<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------
FORM 10-K
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the fiscal year ended
December 31, 1996.
[ ] 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)
<TABLE>
<S> <C>
DELAWARE 52-1778987
(State or other jurisdiction of incorporation or ( I.R.S. Employer Identification No.)
organization)
10000 DEREKWOOD LANE
LANHAM, MD 20706
(Address of principal executive offices) (Zip Code)
</TABLE>
Registrant's telephone number, including area code: 301-352-4600
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
<TABLE>
<S> <C>
Name of each exchange
Title of each class on which registered
------------------- -------------------
Common Stock, par value $.01 per share The Nasdaq Stock Market (National Market)
</TABLE>
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [ ]
The aggregate market value of the common stock of Yurie Systems, Inc. held by
non-affiliates as of March 21, 1997 was $62,653,150.
As of March 21, 1997, the registrant had outstanding 24,638,400 shares of its
common stock.
<PAGE> 2
YURIE SYSTEMS, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED
DECEMBER 31, 1996
<TABLE>
<CAPTION>
PAGE NO.
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<S> <C> <C> <C>
PART I: ITEM 1. Business 3
ITEM 2. Properties 17
ITEM 3. Legal Proceedings 17
ITEM 4. Submission of Matters to a Vote of Securities Holders 17
PART II: ITEM 5. Market for the Registrant's Common Equity 18
ITEM 6. Selected Financial Data 19
ITEM 7. Management's Discussion and Analysis of Financial 20
Condition and Results of Operations
ITEM 8. Financial Statements and Supplementary Data 25
ITEM 9. Changes in and Disagreements with Accountants on 25
Accounting and Financial Disclosure
PART III: ITEM 10. Directors, Executive Officers and Key Employees of the 26
Registrant
ITEM 11. Executive Compensation 29
ITEM 12. Security Ownership of Certain Beneficial Owners and 31
Management
ITEM 13. Certain Relationships and Related Transactions 32
PART IV: ITEM 14. Exhibits, Financial Statement Schedules and Reports on F-1
Form 8-K
</TABLE>
<PAGE> 3
INTRODUCTORY STATEMENT
The Private Securities Litigation Reform Act provides a "safe harbor" for
forward-looking statements. Certain statements included in this Annual Report
on Form 10-K are forward-looking, such as statements regarding the anticipated
growth in demand for ATM access products, the anticipated growth of the
Company's revenues from development, manufacture and sale of ATM access
products, the expectation that such revenue growth will result largely from
sales to telecommunications service providers and corporate end users, and the
anticipated expansion of the Company's international activities. 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-K , 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.
References made in this Annual Report on Form 10-K to "Yurie", the "Company"
or the "Registrant" refer to Yurie Systems, Inc.
PART I
ITEM 1. BUSINESS
Yurie designs, manufactures, markets and services asynchronous transfer
mode ("ATM") access equipment for telecommunications 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. End users of telecommunications
services have traditionally maintained separate wide area networks ("WAN"s) for
transmitting voice, data, video and other electronic information among
geographically dispersed locations. ATM technology is conducive to
consolidating these networks. The network consolidation brought about by
employing ATM access platforms can provide savings in WAN communications costs
and simplify network management.
Yurie is a leading supplier of ATM access products. The Company's LDR100,
introduced in February 1995, was one of the first commercially available ATM
access products. The LDR200, designed primarily for telecommunications
carriers and Internet service providers, was released in September 1996. The
LDR50, designed for mid-sized to large corporate offices, is scheduled for
release in April 1997. The Company designed its ATM access products to be
flexible and scaleable, so that customers can realize the benefits of ATM while
preserving their investments in existing equipment. The LDR products adhere to
industry-wide technical standards, allowing users to integrate the products
into current networks operating with other standards-compliant products.
Yurie's proprietary AQueMan algorithm allows the LDR products to reduce network
congestion while maintaining quality of service. The Company's LANET framing
protocol is capable of transporting ATM traffic over circuits of varying speed
and quality, including poor quality circuits. The Company's ATM access products
incorporate a variety of value-added features, including compact size,
scaleability, reliability, encryption capabilities and a broad variety of
access interfaces.
The Company's strategy centers on maintaining its technological leadership,
developing both the telecommunications service provider and corporate end user
markets while continuing to pursue government end users, developing
international markets and building strategic relationships. Since 1994, Yurie
has had a strategic relationship with AT&T. In August 1995, pursuant to this
relationship, the Company and AT&T entered into the AT&T Agreement to
facilitate the joint technical evaluation and marketing of the
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Company's LDR products. Under the AT&T Agreement, as amended, AT&T has a
three-year exclusive right to market and sell the LDR100 and the LDR200 in U.S.
federal, state and local government markets, as well as certain foreign
government markets, and has committed to purchase at least $6.5 million, $10.0
million and $10.0 million of the LDR200 in 1996, 1997 and 1998, respectively.
