-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SBxAHdFWL1N9f9W4+uiTuT/LxmR9QVej24yWFlo4ClqNq+hTm1nsNaXci8tXh5r3 QNqqJY493QnRLb1TevonCg== 0000950005-99-000158.txt : 19990215 0000950005-99-000158.hdr.sgml : 19990215 ACCESSION NUMBER: 0000950005-99-000158 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990212 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-Q SEC ACT: SEC FILE NUMBER: 001-11473 FILM NUMBER: 99535185 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-Q 1 FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______________to__________________ Commission file number 0-12734 Stanford Telecommunications, Inc. ------------------------------------------------------ (Exact name of registrant as specified in its charter) Delaware 94-2207636 -------- ---------- (State or other jurisdiction of incorporation (I.R.S. Employer or organization) Identification No.) 1221 Crossman Avenue, Sunnyvale, CA 94089 ----------------------------------------- (Address of principal executives offices) (Zip Code) 408/745-0818 ------------ (Registrant's telephone number, including area code) ------------ (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes_X_ No___ APPLICABLE ONLY TO CORPORATE USERS: Indicate the number of outstanding shares of each of the issuer's classes of common stock, as of the latest practical date. 13,032,035 as of February 4, 1999 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS STANFORD TELECOMMUNICATIONS, INC. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) The condensed consolidated financial statements included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the Company believes the disclosures which are made are adequate to make the information presented not misleading. Further, the condensed consolidated financial statements have been prepared in all material respects in conformity with the standards of accounting measurement set forth in Accounting Principles Board Opinion No. 28 and reflect, in the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position and results of operations as of and for the periods indicated. It is suggested that these condensed consolidated financial statements be read in conjunction with the financial statements and the notes thereto included in the Stanford Telecommunications, Inc. 1998 Annual Report. The results of operations for the nine months of fiscal year 1999 ended December 31,1998 are not necessarily indicative of results to be expected for the entire year ending March 31, 1999. STANFORD TELECOMMUNICATIONS, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (in thousands, except per share amount)
Three Months Ended Nine Months Ended December 31, December 31, --------------------------- -------------------------- 1998 1997 1998 1997 -------- -------- -------- -------- Revenues $ 37,132 $ 40,713 $122,198 $112,881 Cost of revenues 29,858 30,778 97,499 84,673 -------- -------- -------- -------- Gross profit 7,276 9,935 24,699 28,208 Expenses Research and development 3,363 3,814 10,489 10,712 Marketing and administrative 5,002 4,463 14,199 13,316 -------- -------- -------- -------- Total expenses 8,365 8,277 24,688 24,028 Operating (loss) income (1,089) 1,658 11 4,180 Interest income 395 502 1,296 1,453 -------- -------- -------- -------- (Loss) income before income taxes (694) 2,160 1,307 5,633 Provision (benefit) for income taxes (215) 583 405 1,746 -------- -------- -------- -------- Net (loss) income $ (479) $ 1,577 $ 902 $ 3,887 ======== ======== ======== ======== Basic shares outstanding 12,974 12,926 12,981 12,886 Basic earnings (loss) per share $ (0.04) $ 0.12 $ 0.07 $ 0.30 ======== ======== ======== ======== Diluted shares outstanding 12,974 13,226 13,126 13,173 Diluted earnings (loss) per share $ (0.04) $ 0.12 $ 0.07 $ 0.30 ======== ======== ======== ======== See accompanying notes
