Techsonic. The Company filed a demand for arbitration of counter-claim in September 1993 in Dallas against Techsonic, whereby the Company was seeking relief for breach of contract, anticipatory breach, fraud, negligent misrepresentation, punitive damages, costs and attorneys' fees in an amount exceeding $2.3 million, but not exceeding $5 million. The arbitration hearing was completed in November 1994. On December 16, 1994, Stanford Telecom was informed that the Arbitrators ordered the Company to pay to Techsonic approximately $1.6 million and denied the counterclaim submitted by the Company. The total cost of the unsuccessful arbitration was approximately $2.1 million and included all legal expenses, arbitration costs, and the write-off of a small quantity of inventory and was reflected in the results of the third quarter of fiscal year 1995. ITEM 2. PROPERTIES The Company's headquarters and principal engineering and manufacturing facilities are currently located in four adjacent buildings in Sunnyvale, California where it leases approximately 172,000 square feet. The Company's Sunnyvale facility leases will expire in the year 2000. The leases contain options for renewal under terms and conditions to be negotiated at the time of expiration. The Company's Fremont, California facility of approximately 14,300 square feet is currently being subleased to another tenant. The lease will expire in 1996. The sublease will -10- expire in 1995. The Company also leases approximately 84,000, 34,000, 30,900 and 11,300 square feet of office space in Reston, Virginia, Colorado Springs, Colorado, Annapolis Junction, Maryland and Seabrook, Maryland, respectively, which space is used primarily for the performance of study, system engineering and special hardware contracts. The Reston facility leases expire in 1997 through 2001. The Colorado Springs, Annapolis Junction and Seabrook leases expire in 1999, 2003 and 1995, respectively. The Company believes its current facilities are suitable and adequate for the Company's operations over the next fiscal year. ITEM 3. LEGAL PROCEEDINGS. See "Litigation" above. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. Inapplicable. PART II ITEM 5. - MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS. Incorporated by reference from page 24 of the Annual Report to Stockholders. ITEM 6. SELECTED FINANCIAL DATA. Incorporated by reference from page 24 of the Annual Report to Stockholders. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Incorporated by reference from pages 13 through 15 of the Annual Report to Stockholders. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. Financial statements of Stanford Telecommunications, Inc. as of March 31, 1995 and March 31, 1994 and for each of the three years in the period ended March 31, 1995 and the report of independent public accountants thereon are incorporated by reference from pages 16 through 23 of the Annual Report to Stockholders. ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. Inapplicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. Set forth below are the names and ages of the executive officers and directors of the Company, their principal occupations at present and for the past five years, certain directorships held by each, and the year in which each became a director or executive officer of the Company. Dr. James J. Spilker, Jr. (age 61), a founder of the Company, currently serves as Chairman of the Board. From the Company's organization in May 1973 until August 1981, Dr. Spilker was Chairman of the Board, Executive Vice President and Technical Director. He served as President and Chief Executive Officer from August 1981 to June 1995. -11- Dr. Val P. Peline (age 64) has served as President and Chief Executive Officer of the Company since June 1995. Dr. Peline was elected as a Director of the Company in October 1985. Dr. Peline served as President of Lockheed Corporation's Electronic Systems Group from 1987 to March 1995. Dr. Peline had been President of the Lockheed Space Division from 1984 to March 1987. Mr. Michael Berberian (age 61), a private investor, was appointed to fill a vacancy on the Board of Directors in December 1989. From 1973 to 1990 he served on the Board of Directors of Lockheed Corporation. Mr. John W. Brownie (age 61), a founder of the Company, served as Executive Vice President from June 1982 to January 1985 and General Manager from July 1981 to January 1985 when he retired from the Company. He was a Director and Vice President commencing with the Company's organization in May 1973. Dr. P. Marshall Fitzgerald (age 62), a founder of the Company, has served as a Director since its organization in May 1973 and as President from May 1973 to July 1981 when he retired from the Company. Mr. Milton W. Holcombe (age 62) was appointed to fill a vacancy on the Board of Directors in September 1990. Mr. Holcombe served as President of Chrysler Technologies Airborne Systems, Inc. from 1988 to 1990. In 1970 he co-founded Electrospace Systems, Inc. where he served as Group Vice President and Assistant Treasurer. Mr. Leonard Schuchman (age 58) was elected as a Director of the Company in April 1985. Mr. Schuchman joined the Company in January 1976 and became Vice President in February 1977. In March 1982, he was promoted to Senior Vice President responsible for directing the Company's Systems Engineering Division. In March 1994 he was appointed President of the Company's Systems Integration Group. Dr. C. Jerome Waylan (age 53) was appointed to fill a vacancy on the Board of Directors in May 1994. Dr. Waylan has served as Executive Vice President with GTE Personal Communications since 1993. Prior to his current position, Dr. Waylan served as President of GTE Spacenet Corporation from 1985 to 1993. Dr. Waylan founded the Southern Pacific Satellite Company in 1981, which was acquired by GTE in 1983. Mr. Charles L. Gandy (age 63) joined the Company as Vice President in September 1986. In November 1990 he was elected Senior Vice President. Prior to joining the Company he was employed by the National Security Agency for thirty-one years and served most recently with NSA as Chief of the Special Programs Group. Dr. John E. Ohlson (age 55) joined the Company in March 1981 as Director of Telecommunications Programs Operations and became Vice President in January 1982. In February 1991 he was named Director of Military Ground Terminals and in June 1991 elected Senior Vice President. Dr. Ohlson directed the Satellite Communications Group from June 1992 to November 1994. Dr. Ohlson was named as the Company's Chief Technical Officer in November 1994. Mr. Gary S. Wolf (age 44) joined the Company in May 1978 and was elected Vice President, Chief Financial Officer, Secretary and Treasurer in December 1984. In November 1990, he was elected Senior Vice President. -12- Mr. Hatch Graham (age 34) joined the Company in August 1987 and was named as Operational Vice President in December 1990. In July 1993 he was promoted to Group Vice President and in March 1994 he was elected Corporate Vice President and currently directs the Telecom Products Group. Section 16(a) of the Securities Exchange Act of 1934 requires the Company's officers, directors and certain shareholders to file reports of ownership and changes in ownership of the Company's Common Stock with the Securities and Exchange Commission. All Section 16(a) filing requirements were complied with during the Company s fiscal year ended March 31, 1995. The Company's knowledge is based on a review of the copies of such reports furnished to the Company and written representations that no other reports were required during the Company's fiscal year ended March 31, 1995. ITEM 11. EXECUTIVE COMPENSATION. The information set forth under the caption "Executive Compensation" of Directors and Executive Officers in the Company's Proxy Statement is incorporated herein by reference and made a part hereof in response to the information required by this item. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The information set forth under the caption "Stock Ownership" in the Company's Proxy Statement is incorporated herein by reference and made a part hereof in response to the information required by this item. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. Inapplicable. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. (a) The following documents are filed as a part of this report: Reference Page -------------- 1995 Annual Report Form 10-K ------ --------- 1. Financial Statements. -------------------- Report of Independent Public Accountants 16 Statements of income for each of the three years in the period ended March 31, 1995 16 Balance sheets at March 31, 1995 and March 31, 1994 17 Statements of shareholders' equity for each of the three years in the period ended March 31, 1995 18 Statements of cash flow for each of the three years in the period ended March 31, 1995 19 Notes to financial statements 20 -13- 2. FINANCIAL STATEMENT SCHEDULES II - Valuation and Qualifying Accounts 19 All other schedules have been omitted since the required information is not present or not present in amounts sufficient to require submission of the schedule or because the information required is included in the financial statements or notes thereto. With the exception of such information in the Annual Report to Stockholders incorporated herein by reference, the Annual Report to Stockholders is not deemed "filed" as part of this report. 3. EXHIBITS. Exhibit Number Description - -------------- ----------- 3.1(3) Certificate of Incorporation, as amended (Exhibit 3.1). 3.2(3) Bylaws, as amended (Exhibit 3.2). 4.1(8) Rights Agreement dated as of May 9, 1995 between the Company and The First National Bank of Boston. 10.1(7) Consolidated, Amended and Restated Deed of Lease for the premises located at 1761 Business Center Drive, Reston, Virginia dated October 1, 1993 between the Company and the Variable Annuity Life Insurance Company. 10.2(2) 1982 Stock Option Plan, as amended, and form of Agreements (Exhibit 10.6). 10.3(1) Series B Restricted Stock Plan. (Exhibit 10.7). 10.4(7) Bonus Plan (March 1993 revision). 10.5(4) Officer Incentive Compensation Plan (January 1990 revision). (Exhibit 10.22). 10.6(5) 1992 Employee Stock Purchase Plan. 10.7(6) Lease dated November 19, 1992 for 480 Java Drive, Sunnyvale, California, 440 Moffett Park Drive, Sunnyvale, California, and 1221 Crossman Avenue, Sunnyvale, California. 10.8(7) Office Lease Agreement for 141 National Business Parkway, Annapolis Junction, Maryland dated March 1, 1993 between the Company and Constellation Real Estate, Inc. 10.9(7) Credit Agreement (Including Overdraft Facility) dated July 31, 1993 between the Company and Bank of America National Trust and Savings Association. 10.10 First Amendment to Credit Agreement dated September 19, 1994 between the Company and the Bank of America National Trust and Savings Association. 10.11 Statement regarding computation of per share earnings incorporated by reference to Note 4 to the Company's Financial Statements contained in the Company's Annual Report to Stockholders for the fiscal year ended March 31, 1995. 13.1 Annual Report to Stockholders for the fiscal year ended March 31, 1995. 24.1 Consent of Arthur Andersen LLP, independent public accountants. 