To enhance its distribution efforts and pursue the telecommunications service
provider and corporate end user markets, the Company has established a
nationwide direct sales force which currently consists of 15 sales personnel.
INDUSTRY BACKGROUND
Deregulation of the U.S. telecommunications industry, which began with the
breakup of AT&T in 1984, has triggered significant competition for the
provision of both long distance and local telecommunications services. The
recent adoption of the Telecommunications Act of 1996 is likely to create even
more competition over the next few years. The international market has also
experienced increased deregulation, liberalization, privatization and the
emergence of new wireline and wireless alternatives to traditional carrier
services. In this intensely competitive environment, telecommunications service
providers throughout the world are seeking to differentiate themselves, in
part, by offering enhanced services based on new and emerging technologies.
Industry surveys show that both voice and data traffic are continuing to
expand. Businesses have increasingly deployed communications technology to link
remote sales offices, home offices, mobile offices and geographically dispersed
customers and suppliers. These businesses use increasingly powerful computer
technologies that enable new multimedia applications integrating data, voice
and video. The volume of network traffic has also grown dramatically due to
traffic on the Internet, a rapidly growing global web of networks that permits
users to communicate, share information and conduct business throughout the
world. Businesses demand telecommunications services that provide significantly
higher transmission capacity or bandwidth, the flexibility to choose among
services with varying bandwidths and the ability to access communications
services from remote locations.
Driven by this combination of increased demand and competition, WAN
technology has made significant advances. Current WAN technology permits users
in geographically dispersed locations to communicate. However, most existing
networks have had difficulty keeping pace with the increase in WAN traffic,
resulting in network congestion and related performance inefficiencies.
Today's Networking Technologies
Time division multiplexing ("TDM") and frame relay are the networking
technologies currently most widely deployed in WANs. TDM, which was one of the
first technologies developed to send traffic through circuits across a WAN,
operates by dedicating a circuit - or fixed amount of bandwidth - to each end
device. TDM's use of dedicated circuits provides high quality service for all
network traffic, whether data, voice or video. Since information is not
continuously transmitted, however, the dedicated circuits are often idle. This
results in inefficient use of expensive bandwidth and high cost to TDM network
users.
Frame relay was introduced in 1990 as a method of connecting local area
networks ("LANs") over WANs by using flexible bandwidth allocation to lower the
cost of transmission. Frame relay uses "packets" or "frames" to transmit
traffic, thereby allowing the same bandwidth to be shared by many users, each
using the bandwidth only for the time required to transmit a packet. Designed
primarily for data transmission, frame relay cannot guarantee the high quality
transmission of voice and video. Currently, frame relay is widely used to
transmit data over WANs, including the Internet. Due to the substantial
increase in data traffic over WANs, however, today's frame relay networks are
being used to transmit more traffic than they were designed to support,
resulting in network congestion.
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<PAGE> 5
To increase a frame relay network's switching capacity to meet increased
data demands and alleviate congestion, sophisticated software is required. To
run this software, the network must be upgraded with powerful, intelligent
processors. The costs of these high-end processors required to switch frame
relay traffic at the speeds needed in today's data network backbones are very
high. Therefore, as data traffic increases, upgrading the frame relay network
becomes more costly and inefficient and ultimately impractical.
The Emergence of ATM as a Standard
Faced with the limitations of frame relay, telecommunications service
providers are installing ATM switches in the "backbones" of their existing
networks. ATM segments data, voice and video traffic into small, uniform-sized
"cells," rather than the larger, variable-size "packets" or "frames" used in
frame relay. The addition of ATM backbone switches upgrades a network's
performance by increasing switching capabilities at the network's core. ATM's
cell-based architecture increases bandwidth utilization and seeks to provide
consistent quality of service and predictability for all traffic types. ATM is
also an enabling technology, making possible new network applications such as
video distribution, medical imaging and collaborative computing, all of which
would be impractical with conventional network technologies.
ATM is the first standard protocol to permit reliable service for all
traffic types, allowing the consolidation of TDM and frame relay networks into
a single ATM network for data, voice and video. A single ATM network offers the
potential for economies of scale and streamlining of network operations. ATM
technology has been approved by both the ATM Forum, a group of equipment
manufacturers, telecommunications service providers and end users, and the ITU
as a standard in both the computer and telecommunications industries. The
standardization of ATM has allowed for compatibility of ATM equipment and
interoperability of ATM among a wide variety of interfaces and vendors, which
the Company believes will result in the widespread adoption of ATM.
Current Status of ATM
The U.S. government was among the first to deploy ATM technology. Its
initial decision to use ATM was motivated by its desire to consolidate many
discrete networks onto a single network, thus significantly reducing cost. The
U.S. government was able to deploy ATM across geographic boundaries because ATM
was quickly accepted as an international standard, and the government soon
discovered the effectiveness and efficiency of ATM as a global networking
technology.