STANFORD TELECOMMUNICATIONS, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands, except per share amount)
December 31, March 31, 1998 1998 --------- --------- (Unaudited) ASSETS Current assets: Cash and cash equivalents $ 18,684 $ 13,914 Short-term investments 9,886 19,493 Accounts receivable 23,872 26,958 Unbilled receivables 25,753 20,911 Inventories 13,763 14,276 Prepaid taxes and other 4,818 1,919 --------- --------- Total current assets 96,776 97,471 --------- --------- Property and equipment at cost: Electronic test equipment 49,997 46,768 Furniture and fixtures 4,053 3,887 Leasehold improvements 4,241 3,996 --------- --------- 58,291 54,651 Less: Accumulated depreciation and amortization (44,900) (40,516) --------- --------- Net property and equipment 13,391 14,135 --------- --------- Other assets 818 535 --------- --------- $ 110,985 $ 112,141 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current maturities of long-term obligations $ 46 $ 44 Accounts payable 5,958 10,739 Advance payments from customers 2,633 1,909 Accrued liabilities 9,953 8,218 Accrued and deferred income taxes 3,402 3,462 --------- --------- Total current liabilities 21,992 24,372 --------- --------- Long-term obligations, less current maturities 77 41 --------- --------- Other long-term liabilities 645 855 --------- --------- Shareholders' equity: Common shares - par value $.01; 25,000 shares authorized Outstanding - 13,009 shares at December 31, 1998 130 - 12,975 shares at March 31, 1998 130 Paid-in capital 42,855 42,359 Retained earnings 45,286 44,384 --------- --------- Total shareholders' equity 88,271 86,873 --------- --------- $ 110,985 $ 112,141 ========= ========= See accompanying notes
STANFORD TELECOMMUNICATIONS, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (in thousands)
Nine Months Ended December 31, ---------------------------- 1998 1997 -------- -------- Cash flows from operating activities: Net income $ 902 $ 3,887 Adjustments to reconcile net income to net cash used in operating activities: Depreciation and amortization 4,747 4,303 Issuances of stock to employees under bonus and award plans 16 22 Change in provision for losses on receivables, contracts and inventories (429) (963) Loss on disposition of property and equipment 34 11 (Increase) decrease in assets: Receivables billed and unbilled (1,550) (7,417) Inventories 736 (7,527) Prepaid taxes and other assets (2,866) 293 Increase (decrease) in liabilities: Accounts payable, advance payments, and accrued expenses (2,237) 3,527 Other long-term liabilities (210) (90) Accrued and deferred income taxes (60) (759) -------- -------- Net cash used in operating activities (917) (4,713) -------- -------- Cash flows used in investing activities: Proceeds from maturities of short-term investments 9,607 6,853 Purchase of property and equipment (4,037) (4,520) -------- -------- Net cash provided by investing activities 5,570 2,333 -------- -------- Cash flows from financing activities: Payments on capital lease obligations (47) (66) Common stock repurchases (858) -- Proceeds from transactions under stock plans 1,022 1,340 -------- -------- Net cash provided by financing activities 117 1,274 -------- -------- Net increase (decrease) in cash and cash equivalents 4,770 (1,106) Cash and cash equivalents at beginning of period 13,914 8,235 -------- -------- Cash and cash equivalents at end of period $ 18,684 $ 7,129 ======== ======== See accompanying notes.