25.1 Power of Attorney (included on page 16 hereof). -14- ___________________________ (l) Incorporated by reference to the exhibit set forth in parenthesis from the Company's Registration Statement on Form S-l, No. 2-85894. (2) Incorporated by reference to the exhibit set forth in parenthesis from the Company's Annual Report on Form l0-K for the fiscal year ended March 31, 1987. (3) Incorporated by reference to the exhibit set forth in parenthesis from the Company's Annual Report on Form l0-K for the fiscal year ended March 31, 1989. (4) Incorporated by reference to the exhibit set forth in parenthesis from the Company's Annual Report on Form l0-K for the fiscal year ended March 31, 1990. (5) Incorporated by reference to the exhibit set forth in parenthesis from the Company's Annual Report on Form l0-K for the fiscal year ended March 31, 1992. (6) Incorporated by reference to the exhibit set forth in parenthesis from the Company's Annual Report on Form l0-K for the fiscal year ended March 31, 1993. (7) Incorporated by reference to the exhibit set forth in parenthesis from the Company's Registration statement on Form S-1, No. 33-72720. (8) Incorporated by reference to the exhibit set forth in parenthesis from the Company's Registration statement on Form 8-A, dated May 24, 1995. REPORTS OF FORM 8-K No Form 8-K was filed with the Securities and Exchange Commission since January 3, 1994. -15- SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. STANFORD TELECOMMUNICATIONS, INC. Dated: June 23, 1995 /s/ J. Spilker ---------------------------------------- James J. Spilker, Jr. Chairman of the Board POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints James J. Spilker, Jr. and Gary S. Wolf and both of them, as his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments to this Form 10-K and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in- fact and agents, or either of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated: Signature Title Date --------- ----- ---- /s/ James J. Spilker, Jr. Chairman of the Board June 23, 1995 - ------------------------- James J. Spilker, Jr. /s/ Val P. Peline President (Principal June 23, 1995 - ----------------------- Executive Officer) and Val P. Peline Director /s/ Gary S. Wolf Senior Vice President, June 23, 1995 - --------------------- Treasurer and Secretary Gary S. Wolf (Principal Financial and Accounting Officer) /s/ Michael Berberian Director June 12, 1995 - --------------------- Michael Berberian -16- /s/ John W. Brownie Director June 14, 1995 - ------------------- John W. Brownie /s/ P. Marshall Fitzgerald Director June 14, 1995 - -------------------------- P. Marshall Fitzgerald /s/ Milton W. Holcombe Director June 23, 1995 - ---------------------- Milton W. Holcombe /s/ Leonard Schuchman Sr. Vice President June 23, 1995 - --------------------- and Director Leonard Schuchman /s/ C. J. Waylan Director June 23, 1995 - ---------------- C. J. Waylan -17- REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULES To Stanford Telecommunications, Inc.: We have audited in accordance with generally accepted auditing standards, the financial statements included in Stanford Telecommunications, Inc.'s annual report to stockholders incorporated by reference in this Form l0-K, and have issued our report thereon dated May 2, 1995 (except with respect to the matter discussed in Note 9 as to which the date is May 9, 1995). Our audit was made for the purpose of forming an opinion on those statements taken as a whole. The schedule listed at Item 14(a)(2) is the responsibility of the Company's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. ARTHUR ANDERSEN LLP San Jose, California May 2, 1995 -18- SCHEDULE II STANFORD TELECOMMUNICATIONS, INC. Valuation and Qualifying Accounts Three years ended March 31, 1995 (In Thousands) ALLOWANCE FOR DOUBTFUL ACCOUNTS Bal. at Beg. Charged to Bal. at End Year of period expense Deductions of Period ---- ---------- ---------- ---------- ----------- 1993 $100 $ 75 0 $175 1994 $175 375 (307) $243 1995 $243 541 (134) $650 -19- EX-10.10 2 EXHIBIT 10.10 FIRST AMENDMENT TO CREDIT AGREEMENT THIS FIRST AMENDMENT TO CREDIT AGREEMENT (the "AMENDMENT"), dated as of September 19, 1994 is entered into by and between STANFORD TELECOMMUNICATIONS, INC. (the "BORROWER") and BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION (the "BANK"). RECITALS A. The Borrower and the Bank are parties to a Credit Agreement (Including Overdraft Facility) dated as of July 31, 1993 (as in effect as of the date of this agreement, the "CREDIT AGREEMENT") pursuant to which the Bank has extended certain credit facilities to the Borrower. B. The Borrower and the Bank have agreed to extend the period in which the credit is available under the Credit Agreement and to certain other changes to the terms and conditions of the Credit Agreement and that no new credit will be extended under the Credit Agreement after July 31, 1994, until execution of this Amendment and compliance with the provisions of Paragraph 4 of this Amendment. C. The Bank is willing to amend the Credit Agreement, subject to the terms and conditions of this Amendment. NOW, THEREFORE, for valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereto hereby agree as follows: 1. DEFINED TERMS. Unless otherwise defined herein, capitalized terms used herein shall have the meanings, if any, assigned to them in the Credit Agreement. 2. AMENDMENTS TO CREDIT AGREEMENT. (a) Paragraph 1.1 of the Credit Agreement shall be amended in the first sentence thereof by deleting the date "July 31, 1994" and inserting in lieu thereof the date "September 30, 1995". (b) Paragraph 1.2(b) of the Credit Agreement shall be amended in the last sentence thereof by deleting the date "July 31, 1994" and inserting in lieu thereof the date "September 30, 1995". (c) Paragraph 1.3(a) of the Credit Agreement shall be amended by deleting it in its entirety and restating it in full, as follows: 1 "(a) Each Offshore Rate related advance shall be in an amount not less than One Million and 00/100 Dollars ($1,000,000.00).". (d) Paragraph 1.3(b) of the Credit Agreement shall be amended by inserting in the first sentence thereof after the phrase "at a rate per annum equal to the Offshore Rate" the phrase "plus 1.25 percentage points (1.25%)". (e) The definition "Offshore Rate Interest Period" in Paragraph 1.3(f) of the Credit Agreement shall be amended in the last line thereof by deleting the date "January 30, 1995" and inserting in lieu thereof the date "March 31, 1996". (f) Paragraph 1.4(b) of the Credit Agreement shall be amended by inserting in the first sentence thereof after the phrase "at a rate per annum equal to the Fixed Rate" the phrase "plus 1.25 percentage points (1.25%)". (g) The definition "Fixed Rate Interest Period" in Paragraph 1.4(e) of the Credit Agreement shall be amended in the last line thereof by deleting the date "January 30, 1995" and inserting in lieu thereof the date "March 31, 1996". (h) Paragraph 1.5(c)(i) of the Credit Agreement shall be amended by deleting the date "January 30, 1995" and inserting in lieu thereof the date "March 31, 1996". (i) Paragraph 1.5(d) of the Credit Agreement shall be amended by deleting it in its entirety and restating it in full, as follows: "(d) The discount and commission for each draft shall be at the Bank's 'all-in-rate' for acceptances in effect on the date of acceptance and discount plus 1.25 percentage points (1.25%)." (j) Paragraph 1.6(b)(ii) of the Credit Agreement shall be amended by deleting the date "January 30, 1995" and inserting in lieu thereof the date "March 31, 1996". (k) Paragraph 1.7(b)(i) of the Credit Agreement shall be amended by deleting the date "July 31, 1995" and inserting in lieu thereof the date "September 30, 1996". (l) Paragraph 1.7(c) of the Credit Agreement shall be amended by deleting it in its entirety and restating it in full, as follows: "(c) Borrower shall pay Bank the following issuance fees: 2 "If the face amount of the letter of credit is: "$-0- to $249,999 $250,000 to $1,000,000 Over $1,000,000 ---------------- ---------------------- --------------- "1.75% per annum 1.50% per annum 1.00% per annum "With a minimum fee of $250.00 and other such fees at the times and in the amounts Bank advises Borrower from time to time as being applicable to standby letters of credit.". (m) Paragraph 1.8(b) through Paragraph 1.8(f) of the Credit Agreement shall be amended in its entirety to provide as follows: "(b) At the Borrower's request, the Bank shall make, on or after the First Amendment Effective Date (as defined in the First Amendment to this Agreement) and prior to September 30, 1995, one or more term loans to the Borrower (the 'Term Loan' or 'Term Loans') in an aggregate amount (net of any existing terms loans made by the Bank to the Borrower and outstanding as of the date of this Agreement) not exceeding the lesser of: "(i) $5,000,000; or "(ii) An amount equal to the purchase price of fixed assets purchased by the Borrower during the twelve months prior to the date the Term Loan is made (and not included in computing any Term Loan previously made under this Agreement) but excluding sales taxes, freight charges, and installation costs incurred by the Borrower with respect to such assets. If requested by the Bank, the Borrower shall submit invoices to the Bank documenting the foregoing. "(c) The Bank's obligation to make any Term Loan is subject to the following conditions precedent at the time the Term Loan is made: "(i) The Borrower shall have maintained on a consolidated basis, for two consecutive fiscal quarters (each commencing after September 30, 1994), a Debt Coverage ratio of not less than 2.00 to 1.00. For the purpose of this Agreement, 'Debt Coverage ratio' means the ratio of (1) quarterly net profits after taxes, minus interest income, plus depreciation and amortization, to (2) 25% of the current portion of long-term debt (including lease debt). In calculating this ratio, the components of Debt Coverage shall be determined in accordance with generally accepted accounting principles consistently applied; and "(ii) The Borrower shall have provided the Bank with a financial forecast, including a balance sheet and 3 profit and loss statement for the same period as the requested Term Loan. "All terms and provisions of this Agreement, including the Covenants contained in Paragraphs 6.5 through 6.9 must be complied with so long as any Term Loan is outstanding. "(d) At the time the Borrower requests a Term Loan, it shall specify which of the following (i), (ii), or (iii) applies to such Term Loan: "(i) REFERENCE RATE OPTION. "(aa) Under this option, the Term Loan (the 'Reference Rate Term Loan' shall bear interest until payment is due (computed daily on the basis of a 360 day year and actual days elapsed, which results in more interest than if a 365 day year were used) at a rate per annum equal to the rate of interest publicly announced from time to time by the Bank in San Francisco, California, as its Reference Rate plus one-half of one percentage point (0.50%). The Reference Rate is set by the Bank and is based on various factors, including the Bank's costs and desired return, general economic conditions, and other factors, and is used as a reference point for pricing some loans. The Bank may price loans at, above, or below the Reference Rate. Any change in the Reference Rate shall take effect on the day specified in the public announcement of such change. The Borrower shall pay interest on each Reference Rate Term Loan on the last day of the calendar month in which the Reference Rate Term Loan is made, on the last day of each successive month thereafter, and upon payment in full of principal of the Reference Rate Term Loan. "(bb) Borrower may prepay the Reference Rate Term Loan at any time in full or in part. "(cc) Principal of each Reference Rate Term Loan shall be repaid in 36 substantially equal monthly instalments on the last day of each month (commencing on the month in which the Reference Rate Term Loan is made) and all unpaid principal, together with all accrued and unpaid interest, shall be due on the date which is three