Several telecommunications service providers began offering trial ATM
services in the early 1990s. These services were available only for high speed
traffic and at high prices and, therefore, made ATM attractive only to
"bandwidth hungry" users and limited ATM deployment within the providers'
networks. Driven by increasing competition and the rapid growth of data traffic
on frame relay systems, a number of telecommunications service providers began
deploying ATM for use in their network backbones to manage heavy loads of user
traffic and thereby relieve network congestion. Until recently, providers have
continued to install ATM primarily in their network backbones and typically
have not offered ATM service directly to end users. End users have generally
continued to use a costly mix of frame relay and TDM, along with leased
communications lines, to meet their data, voice and video transport needs.
In 1996, several telecommunications service providers announced plans to
begin offering ATM services directly to end users at prices competitive with
similar frame relay and TDM access services. To utilize these direct ATM
services, an end user needs ATM access products either located at the local
office of a telecommunications service provider (in close proximity to the end
user) or deployed by the end user in its
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private network. Access products provide the end user with network access
through multiple network interfaces, traffic concentration and data protocol
translation.
ATM access products are well suited to provide efficient connectivity to
ATM networks, facilitate transmission of a variety of traffic types at varying
speeds and accommodate a mix of end user applications on a single network. In
addition, ATM access products have the potential to lower the cost to end users
of transmitting data, voice and video communications. For these reasons, the
Company believes that ATM access products, over time, will supplant TDM and
frame relay access products in WANs. Vertical Systems, a leading industry
research firm, forecasts the aggregate ATM market, including the markets for
both ATM access and backbone equipment, to be $330.0 million in 1996 and
expects these markets to exceed $1.3 billion by 1999.
THE CHALLENGES OF WIDESPREAD ATM ACCESS
Before telecommunications service providers and end users can fully deploy
ATM, several problems relating to the ATM access layer must be solved.
Quality of Service and Network Congestion
The architects of early ATM products focused almost exclusively on data
applications and did not fully implement ATM's traffic management capabilities
for voice and video. However, today's mixed-services environment demands
sophisticated traffic management to provide the level of bandwidth utilization
that makes a single ATM network more cost effective than separate voice and
data networks. An ATM network must be capable of delivering high quality
service for all traffic types, notwithstanding high levels of utilization.
Support for Limited Circuit Types
ATM was originally conceived for use only on high quality fiber optic
circuits (e.g., T3/E3, OC-3c and STM-1). At the access layer, however, circuits
come in all varieties, including wireless, copper and satellite. On these
circuits, quality may be affected by atmospheric conditions, interfering
transmissions or defects in the circuits themselves. Transmission on lower
quality or "noisy" circuits frequently results in uncorrectable errors and
corruption in the network. The inability of early ATM products to transmit
reliably over lower-quality circuits has limited the use of ATM to high quality
circuits, thereby limiting widespread ATM access.
Need for Additional Product Features
Early ATM access products did not meet the requirements of
telecommunications service providers and end users because they lacked
important features:
Size and Scaleability. Telecommunications service providers, who often
house thousands of pieces of equipment in their central offices, and end users,
who incur costs for each square foot of office space, place a premium on space.
To be attractive to telecommunications service providers and end users, an ATM
access product must offer the required functionality in a compact package. At
the same time, an access product must be scaleable to permit telecommunications
service providers and end users to upgrade performance and capacity through
minimal additions to existing equipment. Early ATM access products were
physically large relative to their capacities.
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Reliability. Service interruptions can be disastrous to telecommunications
service providers and end users, who need reliable products designed for
continuous utilization. Redundant features are essential to the reliability of
an access product. Early ATM access products provided little redundancy,
typically limited to power supply. Products deployed to deliver public services
or to carry mission-critical traffic across a private network must offer
multiple levels of redundancy for a broad variety of features, including
central processing unit, clock, backplane and interface cards.
Access Interfaces. Early ATM access products generally did not interface
with a wide range of standard communications equipment, such as private branch
exchanges, video decoders, LAN routers, hubs and switches and IBM SNA-based
equipment. This limited the utility of these products because users frequently
employ a variety of non-ATM equipment.
THE YURIE SOLUTION
Yurie has developed ATM access products that are designed to meet the
challenges of widespread ATM deployment. These products are capable of
furnishing telecommunications service providers, corporate end users and
government end users with flexible, cost-effective and reliable access to
present and future ATM-based services. The Company's product family includes
the LDR100, released in February 1995; the LDR200, released in September 1996;
and the LDR50, scheduled for release in April 1997. All three of these
products have been engineered with a set of Company-developed technologies
designed to solve the current problems of ATM access. These technologies
include AQueMan, a proprietary queuing algorithm designed to maximize bandwidth
utilization while preserving quality of service, and LANET, a robust framing
protocol that facilitates ATM deployment over low quality circuits. In
addition, the LDR products offer value-added features, such as compact size,
scaleability and reliability.
