<PAGE>
PROSPECTUS SUPPLEMENT RULES 424(b)(3) and 424(c)
TO PROSPECTUS DATED NOVEMBER 4, 1997 REGISTRATION NO. 333-36413
2,020,000 SHARES
YURIE SYSTEMS, INC.
COMMON STOCK
Yurie Systems, Inc. (the "Company" or "Yurie"), has prepared this
Prospectus Supplement to update the Company's Prospectus dated November 4, 1997
(the "Prospectus") covering 2,020,000 shares of the Company's common stock, par
value $.01 per share (the "Common Stock") to be sold by certain Selling
Stockholders of the Company. This Prospectus Supplement should be read in
conjunction with the Prospectus, and is qualified by reference to the Prospectus
except to the extent that the information herein contained supersedes the
information contained in the Prospectus. Capitalized terms used in this
Prospectus Supplement and not otherwise defined herein have the meanings
specified in the Prospectus.
The Prospectus, together with this First Prospectus Supplement, constitutes
the prospectus required to be delivered by Section 5(b) of the Securities Act
with respect to offers and sales of the shares of Common Stock by the Selling
Stockholders. All references in the Prospectus to "this Prospectus" are hereby
amended to read "this Prospectus (as supplement and amended)."
QUARTERLY AND PRO FORMA FINANCIAL INFORMATION. The Prospectus is hereby
amended to add the information contained in the Quarterly Report on Form 10-Q
for the fiscal quarter ended September 30, 1997 (the "Quarterly Report") filed
by the Company with the Commission on November 13, 1997. The Quarterly Report
has been attached at pages 22 to 32 hereto. The following pro forma financial
information related to the Company is included as part of this Prospectus
Supplement: the Company's unaudited pro forma financial information as of
September 30, 1997 and for the years ended December 31, 1996 and December 31,
1995 and for the nine months ended September 30, 1997 and September 30, 1996,
reflecting the probable acquisition of Data Labs.
DATA LABS ACQUISITION. On November 3, 1997, the Company announced plans to
acquire privately-held Data Labs, Inc., a Delaware corporation ("Data Labs"),
based in Maryland that manufactures and markets branch office ATM access
products. The Company had signed a letter of intent on October 28, 1997 to
acquire Data Labs. On November 15, 1997, the letter of intent expired by its
terms. The Company and Data Labs have continued acquisition discussions.
Consummation of the acquisition is subject to the execution of a definitive
merger agreement, as well as approval by the boards of directors of Data Labs
and Yurie, and the stockholders of Data Labs, and Data Labs' obtaining certain
consents and waivers. There can be no assurance that the transaction will be
consummated.
DATA LABS FINANCIAL INFORMATION. The following financial information of
Data Labs is included as part of this Prospectus Supplement: the audited
financial statements of Data Labs as of December 31, 1996 and for the years
ended December 31, 1995 and December 31, 1996 and related notes thereto, and the
unaudited financial information as of September 30, 1997 and for the nine months
ended September 30, 1997 and 1996.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this Prospectus Supplement is November 24, 1997
<PAGE>
YURIE SYSTEMS, INC.
Unaudited Pro Forma Balance Sheet
September 30, 1997
<TABLE>
<CAPTION>
Pro Forma
Yurie Data ----------------------------------
Systems, Inc. Labs, Inc. Adjustments Combined
--------------- ------------- ------------- ---------------
ASSETS
<S> <C> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 22,766,548 $ 318,142 $ - $ 23,084,690
Restricted cash 1,000,000 - 1,000,000
Short term investments 21,883,297 - 21,883,297
Accounts receivable 10,071,495 41,696 (77,284) (1) 10,035,907
Interest receivable 302,483 - 302,483
Inventory 4,687,665 291,027 (5,400) (1) 4,973,292
Deferred income taxes 950,988 - 195,000 (3) 2,286,431
1,140,443 (2)
Prepaid expenses 414,407 - 414,407
--------------- ------------- ------------- ---------------
Total current assets 62,076,883 650,865 1,252,759 63,980,507
PROPERTY AND EQUIPMENT, net 6,075,448 211,289 6,286,737
OTHER ASSETS 141,372 4,174 145,546
--------------- ------------- ------------- ---------------
TOTAL ASSETS $ 68,293,703 $ 866,328 $ 1,252,759 $ 70,412,790
=============== ============= ============= ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 2,511,166 $ 140,000 $ (79,390) (1) $ 2,571,776
Accrued liabilities 5,225,022 310,904 500,000 (3) 6,035,926
Unearned revenue 41,250 - 41,250
Equipment loan - 300,000 300,000
--------------- ------------- ------------- ---------------
Total current liabilities 7,777,438 750,904 420,610 8,948,952
ACCRUED RENT 390,621 - 390,621
DEFERRED INCOME TAXES 326,463 - 326,463
CAPITAL LEASE OBLIGATIONS - 25,745 25,745
STOCKHOLDERS' EQUITY:
Preferred Stock - 3,130,000 (3,130,000) (5) -
Common Stock 249,100 3,270 314 (5) 252,684
Treasury Stock (461,166) - (461,166)
Additional paid-in capital 51,097,181 2,063 3,129,686 (5) 54,228,930
Retained earnings 8,914,066 (3,045,654) 832,149 (4) 6,700,561
--------------- ------------- ------------- ---------------
Total stockholders' equity 59,799,181 89,679 832,149 60,721,009
--------------- ------------- ------------- ---------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 68,293,703 $ 866,328 $ 1,252,759 $ 70,412,790
=============== ============= ============= ===============
</TABLE>
See notes to pro forma combined financial statements.
<PAGE>
YURIE SYSTEMS, INC.
Unaudited Pro Forma Combined Statement of Income
For the Nine Months Ended September 30, 1997
<TABLE>
<CAPTION>
Pro Forma
Yurie Data -----------------------------------
Systems, Inc. Labs, Inc. Adjustments Combined
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
Product revenue $ 30,436,798 $ 265,918 $ (170,582) (1) $ 30,532,134
Service revenue 2,913,927 -- 2,913,927
Other revenue -- -- --
------------ ------------ ------------ ------------
Total Revenues 33,350,725 265,918 (170,582) 33,446,061
Cost of Revenues:
Cost of product revenue 11,023,160 158,128 (191,538) (1) 10,989,750
Cost of service revenue 2,152,620 -- 2,152,620
------------ ------------ ------------ ------------
Total Cost of Revenues 13,175,780 158,128 (191,538) 13,142,370
Gross Profit 20,174,945 107,790 20,956 20,303,691
Operating Expenses:
General and administrative 4,121,988 605,947 4,727,935
Sales and marketing 3,686,102 750,675 4,436,777
Research and development 5,339,509 767,753 6,107,262
------------ ------------ ------------ ------------
Total Operating Expenses 13,147,599 2,124,375 -- 15,271,974
Income (Loss) from Operations 7,027,346 (2,016,585) 20,956 5,031,717
Other Income (Expense) 1,130,253 29,200 1,159,453
------------ ------------ ------------ ------------
Income (Loss) Before Income Taxes 8,157,599 (1,987,385) 20,956 6,191,170
Tax Provision 3,177,000 -- (701,947) (2) 2,475,053
------------ ------------ ------------ ------------
Net Income (Loss) $ 4,980,599 $ (1,987,385) $ 722,903 $ 3,716,117
============ ============ ============ ============
NET INCOME PER COMMON SHARE: $ 0.19 $ 0.14
============ ============
WEIGHTED AVERAGE SHARES OUTSTANDING:
26,346,737 26,705,149
============ ============
</TABLE>
See notes to pro forma combined financial statements.
<PAGE>
YURIE SYSTEMS, INC.