years less one day after the date the Reference Rate Term Loan is made and not after September 30, 1998. "(dd) Principal and interest owing to the Bank on each Reference Rate Term Loan shall be evidenced by entries in records maintained by the Bank. 4 "(ii) FIXED RATE OPTION. "(aa) Under this option, the Term Loan (the 'Fixed Rate Term Loan' shall bear interest until payment is due (computed daily on the basis of a 360 day year and actual days elapsed, which results in more interest than if a 365 day year were used) at a rate per annum equal to the sum of a rate chosen by the Bank plus two percentage points, which aggregate rate of interest shall be agreed to between the Bank and the Borrower as applicable to such Fixed Rate Term Loan (the 'Fixed Rate'). Each Fixed Rate Term Loan shall be for an amount not less than $500,000 and for a period of at least 12 months and if longer, for the number of months divisible by three but not more than 36 months, as agreed to between the Bank and the Borrower. "(bb) The Borrower shall pay interest on each Fixed Rate Term Loan on the last day of the calendar month in which the Fixed Rate Term Loan is made, on the last day of each successive month thereafter, and upon payment in full of principal of the Fixed Rate Term Loan. "(cc) The Borrower may at any time prepay any Fixed Rate Term Loan in full or in part. Each prepayment shall be accompanied by the payment of accrued interest on the amount prepaid. The Borrower shall, on demand, pay to the Bank the amount (if any) by which (i) the additional interest which would have been payable on the amount prepaid had it not been paid until the maturity date for such Fixed Rate Term Loan exceeds (ii) the interest which would have been recoverable by the Bank by placing the amount prepaid on deposit in the certificate of deposit markets for a period starting on the date on which it was prepaid and ending on the maturity date for such Fixed Rate Term Loan. "(dd) Principal and interest owing to the Bank under the Fixed Rate Term Loan shall be evidenced by entries in records maintained by the Bank. "(ee) For purposes of this Agreement: 'Fixed Rate Interest Period' of a Fixed Rate Term Loan means the period commencing on the date the Fixed Rate Term Loan is made and ending on the maturity date of such Fixed Rate Term Loan (which maturity date cannot occur after September 30, 1998). "(ff) Principal of each Fixed Rate Term Loan shall be repaid in substantially equal quarterly installments commencing on the last day of the second month after the month in which the Fixed Rate Term Loan is made, on the last day of each three month period (commencing on 5 the day on which the prior principal installment was made) thereafter until the last day of the Fixed Rate Interest Period of the Fixed Rate Term Loan, on which day the entire unpaid principal balance of the Fixed Rate Term Loan together with accrued and unpaid interest thereon shall be due and payable. "The number of quarterly installments of each Fixed Rate Term Loan shall be the quotient resulting from dividing the number of months in the term of such Term Loan by three and any remained in the form of a fraction shall be counted as one. "(iii) OFFSHORE RATE OPTION. "(aa) Under this option, the Term Loan (the 'Offshore Rate Term Loan') shall bear interest until payment is due (computed daily on the basis of a 360 day year and actual days elapsed, which results in more interest than if a 365 day year were used) at a rate per annum equal to the Offshore Rate plus two percentage points. Each Offshore Rate Term Loan shall be in a minimum amount of $1,000,000 and not less than 15,000,000 in Dollar Days. For purposes of this Agreement, 'Dollar Days' means the product of the amount of the Offshore Rate Term Loan times the number of days in the term of the Offshore Rate Term Loan. Each Offshore Rate Term Loan shall be for a period of at least 12 months and if longer, for the number of months divisible by three but not more than 36 months (and in no event maturing after September 30, 1998), as agreed to between the Bank and the Borrower. "(bb) The Borrower shall pay interest on each Offshore Rate Term Loan on the last day of each month starting with the month in which such Offshore Rate Term Loan is made and on the last day of each Offshore Rate Interest Period for such Offshore Rate Term Loan. The Borrower shall pay the principal amount of each Offshore Rate Term Loan in substantially equal quarterly instalments on the last day of each Offshore Rate Interest Period of such Offshore Rate Term Loan. "The number of quarterly installments of each Offshore Rate Term Loan shall be the number of Interest Periods in such Offshore Rate Term Loan. "(cc) The Borrower may at any time prepay any Offshore Rate Term Loan, in full or in part. Each prepayment shall be accompanied by the payment of accrued interest on the amount prepaid. The Borrower shall, on demand, pay the Bank the amount (if any) by which (i) the additional interest which would have been payable on the amount prepaid had it not been paid until the last day of 6 the Offshore Rate Interest Period in which such prepayment was made exceeds (ii) the interest which would have been recoverable by the Bank by placing the amount prepaid on deposit in the Offshore Dollar inter-bank markets for a period starting on the date on which it was prepaid and ending on the last day of such Offshore Rate Interest Period. "(dd) The Bank shall have no obligation to make Offshore Rate Term Loan, or to continue any Offshore Rate Term Loan if the Bank and the Borrower are unable to agree on an Offshore Rate for an Interest Period for such Term Loan or if any of the following described events has occurred and is continuing: "(i) Dollar deposits in the principal amount of the Offshore Rate Term Loan and for periods equal to the Offshore Rate Interest Period are not available in the Offshore Dollar inter-bank markets; or "(ii) The Offshore Rate does not accurately reflect the cost of making the affected Offshore Rate Term Loan or Loans. "If the Bank shall not have any obligation to make or continue any Offshore Rate Term Loan, such Offshore Rate Term Loan shall be converted into a Reference Rate Term Loan subject to the provisions of Paragraph 1.8(d)(i). "(ee) Principal and interest owing to Bank under each Offshore Rate Term Loan shall be evidenced by entries in records maintained by Bank. "(ff) For purposes of this Agreement: 'Offshore Rate' means for each Offshore Rate Interest Period for an Offshore Rate Loan the rate of interest which Bank and Borrower agree, at the time Borrower requests the Offshore Rate Term Loan (which request must be received by the Bank not later than three banking days prior to the first day of such Offshore Rate Interest Period), will be applicable to such Offshore Rate Interest Period. 'Offshore Rate Interest Period' means for each Offshore Rate Term Loan the period commencing on the date the Offshore Rate Term Loan is made and ending on the last day of the second month after the Offshore Rate Term Loan is made and each successive three month period thereafter; provided, however, that the last day of each Offshore Rate Interest Period shall be (a) determined in accordance with the practices of the 7 Offshore Dollar inter-bank markets as from time to time in effect and (b) on or prior to September 30, 1998. "(e) On the date each Term Loan is made, the Borrower shall pay the Bank a fee in an amount equal to 0.125% of the amount of the Term Loan. "(f) The maximum amount which may be outstanding under Paragraph 1.1 shall be reduced in an amount equal to the aggregate amount of the Term Loans made." (n) Paragraph 1.9 of the Credit Agreement shall be amended, respectively, in the first, second, and third sentences thereof by deleting the date "July 31, 1994" and inserting in lieu thereof the date "September 30, 1995". (o) Article 2 of the Credit Agreement shall be amended by deleting it in its entirety and inserting in lieu thereof the term "Reserved". (p) Paragraph 6.4 of the Credit Agreement shall be amended by deleting the amount "Five Hundred Thousand and 00/100 Dollars ($500,000.00)" and inserting in lieu thereof the amount "One Million and 00/100 Dollars ($1,000,000.00)". (q) Paragraph 6.5 of the Credit Agreement shall be amended by deleting it in its entirety and restating it in full, as follows: "6.5 Maintain at all times on a consolidated basis a ratio of (a) the sum of cash, cash equivalents, short-term cash investments, and billed accounts receivable to (b) current liabilities of at least 1.00 to 1.00. Current liabilities shall be determined in accordance with generally accepted accounting principles consistently applied;" (r) Paragraph 6.6 of the Credit Agreement shall be amended by deleting it in its entirety and restating it in full, as follows: "6.6 Not suffer or incur on a consolidated basis any quarterly net or operating loss in any two consecutive quarters;" (s) Paragraph 6.7 of the Credit Agreement shall be amended by deleting it in its entirety and restating it in full, as follows: "6.7 (a) Maintain on a consolidated basis a Tangible Net Worth of at least $53,000,000.00 plus 75% of net profit after taxes as of each quarter starting with the quarter ending on June 30, 1994 plus 100% of new equity as of each quarter starting with the quarter 8 ending on June 30, 1994; (b) not permit Borrower's total liabilities not subordinated in a manner satisfactory to Bank to all of Borrower's indebtedness to Bank to exceed Tangible Net Worth. For purposes of this Agreement, 'Tangible Net Worth' means the gross book value of the assets of Borrower (exclusive of goodwill, patents, trademarks, trade names, organization expense, treasury stock, unamortized debt discount and expense, deferred charges and other like intangibles) less (i) reserves applicable thereto and (ii) all liabilities including accrued and deferred income taxes other than indebtedness subordinated, in a manner satisfactory to Bank, to all of Borrower's indebtedness to Bank; total liabilities and the components of Tangible Net Worth shall be determined in accordance with generally accepted accounting principles consistently applied;" (t) Exhibit A of the Credit Agreement shall be deleted in its entirety. 3. REPRESENTATIONS AND WARRANTIES. The Borrower hereby represents and warrants to the Bank as follows: (a) No event which is, or with the lapse of time or notice or both would be, an Event of Default has occurred and is continuing. (b) The execution, delivery and performance by the Borrower of this Amendment have been duly authorized by all necessary corporate and other action and do not and will not require any registration with, consent or approval of, notice to or action by, any person (including any governmental regulatory authority) in order to be effective and enforceable. The Credit Agreement as amended by this Amendment constitutes the legal, valid and binding obligations of the Borrower, enforceable against it in accordance with its respective terms, without defense, counterclaim or offset. (c) All representations and warranties of the Borrower contained in the Credit Agreement are true and correct. (d) The Borrower is entering into this Amendment on the basis of its own investigation and for its own reasons, without reliance upon the Bank or any other person. 4. EFFECTIVE DATE. This Amendment will become effective as of August , 1994 (the "FIRST AMENDMENT EFFECTIVE DATE"), PROVIDED THAT each of the following conditions precedent has been satisfied: (a) The Bank has received from the Borrower a duly executed original of this Amendment. 