November 03, 2000
ADAPTIVE BROADBAND CORP
(ADAP)
Quarterly Report (SEC form 10-Q)
Management's Discussion and Analysis of Financial Condition and Results of Operations
Statements made below and in the Adaptive Broadband Corporations 2000 Annual Report to Shareholders contain
forward-looking statements that involve risks and uncertainties, including statements regarding our markets, the ability to be a
leader in our markets and to achieve our growth objectives, the future of network computing, data communications and
broadcasting and other matters, as well as statements about the results of litigation or disputes, the results of post-closing
procedures in connection with discontinued operations sale agreements, product mix and international operations, the effect of
new accounting pronouncements, the realization of certain tax assets, adequacy of funds for the foreseeable future and
expectations for fiscal year 2001 and beyond. Words such as "believes," "anticipates," "expects," "intends," and similar
expressions are intended to identify forward-looking statements, but are not the exclusive means of identifying such statements.
You should not place undue reliance on these forward-looking statements. These statements reflect management's analysis only
as of the date thereof, and we assume no obligation to update these statements. Actual events or results may differ materially
from the events or results discussed in the forward-looking statements. Factors that could cause our actual results to differ
materially from these forward-looking statements include, but are not limited to, the level of demand for products, competition,
new product introductions by competitors, the pace of market acceptance of our new products, our ability to participate and
respond to rapid technological change, challenges in implementing the plan to divest our legacy businesses, availability of
qualified personnel, risks related to international sales, delays in the receipt of orders or in the shipment of products, changes in
demand for products, cost overruns, foreign currency exchange rate fluctuations, timely availability of supply of components,
dependence on major orders from a small number of customers, limitations on our ability to reduce inventory and expenses if
forecasts and expected demand are not realized, general economic conditions, and whether our claims and defenses in litigation
and disputes are viewed as meritorious. For a more detailed discussion of these and other factors, see " Information Regarding
Forward Looking Statements " in our Annual Report on Form 10-K for the fiscal year ended June 30, 2000, and in our
Consolidated Financial Statements and Notes to Consolidated Financial Statements. The Consolidated Financial Statements
should be read in conjunction with this Management's Discussion and Analysis of Financial Conditions and Results of
Operations.
In order to focus on the high-growth wireless broadband access market, in July 2000, we sold the EFData Satellite Products
Division (EFData), the Microwave Data Systems Division (MDS) and the Microwave Radio Communications Division
(MRC). The operating results and financial position of these three divisions have been classified as discontinued operations for
all periods presented in the financial statements. See Note 5 - Discontinued Operations, of Notes to Condensed Consolidated
Financial Statements for further discussion.
Share amounts and related information have been restated to reflect our stock- split in the form of a two for one common stock
dividend paid on March 30, 2000.
RESULTS OF OPERATIONS
Overview
We are a supplier of data communications transmission equipment that is developing leading-edge technology for the
deployment of broadband wireless communications over the Internet. Our AB-AccessTM fixed wireless broadband system
(AB-Access) provides a high-speed means to bridge the "last mile" for business and residential subscribers by replacing or
supplementing the traditional telephone company local loop. It offers two-way data transmission at rates up to 25 Mbps, which
provides the capability for real-time video conferencing, voice, transmission of full streaming video, web surfing, and
transmission of data files - all simultaneously and over one connection.
Following the successful field trials of AB-Access technology, we began to ship AB-Access products to customers in the first
quarter of fiscal year 2000. As of September 30, 2000, we have generated over $1.5 billion of contracted five-year demand
for the AB-Access product. These contracts generally required twelve- month rolling forecasts of product purchases, including
penalty provisions in the event of a purchase order cancellation. Solectron Corporation (Solectron) has been contracted to
manufacture the AB-Access product line with the goal of lowering per unit product costs as a result of manufacturing
economies of scale.
Since our acquisition of Adaptive Broadband Limited (ABL) in August 1998, our operating activities have related primarily to
developing a research and development organization, testing prototype designs and commencing the staffing of our sales,
marketing, field services, and technical support organizations. We have incurred operating losses due to our investments in
research and development, as well as sales and marketing of the AB-Access technology and product offerings. The substantial
increase in our operating expenses over the same period a year ago was primarily due to our organizational expansion to
provide support for the growth of our business.
For the quarter ended September 30, 2000, excluding a $7.9 million pre-tax gain on investments, we reported a net loss from
continuing operations, which reflect solely the results of the AB-Access wireless broadband business, of $2.4 million, or $.06
per share, compared to a loss of $4.8 million, or $0.16 per share, for the same quarter a year ago.