Quality of Service and Reduced Network Congestion
Yurie developed AQueMan to reduce network congestion while preserving
quality of service. AQueMan is a queuing algorithm that establishes separate
queues for time-sensitive traffic (typically voice) and loss-sensitive traffic
(typically data) and prioritizes traffic within these separate queues. This
technique reduces cell loss for loss-sensitive traffic and cell delay for
time-sensitive traffic, thereby allowing higher quality of service and more
optimal use of bandwidth. Time-sensitive cells are transmitted ahead of
loss-sensitive cells, but have a higher probability of being selectively
deleted during network congestion than loss-sensitive cells. In addition, when
comparing cells of the same traffic type (e.g., voice-to-voice or
data-to-data), AQueMan is able to ensure that more important time-sensitive
traffic will experience less delay and more important loss-sensitive traffic
will have a lower probability of being selectively deleted. With AQueMan, the
LDR products can meet the ATM Forum's quality of service standards for constant
bit rate, variable bit rate and unspecified bit rate traffic management even
during periods of network congestion. Through the use of AQueMan, Yurie's LDR
products substantially reduce the expense of sending information over a WAN by
achieving higher levels of bandwidth utilization.
Support for Many Circuit Types
Yurie developed LANET, a robust framing protocol that enables the transport
of ATM cells on any transmission medium, including low-speed and/or low-quality
circuits. LANET is particularly beneficial in wireless environments (e.g.,
satellite, cellular and microwave), which often suffer from high bit error
rates and blocks of errors due to interfering transmissions or adverse
conditions such as inclement weather. LANET provides a framing structure that
allows ATM cells to be "multiplexed" into serial bit streams for transmission
over a single channel. This framing structure, which is scaleable to conform to
the transmission speed of the circuit, provides an embedded network
synchronization capability required for serving
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isochronous applications such as voice and real-time video. LANET's simple
framing structure makes the required communication link synchronization
relatively easy even in a noisy environment. The Company's LDR products include
a combination of LANET, Reed Solomon forward error correction and
error-tolerant addressing, which enable the products to significantly increase
the reliability of transmission of ATM cells over noisy circuits.
Other Value-Added Product Features
Yurie's products incorporate a wide variety of value-added features,
including the following:
Size and Scaleability. The LDR products are compact and can be easily
upgraded. A single LDR200 platform occupies significantly less space than early
ATM access products and can be upgraded with minimal additional space and at
minimal cost. And because the LDR50 and LDR200 support the same I/O and server
modules, configurations that outgrow the LDR50Gs four user slots can upgrade to
LDR200 (which has 11 user slots) with minimal equipment expense.
Reliability. Yurie's LDR200 satisfies telecommunications service
providers' need for reliability, offering uninterrupted service through
comprehensive redundancy options, including power, central processing unit,
clock, backplane and interface cards.
Wide Variety of Access Interfaces. Yurie's ATM access products are built
to interface with a wide variety of standard communications equipment including
private branch exchanges, video decoders, LAN routers, hubs and switches and
IBM SNA-based equipment. In addition, the LDR product line is designed to allow
for the easy addition of new interfaces as they emerge.
STRATEGY
Yurie's objective is to become the leading provider of ATM access equipment
to both telecommunications service providers and end users. The key elements of
Yurie's strategy are as follows:
Maintain Technology Leadership. Yurie is a leader in developing new
technology for the ATM access market. The Company's LANET framing protocol was
among the first technologies to facilitate ATM access at low speeds and across
noisy circuits. Yurie's AQueMan queuing algorithm was one of the first to
establish separate queues for voice and data and prioritize traffic types
within each queue to improve quality and maximize bandwidth utilization. Yurie
intends to continue to develop additional product features and network
interfaces while reducing production costs. Yurie plans to continue to commit
substantial resources to its active research and development program so it can
remain in the forefront of ATM product development and maintain its position as
a technology leader in the emerging ATM access market.
Focus on ATM Access Solutions. Most ATM equipment suppliers have focused
on designing and marketing products that can be used as backbone switches at
major switching centers. Yurie, by contrast, has concentrated on developing ATM
access products which act as gateways for non-ATM equipment and concentrators
for lower speed ATM circuits. Yurie believes that by continuing to focus on
this market segment and developing cost effective products designed
specifically to provide ATM access, it can strengthen its current market
position.
Develop Both the Telecommunications Service Provider and Corporate End User
Markets. The Company has successfully marketed its ATM access products to
government end users and believes that the government's demand for these
products will increase. Yurie intends to continue to market its products to the
government through its strategic relationship with AT&T. The Company believes,
however, that the
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market for ATM access products among telecommunications service providers and
corporate end users has greater potential than the government end user market.