Unaudited Pro Forma Combined Statement of Income
For the Nine Months Ended September 30, 1996
<TABLE>
<CAPTION>
Pro Forma
Yurie Data ----------------------------------
Systems, Inc. Labs, Inc. Adjustments Combined
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
Product revenue $ 13,023,251 $ 995 $ -- $ 13,024,246
Service revenue 1,622,614 37,260 1,659,874
Other revenue 391,667 -- 391,667
------------ ------------ ------------ ------------
Total Revenues 15,037,532 38,255 -- 15,075,787
Cost of Revenues:
Cost of product revenue 4,536,284 -- -- 4,536,284
Cost of service revenue 1,094,741 19,250 1,113,991
------------ ------------ ------------ ------------
Total Cost of Revenues 5,631,025 19,250 -- 5,650,275
Gross Profit 9,406,507 19,005 -- 9,425,512
Operating Expenses:
General and administrative 1,733,013 221,841 1,954,854
Sales and marketing 790,256 130,098 920,354
Research and development 2,379,923 323,409 2,703,332
------------ ------------ ------------ ------------
Total Operating Expenses 4,903,192 675,348 -- 5,578,540
Income (Loss) from Operations 4,503,315 (656,343) -- 3,846,972
Other Income (Expense) 62,064 4,677 66,741
------------ ------------ ------------ ------------
Income (Loss) Before Income Taxes 4,565,379 (651,666) -- 3,913,713
Tax Provision 1,826,152 -- (254,150) (2) 1,572,002
------------ ------------ ------------ ------------
Net Income (Loss) $ 2,739,227 $ (651,666) $ 254,150 $ 2,341,711
============ ============ ============ ============
NET INCOME PER COMMON SHARE: $ 0.13 $ 0.11
============ ============
WEIGHTED AVERAGE SHARES OUTSTANDING:
21,750,808 22,109,220
============ ============
</TABLE>
See notes to pro forma combined financial statements.
<PAGE>
YURIE SYSTEMS, INC.
Unaudited Pro Forma Combined Statement of Income
For the Year Ended December 31, 1996
<TABLE>
<CAPTION>
Pro Forma
Yurie Data ------------------------------------
Systems, Inc. Labs, Inc. Adjustments Combined
------------ ------------ ------------ ------------
Revenues:
<S> <C> <C> <C> <C>
Product revenue $ 18,728,525 $ 75,058 $ (65,890) (1) $ 18,737,693
Service revenue 2,490,563 37,260 2,527,823
Other revenue 391,667 - 391,667
------------ ------------ ------------ ------------
Total Revenues 21,610,755 112,318 (65,890) 21,657,183
Cost of Revenues:
Cost of product revenue 6,783,520 62,216 (39,534) (1) 6,806,202
Cost of service revenue 1,635,427 30,885 1,666,312
------------ ------------ ------------ ------------
Total Cost of Revenues 8,418,947 93,101 (39,534) 8,472,514
Gross Profit 13,191,808 19,217 (26,356) 13,184,669
Operating Expenses:
General and administrative 2,699,606 280,714 2,980,320
Sales and marketing 1,547,120 332,899 1,880,019
Research and development 3,846,654 581,156 4,427,810
------------ ------------ ------------ ------------
Total Operating Expenses 8,093,380 1,194,769 - 9,288,149
Income (Loss) from Operations 5,098,428 (1,175,552) (26,356) 3,896,520
Other Income (Expense) 83,375 7,259 90,634
------------ ------------ ------------ ------------
Income (Loss) Before Income Taxes 5,181,803 (1,168,293) (26,356) 3,987,154
Tax Provision 2,029,395 - (465,913) (2) 1,563,482
------------ ------------ ------------ ------------
Net Income (Loss) $ 3,152,408 $ (1,168,293) $ 439,557 $ 2,423,672
============ ============ ============ ============
NET INCOME PER COMMON SHARE: $ 0.14 $ 0.11
============ ============
WEIGHTED AVERAGE SHARES OUTSTANDING:
21,811,082 22,169,494
============ ============
</TABLE>
See notes to pro forma combined financial statements.
<PAGE>
YURIE SYSTEMS, INC.
Unaudited Pro Forma Combined Statement of Income
For the Year Ended December 31, 1995
<TABLE>
<CAPTION>
Pro Forma
Yurie Data -------------------------------
Systems, Inc. Labs, Inc. Adjustments Combined
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
Product revenue $ 2,869,937 $ 9,945 $ -- $ 2,879,882
Service revenue 1,992,669 641,247 2,633,916
Other revenue 1,108,333 -- 1,108,333
------------ ------------ ------------ ------------
Total Revenues 5,970,939 651,192 -- 6,622,131
Cost of Revenues:
Cost of product revenue 1,326,702 2,264 -- 1,328,966
Cost of service revenue 1,184,093 146,009 1,330,102
------------ ------------ ------------ ------------
Total Cost of Revenues 2,510,795 148,273 -- 2,659,068
Gross Profit 3,460,144 502,919 -- 3,963,063
Operating Expenses:
General and administrative 1,588,154 282,485 1,870,639
Sales and marketing -- 4,701 4,701
Research and development 427,815 134,782 562,597
------------ ------------ ------------ ------------
Total Operating Expenses 2,015,969 421,968 -- 2,437,937
Income from Operations 1,444,175 80,951 -- 1,525,126
Other Income (Expense) 13,341 (15,117) (1,776)
------------ ------------ ------------ ------------
Income Before Income Taxes 1,457,516 65,834 -- 1,523,350
Tax Provision 560,661 14,024 574,685
------------ ------------ ------------ ------------
Net Income $ 896,855 $ 51,810 $ -- $ 948,665
============ ============ ============ ============
NET INCOME PER COMMON SHARE: $ 0.04 $ 0.04
============ ============
WEIGHTED AVERAGE SHARES OUTSTANDING:
21,710,064 22,068,476
============ ============
</TABLE>
See notes to pro forma combined financial statements.
<PAGE>
YURIE SYSTEMS, INC.
Notes to Unaudited Pro Forma Combined Financial Data
Note 1: The pro forma financial data reflects the issuance of
358,412 shares of Yurie Systems, Inc. common stock for an
aggregate of 8,029,700 shares of preferred and common stock of
Data Labs (including warrants, vested options and 206,500
unvested options representing 50% of the unvested options of
Data Labs) in connection with the merger.
Note 2: The adjustments to the pro forma combined financial data are as
follows:
(1) To eliminate intercompany sales and/or record related gross profit
upon realization.
(2) To eliminate the valuation allowance attributable to the net
operating loss carryforwards.
(3) To record the accrual of costs incurred to consummate the Merger.
(4) To record current period effect of pro forma adjustments on net
income and recognize carryover effect of prior period pro forma
adjustments.
(5) To record the exchange of stock.
Note 3: The pro forma statements of income exclude the estimated non-
recurring merger costs of approximately $500,000.
<PAGE>
Report of Independent Public Accountants
To Data Labs, Inc.:
We have audited the accompanying balance sheets of Data Labs, Inc., a Delaware
Corporation, as of December 31, 1996 and 1995, and the related statements of
operations, stockholders' equity and cash flows for the years then ended. 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 an 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 Data Labs, Inc., as of December
31, 1996 and 1995, and the results of its operations and its cash flows for the
years then ended in conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
----------------------------------------
Arthur Andersen LLP
Washington, D.C.
March 10, 1997
<PAGE>
Data Labs, Inc.