STANFORD TELECOMMUNICATIONS, INC. Notes to Condensed Financial Statements (Unaudited) December 31, 1998 1. Basis of Presentation The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principals for interim financial information. 2. Fiscal Year The Company's fiscal year ending March 31, 1999 is comprised of one 14-week quarter (quarter ended June 30, 1998) and three 13-week quarters. Fiscal year ended March 31, 1998 was comprised of four 13-week quarters. 3. Inventories Inventories are stated at the lower of cost (first-in, first-out) or market. Cost includes materials, labor and related indirect expenses. General and administrative costs are only included in inventory for government contracts, as such costs are reimbursed by the government. The components of inventory are as follows (in thousands): December 31, 1998 March 31, 1998 ----------------- -------------- Work-in-progress $ 10,927 $ 11,176 Finished goods 2,859 3,066 Allocated general and administrative costs 87 136 Less: progress billings (110) (102) -------- -------- $ 13,763 $ 14,276 ======== ======== 4. Earnings (loss) per share Basic earnings per share is computed based on the weighted average number of common shares outstanding. Diluted earnings per share is computed based on the weighted average number of common shares outstanding plus dilutive potential common shares calculated in accordance with the treasury stock method. The Company's dilutive potential common shares are represented by shares issuable through the exercise of stock options. For the first nine months of fiscal 1999 and 1998, the dilutive potential common shares were approximately 150,000 and 308,000 respectively. Options to purchase approximately 677,000 and 86,000 of weighted shares outstanding during the first nine months in fiscal years 1999 and 1998, respectively, were excluded from the computation of diluted earnings per share because the options' exercise prices were greater than the average market price of the Company's common stock during those periods. Basic and diluted earnings per share for the Company are substantially the same. Loss per share is computed using the weighted average number of common shares outstanding during the quarter. 5. Comprehensive Income Effective April 1, 1998 the Company adopted Statement of Financial Accounting Standards No. 130 ("SFAS 130") "reporting Comprehensive Income", which establishes standards for reporting and displaying comprehensive income and its components in the financial statements. For the third quarter and the first nine months of fiscal years 1999 and 1998, the Company's net income (loss) was equal to comprehensive income (loss) as defined in SFAS 130. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview Since the Company's inception in 1973, revenues have been generated primarily from sales to agencies of the U.S. Government, including the DoD, the U.S. Air Force, Army and Navy, NASA and the FAA, or their prime contractors. Such revenues are generated from many contracts including programs requiring multi-year hardware and software development and limited production of products and systems. The Company's contracts often require the design, production, operation and maintenance of sophisticated equipment and systems and provision of system integration services in the digital telecommunications and satellite communications fields. A substantial portion of the digital telecommunications and satellite communications research and development performed by the Company since its inception has been funded by its customers and recorded as revenues by the Company. Accordingly, the cost of performing this customer-funded research and development is included in "Cost of Revenues" in the Company's financial statements. The Company's government contracts are generally cost-reimbursement plus profit or fixed-price contracts. The Company generally recognizes revenues from its long-term government contracts on a percentage-of-completion basis. Commencing in the late 1980's, the Company began to pursue commercial opportunities utilizing its digital telecommunications technology developed and enhanced by the Company since its inception. Commercial revenues have risen from less than 6% of total revenues in fiscal year 1989 to approximately 38% of total revenues in fiscal year 1998. During the first nine months of fiscal year 1999, commercial revenues amounted to approximately 37% of the total revenues reported. The Company includes in commercial revenues sales of standard or off-the-shelf products to any customers, including government customers. Over the past four years the Company has invested heavily in the development of a family of products to deliver telephone and data services over wireless broadband links. The high level of R&D expenses associated with the development of the wireless broadband family impacted the earnings results for the Company over the past several years. In order to provide further detail as to the level of revenues, cost of revenues, and operating expenses incurred by the base business and the corresponding financial performance of the broadband wireless business, the Company established a wholly owned subsidiary, Stanford Wireless Broadband, Inc. in June 1998. In addition to providing financial visibility, the establishment of the subsidiary allows the Company's wireless broadband customers the benefit of working with a unique and separate entity dedicated to the development, manufacturing, sales and support of its broadband family of products. The table shown below provides a summary of the financial performance for the base business operations and Stanford Wireless Broadband, Inc. for the third quarter of fiscal 1999 and nine months ended December 31, 1998:
Three months ended Nine months ended December 31, 1998 December 31, 1998 -------------------------------- -------------------------------- Base Stanford Base Stanford Business Wireless Business Wireless Operations Broadband, Inc Operations Broadband, Inc. ---------- -------------- ---------- --------------- Revenues from unaffiliated customers $ 31,434 $ 5,698 $ 99,126 $ 23,072 Cost of revenues 23,824 6,032 75,268 22,231 -------- -------- -------- -------- Gross profit (loss) 7,610 (334) 23,858 841 Expenses Research and development 731 2,632 2,685 7,804 Marketing and administrative 3,323 1,679 9,201 4,998 -------- -------- -------- -------- Total expenses 4,054 4,311 11,886 12,802 -------- -------- -------- -------- Operating income (loss) $ 3,556 $ (4,645) $ 11,972 $(11,961) ======== ======== ======== ========
For the third quarter of fiscal year 1999, revenues for Base Business Operations consisted of $24.0 million and $7.4 million of Government and commercial revenues, respectively. Of the $5.7 million of revenues realized by Stanford Wireless Broadband during the third quarter approximately $5.1 million were derived from the subsidiary's commercial manufacturing operations. For the first nine months of fiscal year 1999, revenues for Base Business Operations consisted of $76.4 million and $22.7 million of Government and commercial revenues respectively. Revenues for Stanford Wireless Broadband consisted primarily of commercial contract manufacturing revenues amounting to $20.4 million. The Company's wireless broadband subsidiary's operating loss for the third quarter and the first nine months of fiscal year 1999, was attributable to a continued high level of research and development in the wireless broadband family of products, the increased level of cost associated with activities necessary to support worldwide LMDS and MMDS field trials, and an operating loss associated with the manufacturing operation. The Company's operating results have from time to time been adversely affected by non-recoverable cost overruns on certain fixed-price contracts, primarily fixed-price development contracts. The Company has management controls to closely monitor its bidding process and costs incurred on fixed-price development contracts, however, no assurance can be given that the Company will not incur losses on future fixed-price contracts or additional losses on existing contracts. The Company believes that development contracts are an important element in maintaining its technological leadership position in digital telecommunications. As a result, the Company may incur losses on certain fixed-price contracts. Such losses will be charged against results of operations in the period when they first become known, and may have a material adverse effect on the Company's results of operations. Year 2000 issue The "Year 2000 Issue", also known as "Y2K", exists because many computer programs store and process dates using only the last two digits of the year in the date field. If not corrected, many computer applications could create miscalculations or erroneous results causing disruptions of operations. The Company has made this issue a significant priority and has formed an Interdisciplinary Steering Committee, which has been meeting regularly since January 1998, dedicated to the evaluation and mitigation of any Y2K issues. The Committee is responsible for determining the overall structure and approach for addressing the Y2K issue, and coordinating the Company's legal, financial and business resources towards remediation of any Y2K issues. This Committee is also responsible for overseeing and providing guidelines for four sub-task forces whose function is to focus on specific areas of the Y2K issue, namely products, software, customers and suppliers. In March of 1998, the Corporate Steering Committee implemented a remediation plan to address mission-critical software (mission-critical is defined as software or systems that can seriously impair the Company's ability to conduct its business) and products impacted by the Y2K issue including Information Technology "IT" systems, such as financial reporting systems, and non-IT systems such as building security systems. The Company has completed the first phase which was to identify and assess