9 (b) The Bank has received from the Borrower a copy of a resolution passed by the board of directors of such corporation, certified by the Secretary or an Assistant Secretary of such corporation as being in full force and effect on the date hereof, authorizing the execution, delivery and performance of this Amendment. On the First Amendment Effective Date, Bank and Borrower agree that the Credit Agreement shall be in full force and effect as of such date, as amended by this Amendment. 5. RESERVATION OF RIGHTS. The Borrower acknowledges and agrees that the execution and delivery by the Bank of this Amendment shall not be deemed to create a course of dealing or otherwise obligate the Bank to forbear or execute similar amendments under the same or similar circumstances in the future. 6. MISCELLANEOUS. (a) Except as herein expressly amended, all terms, covenants and provisions of the Credit Agreement are and shall remain in full force and effect and all references therein to such Credit Agreement shall henceforth refer to the Credit Agreement as amended by this Amendment. This Amendment shall be deemed incorporated into, and a part of, the Credit Agreement. (b) This Amendment shall be binding upon and inure to the benefit of the parties hereto and thereto and their respective successors and assigns. No third party beneficiaries are intended in connection with this Amendment. (c) This Amendment shall be governed by and construed in accordance with the law of the State of California. (d) This Amendment may be executed in any number of counterparts, each of which shall be deemed an original, but all such counterparts together shall constitute but one and the same instrument. (e) This Amendment, together with the Credit Agreement, contains the entire and exclusive agreement of the parties hereto with reference to the matters discussed herein and therein. This Amendment supersedes all prior drafts and communications with respect thereto. This Amendment may not be amended except in accordance with the provisions of Paragraph 8.3 of the Credit Agreement. (f) If any term or provision of this Amendment shall be deemed prohibited by or invalid under any applicable law, such provision shall be invalidated without affecting the remaining provisions of this Amendment or the Credit Agreement, respectively. 10 (g) Borrower covenants to pay to or reimburse the Bank, upon demand, for all costs and expenses (including allocated costs of in-house counsel) incurred in connection with the development, preparation, negotiation, execution and delivery of this Amendment, including without limitation appraisal, audit, search and filing fees incurred in connection therewith. IN WITNESS WHEREOF, the parties hereto have executed and delivered this Amendment as of the date first above written. STANFORD TELECOMMUNICATIONS, INC. By: /s/ James J. Spilker, Jr. ----------------------------- Name: James J. Spilker, Jr. -------------------------- Title: Chairman, President -------------------------- By: /s/ Gary Wolf ----------------------------- Name: Gary Wolf -------------------------- Title: Senior Vice President, CFO -------------------------- BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION By: /s/ Allen B. Miner ------------------------- Title: Vice President 11 EX-13.1 3 EX-13.1 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW Since the Company's inception in 1973, revenues have been generated primarily from sales to agencies of the U.S. Government, including the DoD, the U.S. Air Force, Army and Navy, NASA and the FAA, or their prime contractors. Such revenues are generated from many contracts including programs requiring multi-year hardware and software development and limited production of products and systems. The Company's contracts often require the design, production, operation and maintenance of sophisticated equipment and systems and provision of system integration services in the digital telecommunications and satellite communications fields. A substantial portion of the digital telecommunications and satellite communications research and development performed by the Company since its inception has been funded by its customers and recorded as revenues by the Company. Accordingly, the cost of performing this customer-funded research and development is included in "Direct and Indirect Costs" in the Company's financial statements. The Company's government contracts are generally cost-reimbursement plus profit or fixed-price contracts. The Company generally recognizes revenues from its long-term government contracts on a percentage-of-completion basis. Commencing in the late 1980s, the Company began to pursue commercial opportunities utilizing its digital telecommunications technology developed and enhanced by the Company since its inception. Commercial revenues have risen from less than 6% of total revenues in fiscal 1989 to approximately 31% of total revenues in fiscal 1995. During fiscal 1995, commercial revenues which amounted to approximately $35.6 million included: (i) contract manufacturing revenues from the Company's electronics assembly business ($12.1 million); (ii) sales of ASICs, circuit boards and subsystems to the telecommunications industry ($9.1 million); (iii) sales of off-the-shelf products for secure voice transmissions and GPS instrumentation ($7.5 million); (iv) development programs for INTELSAT and for a vehicle tracking and information services system ($4.0 million); and (v) other commercial systems and product business ($2.9 million). The Company includes in commercial revenues sales of standardized or off-the-shelf products such as the digital interfaces for secure voice transmissions or GPS simulators to any customers, including government customers. The Company's operating results have from time to time been adversely affected by non-recoverable cost overruns on certain fixed-price contracts, primarily fixed-price development contracts which have included significant software and hardware development. The Company's net income in fiscal 1993, 1994 and 1995 was adversely affected due to losses on a number of fixed-price development contracts. The Company has been instituting additional management controls to more closely monitor its bidding process and costs incurred on fixed-price development contracts, however, no assurance can be given that the Company will not incur losses on future fixed-price contracts or additional losses on existing contracts. The Company believes that development contracts are an important element in maintaining its technological leadership position in digital telecommunications. The Company plans to selectively bid on programs where it would be the sole provider or its technology leadership provides a competitive advantage. In addition, in order to position itself in the commercial marketplace, the Company may selectively enter into contracts with customers to deliver products where the Company will be funding a portion of the development costs. As a result, the Company may incur losses on certain fixed-price contracts. Such losses will be charged against results of operations in the period when they first become known, typically near the initiation of the contract and may have a material adverse effect on the Company's results of operations. RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, certain items from the Company's Statements of Income expressed as a percentage of the Company's total revenues:
YEAR ENDED MARCH 31 ------------------------ 1993 1994 1995 ------ ------ ------ Revenues . . . . . . . . . . . . . . . . . . . . . . . . 100.0% 100.0% 100.0% Costs and expenses: Direct and indirect costs . . . . . . . . . . . . . . 83.7 82.0 83.6 General and administrative . . . . . . . . . . . . . 6.3 6.9 8.2 Research and development . . . . . . . . . . . . . . 7.5 6.5 6.8 ------ ------ ------ 97.5 95.4 98.6 ------ ------ ------ Income from operations . . . . . . . . . . . . . . . 2.5 4.6 1.4 Interest (expense) income net . . . . . . . . . . . . . (0.5) (0.1) .6 Arbitration settlement expenses . . . . . . . . . . . . -- -- (1.8) ------ ------ ------ Income before provision for income taxes and accounting change . . . . . . . 2.0 4.5 .2 Provision for income taxes . . . . . . . . . . . . . . . (0.8) (1.6) (.1) ------ ------ ------ Income before change in accounting method . . . . . . . 1.2 2.9 .1 Cumulative effect of change in accounting method . . . . -- 0.7 -- ------ ------ ------ Net income . . . . . . . . . . . . . . . . . . . . . . . 1.2% 3.6% .1% ------ ------ ------ ------ ------ ------
13 COMPARISON OF FISCAL YEARS 1993, 1994 AND 1995 REVENUES. Revenues were $92.8 million, $98.1 million and $114.4 million in fiscal 1993, 1994 and 1995, respectively, representing year-to-year increases of 6% in fiscal 1994 and 17% in fiscal 1995. The increase in revenues from fiscal 1993 to fiscal 1994 is primarily attributable to an increase in the Company's commercial operations. The increase in revenues from fiscal 1994 to fiscal 1995 is attributable to increases in both the Company's commercial operations as well as its government business sectors. Fiscal 1995 commercial and government business revenues of approximately $35.6 million and $78.8 million, respectively, compares with fiscal 1994 commercial and government business revenues of $26.9 million and $71.2 million, respectively and fiscal 1993 commercial and government business revenues of $36.5 million and $76.3 million, respectively. Although the Company experienced an increase in its government business revenues during fiscal 1995, budgetary pressures continue to affect Department of Defense and NASA budgets. The Company anticipates that its revenues from these government customers may not increase at the same level as experienced during fiscal 1995 and may remain flat and could decline in future periods. All contracts with the government are cancelable at any time for the convenience of the government. The Company is not aware of the cancellation or proposed cancellation of any of its current contracts. The Company plans to continue to selectively pursue government business where it has a competitive advantage, can be the sole provider or can be a prime contractor rather than a subcontractor. Over the past three years, the Company's commercial business represented approximately 18% of total revenues in fiscal 1993, 27% in fiscal 1994 and 31% in fiscal 1995. During this period, the volume of commercial business has increased as a result of the expansion of its contract manufacturing operations which followed the acquisition of a small electronics assembly facility in fiscal 1993, the organization of a separate division in fiscal 1991 to pursue opportunities for selling ASICs, circuit boards and subsystems to the telecommunications industry, the sale of of-the-shelf products and development programs for INTELSAT and for NYNEX Assurance Services. DIRECT AND INDIRECT COSTS. Direct and indirect costs were $77.7 million, $80.4 million and $95.7 million in fiscal 1993, 1994 and 1995, respectively, representing 83.7%, 82.0% and 83.6% of revenues, respectively. The decrease in direct and indirect costs as a percentage of revenues in fiscal 1994 relative to fiscal 1993 is attributable primarily to a reduction in non-recoverable cost overruns on certain fixed-price development contracts. The increase in direct and indirect costs as a percentage of revenues in fiscal 1995 relative to fiscal 1994 is attributable primarily to an increase in reserves and non-recoverable cost overruns on certain fixed-price contracts. In fiscal 1993, 1994 and 1995, the Company experienced losses totaling $5.3 million, $2.4 million and $4.2 million, respectively on a number of fixed-price development contracts. For fiscal 1995, the company recorded a reserve of $2.8 million against the completion of a development