Balance Sheets
As of December 31, 1996 and 1995
<TABLE>
<CAPTION>
Assets
1996 1995
----------- -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 2,016,252 $ 22,756
Accounts receivable 74,084 62,898
Prepaid expenses and other assets 17,319 3,672
----------- -----------
Total current assets 2,107,655 89,326
Furniture and equipment 209,970 47,372
----------- -----------
Total assets $ 2,317,625 $ 136,698
=========== ===========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 110,015 $ --
Accrued expenses and other current liabilities 93,587 23,425
----------- -----------
Total current liabilities 203,602 23,425
Capital lease obligations, net of current portion 38,210 --
----------- -----------
Total liabilities 241,812 23,425
Commitments and contingencies (Note 5)
Stockholders' equity:
Series A - Preferred stock, $.001 par value, 3,200,000 shares authorized,
3,130,000 and none issued or outstanding in 1996 and 1995, respectively,
entitled to $1 per share liquidation preference ($3,130,000 in the
aggregate)
3,130,000 --
Series A1 - Preferred stock, $.001 par value, 3,200,000 authorized, none issued or
outstanding -- --
Common stock, $.001 par value, 10,000,000 shares authorized, 3,257,534 and
3,249,200 issued and outstanding in 1996 and 1995, respectively 3,258 3,249
Additional paid-in capital 824 --
Accumulated deficit (1,058,269) 110,024
----------- -----------
2,075,813 113,273
----------- -----------
Total liabilities and stockholders' equity $ 2,317,625 $ 136,698
=========== ===========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
<PAGE>
Data Labs, Inc.
Statements of Operations
For the Years Ended December 31, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Revenues:
Product sales $ 75,058 $ 9,945
Contract 37,260 641,247
----------- -----------
Total revenues 112,318 651,192
Operating expenses:
Costs of revenues 93,101 148,273
Sales and marketing 332,899 4,701
General and administrative 280,714 282,485
Research and development 581,156 134,782
----------- -----------
Total operating expenses 1,287,870 570,241
Other (income) expense (7,259) 15,117
----------- -----------
Income (loss) before provision for income taxes (1,168,293) 65,834
Provision for income taxes -- 14,024
----------- -----------
Net income (loss) $(1,168,293) $ 51,810
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
Data Labs, Inc.
Statements of Stockholders' Equity
For the Years Ended December 31, 1996 and 1995
<TABLE>
<CAPTION>
Common Stock
------------------------
Additional
Preferred Paid-in Accumulated
Stock Shares Amount Capital Deficit Total
----------- --------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1994 $ -- 3,249,200 $ 3,249 $ -- $ 58,214 $ 61,463
Net income -- -- -- -- 51,810 51,810
----------- --------- ----------- ----------- ----------- -----------
Balance, December 31, 1995 -- 3,249,200 3,249 -- 110,024 113,273
Exercise of stock options -- 8,334 9 824 -- 833
Preferred stock issuance 3,130,000 -- -- -- -- 3,130,000
Net loss -- -- -- -- (1,168,293) (1,168,293)
----------- --------- ----------- ----------- ----------- -----------
Balance, December 31, 1996 $ 3,130,000 3,257,534 $ 3,258 $ 824 $(1,058,269) $ 2,075,813
=========== ========= =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
Data Labs, Inc.
Statements of Cash Flows
For the Years Ended December 31, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income $(1,168,293) $51,810
Adjustments to reconcile net (loss) income to net cash flows provided by
operating activities-
Depreciation 37,015 15,833
Changes in assets and liabilities:
Accounts receivable (11,186) (62,898)
Prepaid expenses and other assets (13,647) 29,803
Accounts payable 110,015 -
Accrued expenses and other current liabilities 53,542 23,425
----------- -------
(992,554) 57,973
----------- -------
Cash flows used in investing activities:
Purchase of furniture and equipment (144,783) (36,886)
----------- -------
Cash flows from financing activities:
Preferred stock issuance 3,130,000 -
Common stock issuance 833 -
----------- -------
3,130,833 -
----------- -------
Net increase in cash and cash equivalents 1,993,496 21,087
Cash and cash equivalents, beginning of year 22,756 1,669
----------- -------
Cash and cash equivalents, end of year $ 2,016,252 $22,756
=========== =======
Supplemental disclosure:
Cash paid during the year for income taxes - 14,024
Supplemental schedule of noncash investing and financing activities:
In 1996, the Company entered into capital leases totaling $55,000 for
equipment
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
Data Labs, Inc.
Notes to Financial Statements
As of December 31, 1996 and 1995
1. The Company:
Business
Data Labs, Inc. (the "Company") designs, manufactures and markets
telecommunications and data communications networking products. These products
enable network administrators to preserve existing network infrastructures and
meet current technology needs while still allowing for future expansion. The
Company currently markets and sells their products to network service providers,
equipment vendors and end users.
The Company is in the early stages of developing the market for its products.
Certain products proposed to be offered by the Company have not been fully
developed and will require additional research and development. There can be no
assurance that the Company's research and development activities will result in
the development of additional products that can be marketed in a commercially
successful manner, or that any such products will be able to compete with other
products that may be marketed at the time the Company's products become
available. The Company is dependent on the principal members of its technical
and management staff, and the loss of any of their services may impede the
achievement of certain of the Company's product development activities.
The continued development of the Company's products and markets will require
substantial additional capital. There can be no assurance that the Company will
be able to obtain additional financing when needed, if at all, or on terms
acceptable to the Company.
Recapitalization of Common Stock
The Company, a Maryland corporation, elected to change its capital structure in
June 1996 and reincorporate into Data Labs, Inc., a Delaware corporation (the
"Recapitalization"). Pursuant to the Recapitalization and amended certificate of
incorporation, the Company exchanged existing outstanding common stock for
3,249,200 shares of $.001 par value common stock completing a 50 to 1 stock
split. All amounts have been restated to reflect the 50 to 1 stock split and
change in par value.
2. Summary of Significant Accounting Policies:
Revenue Recognition
Revenue relating to product sales is generally recognized upon shipment. Revenue
under product development contracts is recognized on a percentage-of-completion
basis.
<PAGE>
-2-
Cash and Cash Equivalents
The Company considers all short-term investments with an original maturity of 90
days or less as cash equivalents. Cash equivalents at December 31, 1996, consist
primarily of U.S. Treasury bills and certificates of deposit. All investments
are classified as held-to-maturity securities and, accordingly, are carried at
cost.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist primarily of cash and cash equivalents.
The Company had concentrations of cash in a single bank in the form of demand
deposits and certificates of deposit totaling approximately $980,000 at December
31, 1996.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reported period. Actual
results could differ from those estimates.
Furniture and Equipment
Furniture and fixtures, computers, and equipment are stated at cost, less
accumulated depreciation. Depreciation is computed on the straight-line method
over the estimated useful lives of the assets, generally three to five years.
Furniture and equipment consist of the following:
<TABLE>
<CAPTION>
As of December 31,
-----------------------
1996 1995
--------- ---------
<S> <C> <C>
Furniture and fixtures $ 13,838 $ 9,494
Computers and equipment 261,109 65,840
--------- ---------
274,947 75,334
Less- Accumulated depreciation (64,977) (27,962)
--------- ---------
Total $ 209,970 $ 47,372
========= =========
</TABLE>
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of," was adopted by the Company for fiscal year
ending December 31, 1996. The adoption did not have a material effect on the
Company's financial position.
<PAGE>
-3-
3. Accrued Expenses and Other Current Liabilities:
Accrued expenses and other current liabilities consist of the following:
<TABLE>
<CAPTION>
As of December 31,
------------------
1996 1995
------- -------
<S> <C> <C>
Salaries $37,512 $ 7,317
Vacation 38,265 16,108
Current portion of capital lease obligation 16,620 --
Other 1,190 --
------- -------
Total $93,587 $23,425
======= =======
</TABLE>
4. Income Taxes:
The Company accounts for income taxes in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 109 "Accounting for Income Taxes." Under the
provisions of SFAS No. 109, deferred tax assets and liabilities are recognized
for the estimated future tax consequences of temporary differences and income
tax credits. Temporary differences are primarily the result of the differences
between the tax basis of assets and liabilities and their financial reporting
amounts. Deferred tax assets and liabilities are measured by applying enacted
statutory tax rates applicable to the future years in which deferred tax assets
or liabilities are expected to be settled or realized. Valuation allowances are
established when necessary to reduce deferred tax assets to the amount expected
to be realized.