These customers should benefit greatly from an ATM access platform that can
combine voice, video and data on a single ATM network. Yurie's LDR products are
specifically designed to be attractive to these customers because they can
connect to a variety of standard central office and customer premises
equipment. Yurie has implemented a sales and pricing strategy that targets both
the telecommunications service provider and corporate end user markets. In
addition, the Company is expanding its direct sales force, particularly in the
geographic areas where the telecommunications service provider and corporate
end user markets are concentrated. This direct sales force is comprised of
sales personnel who have all had prior experience in commercial sales of
networking and/or telecommunications products.
Pursue International Markets. Since ATM is an international standard,
Yurie believes that the potential market for its ATM access products is global
in scope. Yurie, therefore, intends to establish a sales and support
organization not only in North America, but also in Europe and Asia, and to
develop the product features and obtain the certifications required to pursue
international markets.
Build and Leverage Strategic Relationships. Yurie has established a
successful strategic relationship with AT&T to develop the U.S. government
markets. The Company is actively seeking to establish similar relationships for
other markets with other telecommunications industry participants, including
equipment suppliers and telecommunications service providers. Once these
relationships are established, Yurie intends to leverage its position in the
marketplace by using the marketing expertise, distribution network, support
capabilities and technologies of its strategic allies.
THE LDR PRODUCT FAMILY AND SUPPORTING SERVICES
Yurie's LDR family of ATM access products includes the LDR100, the
LDR200, the LDR50, and the LDR5. All of Yurie's LDR products are based on an
ATM "cell" architecture that allows flexible transmission of all traffic types.
The following table provides an overview of the Company's LDR products:
<TABLE>
<CAPTION>
NUMBER OF BUS
PLATFORM USER SLOTS BANDWIDTH DIMENSIONS
-------- ---------- --------- ----------
<S> <C> <C> <C>
LDR200 11 1.2 Gbps 7"H x 10.5"D x 19"W
LDR100S 10 64 Mbps 12.25"H x 15.25"D x 19"W
LDR100C 3 64 Mbps 8.75"H x 10"D x 19"W
LDR50 4 600 Mbps 5.25OH x 10.25OD x 19OW
LDR5 2 1.544 Mbps 3.5"H x 10"D x 19"W
</TABLE>
THE LDR100
Yurie's first access product, the LDR100, was originally built as a
prototype to demonstrate the AQueMan queuing algorithm and the LANET framing
protocol. The LDR100 was designed to meet the needs of highly technical users.
Beginning in 1995, the LDR100 was delivered, through AT&T, to a variety of U.S.
government agencies and their support contractors for deployment in
mission-critical environments, including the U.S. military operations in Haiti
and Bosnia. In addition to ships, aircraft and ground vehicles, the LDR100 has
been deployed in centralized locations, such as telecommunications equipment
closets and desktops.
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To further ensure quality over a wide variety of circuit types, the LDR100
employs Reed Solomon forward error correction, an industry standard method of
detecting and correcting transmission errors, and a simple error-tolerant
addressing scheme that ensures highly reliable communications over circuits of
varying speeds and quality.
The LDR100, with a bus bandwidth of 64 megabits per second, aggregates
high speed ATM LAN traffic and non-ATM voice and data traffic onto a low-speed
ATM WAN. Where bandwidth utilization is especially critical, the LDR100
compresses voice prior to transmission over the WAN. The Company has shipped
more than 150 LDR100 access concentrators since February 1995.
The following table describes the key features of the LDR100:
<TABLE>
<CAPTION>
INTERFACE MODULE PORTS PORT SPEEDS PROTOCOLS SUPPORTED
---------------- ----- ----------- -------------------
<S> <C> <C> <C>
DS3 1 45 Mbps ATM
High Speed Parallel/Serial 1 378 kbps - 15 Mbps ATM/LANET
(RS422, V.35, DSS Parallel)
Serial Data (RS232, RS422, 4 75bps - 1.544Mbps ATM/LANET, frame relay,
RS530, V.35) synchronous, asynchronous
Analog Compressed Voice 2 8kbps, 16kbps 2 Wire POTS, Station, Office
TAXI 1 100/140 Mbps ATM
</TABLE>
The LDR200
Yurie's second generation product, the LDR200, was first shipped in
September 1996. The LDR200 is designed to be easily deployed by
telecommunications service providers, corporate end users and government end
users. The LDR200 incorporates AQueMan and LANET and expands the capabilities
of the LDR100 by offering higher throughput, greater port density, a greater
variety of interface types, enhanced scaleability and higher speed.
The LDR200 has a bus bandwidth of 1.2 gigabits per second and is scaleable
up to 11 interface module slots. It also provides enhanced reliability,
offering redundancy for the power, central processing unit, clock, backplane
and interface cards. The LDR200 conforms to carrier equipment installation
requirements, such as Bellcore's Network Equipment Building Standards (NEBS).