the risks of various aspects of the Y2K issue and the second phase which was to test mission-critical software and IT systems. The third phase is to correct and replace any software and products impacted by the Y2K issue. The final phase is to draft and put into effect any contingency plan necessary to mitigate any Y2K issues. The Company expects this project to be completed by the end of June 1999. The Company does not anticipate the costs associated with the implementation of this plan or its findings on the Y2K issue will have a material impact to the Company's financial position, capital resources, or results of operation. The above statements describing the Company's plans and objectives for handling the Y2K Issue and the expected impact involve risks and uncertainties that could cause actual results to differ materially from the results discussed above, therefore having an adverse effect on future results of operations. Uncertainties that might cause such a difference include, but are not limited to, delays in executing the plan or unforeseen costs associated with implementation of the plan. Further, even if the Company successfully implements the plan, there is no assurance that the company will not be adversely affected by the failure of others to become Year-2000 compliant. Cautionary Statements In the interest of providing the Company's shareholders and potential investors with certain Company information, including management's assessment of the Company's future potential, certain statements set forth herein (a) contain or are based on projections of revenue, income, earnings per share and other financial items or (b) relate to management's future plans, expectations, and objectives or to the Company's future economic performance. Such statements are forward-looking statements within the meaning of Section 27A(i) of the Securities Act of 1933, as amended, and in Section 21E(i) of the Securities Exchange Act of 1934, as amended. Although any forward-looking statements contained herein or otherwise expressed by or on behalf of the Company are to the knowledge and in the judgment of the officers and directors of the Company, expected to prove true and to come to pass, management is not able to predict the future with absolute certainty. Accordingly, shareholders and potential investors are hereby cautioned that certain events or circumstances could cause actual results to differ materially from those projected or predicted herein. In addition, the forward-looking statements herein are based on management's knowledge and judgment as of the date hereof, and the Company does not intend to update any forward-looking statements to reflect events occurring or circumstances existing hereafter. For further information on the foregoing, reference is made to the Company's Securities and Exchange Commission report on Form 10-K. Quarterly Results The following table presents the Company's financial results by quarter for fiscal 1998 and the first three quarters of fiscal 1999. These quarterly financial results are unaudited. In the opinion of management, however, they have been prepared on the same basis as the audited financial information and include all adjustments necessary for a fair presentation of the information set forth therein. The operating results for any quarter are not necessarily indicative of the results that may be expected for any future period. Quarter Ended Statement of Operations Data (in thousands, except per share data)
Fiscal 1998 Fiscal 1999 -------------------------------------------- --------------------------------- June 30 Sept. 30 Dec. 31 Mar. 31 June 30 Sept. 30 Dec. 31 -------- -------- -------- -------- -------- -------- -------- Revenues $ 35,331 $ 36,838 $ 40,713 $ 40,378 $ 44,362 $ 40,705 $ 37,132 Cost of revenues 26,430 27,465 30,778 31,956 34,919 32,724 29,856 -------- -------- -------- -------- -------- -------- -------- Gross profit 8,901 9,373 9,935 8,422 9,443 7,981 7,276 -------- -------- -------- -------- -------- -------- -------- Expenses: Research and development 3,031 3,868 3,814 2,934 3,709 3,417 3,363 Marketing and administrative 4,251 4,602 4,463 4,005 4,712 4,485 5,002 -------- -------- -------- -------- -------- -------- -------- Total expenses 7,282 8,470 8,277 6,939 8,421 7,902 8,365 Operating income (loss) 1,619 903 1,658 1,483 1,022 79 (1,089) Interest income 459 492 502 443 484 417 395 -------- -------- -------- -------- -------- -------- -------- (Loss) income before income taxes 2,078 1,395 2,160 1,926 1,506 496 (694) (Provision) benefit for income taxes (696) (467) (583) (597) (467) (154) 215 -------- -------- -------- -------- -------- -------- -------- Net income (loss) $ 1,382 $ 928 $ 1,577 $ 1,329 $ 1,039 $ 342 $ (479) ======== ======== ======== ======== ======== ======== ======== Basic shares outstanding 12,841 12,888 12,927 12,953 12,976 12,993 12,974 Basic earnings (loss) per share $ 0.11 $ 0.07 $ 0.12 $ 0.10 $ 0.08 $ 0.03 $ (0.04) ======== ======== ======== ======== ======== ======== ======== Diluted shares outstanding 13,073 13,219 13,226 13,199 13,171 13,122 12,974 Diluted earnings (loss) per share $ 0.11 $ 0.07 $ 0.12 $ 0.10 $ 0.08 $ 0.03 $ (0.04) ======== ======== ======== ======== ======== ======== ========