At December 31, 1996, the Company had a net operating loss carryforward of
approximately $1.1 million for Federal income tax reporting purposes. The amount
of U.S. net operating loss carryforwards available to be issued in any given
year may be limited in the event of significant changes in ownership of the
Company.
SFAS No. 109 requires that the tax benefit of financial reporting net operating
losses and tax credits be recorded as an asset to the extent that management
assesses the utilization of such net operating losses and tax credits to be
"more likely than not." As of December 31, 1996, the Company's net deferred tax
assets were approximately $400,000 and a valuation reserve was recorded against
the entire amount.
5. Commitments and Contingencies:
The Company is obligated under an operating lease for space in its office
building and capital lease obligations for equipment. The lease term expires in
March 1999 and May 2000, respectively.
<PAGE>
-4-
Future minimum lease payments are as follows:
<TABLE>
<CAPTION>
Year Ended
December 31,
------------
<S> <C>
1997 $110,535
1998 113,355
1999 41,346
2000 4,970
---------
Total $270,206
=========
</TABLE>
Rent expense charged to operations during the years ended December 31, 1996 and
1995, was $55,612 and $36,589, respectively.
6. Stock Option Plan:
During 1996, the Company adopted a stock option plan (the "Plan") and reserved
2,100,800 shares for issuance. The Board of Directors administers the Plan and
determines the price, vesting, and other terms upon which awards shall be made.
All options have been granted with an exercise price equal to the fair market
value of the Company's common stock on date of grant as determined by the Board
of Directors. Options granted under the Company's plan generally expire three
months after termination of employment or five to ten years after date of grant.
A summary of option transactions during 1996 is as follows.
<TABLE>
<CAPTION>
Option
Weighted Price
Number of Average Per
Stock Options Exercise Price Share
------------- -------------- -------
<S> <C> <C> <C>
Outstanding at January 1, 1996 - - -
Options granted 837,000 $.10 - $.11 $.10 - $.11
Options exercised (8,334) $.10 $.10
----------- ----------- -----------
Outstanding at December 31, 1996 828,666 $.10 - $.11 $.10 - $.11
=========== =========== ===========
Exercisable at December 31, 1996 357,502 $.10 $.10 - $.11
Unexercisable at December 31, 1996 471,164 $.10 $.10 - $.11
</TABLE>
The Company accounts for the Plan under APB Opinion No. 25, under which no
compensation cost has been recognized. Net loss, on a pro forma basis assuming
that the Company had determined compensation cost consistent with SFAS No. 123,
would have been increased by $55,000 to $1,223,293 in 1996.
The fair value for options was estimated at the date of grant using the minimum
value method with the following weighted-average assumptions for 1996: risk free
interest rates of 6.33 percent during the period, no expected dividend yields,
no volatility in the expected market price of the Company's common stock and the
estimated life of the option is the contractual term of the option. The weighted
average fair value of options granted during 1996 was $.05.
<PAGE>
-5-
7. Preferred Stock:
In July 1996, the Company amended it's certificate of incorporation to authorize
two new classes of Convertible, Redeemable, and Voting preferred stock
("Preferred Stock"). Preferred Stock can be issued in two series, A and A1.
Dividends are not cumulative and are paid at the rate of $.10 per share, per
annum, if declared by the Board of Directors. No series A1 Preferred Stock has
been issued.
In 1996, the Company issued 3,130,000 shares of Series A preferred stock for $1
per share. The Preferred Stock is redeemable any time after June 30, 2001, upon
written request of not less than sixty-five percent of the outstanding preferred
stockholders. The redemption shall be paid in cash equal to the original issue
price per share ($1) plus any declared but unpaid dividends. The declared and
unpaid dividends accrue interest at the rate of 10 percent compounded annually.
Each share of the Preferred Stock is convertible into common stock at any time
prior to the fifth day before redemption of the Preferred Stock at a 1 to 1
ratio. The Preferred Stock automatically converts to common stock upon a firm
commitment of an underwritten public offering, at not less than $5.00 per share
or $10,000,000 in aggregate proceeds. Conversion to common stock can also occur
upon written request of 65 percent of the outstanding preferred stockholders.
In the event of liquidation, dissolution, or winding up of the Company, the
holders of each share of Preferred Stock are entitled to redeem their shares for
$1 for each outstanding share of Preferred Stock.
The Preferred Stock and other shareholder agreements provide for certain
registration rights, preemptive rights with respect to future issuances of
equity securities and rights of first refusal and co-sale in the event that the
stockholders sell their shares.
Warrants
In connection with the issuance of the series A preferred stock the Company
issued 900,000 warrants to purchase common stock at $.10 a share. The warrants
have a 10 year term.
8. Stock Purchase Agreements:
The Company has in place several contingent stock purchase agreements whereby
the Company reserves the right to repurchase shares of common stock from key
employees upon termination of employment. The amount of shares that the Company
can repurchase decreases ratably over a four year period. In the event of
voluntary termination or termination for cause by the Company the purchase price
is $.002 per share, the employee's original purchase price. If termination is
for any other reason the purchase price will be the fair market value at the
date of termination.
<PAGE>
-6-
9. Line of Credit:
In October 1996, the Company entered into a line-of-credit agreement for
$400,000 that matures on April 5, 1998. The line of credit accrues interest at a
rate of prime plus 1-1/2 percent. There were no borrowings outstanding at
December 31, 1996.
<PAGE>
Data Labs, Inc.
Balance Sheets
As of September 30, 1997 and December 31, 1996
<TABLE>
<CAPTION>
Assets
September 30, December 31,
1997 1996
------------- -------------
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 318,142 $ 2,016,252
Accounts receivable 41,696 74,084
Inventory 291,027 -
Prepaid expenses and other current assets - 17,319
------------- -------------
Total current assets 650,865 2,107,655
Furniture and equipment 211,289 209,970
Deposits 4,174 -
------------- -------------
Total assets $ 866,328 $ 2,317,625
============= =============
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable $ 140,000 $ 110,015
Accrued expenses and other current liabilities 310,904 93,587
Line of credit 300,000 -
------------- -------------
Total current liabilities 750,904 203,602
Capital lease obligations, net of current portion 25,745 38,210
------------- -------------
Total liabilities 776,649 241,812
Commitments and Contigencies
Stockholders' equity:
Series A-Preferred stock $.001 par value,
3,200,000 shares authorized, 3,130,000
outstanding as of September 30, 1997
and December 31, 1996 3,130,000 3,130,000
Series A1-Preferred stock, $.001 par value,
3,200,000 authorized, none issued or
outstanding - -
Common stock, $.001 par value, 10,000 shares
authorized, 3,270,035 and 3,257,534 issued
and outstanding as of September 30, 1997
and December 31, 1996, respectively 3,270 3,258
Additional paid-in capital 2,063 824
Accumulated deficit (3,045,654) (1,058,269)
------------- -------------
89,679 2,075,813
------------- -------------
Total liabilities and stockholders'
equity $ 866,328 $ 2,317,625
============= =============
</TABLE>
<PAGE>
Data Labs, Inc.