Additionally, the LDR200 complies with the ATM Forum's User Network Interface
standard and the IISP 1.0 network/network interface standards, providing
connectivity and interoperability with ATM backbone switches.
Currently, the LDR200 supports high-speed WAN connections via DS3 cards.
It uses DS1 cards to support structured and unstructured service in compliance
with the ATM Forum's circuit emulation specification as well as ATM
cell-bearing capabilities. The system also offers OC-3c, High Speed, TAXI, and
analog voice interfaces and a DSP1 server card, which provides voice
compression, echo cancellation, and silence suppression capabilities. The
Company plans to introduce other interface cards in the future, including E1,
E3, PRI, and ethernet.
The current version of the LDR200 contains most of the features included in
the LDR100, and the Company is in the process of developing the LDR200 to
include all of the LDR100's attributes, along with additional value-added
features. The Company intends to phase out the LDR100 when the LDR200
development is completed but will continue to provide service support for the
LDR100 product.
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The LDR50
Yurie's LDR50, which started shipping in March 1997, was designed to
provide access to ATM services for mid-sized to large corporate offices. Like
the LDR200, the LDR50 incorporates AQueMan and LANET.
The LDR50 has a bus bandwidth of 600 megabits per second and is scaleable
up to 4 interface module slots. The LDR50 provides PVC support for ATM Forum
UNI 3.0 and UNI 3.1 standard signaling and thus can interoperate with ATM
equipment from other manufacturers.
Because the LDR50 supports the same I/O and server modules as the LDR200,
sites that outgrow the smaller system can easily upgrade to the LDR200. The
LDR50 currently supports all the standard network and user interfaces supported
on the LDR200. See the table above for a complete listing of current and
future features.
The LDR50Gs 19" x 10.25" x 5.25" chassis can be wall mounted, secured in a
standard 19O telco rack, or fitted for table-top use.
The following table describes the key features of both the LDR200 and the
LDR50:
<TABLE>
<CAPTION>
INTERFACE MODULE PORTS PORT SPEEDS PROTOCOLS SUPPORTED
---------------- ----- ----------- -------------------
<S> <C> <C> <C>
DS3 2 45 Mbps ATM
Channelized T1 (DS1) 6 1.544 Mbps ATM, TDM, Frame Relay*
Multi-Serial (EIA-232, 6 300 bps-2.048 Mbps ATM/LANET, HDLC,
EIA-422, EIA-530, V.35) Synchronous, Asynchronous,
High Speed 1 up to 30 Mbps ATM/LANET
(EIA-422 Serial and Parallel)
Multimode OC-3c 1 155Mbps ATM
Single Mode OC-3c* 1 155 Mbps ATM
ISDN Primary Rate Interface* 6 1.544 Mbps National ISDN-2, AT&T
4ESS/5ESS, Nortel DMS
Two Wire Station 8 64 Kbps PLAR
Two Wire Office* 4 64 Kbps POTS
E1* 6 2.048Mbps ATM, TDM, Frame Relay,
Voice Compression
E3* 2 34 Mbps ATM
TAXI 1 100/140 Mbps ATM
Ethernet* 6** 10Mbps** ATM (RFC 1483)
</TABLE>
<TABLE>
<CAPTION>
SERVER MODULE FEATURES
------------- --------
<S> <C>
DSP1 32K ADPCM Voice Compression, Silence Suppression, Adaptive Echo
Cancellation
</TABLE>
* In development.
** One port can be run at 100Mbps.
11
<PAGE> 12
The LDR5
To augment its product family, Yurie has recently entered into an agreement
with DataLabs, Inc., under which Yurie has a non-exclusive license to market
DataLabs' Virtual Access 1000 product on a private label basis as the LDR5.
The LDR5 is an ATM access device that features full "CSU/DSU" capabilities,
thereby allowing frame relay and TDM equipment to interface with an ATM
network. The LDR5 offers low-cost ATM access for standard customer premises
equipment. It is designed for use in branch offices and other settings that do
not require the more sophisticated LDR100 or LDR200 access products. The LDR5
enables the Company to offer a full range of ATM access products, but Yurie
does not expect sales of the LDR5 to be significant.
The following table describes the key features of the LDR5:
<TABLE>
<CAPTION>
INTERFACE MODULE PORTS PORT SPEEDS PROTOCOLS SUPPORTED
----------------- ----- ----------- -------------------
<S> <C> <C> <C>
NETWORK:
T1 (DS1) 1 1.544 Mbps ATM
USER:
Channelized T1 (DS1) 1 1.544 Mbps Frame Relay, TDM
Serial Data (EIA-422, 1 56kbps-1.544Mbps Frame relay, synchronous
EIA-530, V.35)
</TABLE>
Product Management Protocol; Pricing
Each of the Company's LDR products can be managed using any software
package supported by the Simple Network Management Protocol ("SNMP"), such as
HP OpenView and SunNet Manager. The LDR200 and LDR50 can also be managed using
a simple "dumb" terminal interface.