Revenue
Revenue was $24.2 million for the quarter ended September 30, 2000, representing a $23.1 million increase from $1.1 million
for the same period a year ago, which was the first quarter for shipments of AB-Access products. Revenue also increased from
the quarter ended June 30, 2000 of $17.1 million, representing a 42% sequential growth. The increase is mainly due to
increased market demand and manufacturing volume. We added 22 new customers to our active customer list during the
quarter ending September 30, 2000, bringing number of total customers to 63.
The majority of our bookings and revenue were domestic; however, as we expand our product offerings to other frequency
ranges useable in foreign countries, international revenue could increase significantly in the future. For the quarter ended
September 30, 2000, international revenue accounted for approximately 18% of our total revenue. Currently, all of our
international revenue is denominated in U.S. dollars. For the quarter ended September 30, 2000, three customers each
accounted for 10% or more of our revenue and all three combined accounted for 76% of revenue.
We generally record bookings for new orders received if the product will be shipped to the customer within twelve months.
New orders booked were $30.0 million for the quarter ended September 30, 2000, compared to bookings of $12.5 million for
the same quarter a year ago. Backlog at September 30, 2000 was $72.4 million.
Gross Margin
As a percentage of revenue, our gross margin was 30% for the quarter ended September 30, 2000, compared with (24%) for
the same quarter a year ago, and 15% for the quarter ended June 30, 2000. The significant improvement in our gross margin is
largely attributable to increased efficiency on higher volume production, better manufacturing capacity utilization, as well as
transition to manufacturing lower-cost ASIC (Application Specific Integrated Circuit) chips for the AB-Access product
platform. The ASIC chip replaces four other high- cost chips, thus reducing the cost of the AB-Access product.
Operating Expenses
Research and development expenses for continuing operations were $5.0 million and $2.1 million for the quarter ended
September 30, 2000 and 1999. The increase in research and development expenses was mainly attributable to an increase in
research and development personnel and outside consultants, as well as prototype charges for developing technology for
products in multiple frequency bands for both the domestic and international markets. We believe that the continual and rapid
introduction of new products and technologies is critical to sustaining growth within our current and future target markets, and
we expect to continue to commit substantial resources to product development and engineering in future periods. In addition,
we may consider acquiring additional technologies complementary to our business through strategic acquisitions.
Sales, marketing and administrative expenses for continuing operations were $7.6 million and $4.7 million for the quarter ended
September 30, 2000 and 1999. The increase was primarily due to the expansion in our sales and marketing staffing to support
the growing level of bid and proposal activities for the new AB- Access products, increased sales commissions associated with
generating AB- Access revenue, and increased promotional and product marketing expenses. We believe that continued
investment in sales and marketing is critical to our success and expect these expenses to increase in the future.
The amortization of intangible assets, which consist of assembled workforce and goodwill associated with the acquisition of
ABL, was $0.1 million for the quarters ended September 30, 2000 and 1999.
Interest Income (Expense) and Other
Net interest income (expense) was $1.6 million and ($0.3) million for the quarter ended September 30, 2000 and 1999. The
higher interest income in the quarter ended September 30, 2000 was primarily due to interest earned on higher average cash
balances resulting from the sales proceeds of our discontinued operations and of our investments. In addition, interest expense
was lowered due to the conversion of our $57.5 million 5.25% subordinated notes into common stock, and the payoff of our
credit facility in the quarter ended December 30, 1999.
During the quarter ended September 30, 2000, we collected approximately $10.4 million of cash proceeds from the sale of our
interests in Astro Terra Corporation, a laser communications technology company and recorded a gain of $7.9 million on the
sale, net of loss on disposition of other investments.
Provision for Income Taxes
The income tax provision (benefit) from continuing operations was $1.5 million and ($2.7) million for the three months ended
September 30, 2000 and 1999. The effective income tax rate for the three months ended September 30, 2000 and 1999 was
consistent at 36%.
Discontinued Operations
In July 2000, we sold the EFData Satellite Products Division (EFData), the Microwave Data Systems Division (MDS) and the
Microwave Radio Communications Division (MRC). We recorded an estimated loss of $8.3 million (net of income taxes) on
disposal of the three divisions in the quarter ended June 30, 2000. In the quarter ended September 30, 2000, we accrued an
additional $1 million loss (net of taxes) for final transaction related expenses. Final accounting for the MRC division is subject to
completion of the post-closing procedures
provided for in the MRC purchase agreement. We have been monitoring and have accrued for transaction costs related to the
sales that may occur in the post- closing procedures. We believe that the completion of these procedures will not have a
material impact on our financial position, results of operations, or cash flows.