The Company's revenues and results of operations are subject to fluctuation from period to period. Factors that could cause the Company's revenues and operating results to vary from period to period include: underestimating costs on fixed-price contracts, particularly for software and hardware development, timing, bidding activity and delivery of significant contracts and orders, termination of contracts, mix of products and systems sold, and services provided, reduced levels of operation during the holidays which occur primarily in the Company's third fiscal quarter, disruptions in delivery of components or subsystems, regulatory developments, and general economic conditions. Research and development expenses include both research and development costs as well as bid and proposal expenses. Bid and proposal expenses vary significantly from period to period based on the number of proposals being prepared at any time. These requests for proposals are not received evenly during the year or in any predictable pattern. Comparison of the Third Quarter Ended December 31, 1998 and 1997 Revenues. Revenues were $37.1 million and $40.7 million for the third quarter of fiscal years 1999 and 1998, respectively, representing a decrease of approximately 9%. Government revenues during the third quarter of fiscal year 1999 totaled $24.0 million, a decrease of 6% from Government revenues of $25.4 million recorded during the third quarter of fiscal year 1998. Commercial revenues during the third quarter of fiscal year 1999 totaled $13.1 million, a decrease of 14% from commercial revenues of $15.3 million recorded during the third quarter of fiscal year 1998. The decrease can be partially attributed to the Christmas Holiday shutdown wherein the majority of the Company facilities are closed for a week. During fiscal 1999, the shutdown occurred during the third accounting quarter while during fiscal 1998 the shutdown occurred during the fourth accounting quarter. The revenue decrease is also attributable to lower revenues derived from the Company's commercial contract manufacturing services. Revenues from commercial contract manufacturing services were $5.1 million and $7.0 million for the third quarter of fiscal years 1999 and 1998, respectively. The sale of commercial telecommunication chip and board level products for the third quarter of fiscal years 1999 and 1998 were $3.3 million and $4.7 million respectively. Cost of Revenues. Cost of revenues were $29.9 million and $30.8 million for the third quarter of fiscal 1999 and 1998, respectively, representing a 3% decrease. The decrease during the third quarter of fiscal 1999 was the result of the recognition of costs on a lower revenue base. The increase in cost of revenues as a percentage of revenues from the third quarter of fiscal year 1998 to the third quarter of fiscal year 1999 is attributable to the Company's wireless broadband subsidiary's lower margin contracts associated with field trials of LMDS and MMDS and a gross loss associated with the contract manufacturing operation. The Company anticipates it will continue to expend resources in support of on-going and anticipated field trials of its wireless broadband products over the next several quarters. Research and Development. During recent quarters, the Company has focused a large portion of its available research and development funds on the development of commercial products. Research and development expenses, including bid and proposal expenses were $3.4 million and $3.8 million during the third quarter of fiscal 1999 and 1998, respectively. Excluding bid and proposal expenses, the Company's research and development expenses which are primarily applied to the development of products such as wireless broadband communications were substantially the same at $3.0 million during the third quarter of fiscal 1999 and 1998. Bid and proposal expenses were $0.4 million and $0.8 million for the third quarter of fiscal years 1999 and 1998 respectively. The decrease in bid and proposal expenses is mainly attributable to the timing and release of request for proposals from the Company's Government customers. The Company expects the level of bid and proposal to increase in the fourth quarter of fiscal year 1999. Marketing and Administrative. Marketing and Administrative expenses were $5.0 million and $4.5 million for the third quarter of fiscal 1999 and 1998, respectively. The increase can be partially attributed to an increase in marketing expenses associated with the Company's base business operations. The increase is also attributed to the Company's active marketing in pursuit of commercial opportunities as well as increased legal fees primarily associated with a patent infringement case brought by the Company in December 