<PAGE>
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 September 30, 1997;
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 0-22087
YURIE SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 52-1778987
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
8301 PROFESSIONAL PLACE
LANDOVER, MD 20785-2237
(Address of principal executive offices and zip code)
301-352-4600
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports 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 [_]
As of September 30, 1997, the registrant had outstanding 24,909,976 shares of
its common stock.
1
<PAGE>
YURIE SYSTEMS, INC.
REPORT ON FORM 10-Q
FOR THE THREE AND THE NINE MONTHS ENDED
SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
PART I: FINANCIAL INFORMATION
ITEM 1. Financial Statements
a. Balance Sheets as of September 30, 1997 and
December 31, 1996 (unaudited) 3
b. Statements of Operations for the three and nine
months ended September 30,1997 and 1996
(unaudited) 4
c. Statements of Cash Flows for the three and nine
months ended September 30, 1997 and 1996
(unaudited) 5
d. Notes to Financial Statements 6
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
PART II: OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K 13
</TABLE>
2
<PAGE>
PART I
ITEM 1. FINANCIAL STATEMENTS
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>
ITEM 2. 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>
PART II
ITEMS 1 THROUGH 5.
Not Applicable.
ITEM 6.
EXHIBITS
11.1 Statement regarding Computation of Earnings per Share
27.1 Financial Data Schedule
REPORTS ON FORM 8-K
None
13
<PAGE>
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.
YURIE SYSTEMS, INC.
/s/ Harry J. D'Andrea
DATE: November 14, 1997 BY: -------------------------------------------
HARRY J. D'ANDREA
Chief Financial Officer and Treasurer
(also serves as Chief Accounting Officer)
14
<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>