contract with INTELSAT and incurred losses on several other development contracts totaling $1.4 million. The largest loss contract, other than INTELSAT, was a $.4 million loss taken against the completion of a U.S. Navy contract. GENERAL AND ADMINISTRATIVE. General and administrative expenses were $5.9 million, $6.8 million and $9.4 million, respectively, representing year-to-year increases of 15% in fiscal 1994 and 38% in fiscal 1995. These increases were primarily a result of hiring additional technical marketing personnel and increased marketing expenses in pursuit of commercial opportunities. In addition, the Company has expanded its patent activities and has experienced increased legal costs associated with the protection of its intellectual property. RESEARCH AND DEVELOPMENT. A substantial portion of the Company's research and development expenses consist of bid and proposal expenses associated with government contracts and certain large commercial programs. Bid and proposal expenditures are largely the initial advanced technology development efforts directed toward a specific product or technical task for which the Company must show technical viability. Research and development expenses were $6.9 million, $6.4 million and $7.7 million in fiscal 1993, 1994 and 1995, respectively. The fluctuation in these expenses is attributable primarily to the timing and magnitude of bid and proposal activity and the Company's decisions as to which opportunities to pursue. The Company expects research and development expenses as a percentage of revenues to increase in the future as it pursues additional commercial activities. INCOME FROM OPERATIONS. Income from operations was $2.3 million, $4.5 million and $1.6 million for fiscal 1993, 1994 and 1995 respectively, representing a year-to-year increase of 94% in fiscal 1994 and a decrease of 64% in fiscal 1995. The increase in fiscal 1994 was primarily attributable to increased revenues and reduced losses on certain fixed-price development contracts. The decrease in fiscal 1995 was primarily attributable to an increase in reserves and non-recoverable cost overruns on certain fixed-price contracts and the recognition of revenues on certain large system level contracts at zero or minimal operating margins. The Company has entered into and may continue to enter into certain fixed-price development contracts with zero or minimal operating margin which it believes are essential to maintain and strengthen its competitive market position. INTEREST INCOME (EXPENSE), NET. Interest expense, net was $.4 million, and $.1 million and interest income, net was $.7 million in fiscal 1993, 1994 and 1995, respectively. The reduction in interest expense, net from fiscal 1993 to 1994 reflects the combination of lower interest rates, decreased average borrowings and the effect of interest earned on short-term investments during the fourth quarter of fiscal 1994 resulting from the proceeds generated from the Company's secondary public offering of its common stock. During fiscal 1995 the Company earned interest from the proceeds generated from the Company's secondary public offering completed in January 1994 by investing the proceeds in interest bearing short-term investments. ARBITRATION SETTLEMENT EXPENSES. During the third quarter of fiscal 1995, the Company received an unfavorable decision in an arbitration hearing involving an alleged default under a 1990 joint product development agreement. A charge of $1.6 million associated with the award to the prevailing party and other direct arbitration costs of $.5 million were recognized. PROVISION FOR INCOME TAXES. Provision for income taxes was $.7 million, $1.5 million and $.1 million in fiscal 1993, 1994 and 1995, respectively. This represents an effective tax rate of 38.7% for fiscal 1993 and 35.0% for fiscal 1994 and 1995. The decrease in the effective tax rate during fiscal 1994 and 1995 compared with fiscal 1993 results primarily from the effect of the Omnibus Budget Reconciliation Act of 1993 and increased research and development tax credits. ACCOUNTING CHANGE. Effective April 1, 1993, the Company adopted the provisions of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes." The cumulative effect of this change in accounting principle was an increase in net income of $.7 million in the first quarter of fiscal 1994. This item is non-recurring and does not affect any prior or later periods. BOOKINGS AND BACKLOG. Funded bookings were $78.8 million, $106.6 million and $127.8 million in fiscal 1993, 1994 and 1995, respectively, representing year-to-year increases of 35% in fiscal 1994 and 20% in fiscal 1995. The increase in bookings were derived from both the Company's commercial operations as well as its government business sectors. During the past two fiscal years, the Company has increased its commercial bookings through expanded commercial offerings and has successfully pursued government business requiring development and delivery of fixed and mobile satellite terminals. The increase in bookings has resulted in the Company's backlog increasing from from $50.6 million at the end of fiscal 1993 to $59.1 million at the end of fiscal 1994, and to $72.5 million at the end of fiscal 1995. QUARTERLY RESULTS The Company's revenues and results of operations are subject to fluctuation from period to period. Factors that could cause the Company's revenues and operating results to vary from period to period include: underestimating costs on fixed-price contracts particularly for software and hardware development; timing, bidding activity and delivery of significant contracts and orders; termination of contracts; mix of products and systems sold, and services provided; historically reduced levels of operation during the holidays which occur primarily in the Company's third fiscal quarter; disruptions in delivery of components or subsystems; regulatory developments; and general economic conditions. Revenues have 14 QUARTERLY RESULTS The following table presents the Company's financial results by quarter for fiscal 1993, 1994 and 1995. These quarterly financial results are unaudited. In the opinion of management, however, they have been prepared on the same basis as the audited financial information and include all adjustments necessary for a fair presentation of the information set forth therein. The operating results for any quarter are not necessarily indicative of the results that may be expected for any future period.
QUARTER ENDED (IN THOUSANDS, EXCEPT PER SHARE DATA) ----------------------------------------------------------------------------------- FISCAL 1993 FISCAL 1994 ---------------------------------------- ----------------------------------------- JUNE 30 SEPT. 30 DEC. 31 MAR. 31 JUNE 30 SEPT. 30 DEC. 31 MAR. 31 ------- -------- -------- -------- -------- -------- -------- -------- STATEMENTS OF INCOME DATA: Revenues . . . . . . . . . . . . . . $20,788 $24,224 $21,609 $26,200 $24,322 $25,260 $23,445 $25,028 Costs and expenses: Direct and indirect costs . . . . 18,097 19,992 17,815 21,811 19,607 20,983 19,575 20,277 General and administrative . . . . 1,360 1,628 1,354 1,529 1,411 1,793 1,631 1,925 Research and development . . . . . 1,961 1,720 1,275 1,960 2,102 1,202 1,120 1,931 ------- -------- -------- -------- -------- -------- -------- -------- Total costs and expenses . . . 21,418 23,340 20,444 25,300 23,120 23,978 22,326 24,133 ------- -------- -------- -------- -------- -------- -------- -------- Income (loss) from operations . . . . . . . . . . . (630) 884 1,165 900 1,202 1,282 1,119 895 Interest (expense) income net . . . (82) (89) (137) (120) (70) (88) (77) 100 Arbitration settlement expenses . . -- -- -- -- -- -- -- -- ------- -------- -------- -------- -------- -------- -------- -------- Income (loss) before income taxes and accounting chang . . . (712) 795 1,028 780 1,132 1,194 1,042 995 (Provision) credit for income taxes . . . . . . . . . . . . . . 279 (311) (398) (302) (442) (404) (378) (303) ------- -------- -------- -------- -------- -------- -------- -------- Income (loss) before change in accounting method . . . . . . (433) 484 630 478 690 790 664 692 Cumulative effect of change in accounting method . . . . . . -- -- -- -- 700 -- -- -- ------- -------- -------- -------- -------- -------- -------- -------- Net income (loss) . . . . . . . . . $ (433) $ 484 $ 630 $ 478 $ 1,390 $ 790 $ 664 $ 692 ------- -------- -------- -------- -------- -------- -------- -------- ------- -------- -------- -------- -------- -------- -------- -------- Net income (loss) per spare . . . . $ (.09) $ .10 $ .13 $ .10 $ .28 $ .16 $ .13 $ .12 ------- -------- -------- -------- -------- -------- -------- -------- ------- -------- -------- -------- -------- -------- -------- -------- Weighted average common shares and equivalents . . . . . 4,860 4,857 4,853 4,869 4,900 4,976 5,058 5,867 QUARTER ENDED (IN THOUSANDS, EXCEPT PER SHARE DATA) ---------------------------------------- FISCAL 1995 ----------------------------------------- JUNE 30 SEPT. 30 DEC. 31 MAR. 31 -------- -------- -------- -------- STATEMENTS OF INCOME DATA: Revenues . . . . . . . . . . . . . . $24,645 $28,319 $26,499 $34,921 Costs and expenses: Direct and indirect costs . . . . 19,244 22,633 24,689 29,113 General and administrative . . . . 2,000 2,423 2,166 2,773 Research and development . . . . . 2,032 2,302 1,345 2,044 -------- -------- -------- -------- Total costs and expenses . . . 23,276 27,358 28,200 33,930 -------- -------- -------- -------- Income (loss) from operations . . . . . . . . . . . 1,369 961 (1,701) 991 Interest (expense) income net . . . 180 156 191 130 Arbitration settlement expenses . . -- -- (2,075) -- -------- -------- -------- -------- Income (loss) before income taxes and accounting chang . . . 1,549 1,117 (3,585) 1,121 (Provision) credit for income taxes . . . . . . . . . . . . . . (557) (403) 1,282 (393) -------- -------- -------- -------- Income (loss) before change in accounting method . . . . . . 992 714 (2,303) 728 Cumulative effect of change in accounting method . . . . . . -- -- -- -- -------- -------- -------- -------- Net income (loss) . . . . . . . . . $ 992 $ 714 $(2,303) $ 728 -------- -------- -------- -------- -------- -------- -------- -------- Net income (loss) per spare . . . . $ .16 $ .11 $ (.37) $ .12 -------- -------- -------- -------- -------- -------- -------- -------- Weighted average common shares and equivalents . . . . . 6,221 6,244 6,256 6,252