Statements of Operations
For the Nine Months Ended September 30, 1997 and 1996
(unaudited)
<TABLE>
<CAPTION>
1997 1996
------------- ------------
(unaudited) (unaudited)
<S> <C> <C>
Revenues:
Product sales $ 265,918 $ 995
Contract 37,260
------------- ------------
Total revenues 265,918 38,255
Operating Expenses
Costs of revenues 158,128 19,250
Sales and marketing 750,675 130,098
General and administrative 605,947 221,841
Research and development 767,753 323,409
------------- ------------
Total operating expenses 2,282,503 694,598
Other income, net (29,200) (4,677)
------------- ------------
Net loss $(1,987,385) $ (651,666)
============= ============
</TABLE>
<PAGE>
Data Labs, Inc.
Statements of Cash Flows
For the Nine Months Ended September 30, 1997 and 1996
(unaudited)
<TABLE>
<CAPTION>
1997 1996
-------------- ---------------
(unaudited) (unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (1,987,385) $ (592,957)
Adjustments to reconcile net loss to net cash flows
provided by operating activities-
Depreciation 39,093 12,317
Changes in assets and liabilities:
Accounts receivable 32,388 62,898
Inventory (291,027) -
Prepaid expenses and other current assets 17,319 (4,096)
Deposits (4,174)
Accounts payable 29,985 34,902
Accrued expenses 217,317 75,555
-------------- ---------------
(1,946,484) (411,381)
-------------- ---------------
Cash flows used in investing activities:
Purchase of furniture and equipment (40,412) (51,539)
-------------- ---------------
Cash flows from financing activities:
Preferred stock issuance - 3,055,000
Common stock issuance 1,251 -
Proceeds from line of credit 300,000 -
Payments of capital lease obligation (12,465) -
-------------- ---------------
288,786 3,055,000
-------------- ---------------
Net increase (decrease) in cash and cash equivalents (1,698,110) 2,592,080
Cash and cash equivalents, beginning of period 2,016,252 22,756
-------------- ---------------
Cash and cash equivalents, end of period $ 318,142 $ 2,614,836
============== ===============
Supplemental disclosure:
Cash paid during the period for interest 11,200 -
============== ===============
</TABLE>
<PAGE>
The following pages 22 through 32 set forth the information contained in the
Quarterly Report on Form 10-Q of Yurie Systems, Inc. for the quarter ended
September 30, 1997.
YURIE SYSTEMS, INC.
BALANCE SHEETS AS OF SEPTEMBER 30, 1997 AND DECEMBER 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
---------------- --------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $22,766,548 $ 3,229,069
Restricted cash 1,000,000 ---
Short term investments 21,883,297 ---
Accounts receivable (1) 10,071,495 4,985,166
Interest receivable 302,483 ---
Inventory 4,687,665 2,599,915
Deferred offering costs --- 910,442
Deferred income taxes 950,988 9,301
Prepaid expenses 414,407 392,881
---------------- --------------
Total current assets 62,076,883 12,126,774
PROPERTY AND EQUIPMENT, net 6,075,448 2,031,301
OTHER ASSETS 141,372 57,756
---------------- --------------
TOTAL ASSETS $68,293,703 $14,215,831
================ ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 2,511,166 $ 1,969,714
Accrued liabilities 5,225,022 3,156,385
Unearned revenue 41,250 ---
---------------- --------------
Total current liabilities 7,777,438 5,126,099
ACCRUED RENT 390,621 14,932
DEFERRED INCOME TAXES 326,463 19,310
STOCKHOLDERS' EQUITY:
Preferred Stock, par value $.01, authorized 10,000,000 shares, --- ---
none issued
Common Stock, par value $.01; 50,000,000 shares authorized;
issued and outstanding, 24,909,976 shares at September 30,
1997 and 20,608,400 shares at December 31, 1996 249,100 206,084
Treasury Stock, 15,950 shares outstanding at September 30,
1997 (461,166) ---
Additional paid-in capital 51,097,181 4,915,939
Retained earnings 8,914,066 3,933,467
---------------- --------------
Total stockholders' equity 59,799,181 9,055,490
---------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $68,293,703 $14,215,831
================ ==============
</TABLE>
_____________________
(1) Accounts receivable includes amounts from related parties of $1,051,460 at
September 30, 1997 (unaudited).
See notes to financial statements.
3
<PAGE>
YURIE SYSTEMS, INC.
STATEMENTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED
SEPTEMBER 30, 1997 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1997 1996 1997 1996
-------------------------- --------------------------
<S> <C> <C> <C> <C>
REVENUE:
Product revenue $13,037,809 $ 5,631,692 $30,436,798 $13,023,251
Service revenue 1,034,844 601,093 2,913,927 1,622,614
Other revenue --- --- --- 391,667
-------------------------- --------------------------
Total revenue (1) 14,072,653 6,232,785 33,350,725 15,037,532
COSTS OF REVENUE:
Cost of product revenue 4,626,156 2,178,989 11,023,160 4,536,284
Cost of service revenue 783,547 365,628 2,152,620 1,094,741
-------------------------- --------------------------
Total costs of revenue 5,409,703 2,544,617 13,175,780 5,631,025
-------------------------- --------------------------
GROSS PROFIT 8,662,950 3,688,168 20,174,945 9,406,507
OPERATING EXPENSES:
Research and development 2,010,304 1,033,865 5,339,509 2,379,923
Sales and marketing 1,389,582 504,238 3,686,102 790,256
General and administrative 1,793,229 896,798 4,121,988 1,733,013
-------------------------- --------------------------
Total operating expenses 5,193,115 2,434,901 13,147,599 4,903,192
-------------------------- --------------------------
INCOME FROM OPERATIONS 3,469,835 1,253,267 7,027,346 4,503,315
Other income 401,354 7,540 1,130,253 62,064
-------------------------- --------------------------
INCOME BEFORE INCOME TAX PROVISION 3,871,189 1,260,807 8,157,599 4,565,379
Provision for income taxes 1,504,705 504,323 3,177,000 1,826,152
-------------------------- --------------------------
NET INCOME $ 2,366,484 $ 756,484 $ 4,980,599 $ 2,739,227
========================== ==========================
NET INCOME PER COMMON SHARE $ 0.09 $0.03 $0.19 $0.13
========================== ==========================
WEIGHTED AVERAGE SHARES OUTSTANDING 27,294,972 21,750,808 26,346,737 21,750,808
========================== ==========================
</TABLE>
________________________
(1) Revenue includes amounts from related parties of $7,172,832 and $11,991,002
for the three and nine months ended September 30, 1997, respectively
(unaudited).
See notes to financial statements.
4
<PAGE>
YURIE SYSTEMS, INC.
STATEMENTS OF CASH FLOWS FOR THE THREE AND NINE MONTHS
ENDED SEPTEMBER 30, 1997 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1997 1996 1997 1996
------------------------------ ---------------------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,366,482 $ 756,484 $ 4,980,599 $ 2,739,227
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 349,110 67,051 745,694 148,422
Compensation due to stock issuance --- --- 120,500 ---
Deferred income taxes 93,939 (232,646) (634,534) (232,646)
Changes in assets and liabilities:
Accounts receivable (1,160,987) 1,902,248 (5,086,329) (486,666)
Restricted cash (1,000,000) --- (1,000,000) ---
Interest receivable 103,132 --- (302,483) ---
Advances 740,477 --- --- ---
Inventory (689,115) (657,861) (2,087,750) (621,890)
Prepaid expenses (12,262) (132,931) (21,526) (193,683)
Other assets (4,910) (5,644) (83,616) (31,784)
Accounts payable 844,003 1,094,010 541,452 1,939,606
Accrued expenses 1,931,202 969,968 2,068,637 1,568,640
Income taxes payable 1,116,256 (118,031) 1,857,783 (238,920)
Unearned revenue 41,250 2,004,235 41,250 (1,153,765)
Accrued rent 291,868 (3,576) 375,689 (8,047)
------------------------------ ---------------------------
Net cash provided by operating activities 5,010,445 5,643,307 1,515,366 3,428,494
------------------------------ ---------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Short term investments (9,002,185) --- (21,883,297) ---
Purchase of property and equipment (1,855,764) (280,632) (4,789,841) (859,940)
------------------------------ ---------------------------
Net cash used in investing activities (10,857,949) (280,632) (26,673,138) (859,940)
------------------------------ ---------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock (127,625) (146,815) 44,695,251 (146,815)
------------------------------ ---------------------------
Net cash provided by (used in) financing activities (127,625) (146,815) 44,695,251 (146,815)
------------------------------ ---------------------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (5,975,129) 5,215,860 19,537,479 2,421,739
CASH AND CASH EQUIVALENTS, BEGINNING OF
PERIOD 28,741,677 985,679 3,229,069 3,779,800
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 22,766,548 $6,201,539 $ 22,766,548 $ 6,201,539
============================== ===========================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for income taxes $ 600,000 $ 855,000 $ 2,075,450 $ 2,296,000
============================== ===========================
</TABLE>
See notes to financial statements.