In April 1999, we completed the sale of our Government Division to Northrop Grumman Corporation (Northrop Grumman)
for $93 million in cash, for a net gain of approximately $36 million (net of income taxes). The Government Division provided
specialized products and services principally in the areas of communications, reconnaissance, and surveillance systems used in
low-altitude airplanes. The Government Division sale price includes up to an additional $5 million cash payment, contingent
upon the future performance of the divested business. Northrop Grumman has notified us that Northrop Grumman believes
there is no basis for any contingent future payment. We have not recognized any benefit for this contingent future payment. Final
accounting for the Government Division is subject to completion of the post-closing procedures provided for in the Northrop
Grumman agreement. We have accrued for future price adjustments that may occur in the post-closing procedures for the
Government Division divestiture. At September 30, 2000, the discontinued operations reserve for the Government Division
divestiture was $3.2 million. We believe that the completion of these procedures will not have a material impact on our financial
position, results of operations, or cash flows.
In July 1999, Northrop Grumman filed a lawsuit against us alleging that we failed to disclose certain events and information as
required by the terms of the agreement pursuant to which Northrop Grumman acquired the Government Division of the
Company in April 1999. No damages have been specified. In September 1999, we filed a cross-complaint against Northrop
Grumman seeking to recover in excess of $3.7 million, which represents the amount that we contend Northrop Grumman
appropriated from our bank accounts following the acquisition. We believe that we have strong defenses and counterclaims and
plan to vigorously defend the lawsuit filed by Northrop Grumman and to pursue our counterclaims. No provisions have been
made for expenses that may be incurred to resolve the lawsuit, and we believe final resolution of the Northrop Grumman
allegations will not have a material impact on our financial position, results of operations, or cash flows.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2000, our net working capital was $125.4 million, which included $120.3 million of cash and cash
equivalents, as compared to net working capital of $73.1 million, which included cash and cash equivalents of $16.5 million, at
June 30, 2000. The increase in cash and cash equivalents was primarily due to proceeds from the sale of discontinued
operations and investments, offset by cash used for continuing operations.
For the three months ended September 30, 2000, we used $18.4 million of cash for continuing operating activities, primarily
due to a loss from operations, an increase in accounts receivable of $10.8 million and a decrease in accounts payable and other
accrued liability of $14.5 million, offset by a decrease in inventory of $10.3 million. For the same period in the prior year, we
used $9.3 million of cash for continuing operating activities, primarily due to a loss from operations and a decrease in accounts
payable and other accrued liability of $2.0 million.
For the three months ended September 30, 2000, we collected $120.4 million of cash from investing activities, including
proceeds from the sale of discontinued operations for $110.0 million, proceeds from the sale of technology investment for
$10.4 million, offset by $1.3 million used for capital expenditures. For the same period in the prior year, we used $0.5 million
for capital expenditures and $9.0 million for discontinued operations.
For the three months ended September 30, 2000 and 1999, we received $2.1 million and $4.9 million cash from the sale of
common stock under our stock option and stock purchase plans. During the quarter ended September 30, 1999, we acquired
252,500 shares of our common stock for $3.3 million, bringing the total shares repurchased to approximately 5.6 million shares
under the board of directors authorized twelve million share common stock repurchase plan. The Company is not currently
repurchasing shares on an active basis.
In March 2000, we entered into a secured revolving credit facility with available credit of $25 million that expires in March
2003. The annual commitment fee on the unused portion of the facility and the interest rate for borrowings vary based upon our
ratio of funded debt to earnings before interest, amortization and taxes, with the maximum commitment fee set at 0.25% and the
maximum borrowing rate set at the bank's prime rate plus 0.5%. The maximum borrowing rate was 10.0% at September 30,
2000. The net borrowing capacity under our credit facility was $25 million as of September 30, 2000.
We believe that our current cash position, funds generated from operations and available credit facility, will be adequate to
meet our requirements for working capital, capital expenditures for the foreseeable future.
Item 3. Quantitative and Qualitative Disclosure about Market Risks
Market risk disclosures set forth in our 2000 Annual Report to Shareholders have not changed significantly. |