generally increased on a quarterly basis since fiscal 1993 as a result of increasing commercial activities during the past three years and increased government related activities experienced during fiscal 1995. Revenues are generally lower during the third fiscal quarter ending December 31 because the Company reduces operations during the holiday period, and it expects to continue to reduce activities in future holiday periods. The Company's results of operation are adversely affected by losses on fixed-price development contracts. Direct and indirect costs were adversely affected throughout fiscal 1993, 1994 and 1995, by cost overruns on certain fixed-price development contracts. Research and development expenses include both research and development costs as well as bid and proposal expenses. Bid and proposal expenses, which often make up a substantial portion of this expense category, vary significantly from period to period based on the number of proposals being prepared at any time. These requests for proposals are not received evenly during the year or in any predictable pattern. LIQUIDITY AND CAPITAL RESOURCES Working capital increased from $26.2 million to $48.7 million at March 31, 1993 and 1994, respectively, and decreased to $48.0 million at March 31, 1995. The increase in working capital of $22.5 million from March 31, 1993 to March 31, 1994 was largely attributable to the Company's secondary offering of its common stock completed during January 1994. The decrease in working capital at March 31, 1995 was primarily attributable to a cash award paid to the prevailing party in an arbitration dispute and the need to fund certain contract losses. Net cash provided by operating activities for the years ended March 31, 1993, 1994 and 1995 was $3.2 million, $9.8 million and $1.2 million, respectively. The increase in net cash provided by operating activities from fiscal 1994 to 1994 was largely attributable to an increase in net income and a decrease in unbilled receivables. The decrease from fiscal 1994 to fiscal 1995 was largely attributable to an increase in receivables, an increase in inventories associated with commercial contracts and a decrease in net income, associated with the cost overruns on fixed price development contracts and the arbitration settlement expenses. The Company utilized its cash for the purchase of property and equipment totaling $4.7 million, $5.8 million and $6.2 million in fiscal 1993, 1994 and 1995. The Company has a bank credit commitment of $15.0 million which it has utilized to augment cash flow needs and to secure standby letter of credit or term loans not to exceed the lesser of $5.0 million, or the amount of fixed assets purchased during the preceding twelve months. Available borrowings under this line at March 31, 1995 were $15.0 million. Under this line of credit the Company must maintain certain financial covenants, including a minimum debt coverage for two consecutive fiscal quarters. As a result of not maintaining the minimum debt coverage during the third quarter of fiscal 1995, the Company is prohibited from utilizing the long term loan provision of its credit agreement for a minimum of six months unless a waiver is requested by the Company and granted by the bank. As of March 31, 1995 a waiver has not been requested. The credit arrangment expires on September 30, 1995. At March 31, 1995, the Company's long-term obligations (including current maturities) and capital lease obligations totaled approximately $.3 million. At March 31, 1995, cash and cash equivalents of $2.9 million were held in money market accounts and short-term investments of $9.9 million were held in U.S. Government Treasury instruments. The Company believes that its current cash position, funds generated from operations and funds available from its existing bank credit agreement, will be adequate to meet the Company's requirements for working capital, capital expenditures and debt service for the foreseeable future. 15 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Stanford Telecommunications, Inc.: We have audited the accompanying balance sheets of Stanford Telecommunications, Inc. (a Delaware Corporation) as of March 31, 1995 and 1994, and the related statements of income, shareholders' equity and cash flows for each of the three years in the period ended March 31, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Stanford Telecommunications, Inc. as of March 31, 1995 and 1994 and the results of its operations and its cash flows for each of the three years in the period ended March 31, 1995 in conformity with generally accepted accounting principles. As discussed in Note 6 of the notes to financial statements, effective April 1, 1993, the Company changed its method of accounting for income taxes. /s/ Arthur Andersen LLP ARTHUR ANDERSEN LLP San Jose, California May 2, 1995 (except with respect to the matter discussed in Note 9, as to which the date is May 9, 1995). STATEMENTS OF INCOME (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED MARCH 31 ------------------------------- 1995 1994 1993 --------- -------- -------- Revenues . . . . . . . . . . . . . . . . . . . . . . . . $114,384 $ 98,055 $ 92,821 --------- -------- -------- Costs and expenses: Direct and indirect costs . . . . . . . . . . . . . . 95,679 80,442 77,715 General and administrative . . . . . . . . . . . . . . 9,362 6,760 5,871 Research and development . . . . . . . . . . . . . . 7,723 6,355 6,916 --------- -------- -------- 112,764 93,557 90,502 --------- -------- -------- Income from operations . . . . . . . . . . . . . . . . 1,620 4,498 2,319 Interest income (expense), net . . . . . . . . . . . . . 657 (135) (428) Arbitration settlement expenses . . . . . . . . . . . . (2,075) -- -- --------- -------- -------- Income before provision for income taxes and change in accounting method . . . . . . . . . . . . 202 4,363 1,891 Provision for income taxes . . . . . . . . . . . . . . . (71) (1,527) (732) --------- -------- -------- Income before change in accounting method . . . . . . . 131 2,836 1,159 Cumulative effect of change in accounting method . . . . -- 700 -- --------- -------- -------- Net income . . . . . . . . . . . . . . . . . . . . . . . $ 131 $ 3,536 $ 1,159 --------- -------- -------- --------- -------- -------- Earnings per share: Income before change in accounting method . . . . . . $ .02 $ .54 $ .24 Cumulative effect of change in accounting method . . . -- .14 -- --------- -------- -------- Net Income . . . . . . . . . . . . . . . . . . . . . . $ .02 $ .68 $ .24 --------- -------- -------- --------- -------- -------- Weighted average number of common and common equivalent shares outstanding . . . . . . . . 6,242 5,197 4,865 --------- -------- -------- --------- -------- --------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS. 16 BALANCE SHEETS (IN THOUSANDS, EXCEPT PER SHARE AMOUNT)
MARCH 31 ----------------- 1995 1994 ASSETS Current assets: Cash and cash equivalents $ 2,910 $ 5,840 Short-term investments 9,907 11,466 Accounts receivable 22,930 15,911 Unbilled receivables 16,891 16,593 Inventories, net of related progress billings 15,798 8,745 Prepaid expenses and other 3,558 1,570 -------- -------- Total current assets 71,994 60,125 -------- -------- Property and equipment at cost: Electronic test equipment 38,108 33,949 Furniture and fixtures 2,889 3,225 Leasehold improvements 3,052 2,550 -------- -------- 44,049 39,724 Less: Accumulated depreciation and amortization (28,441) (25,719) -------- -------- Net property and equipment 15,608 14,005 -------- -------- Other assets 403 373 -------- -------- $ 88,005 $ 74,503 -------- -------- -------- -------- LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current maturities of long-term obligations $ 158 $ 171 Accounts payable 11,268 3,420 Advance payments from customers 963 791 Accrued liabilities 10,183 6,519 Accrued and current deferred income taxes 1,463 565 -------- -------- Total current liabilities 24,035 11,466 -------- -------- Long-term obligations, less current maturites 161 235 -------- -------- Other long-term liabilities 927 626 -------- -------- Deferred income taxes 785 809 -------- -------- Commitments and contingencies (Notes 3 and 8) Shareholders' equity: Common shares - par value $.01; 10,000 shares authorized Common stock - Authorized - 9,000 shares Outstanding - 6,234 shares in 1995; 6,181 shares in 1994 62 62 Series B Common Stock - Authorized - 800 shares Outstanding - none --- --- Paid-in capital 37,051 36,452 Retained earnings 24,984 24,853 -------- -------- Total shareholders' equity 62,097 61,367 -------- -------- $ 88,005 $ 74,503 -------- -------- -------- --------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS. 17 STATEMENTS OF SHAREHOLDERS' EQUITY (IN THOUSANDS)
COMMON STOCK TOTAL ----------------- PAID-IN RETAINED SHAREHOLDERS' SHARES AMOUNT CAPITAL EARNINGS EQUITY ------ ------ ------- -------- ------------- BALANCE, MARCH 31, 1992 4,870 $ 48 $16,294 $ 20,158 $36,500 Sale of common stock under Employee Stock Option Plan, net of shares exchanged 34 1 119 --- 120 Issuance of common stock as awards to employees 2 --- 8 --- 8 Repurchase of common stock (42) (1) (215) --- (216) Net income --- --- --- 1,159 1,159 ------ ----- ------- ------ ------- BALANCE, MARCH 31, 1993 4,864 48 16,206 21,317 37,571 Sale of common stock, net of issuance costs 1,150 12 17,985 --- 17,997 Sale of common stock under Employee Stock Purchase Plan 8 --- 182 --- 182 Sale of common stock under Employee Stock Option Plan, net of shares exchanged 155 2 1,582 --- 1,584 Issuance of common stock as awards to employees 4 --- 50 --- 50 Tax benefits from employee stock transactions --- --- 447 --- 447 Net income --- --- --- 3,536 3,536 ------- ------- ------- ------- ------- BALANCE, MARCH 31, 1994 6,181 62 36,452 24,853 61,367 Sale of common stock under Employee Stock Purchase Plan 36 --- 430 --- 430 Sale of common stock under Employee Stock Option Plan, net of shares exchanged 14 --- 86 --- 86 Issuance of common stock as awards to employees 3 --- 42 --- 42 Tax benefits from employee stock transactions --- --- 41 --- 41 Net income --- --- --- 131 131 ------- ------- ------- ------- ------- BALANCE, MARCH 31, 1995 6,234 $ 62 $37,051 $24,984 $62,097 ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS. 18 STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEAR ENDED MARCH 31 -------------------------- 1995 1994 1993 ------- ------- ------- Cash flows from operating activities: Net income $ 131 $ 3,536 $ 1,159 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 4,330 3,960 3,983 Issuances of stock to employees under bonus and award plans 42 50 8 Provision for losses on receivables and contracts 3,073 202 172 Loss on retirements of property and equipment 210 159 --- Change in accounting method --- (700) --- (Increase) decrease in assets: Receivables billed and unbilled (8,355) 5,251 (3,302) Inventories (6,888) (3,467) 723 Prepaid expenses and other assets (2,018) (84) 766 Increase (decrease) in liabilities: Accounts payable, advance payments and accrued expenses 9,484 (488) 230 Other long-term liabilities 301 601 25 Accrued and deferred income taxes 874 798 (533) -------- -------- ------- Net cash provided by operating activities 1,184 9,818 3,231 -------- -------- ------- Cash used in investing activities: Purchase of short-term investments (9,907) (11,466) --- Proceeds from maturities of short-term investments 11,466 --- --- Purchase of property and equipment (6,210) (5,846) (4,733) Proceeds from sale of property and equipment 67 --- --- -------- -------- ------- Net cash used in investing activities (4,584) (17,312) (4,733) -------- -------- ------- Cash flows from financing activities: Payments on capital lease obligations (87) (176) (108) Payments on notes payable to bank --- (14,925) (11,219) Proceeds from term notes --- 7,800 13,500 Proceeds from transactions under stock plans 557 1,766 120 Proceeds from sale of common stock --- 17,997 --- Repurchase of common stock --- --- (216) ------- -------- ------- Net cash provided by financing activities 470 12,462 2,077 ------- -------- ------- Net increase (decrease) in cash and cash equivalents (2,930) 4,968 575 Cash and cash equivalents at beginning of year 5,840 872 297 ------- -------- ------- Cash and cash equivalents at end of year $ 2,910 $ 5,840 $ 872 ------- -------- ------- ------- -------- ------- SUPPLEMENTAL CASH FLOW INFORMATION (IN THOUSANDS) Cash paid during the year for interest and income taxes was as follows: 1995 1994 1993 ------- -------- ------- Interest $ 51 $ 264 $ 464 Income taxes $ 769 $ 1,353 $ 448