The LDR100 and LDR200 products sell for prices ranging from $20,000 to
$90,000; the LDR50Gs price ranges from $18,000 to $40,000; and the LDR5's price
ranges from $5,000 to $10,000. Actual price depends on the configuration of
the product selected.
Product Support
The Company offers comprehensive customer support for its LDR product line.
The Company's service organization offers installation, preventative
maintenance, multi-vendor services, repair, training and a variety of other
advanced services designed to enhance the reliability of a customer's
telecommunications network. The LDR200 and LDR50 are sold with a standard
one-year warranty. The Company's customer support representatives are located
in Lanham, Maryland and currently are available from 8:00 a.m. to 8:00 p.m.
Eastern time, Monday through Friday. At other times, the Company's customer
support representatives can page an on-call technical support person to respond
to technical support requests. Beginning later in 1997, extended service for
the Company's products will be provided by a third party. The third-party
service provider will be available 24 hours a day, seven days a week to
supplement the Company's service organization.
12
<PAGE> 13
AT&T Relationship
The Company has had a significant strategic relationship with AT&T since
1994. Pursuant to this relationship, Yurie and AT&T entered into the AT&T
Agreement in August 1995. The AT&T Agreement, as amended, provides for the
joint technical evaluation and marketing of the LDR products by Yurie and AT&T,
and grants AT&T a three-year exclusive right to market and sell the LDR100 and
the LDR200 solely in U.S. federal, state and local government markets, as well
as certain foreign government markets. Sales pursuant to the AT&T Agreement
have generated a majority of the Company's revenue to date. Under the AT&T
Agreement, AT&T has guaranteed minimum annual purchase orders for the LDR200 of
$6.5 million, $10.0 million and $10.0 million for calendar years 1996, 1997 and
1998, respectively. In the event that the Company fails to fulfill any of its
material obligations under the AT&T Agreement, AT&T could terminate the
contract. Such termination would have a material adverse effect on the
Company's business, results of operations and financial condition.
Customers and End Users
To date, the majority of the Company's products have been sold to AT&T
either for its own use or for resale to government agencies or their support
contractors. The principal end users of Yurie's ATM access products have been
U.S. government agencies and their support contractors. The Company has
recently begun to obtain purchase orders from commercial customers. Among the
more than 25 government organizations and commercial customers that have
purchased or used the Company's products are:
<TABLE>
<S> <C>
Advanced Research Project Agency/Defense Information Mitre Corporation
Systems Agency Joint Program Office Booz-Allen & Hamilton, Inc.
U.S. Army Communications Electronics Command Applied Innovation, Inc.
Defense Aerospace Reconnaissance Organization OneLine Management, Inc.
North Atlantic Treaty Organization Lunex Group, LLC
Naval Research Laboratory K-NET Ltd.
Los Angeles Department of Water & Power Government of Canada, Communications Research
Centre
</TABLE>
Although there are more than 25 end users of Yurie's products, the
Company's customer base is highly concentrated and a small number of customers
has accounted for a significant portion of the Company's total revenue in
recent years. Sales to AT&T, either for its own use or for resale to government
agencies or their support contractors, accounted for 52.4%, 71.8% and 87.0% of
the Company's total revenues in 1994, 1995 and 1996, respectively. The Company
is expanding its sales and marketing efforts to pursue telecommunications
service providers and corporate end users.
RESEARCH AND DEVELOPMENT
The Company's objective is to be a leader in developing new technology for
the ATM access market. The Company has established an active research and
development program that is focused on the development of new and enhanced
products using ATM technology. In particular, the Company's research and
development team is seeking to expand the capabilities of the LDR200's
interface modules, develop new server modules (such as primary rate ISDN, voice
compression and encryption modules), expand network management capabilities and
enhance service interworking capabilities. The Company actively solicits
product development ideas from telecommunications service providers and end
users of the Company's products, and develops additional ideas through
participation in industry organizations and international standards bodies such
as the ITU and ATM Forum.
13
<PAGE> 14
During 1993, 1994, 1995 and 1996, total research and development
expenditures were $8,000, $40,000, $428,000 and $3.8 million, respectively. The
Company expects its future research and development expenditures will grow
commensurately with its revenue growth. As of March 21, 1997, 58 Company
employees were engaged in research and development programs, including hardware
and software development, test and engineering support personnel. Approximately
two-thirds of the Company's research and development employees hold masters or
higher degrees. The Company believes that recruiting and retaining qualified
engineering personnel will be essential to its continuing success.
SALES, MARKETING AND DISTRIBUTION
In order to pursue customers in the telecommunications service provider and
corporate end user markets, the Company has expanded its direct sales force by
hiring sales personnel who have all had experience in commercial sales of
networking and/or telecommunications products. To allow its sales force to
concentrate on commercial markets, the Company will continue to rely on AT&T to
market and sell the LDR products in U.S. federal, state and local government
markets, as well as in certain foreign government markets. As of March 21,
1997, the Company had 15 sales personnel in its direct sales organization.