1996 against Broadcom Corporation. The case has been scheduled to go to trial in May of 1999. Operating Income (Loss). The Company incurred an operating loss for the third quarter of fiscal year 1999 of $1.1 million compared to an operating income of $1.7 million for the third quarter of fiscal year 1998. The operating loss during the third quarter of fiscal 1999 was primarily attributable to the lower margin contracts experienced by the Company's wireless broadband subsidiary due to the increased level of cost associated with activities necessary to support worldwide LMDS and MMDS field trials and an operating loss associated with the manufacturing operation. Interest Income. Interest income for the third quarter of fiscal year 1999 was $0.4 million compared to $0.5 million for the third quarter of the previous fiscal year. The decrease in interest income is the result of the Company maintaining lower average balances in U.S. treasury instruments and money market accounts. Provision/Benefit for Income Taxes. During the third quarter of fiscal year 1999, the Company recognized a benefit for income taxes of $215 thousand as compared to a provision for income taxes of $583 thousand for the third quarter of fiscal year 1998. This represents a provisional tax rate of 31% and 27% for the third quarter of fiscal 1999 and 1998, respectively. The effective tax rate for all of fiscal year 1998 was 31%. The Company does not expect the effective tax rate to increase over the next several quarters. Comparison of Nine Months Ended December 31, 1998 and 1997 Revenues. Revenues were $122.2 million and $112.9 million for the nine months ended December 31, 1998 and 1997, respectively, representing an increase of 8%. Government revenues during the nine months of fiscal year 1999 totaled $76.4 million, an increase of 9% from Government revenues of $70.2 million recorded during the first nine months of fiscal year 1998. Commercial revenues during the first three quarters of fiscal 1999 totaled $45.8 million, an increase of 7% from commercial revenues of $42.6 million recorded during the first nine months of fiscal 1998. During the first nine months of fiscal 1999, revenues from the Company's commercial contract manufacturing services totaled $20.4 million up from $18.4 million recorded for the first nine months of fiscal 1998. The Company's other commercial activities increased by $4.5 million from the first nine months of fiscal year 1998 to fiscal year 1999 mainly attributable to the Company's commercial systems engineering services and wireless broadband activities. Revenues from the sale of commercial telecommunication chip and board level products totaled $8.0 million for the first nine months of fiscal 1999, down from $11.4 million achieved during the nine months of the previous fiscal year. Cost of Revenues. Cost of revenues were $97.5 million and $84.7 million for the first nine months of fiscal 1999 and 1998, respectively. The increase was a result of the recognition of costs on a higher revenue base. The increase in cost of revenues as a percentage of revenues for the first nine months of fiscal year 1998 to the first nine months of fiscal year 1999 can be attributable to the lower margins experienced by the Company's wireless broadband subsidiary due to the increased level of cost associated with activities necessary to support worldwide LMDS and MMDS field trials and the contract manufacturing operation. The Company anticipates it will continue to expend resources in support of on-going and anticipated field trials of its wireless broadband products into fiscal year 2000. Research and Development. Research and development expenses, including bid and proposal expenses were $10.5 million and $10.7 million for the first nine months of fiscal 1999 and 1998, respectively. Excluding bid and proposal expenses, the Company's research and development expenses applied to the development of products such as wireless broadband communications and telecommunication chip and board level products were $9.1 million and $8.6 million for the first nine months of fiscal 1999 and 1998, respectively. Bid and proposal expenses were $1.4 million and $2.1 million for the three quarters of fiscal years 1999 and 1998, respectively. The decrease in bid and proposal expenses is mainly attributable to the timing and release of request for proposals from the Company's Government customers. Marketing and Administrative. Marketing and administrative expenses were $14.2 million and $13.3 million for the first nine months of fiscal 1999 and 1998, respectively. The Company continues its active marketing in pursuit of commercial and base business opportunities as well as increased legal fees primarily associated with a patent infringement case brought by the Company in December 1996 against Broadcom Corporation. Operating Income. Operating income was $11 thousand and $4.1 million for the first nine months of fiscal 1999 and 1998, respectively. The decrease in operating income during