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS. 19 NOTES TO FINANCIAL STATEMENTS MARCH 31, 1995 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES REVENUE RECOGNITION The Company designs, develops, manufactures, markets and supports digital telecommunications systems for satellite communications, navigation and tracking, wireless and digital cable telecommunications. The Company's revenues are generated from U.S. Government contracts where the Company may be either the prime contractor or a subcontractor or from commercial customers. The Company principally uses the percentage-of-completion method of accounting for contract revenues. The percentage-of-completion method is based on total costs incurred to date compared with estimated total costs upon completion of contracts. Revenues for fixed price contracts, which do not have progress payment clauses, are recognized at the time of delivery of the finished product. Certain contracts provide for milestone billings which are recorded as revenues when the defined milestones are met. The company recognizes revenues for standard, off the shelf products and certain commercial products upon shipment to the customer. The Company charges all losses on contracts to cost of sales in the period when the loss is known. Furthermore, the Department of Defense accounted for 44%, 47%, and 53% of total revenues in 1995, 1994, and 1993, respectively. FISCAL YEAR The Companys fiscal year is composed of four 13-week quarters, each of which ends on the Thursday closest to the corresponding calendar quarter end. For convenience, the Company has presented its fiscal year as ending on March 31. RECEIVABLES The Company provides a reserve for doubtful accounts where circumstances indicate that one is necessary. As of March 31, 1995 and 1994, the Company's reserve for doubtful accounts was $650,000 and $243,000, respectively. UNBILLED RECEIVABLES Unbilled receivables represent differences between billings and revenues recognized on fixed price and cost plus contracts. On fixed price contracts, the unbilled amounts represent revenues recognized under the percentage-of-completion method of accounting which exceed the amounts that are billable according to contract terms. In general, the Company is authorized to bill between 80% to 100% of the costs expended on a contract. The remaining portion (if any) is billable as contract deliverables are accepted by the customer. On cost plus contracts, the unbilled amounts mainly represent (a) a portion (generally 15%) of the negotiated contract fees which are not billable until the completion of the contract and (b) differences between actual indirect rates and government approved billing rates which are not billable until approval of final indirect rates by the respective governmental agencies. As of March 31, 1995, the Company has received final indirect rate approval for charges through fiscal 1988. INVENTORIES Inventories are stated at the lower of cost (first-in, first-out) or market. Cost includes materials, labor and related indirect expenses. General and administrative costs are only included in inventory for government contracts, as such costs are reimbursed by the government. Work in-process mainly represents costs incurred on short-term contracts. The components of inventory are (in thousands):
March 31 ------------------------- 1995 1994 ------ ------ Raw materials and supplies $ 175 $ 179 Work-in-process 13,027 6,401 Finished goods 1,820 1,303 Allocated general and administrative costs 938 867 Less progress billings (162) (5) -------- ------- $15,798 $8,745 -------- ------- -------- -------
Total general and administrative expenses incurred during the fiscal years ended March 31, 1995, 1994 and 1993 are $9,362,000, $6,953,000 and $5,901,000, respectively. CAPITALIZED COMPUTER SOFTWARE Effective April 1, 1994, the Company began capitalizing certain software development costs in compliance with Statement of Financial Accounting Standards No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed". Prior to that date, eligible costs had not been significant. Capitalization of Computer software development costs begins upon the establishment of technological feasibility of the product. The establishment of technological feasibility and the ongoing assessment of the recoverability of these costs require considerable judgment by management with respect to certain external factors, including, but not limited to, anticipated future gross product revenues, estimated economic life and changes in software and hardware technology. The Company capitalizes direct costs incurred in connection with the software development subsequent to the establishment of technological feasibility for the products. Capitalized software development costs amounted to $367,000 in 1995 and are included in property and equipment in the accompanying balance sheet. Amortization of capitalizated software begins upon initial product shipment and extends over the estimated economic life of the product. As of March 31, 1995 $30,000 has been amortized and the net value is $337,000. DEPRECIATION AND AMORTIZATION Depreciation and amortization are provided over the estimated useful lives of the assets (5 to 7 years or the term of the lease), using the straight-line method for financial reporting purposes and accelerated methods for certain depreciable assets for tax purposes. 20 ACCRUED LIABILITIES Accrued liabilities consist of the following (in thousands):
MARCH 31 ----------------------- 1995 1994 ------ ------ Compensation and employee benefits. . $5,710 $5,296 Accrued contract cost . . . . . . . . 3,595 525 Other . . . . . . . . . . . . . . . . 878 698 ------- ------- $10,183 $6,519 ------- ------- ------- -------
INVESTMENTS IN DEBT AND EQUITY SECURITIES Effective April 1, 1994, the Company adopted the provisions of "SFAS" No. 115. "Accounting for Certain Investments in Debt and Equity Securities." The Adoption of SFAS No. 115 did not have a material impact on the Company's financial statements. As of March 31, 1995 the aggregate cost basis, fair market value and unrealized holding gain on short term investments consisted of $9,907,000, $10,090,000 and $183,000, respectively. Short term investments consist entirely of U.S. Treasury Notes and are classified as held to maturity. The securities mature at various dates within one year. 2. LINE OF CREDIT The Company has a bank credit commitment of $15,000,000 which it has utilized to augment cash flow needs and standby letter of credit and to secure term loans not to exceed the lesser of $5,000,000 or the amount of fixed assets purchased during the preceding twelve months. Available borrowings under this line at March 31, 1995 were $15,000,000. Under this line of credit the Company must maintain certain financial covenants, including a minimum debt coverage for two consecutive fiscal quarters. As a result of not maintaining the minimum debt coverage during the third quarter of fiscal 1995, the Company is prohibited from utilizing the long term loan provision of its credit agreement for a minimum of six months unless a waiver is requested by the Company and granted by the bank. As of March 31, 1995, a waiver was not requested. The credit commitment expires on September 30, 1995. 3. COMMITMENTS The Company leases its buildings and other equipment under noncancellable operating lease agreements that expire at various dates through 2003. The Company also leases certain office equipment under capital leases which expire during 2000. The terms of several of the Company's leases provide for deferral of cash rental payments over various periods. Rental expense under these agreements is recognized on a straight-line basis. As of March 31, 1995 the Company has accrued approximately $877,000 in related expense which is included in other long-term liabilities in the accompanying balance sheet. Approximate future minimum lease payments under these leases are as follows (in thousands):
Year Ending March 31 Operating Leases Capital Leases ---------------- -------------- 1996 . . . . . . . . . . . . . $ 3,228 $161 1997 . . . . . . . . . . . . . 2,960 90 1998 . . . . . . . . . . . . . 2,967 67 1999 . . . . . . . . . . . . . 3,012 22 2000 . . . . . . . . . . . . . 2,538 7 Thereafter . . . . . . . . . . 2,764 -- ------- ---- Total minimum lease payments . $17,469 347 ------- ------- Less: interest . . . . . . . . (28) ---- 319 Less current portion . . . . . (158) ----- $161 ----- -----
Rental expenses charged to operations totalled approximately $3,432,000, $3,387,000, and $4,358,000 for the years ended March 31, 1995, 1994 and 1993, respectively. During 1995, 1994, and 1993 the Company acquired equipment under capital leases in the amounts of $81,000, $52,000, and $357,000, respectively. 4. EARNINGS PER SHARE Earnings per share is computed using the weighted average number of shares of common stock and common stock equivalents outstanding during the periods. Common stock equivalents consist of the dilutive effect of outstanding options to purchase common stock. Fully diluted earnings per share are substantially the same as reported earnings per share. 5. RETIREMENT PLAN The Employee Retirement Plan, a defined contribution plan covering substantially all employees, provides for future Company contributions of 3% of eligible employees annual compensation. The Company's combined contributions totaled approximately $1,037,000 in 1995, $1,006,000 in 1994 and $1,123,000 in 1993. The Employee Retirement Plan permits eligible employees to make voluntary before-tax salary deferral contributions 6. INCOME TAXES Through March 31, 1993, the Company accounted for income taxes pursuant to Accounting Principles Board (APB) Opinion 11. Effective April 1, 1993, the Company adopted Statement of Financial Accounting Standards No. 109 (SFAS 109), Accounting for Income Taxes. This statement provides for a liability approach under which 21 deferred income taxes are provided based on enacted tax laws and rates applicable to the periods in which the taxes become payable. SFAS 109 was adopted on a prospective basis and amounts presented for prior years have not been restated. The cumulative effect of this change in accounting method increased earnings in fiscal 1994 by $700,000 or $0.14 per share. Income before provision for income taxes and the provision for income taxes charged to operations were comprised of the following (in thousands):
YEAR ENDED MARCH 31 1995 1994 1993 ------ ------ ------ Income before provision for income taxes $ 202 $4,363 $1,891 ------ ------ ------ ------ ------ ------ Provision for (benefit from) income taxes: Current Federal . . . . . . . . . . . . 1,870 $ 984 $ (71) State . . . . . . . . . . . . . 503 212 (14) Deferred, net Federal . . . . . . . . . . . . (1,817) 210 676 State . . . . . . . . . . . . . (485) 121 141 ------ ------ ------ Net tax provision . . . . . . . . . $ 71 $1,527 $ 732 ------ ------ ------ ------ ------ ------
The principal components of the deferred income tax provision computed under APB 11 for the year ended March 31,1993 is as follows (in thousands):
1993 ------- Percentage-of-completion contract accounting . . . . . . . . . $ 1,215 State income taxes . . . . . . . . . . . . . . . . . . . . . . 77 Expenses recognized for income tax (financial statements) but not for financial statements (income tax ) . . . . . . . (433) Accelerated depreciation . . . . . . . . . . . . . . . . . . . (92) Other 50 ------- Total deferred provision . . . . . . . . . . . . . . . . $ 817 ------- -------
The provision for income taxes for the three years ended March 31, 1995 differs from the U.S. statutory rate principally as follows:
YEAR ENDED MARCH 31 1995 1994 1993 ---- ---- ---- Statutory Federal income tax rate . . . . . . 34.0% 34.0% 34.0% State income taxes, net of Federal benefit. . 5.3 5.3 5.8 Research and development credits . . . . . . (5.0) -- (3.0) Other. . . . . . . . . . . . . . . . . . . . .7 2.4 1.9 Change in valuation allowance . . . . . . . . -- (6.7) -- ----- ------ ------ Effective income tax rate . . . . . . . . . . 35.0% 35.0% 38.7% ----- ----- ------ ----- ----- ------