5
<PAGE>
YURIE SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - DESCRIPTION OF BUSINESS
Yurie Systems, Inc. (the "Company") is a Delaware corporation that was
incorporated in February 1992. The Company designs, manufactures, markets and
services asynchronous transfer mode (''ATM'') access products for
telecommunications service providers, Internet service providers, corporate end
users and government end users. ATM is a standard for packaging and switching
digital information that facilitates high speed information transmission with a
high degree of efficiency.
NOTE 2 - BASIS OF PRESENTATION
The accompanying unaudited interim financial statements have been prepared
in accordance with Regulation S-X 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 management believes that the disclosures are
adequate to make the information not misleading.
In the opinion of management, the unaudited condensed financial statements
contain all adjustments, consisting of only normal recurring adjustments,
necessary to present fairly the financial position as of September 30, 1997, the
results of operations for the three and nine month periods ended September 30,
1997 and 1996, and the cash flows for the three and nine month periods ended
September 30, 1997 and 1996. These financial statements should be read in
conjunction with the financial statements and the notes thereto included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1996.
NOTE 3 - SHORT TERM INVESTMENTS
The Company's short term investments at September 30, 1997 are classified
as held-to-maturity because the Company has the positive intent and ability to
hold the securities to maturity. Held-to-maturity securities are stated at
amortized cost, adjusted for amortization of premiums and accretion of discounts
to maturity.
NOTE 4 - ACCOUNTS RECEIVABLE
Accounts receivable consisted of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
--------------- ------------
<S> <C> <C>
Billed $ 9,907,825 $4,166,149
Unbilled 407,331 764,863
Other 13,239 54,154
Allowance for doubtful accounts (256,900) ---
--------------- ------------
Total accounts receivable $10,071,495 $4,985,166
=============== ============
</TABLE>
NOTE 5 - INVENTORY
Inventory consisted of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
--------------- ------------
<S> <C> <C>
Raw materials $ 1,935,899 $1,836,581
Work-in-process 1,324,768 688,686
Finished goods 1,426,998 74,648
--------------- ------------
Total inventory $ 4,687,665 $2,599,915
=============== ============
</TABLE>
6
<PAGE>
NOTE 6 - ACCRUED LIABILITIES
Accrued liabilities consisted of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
--------------- ------------
<S> <C> <C>
Accrued salaries and employee benefits $2,481,178 $1,563,704
Accrued sales and use tax 418,747 272,784
Warranty accrual 1,819,620 544,306
Deferred offering costs --- 653,000
Other accrued liabilities 505,477 122,591
--------------- ------------
Total accrued liabilities $5,225,022 $3,156,385
=============== ============
</TABLE>
NOTE 7 - COMMITMENTS
On May 1, 1997, the Company entered into a lease for approximately 137,000
rentable square feet. This facility is being used as the Company's principal
offices. The lease commenced on June 1, 1997 and expires on November 30, 2004.
Rental payments begin on December 1, 1997, with the monthly rent being recorded
on a straight line basis over the life of the lease.
NOTE 8 - RELATED PARTY TRANSACTIONS
In March 1997, one of the Company's officers became a majority shareholder
in and the acting Chairman of the Board of Splitrock Services, Inc.
("Splitrock") a corporation that provides communications services specifically
configured to meet the needs of large network users. Yurie had product sales to
this company totaling $6,645,840 and $11,464,010 during the three and nine
months ended September 30, 1997, respectively. In addition, during the third
quarter of this year, Yurie generated service revenue totaling $526,992 from
this company. At September 30, 1997, accounts receivable from Splitrock totaled
$1,051,460.
NOTE 9 - EARNINGS PER SHARE
In March 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" (EPS) which
simplifies the standards for computing EPS previously found in APB Opinion No.
15 and makes them comparable to international EPS standards. The Statement is
effective for financial statements issued for periods ending after December 15,
1997. Had the following statement been effective for the three and nine months
ended September 30, 1997 and 1996, earnings per share would have been presented
as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1997 1996 1997 1996
-------------------- -------------------
<S> <C> <C> <C> <C>
Earnings per common share $ .10 $ .04 $ .21 $ .14
==================== ===================
Earnings per common share -
assuming dilution $ .09 $ .03 $ .19 $ .13
==================== ===================
</TABLE>
NOTE 10 - INITIAL PUBLIC OFFERING
On February 5, 1997, the Company completed its initial public offering and
sold an aggregate of 4,000,000 shares of Common Stock at $12.00 per share,
resulting in net proceeds of $44,640,000 after deducting underwriting discounts.
Other deferred offering costs related to the initial public offering totaling
$1,403,863 as of September 30, 1997 have been netted against paid-in capital.
7
<PAGE>
NOTE 11 - SUBSEQUENT EVENT
On November 3, 1997, the Company announced plans to acquire privately-held Data
Labs, Inc., a Delaware corporation, based in Maryland that manufactures and
markets branch office ATM access products. The proposed transaction will be
structured as a tax free stock-for-stock merger, and is intended to be accounted
for as a pooling-of-interests for financial accounting purposes. The transaction
is subject to customary conditions including execution of a definitive merger
agreement and approval by the boards of directors of both Yurie and Data Labs
and the stockholders of Data Labs.
8
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The Private Securities Litigation Reform Act provides a "safe harbor" for
forward-looking statements. Certain statements included in this Quarterly
Report on Form 10-Q are forward-looking. Such forward-looking statements, in
addition to information contained in Management's Discussion and Analysis of
Financial Condition and Results of Operations and elsewhere in this Form 10-Q,
are based on the Company's current expectations and are subject to a number of
risks and uncertainties that could cause actual future results to differ
significantly from results expressed or implied in any forward-looking
statements made by, or on behalf of, the Company. The Company assumes no
obligation to update any forward-looking statements contained herein or that may
be made from time to time by, or on behalf of, the Company. Information
presented in this Form 10-Q should be read in conjunction with the Company's
Annual Report on Form 10-K and prior Quarterly Reports on Form 10-Q filed with
the Securities and Exchange Commission.
References made in this Quarterly Report on Form 10-Q to "Yurie", the
"Company" or the "Registrant" refer to Yurie Systems, Inc.
OVERVIEW
Yurie Systems, Inc. is a Delaware corporation that was incorporated in
February 1992. The Company designs, manufactures, markets and services
asynchronous transfer mode (''ATM'') access products for telecommunications
service providers, Internet service providers, corporate end users and
government end users. ATM is a standard for packaging and switching digital
information that facilitates high speed information transmission with a high
degree of efficiency.