the first nine months of fiscal 1999 was primarily attributable to the operating loss sustained by the Company's wireless broadband subsidiary. Interest Income. Interest income for the nine months of fiscal year 1999 was $1.3 million compared to $1.5 million recorded in the previous fiscal year. The decrease in interest income is the result of the Company maintaining lower average balances in U.S. treasury instruments and money market accounts. Provision for Income Taxes. Provision for income taxes was $0.4 million and $1.7 million for the first nine months of fiscal years 1999 and 1998, respectively. This represents a provisional tax rate of 31%. Bookings and Backlog Funded bookings were $40.0 million and $38.0 million for the third quarter of fiscal 1999 and 1998, respectively, and $108.9 million and $123.5 million for the nine months ended December 31, 1998 and 1997, respectively. Bookings were derived from both the Company's commercial operations as well as its government business sectors. At the end of the third quarter of fiscal 1999 and 1998, backlog stood at $80.3 million and $94.5 million, respectively. The Company's bookings and backlog are largely dependent upon the timing of funding by its Government customers. The Company anticipates that the Government will provide additional funding on several of its contracts in future quarters. Liquidity and Capital Resources Working capital increased from $71.4 million as of December 31, 1997 to $74.8 million as of December 31, 1998, and increased by $1.7 million from the end of fiscal 1998. The increase is due significantly to an increase in receivables resulting from increased revenues. Accounts receivable as of December 31, 1998, includes a $3.6 million secured note receivable for one of the Company's customers. Due to the customer's short-term liqudity condition, the Company agreed to extended payment terms. The note matures in May of 1999. The Company expects to recover the full value of the note. Net cash used in operating activities for the first nine months of fiscal year 1999, was $0.9 million compared to $4.7 million for the first nine months of the previous fiscal year. This decrease is attributable to smaller growth in receivables and utilization versus building of inventory. The Company utilized its cash for the purchase of property and equipment totaling $4.0 million and $4.5 million during the first nine months of fiscal 1999 and 1998 respectively. At December 31, 1998 the Company's long-term obligations (including current maturities) and other long-term liabilities totaled approximately $.7 million compared to December 31, 1997 of $.9 million. At December 31, 1998, cash and cash equivalents of $18.7 million were substantially held in money market accounts and short term investments of $9.9 million were held in U.S. treasury instruments with maturities not exceeding 365 days. During the second quarter of fiscal year 1999, the Company announced a plan to repurchase the Company's common stock in open-market transactions. The plan authorizes the purchase of up to 1,000,000 shares of STII Common Stock. Since the authorization of this plan, the Company repurchased 84,000 shares in open market transactions at an average price of $10.22 per share. The Company has a bank credit commitment of $15.0 million that it can utilize to augment cash flow needs and to secure standby letters of credit. Available borrowings under this line at December 31, 1998 were $15.0 million. Under this line of credit the Company must maintain certain financial covenants, including a covenant prohibiting the Company from incurring a quarterly loss in any two consecutive quarters. The Company is in compliance with all covenants throughout the first nine months of fiscal 1999. The credit agreement expires on December 17, 1999. The Company believes that its current cash position, funds generated from operations and funds available from its existing bank credit agreement, will be adequate to meet the Company's requirement for working capital, capital expenditures and debt service for the next several fiscal quarters. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K No current Reports on Form 8-K were filed with the Securities and Exchange Commission during the period covered by this Form 10-Q. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Stanford Telecommunications, Inc. (Registrant) /s/ Jerome F. Klajbor - ----------------------------------------------- Jerome F. Klajbor Vice-President and Chief Financial Officer (Principal Financial and Accounting Officer) February 11, 1999 EX-27 2 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED STATEMENT OF INCOME AND THE CONSOLIDATED BALANCE SHEET AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1000 9-MOS APR-01-1998 MAR-31-1999 DEC-31-1998 18,684 9,886 49,625 0 13,763 96,776 58,291 44,900 110,985 21,992 0 0 0 130 88,141 110,985 122,198 122,198 97,499 122,187 0 0 0 1,307 405 902 0 0 0 902 0.07 0.07
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