The major components of deferred tax assets and liabilities as computed under SFAS 109 consisted of the following (in thousands):
MARCH 31 MARCH 31 1995 1994 -------- --------- Deferred tax asset: Reserves and accruals not currently deductible for tax purposes . . . . . . . . $ 3,489 $ 2,273 Tax credits . . . . . . . . . . . . . . . . . 256 -- ------- ------- Total deferred tax asset. . . . . . . . . . 3,745 2,273 Valuation allowance . . . . . . . . . . . . . (206) (206) ------- ------- Deferred tax asset net of allowance . . . . 3,539 2,067 ------- ------- Deferred tax liability: Accelerated depreciation . . . . . . . . . . . (785) (809) Percentage of completion contract accounting . (419) (881) ------- ------- Total deferred tax liability . . . . . . . . (1,204) (1,690) -------- ------- Net deferred tax asset . . . . . . . . . . . $ 2,335 $ 377 ------- ------- ------- -------
The $2,335,000 net deferred tax asset as of March 31, 1995 was allocated on the accompanying balance sheet with $785,000 classified as a long term liability, and the remaining $3,120,000 classified as prepaid expenses and other. 7. COMMON STOCK In January 1994, the Company issued an additional 1,150,000 shares of common stock at a price of $17.00 per share through a secondary public offering, resulting in net proceeds of approximately $18 million. 22 In August 1990, the Board of Directors authorized the purchase of up to $2,500,000 of the Company's common stock on the open market. During 1995 and 1994 no shares were repurchased. Since August 1990 the Company has repurchased 272,500 shares at an average price of $5.51 per share. The 1982 Stock Option Plan expired on January 26, 1991 precluding the issuance of option grants under that plan. However, existing and non-expired options may be exercised in accordance with the terms of the option agreement. Under the 1991 Stock Option Plan (the "1991 Plan"), a total of 500,000 shares of common stock were reserved for future issuance to employees. In February 1995, the Board of Directors, subject to shareholder approval, passed a resolution to amend and restate the Company's 1991 Stock Option Plan. The amended and restated plan (a) increases the number of shares subject to the plan by 500,000 to 1,000,000, (b) permits the grant of options to certain non-employee directors, (c) adds individual grant limitations required under Internal Revenue Code section 162(m), allowing option income for certain individuals to be tax deductible by the Corporation and (d) to make other administrative changes. The 1991 Plan provides for the issuance of either incentive or non-qualified options. Incentive options can be granted at an exercise price not less than fair market value of the stock on the date of grant. Non-qualified options can be granted at an exercise price not less than 85% of the fair market value of the stock on the date of the grant. Options granted under the 1991 Plan become exercisable over such periods as determined by the Board of Directors. The 1991 Plan will expire in the year 2001. Information with respect to these plans is as follows:
1982 Stock Option Plan 1991 Stock Option Plan ----------------------------- ----------------------------------------------- Option Available Option Outstanding Prices for Grant Outstanding Prices ----------------------------- ----------------------------------------------- Balance at March 31, 1992 563,052 $2.00 - $13.80 478,500 21,500 $ 8.00 - $10.00 Granted (53,250) 53,250 $ 5.00 - $10.00 Exercised (79,715) $2.00 - $ 7.50 -- -- -- Terminated (256,792) $1.40 - $12.50 -- -- -- ---------- --------------- --------- -------- ----------------- Balance at March 31, 1993 226,545 $4.50 - $13.80 425,250 74,750 $ 5.00 - $10.00 Granted -- -- (107,684) 107,684 $ 9.25 - $21.25 Exercised (136,743) $4.50 - $13.80 -- (24,062) $ 5.00 - $10.00 Terminated (50,302) $9.25 - $11.60 4,936 (4,936) $ 9.25 - $ 9.50 ---------- --------------- --------- -------- ----------------- Balance at March 31, 1994 39,500 $4.50 - $12.00 322,502 153,436 $ 5.00 - $21.25 Granted -- -- (128,167) 128,167 $12.50 - $19.75 Exercised (15,750) $4.75 - $11.30 (4,661) $ 5.50 - $11.25 Terminated -- -- 2,400 (2,400) $ 9.25 - $17.38 ---------- --------------- --------- -------- ----------------- Balance at March 31, 1995 23,750 $4.50 - $12.00 196,735 274,542 $ 5.00 - $21.25 ---------- --------------- --------- -------- ----------------- ---------- --------------- --------- -------- -----------------
Options to purchase 23,750 and 36,750 shares were exercisable on March 31, 1995 and March 31, 1994, respectively, under the 1982 Stock Option Plan. Under the 1991 Stock Option Plan options to purchase 39,420 shares were exercisable on March 31, 1995, and there were no options to purchase shares exercisable on March 31, 1994. The Company's Series B Restricted Common Stock Plan (the "Series B Plan") provides for the granting of certain stock purchase rights to key employees, officers and directors. The terms of payment, vesting provisions, conditions of purchase (including repurchase rights in favor of the Company) and consideration (which may be promissory notes or outstanding shares of the Company's common stock) for shares sold under the plan are to be determined by the Board of Directors ("Board"). The Series B common stock will be sold at no less than its fair market value. The Series B Plan is administered by the Board or by a committee of the Board. Because of the subordination of such shares to common stock as to certain matters and the uncertainty of the conversion of such shares into common stock, it is anticipated that the price for such shares will be substantially below the market price for the common stock. No purchase rights have been granted and no shares have been issued under the Series B Plan. Under the 1992 Employee Stock Purchase Plan (the "1992 Purchase Plan"), a total of 200,000 shares of common stock have been reserved for issuance. The Company makes offerings at such time and of such duration as its Board determines. As of March 31, 1995, 151,480 shares remained available for purchase. 8. LITIGATION AND CONTINGENCIES Results for 1995 include a third quarter charge of approximately $2.1 million to reflect an unfavorable arbitration award and related costs. The arbitration case relates to an alleged default under a 1990 joint product development agreement with Techsonic Industries, Inc. Under the arbitration decision Techsonic was awarded approximately $1.6 million based on allegations that the Company had failed to successfully complete the product called for by the agreement. The Company is also party to other disputes incidental to its business. The Company has prepared and presented documentation and support to the U.S. Government addressing post-award audit recommendations made by the Defense Contract Audit Agency. Management believes that the outcome of such contingencies will not have a materially adverse effect on the Company's financial position or results of operations. 9. SUBSEQUENT EVENT On May 9, 1995 the Board of Directors adopted a Stockholder Rights Plan and declared a dividend of one Common Share Purchase Right (the "Right") for each share of the Company's common stock outstanding on May 25, 1995. Each Right entitles the holder thereof to purchase one share of the Company's common stock for $60. The Rights will be exercisable if a person or group acquires 15% or more of the Company's common stock. Upon such acquisition, each Right (other than those held by the acquiring person) will be exercisable for the number of shares of the Company's common stock having a market value at that time of twice the exercise price of the Right. If the Company subsequently enters into certain business combinations, each Right (other than those held by the acquiring person or group) will be exercisable for that number of shares of common stock of the other party to the business combination having a market value of two times the exercise price of the Right. The Rights are subject to redemption at the option of the Board of Directors at a price of $.01 per Right. The Rights expire on May 9, 2005. 23 SELECTED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA)
SUMMARY OF OPERATIONS FOR THE FISCAL YEAR YEAR ENDED MARCH 31 -------------------------------------------------------------------- 1995 1994 1993 1992 1991 ---- ---- ---- ---- ----- Revenues $114,384 $98,055 $92,821 $94,908 $102,537 Income from Operations 1,620 4,498 2,319 5,601 6,963 Income before change in accounting method 131 2,836 1,159 3,105 3,678 Cumulative effect of change in accounting method -- 700 -- -- -- Net Income 131 3,536 1,159 3,105 3,678 Income per Share before change in accounting method .02 .54 .24 .63 .75 Cumulative effect of changes in accounting method -- .14 -- -- -- Weighted Average Shares 6,242 5,197 4,865 4,913 4,917 Net Income as a Percent of Revenues .1% 3.6% 1.3% 3.3% 3.6% FINANCIAL POSITION AT END OF FISCAL YEAR Current Assets $ 71,994 $60,125 $45,007 $42,791 $ 41,875 Current Liabilities 24,035 11,466 18,792 16,716 19,145 Working Capital 47,959 48,659 26,215 26,075 22,730 Current Ratio 3.0 5.2 2.4 2.6 2.2 Property and Equipment, net 15,608 14,005 12,226 11,038 11,736 Total Assets 88,005 74,503 57,492 54,088 53,729 Long -Term Debt 161 235 358 246 470 Shareholders' Equity $ 62,097 $61,367 $37,571 $36,500 $ 33,355 Common Stock Outstanding 6,234 6,181 4,864 4,870 4,800 Book Value per Share $ 9.96 $ 9.93 $ 7.72 $ 7.50 $ 6.95
SELECTED COMMON STOCK DATA Stanford Telecommunications, Inc. Common Stock was offered to the public on October 6, 1983, and since that date has been traded on the Nasdaq stock market under the symbol STII. During January 1994, the Company completed a secondary offering of its common stock. The price per share reflected in the table represents the closing prices in the Nasdaq National Market System. The quotations represent inter-dealer quotations, without retail markups, markdowns or commissions, and may not necessarily represent actual transactions. The Company has not paid dividends on its Common Stock since its incorporation and anticipates that for the foreseeable future it will continue to retain its earnings for use in its business. A covenant under the current Line of Credit would require prior approval of any dividend by the Bank. On March 31, 1995, there were approximately 1,427 holders of record of the Company's Common Stock.
FISCAL 1995 HIGH LOW ------ ----- First Quarter 18 3/4 11 Second Quarter 20 1/4 12 1/2 Third Quarter 20 13 1/8 Fourth Quarter 15 1/2 12 1/2 FISCAL 1994 First Quarter 14 3/4 8 Second Quarter 20 1/4 12 1/4 Third Quarter 27 1/2 15 3/4 Fourth Quarter 21 1/2 15 1/2
NASDAQ MARKET MAKERS Oppenheimer & Co * Volpe Welty & Co. * Herzog, Heine, Geduld * Prudential Securities * Troster Singer * Mayer & Schweitzer * Dain, Bosworth * Sherwood Securities Corp. NASDAQ TRADING VOLUME Fiscal 1995 - 6,160,978 shares / Fiscal 1994 - 16,480,929 shares 24 EX-24.1 4 EXHIBIT 24.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our reports included in or incorporated by reference in this Form 10-K, into the Company's previously filed Registration Statements on Forms S-8 (file nos. 2-88852, 2-88853, 33-00714, 33-11743, 33-22956, 33-36977, 33-45090 and 33-68534). /s/ Arthur Andersen LLP San Jose, California June 16, 1995 -20- EX-27 5 EXHIBIT 27
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S ANNUAL REPORT FOR FISCAL YEAR 1995 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 12-MOS MAR-31-1995 MAR-31-1995 2,910 9,907 39,821 650 15,798 71,994 44,049 28,441 88,005 24,035 0 37,113 0 0 0 88,005 114,384 114,384 95,679 112,764 2,075 0 0 202 71 0 0 0 0 131 .02 .02
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