In 1995, Yurie granted AT&T the exclusive right to market and sell the
LDR100 and the LDR200, including future designs, upgrades features and
functionalities, in U.S. federal, state and local government markets, as well as
certain foreign government markets (the "AT&T" Agreement), through December
1998, subject to AT&T's option to extend the AT&T Agreement in one-year periods
through December 2001. In the discussions leading up to their recently announced
OEM agreements with Yurie, both Lucent Technologies, Inc. ("Lucent") and Bay
Networks, Inc. ("Bay") expressed an interest in marketing and selling Yurie
products directly to government markets. Several other prospective customers of
the Company also expressed an interest in such direct access. As a result, the
Company began discussions with AT&T regarding AT&T's exclusive right to market
and sell Yurie products in government markets. On November 3, 1997, Yurie and
AT&T entered into an agreement restructuring the terms of the AT&T Agreement
(the "Restructured Agreement"), pursuant to which AT&T will no longer have the
exclusive right to market and sell Yurie products in government markets. In
addition, pursuant to the terms of the Restructured Agreement, AT&T will no
longer be required to make its remaining minimum purchases of LDR products in
1997 and 1998 totaling approximately $14.0 million
The Company has a significant customer relationship with SplitRock
Services, Inc. ("Splitrock"), a Texas corporation that provides communications
services specifically configured to meet the needs of large network users.
Splitrock has recently purchased the underlying network assets of Prodigy
Services Corporation, an Internet service provider. During the first nine months
of 1997, Splitrock purchased $11.5 million of LDR products from the Company.
Yurie and Splitrock have entered into an agreement (the "Splitrock Agreement")
that requires Splitrock to purchase a minimum of $20.0 million of LDR products
from the Company in the period from July 1997 to December 1998. Through
September 30, 1997, $6.6 million of LDR equipment has been purchased by
Splitrock under this agreement. Under the Splitrock Agreement, Yurie has also
agreed to provide services to support deployment and implementation of Yurie's
products in Splitrock's network on a time and materials basis. During the first
nine months of 1997, Splitrock purchased $527,000 of services from the Company.
Kwok L. Li, the Chief Technology Officer and Vice Chairman of the Board of
Yurie, is currently the majority shareholder and acting Chairman of the Board of
Splitrock.
AT&T and Splitrock have entered into agreements pursuant to which AT&T
network services will be provided to Splitrock. In conjunction therewith, AT&T
Credit Corporation will lease to Splitrock Yurie products, including Yurie
products previously sold to AT&T.
In August 1997, the Company signed a three-year OEM agreement with Lucent.
Under this agreement, Lucent will sell Yurie's LDR200 and LDR50 access products
under the Lucent brand. Lucent has no minimum purchase obligation under this
agreement.
In September 1997, the Company entered into a three-year OEM agreement with
Bay under which Bay may order from the Company and sell under Bay's brand name
the Company's LDR products and related software. Pursuant to this agreement, Bay
has purchased approximately $2.4 million of the Company's LDR products. Bay has
no minimum purchase obligation under the agreement.
9
<PAGE>
On November 3, 1997, the Company announced plans to acquire privately-held
Data Labs, Inc., a Delaware corporation based in Maryland that manufactures and
markets branch office ATM access products. The proposed transaction will be
structured as a tax free stock-for-stock merger, and is intended to be
accounted for as a pooling-of-interests for financial accounting purposes. The
Company believes that the transaction will be dilutive to earnings through at
least the fourth quarter of 1997, although it expects the transaction to be
accretive thereafter. The Company expects to recognize a one-time charge in the
fourth quarter of 1997 for transaction costs and expenses related to the merger.
The transaction is subject to customary conditions, including execution of a
definitive merger agreement and approval by the boards of directors of both
Yurie and Data Labs and the stockholders of Data Labs
Data Labs Virtual Access product line aggregates voice, video and data
traffic onto a single wide area network link facilitating ATM art T1/E1 rates
and lower, and offers cost-effective ATM access products to branch and small
regional offices. Yurie currently resells Data Labs Virtual Access 1000 under
Yurie's brand name.
In view of the Company's rapid revenue growth, the Company believes that
period-to-period comparisons of its financial results are not necessarily
meaningful and should not be relied upon as an indication of future performance.
In addition, the Company's results of operations may fluctuate from period to
period in the future.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 1996
Revenue. Total revenue for the third quarter of 1997 was $14.1 million,
compared with $6.2 million for the third quarter of 1996. This 125.8% increase
resulted primarily from an increase in sales of the Company's LDR products, and
particularly from increased product sales to the commercial marketplace. Product
revenue was $13.0 million during the 1997 period compared with $5.6 million
during the 1996 period. Of this $13.0 million in product revenue, 99.6%,
resulted from sales to commercial customers. There were no sales to commercial
customers in the third quarter of 1996. Of the $13.0 million in product sales
during the quarter ended September 30, 1997, $6.6 million were made to
SplitRock Services, Inc. An additional $2.4 million in revenue resulted from
product sales to Bay Networks under an OEM agreement. Service revenue was $1.0
million in the third quarter of 1997 compared with $601,000 in the comparable
quarter in 1996. During the third quarter of 1997, Splitrock purchased $527,000
of services from the Company.
Gross Profit. Gross profit increased to $8.7 million in the third quarter
of 1997 from $3.7 million in the comparable 1996 period. Gross margins were
61.6% and 59.2% during the 1997 and 1996 quarters, respectively. The increase in
gross margin was due largely to a decrease in product cost of goods sold, to
35.5% of product revenue in the 1997 quarter from 38.7% of product revenue in
the 1996 quarter. This reflects the spread of the fixed portion of direct costs
over a larger number of units, an increase in shipments of product to commercial
customers, and an increase in the number of higher margin software features
sold. Cost of service increased to 75.7% of service revenue in the 1997 quarter
from 60.9% in the comparable 1996 period.
Research and Development. Research and development expenses were $2.0
million in the third quarter of 1997, compared with $1.0 million in the third
quarter of 1996. This increase was due primarily to the hiring of additional
engineering personnel and increased prototyping expenses related to the
development of the Company's LDR products. As a percentage of total revenue,
research and development expenses were 14.3% and 16.6% in the third quarters of
1997 and 1996 respectively.
Sales and Marketing. Sales and marketing expenses were $1.4 million in the
third quarter of 1997, compared with $504,000 in the third quarter of 1996.
This increase resulted primarily from the hiring of sales and marketing
personnel to support generally, the Company's entry into the commercial
marketplace, and specifically, the release of the Company's LDR200 product. As
a percentage of total revenue, sales and marketing expenses were 9.9% and 8.1%
in the third quarters of 1997 and 1996 respectively.
General and Administrative. General and administrative expenses were $1.8
million in the third quarter of 1997 compared with $897,000 in the third quarter
of 1996. This increase was due primarily to higher personnel expenses related to
increased staffing in finance, information technology and administration
undertaken in support of the Company's growth. Also, in June 1996 and again in
June 1997, the Company relocated its operations to larger, leased facilities,
resulting in higher occupancy costs in the 1997 period. As a percentage of total
revenue, general and administrative expenses were 12.7% and 14.4% in the third
quarters of 1997 and 1996, respectively.
Provision for Income Taxes. The provision for income taxes in the third
quarter of 1997 was $1.5 million, resulting in an effective tax rate of 38.9%.
In the third quarter of 1996, the provision for income taxes was $504,000,
resulting in an effective tax rate of 40.0%.
10
<PAGE>
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER
30, 1996
Revenue. Total revenue for the first nine months of 1997 was $33.4
million, compared with $15.0 million for the first nine months of 1996. This
121.8% increase resulted primarily from an increase in sales of the Company's
LDR products, and particularly from increased product sales to the commercial
marketplace. Product revenue was $30.4 million during the 1997 period compared
with $13.0 million during the 1996 period. Of this $30.4 million in product
revenue, $23.3 million, or 76.7%, resulted from sales to commercial customers.
There were no sales to commercial customers in the first nine months of 1996. Of
the $30.4 million in product sales in the 1997 period, $11.5 million were made
to SplitRock Services, Inc. An additional $6.0 million in product revenue
resulted from sales to AT&T under the AT&T Agreement. In the first nine months
of 1996, 96.9% of product revenue resulted from sales to AT&T under the AT&T
Agreement.
Service revenue was $2.9 million in the first nine months of 1997 compared
with $1.6 million in the first nine months of 1996. This 79.6% increase was
attributable to growth in both the number and size of contracts with U.S.
government customers and government contractors. In addition, the Company had
service revenue totaling $527,000 during the first nine months of 1997 to
Splitrock. Other revenue in the first nine months of 1996 totaled $392,000,
coming from fees earned under the AT&T Agreement, which called for a total of
$1.5 million to be earned over the six months beginning in August 1995.
Gross Profit. Gross profit increased to $20.2 million in the first nine
months of 1997 from $9.4 million in the comparable 1996 period. Gross margins
were 60.5% and 62.6% during the 1997 and 1996 periods, respectively. The decline
in gross margin was due to an increase in product cost of goods sold to 36.2%
of product revenue in the 1997 period from 34.8% of product revenue in the 1996
period. This reflects the migration of the Company's cost structure to a
commercially sustainable model, both for commercial and government market sales.
The higher gross margin in the 1996 period was also due to the inclusion of
$392,000 in fees earned under an agreement with AT&T which had no associated
direct cost. Cost of service revenue increased to 73.9% of service revenue in
the 1997 period, from 67.5% in the comparable 1996 period.
Research and Development. Research and development expenses were $5.3
million, or 16.0% of total revenue, in the first nine months of 1997, compared
with $2.4 million, or 15.8% of total revenue, in the first nine months of 1996.
This increase was due primarily to the hiring of additional engineering
personnel and increased prototyping expenses related to the development of the
Company's LDR products.
Sales and Marketing. Sales and marketing expenses were $3.7 million, or
11.1% of total revenue, in the first nine months of 1997, compared with
$790,000, or 5.3% of total revenue, in the first nine months of 1996. This
increase resulted primarily from the hiring of sales and marketing personnel to
support generally, the Company's entry into the commercial marketplace, and
specifically, the release of the Company's LDR200 product.
General and Administrative. General and administrative expenses were $4.1
million or 12.4% of total revenue in the first nine months of 1997 compared with
$1.7 million or 11.5% of total revenue in the first nine months of 1996. This
increase was due primarily to higher personnel expenses related to increased
staffing in finance, information technology and administration undertaken in
support of the Company's growth. Also, in June 1996 and again in June 1997, the
Company relocated its operations to larger, leased facilities, resulting in
higher occupancy costs in the 1997 period.
Provision for Income Taxes. The provision for income taxes in the first
nine months of 1997 was $3.2 million, resulting in an effective tax rate of
38.9%. In the first nine months of 1996, the provision for income taxes was $1.8
million, resulting in an effective tax rate of 40.0%.
LIQUIDITY AND CAPITAL RESOURCES
The Company financed its working capital and capital expenditure
requirements primarily from the proceeds from its February 1997 initial public
offering. At September 30, 1997, the Company had cash and cash equivalents of
$22.8 million, short term investments of $21.9 million and working capital of
$54.3 million. This compares to cash and cash equivalents of $3.2 million, no
short term investments and working capital of $7.0 million at December 31, 1996.
The Company had no long term debt at either date.
Operating activities provided the Company with $1.5 million in cash in the
first nine months of 1997. Accounts receivable and inventory increased by $5.1
million and $2.1 million, respectively, from December 31, 1996 to September 30,
1997, reflecting growth associated with the Company's expansion of its product
line and move into the commercial marketplace.
11
<PAGE>
Interest receivable increased by $302,000 reflecting the investment of proceeds
from the Company's February 1997 initial public offering. The Company provided
collateral of $1.0 million for a letter of credit relating to its new
headquarters facility which will be reduced periodically until it terminates in
December 1998. Accounts payable and income taxes payable increased by $541,000
and $1.9 million, respectively, from December 31, 1996. Accrued expenses
increased by $2.1 million. The significant components of this increase were a
$653,000 decrease in deferred offering costs, a $1.3 million increase in
warranty accrual, and a $917,000 increase in accrued salaries and employee
benefits. The Company anticipates that the warranty accrual portion of accrued
liabilities may fluctuate significantly from period to period due to the timing
of customer upgrades and other warranty work.
Cash used in investing activities was $26.7 million for first nine months
of 1997. Short term investments increased by $21.9 million from December 31,
1996 to September 30, 1997, resulting from the investment of certain proceeds of
the Company's initial public offering. An additional $4.8 million was used for
the purchase of property and equipment, primarily computer hardware and software
and assembly and test equipment.
Financing activities generated cash of $44.7 million in the first nine
months of 1997, reflecting primarily the receipt of proceeds, net of offering
costs, from the Company's February 1997 initial public offering, as well as the
exercise of certain employee stock options. The Company sold 4.0 million shares
of common stock at $12.00 per share in its February 1997 initial public
offering.
During the second quarter of 1997, Yurie entered into a lease to occupy,
and relocated its headquarters facility to, a 137,000 square foot facility
located at 8301 Professional Place, Landover, Maryland. This lease commenced on
July 1, 1997 and has an expiration date of November 30, 2004, with an optional
5-year extension. The Company has vacated the two Lanham, Maryland facilities
that it previously occupied. The cost associated with these lease terminations
was not material.
The rent and other expenses associated with this new lease represent a
significant increase in the Company's occupancy costs. The Company believes,
however, that this relocation is necessary to facilitate and support the
Company's growth, and that the additional costs will not have a material adverse
effect on the Company's financial condition and operating results.
12
<PAGE>
YURIE SYSTEMS, INC.
COMPUTATION OF EARNINGS PER COMMON AND COMMON
EQUIVALENT SHARES FOR THE THREE AND NINE MONTHS ENDED
SEPTEMBER 30, 1997 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1997 1996 1997 1996
-------------------------- -------------------------
<S> <C> <C> <C> <C>
Net Income $ 2,366,484 $ 756,484 $ 4,980,599 $ 2,739,227
========================== =========================
Average shares outstanding during the period 24,822,115 20,208,400 24,187,651 20,208,400
Dilutive effect of stock options after application
of treasury stock method 2,472,857 1,542,408 2,159,086 1,542,408
-------------------------- -------------------------
Average number of shares and equivalent shares
outstanding during the period 27,294,972 21,750,808 26,346,737 21,750,808
========================== =========================
Earnings per common and common
equivalent share $ .09 $ .03 $ .19 $ .13
========================== =========================
</TABLE>
15
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q
(9-30-97) AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 23,766,548
<SECURITIES> 21,883,297
<RECEIVABLES> 10,328,395
<ALLOWANCES> 256,900
<INVENTORY> 4,687,665
<CURRENT-ASSETS> 62,076,883
<PP&E> 7,154,893
<DEPRECIATION> 1,079,445
<TOTAL-ASSETS> 68,293,703
<CURRENT-LIABILITIES> 7,777,438
<BONDS> 0
0
0
<COMMON> 249,100
<OTHER-SE> 59,550,081
<TOTAL-LIABILITY-AND-EQUITY> 68,293,703
<SALES> 33,350,725
<TOTAL-REVENUES> 33,350,725
<CGS> 13,175,780
<TOTAL-COSTS> 13,175,780
<OTHER-EXPENSES> 13,147,599
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (1,130,253)
<INCOME-PRETAX> 8,157,599
<INCOME-TAX> 3,177,000
<INCOME-CONTINUING> 4,980,599
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,980,599
<EPS-PRIMARY> .19
<EPS-DILUTED> .19
</TABLE>