Currently, sales offices are located in New York, Phoenix, San Francisco, Los
Angeles, Hartford, Chicago, Dallas, Denver, Tampa and Lanham, MD. All of these
offices, except those in Phoenix and Lanham, MD are currently located in the
homes of sales personnel. In 1997, the Company plans to open sales offices in
Seattle, Boston, Houston, Atlanta, Miami and Pittsburgh, all of which are
expected to be located in the homes of sales personnel. International sales
offices are also planned for 1997 in the U.K. and Korea or Singapore.
Direct Sales
The Company continues to expand its direct sales force to market the
Company's products and to ensure direct contact with its customers. The primary
roles of the Company's sales force are (i) to provide support to AT&T and seek
additional strategic partners, (ii) to support end users by addressing complex
ATM access problems and (iii) to differentiate the features and capabilities of
the Company's LDR products from competitive products. In addition, the Company
believes that its investment in a direct sales force will help the Company to
monitor changing customer requirements, competing products and the development
of industry standards.
Yurie's 15 person direct sales force includes both sales persons and sales
engineers. Sales engineers provide support and services for the Company's sales
persons and for existing customers. Most of the members of the direct sales
force have had significant prior experience in sales with industry-leading
networking companies. The average Yurie sales person has had over 10 years of
sales experience, and many of the sales persons have had experience selling and
managing end user, telecommunications service provider and strategic private
label accounts.
Marketing
The Company has recently established a marketing program to support the
sale and distribution of its products. The objective of this program is to
inform potential strategic allies and end users about the capabilities and
benefits of the Company's products. The marketing program includes
participation in industry trade shows and technical conferences, technology
seminars, publication of customer newsletters and technical and educational
articles for the trade press and other industry journals. In addition, the
Company communicates frequently with its installed base of end users regarding
evolving applications for the Company's products.
14
<PAGE> 15
MANUFACTURING AND SUPPLIERS
The Company's manufacturing operations consist primarily of materials
planning and procurement, test and manufacturing engineering, module testing
and quality control. Yurie relies on one manufacturer, Sanmina Corporation, to
manufacture the majority of its common equipment circuit packs, backplanes,
chassis and printed circuit board assemblies used in the Company's products.
Sanmina Corporation manufactures most of these products and assembles them at
its New Hampshire facility. Yurie does not have a contract with Sanmina
Corporation or any other manufacturer, and all of the Company's products are
manufactured pursuant to individual purchase orders. The Company believes that
its orders did not represent a significant portion of Sanmina Corporation's
total business in 1996. In the past, Yurie has also used several other
manufacturers as supplemental sources for backplanes, chassis and printed
circuit boards, and may use these manufacturers in the future as necessary.
The Company's reliance on a limited number of manufacturers may reduce the
Company's flexibility and responsiveness to changes. The Company believes,
however, that by using a limited number of manufacturers, it is in a better
position to reduce product costs, acquire additional capacity and reduce its
capital investment.
Final testing of the Company's products is performed by the Company at its
Lanham, Maryland facility. All products are rigorously tested using automated
test equipment prior to shipment to customers. All circuit boards are tested
individually. As each customer's network requires different product features to
provide the desired functionality, the products are not assembled into complete
units prior to shipment. Each feature is packaged and shipped separately to the
customers, who use instructions provided by Yurie to configure the products at
their locations. Yurie warrants all of its products to be free from defects for
a period of one year from the date of shipment.
Generally, the Company uses industry standard components for its access
products. It uses field programmable gate arrays with erasable programmable
memory rather than custom integrated circuits in order to maximize its ability
to customize products quickly for telecommunications service providers and add
product features. Certain components used in the Company's products, including
microprocessors and communications chips manufactured by PMC-Sierra, Inc.,
Hewlett-Packard Company, Integrated Device Technology, Inc., Xilinx, Inc. and
Altera Corporation, are currently available from only one supplier. In the
past, there have been shortages of certain of these components because of
vendor production problems and the inability of suppliers to increase delivery
rates. In addition, the Company has experienced shortages of certain other key
components. These component shortages and delays have resulted in delays in the
shipment of the Company's products, and the component shortages have also
resulted in higher component costs. When these components are in short supply,
Yurie must compete for them with larger companies that often have longer
established relationships with these vendors. Certain components that currently
are readily available may become difficult to obtain in the future.
COMPETITION
While the market for ATM access products is still evolving, the networking
industry as a whole is intensely competitive. Among the companies who have
already produced ATM access products are ADC Kentrox and OnStream Networks,
which was recently acquired by 3Com. In addition, Sahara Networks, which was
recently acquired by Cascade Communications, is reportedly developing an ATM
access product. Other companies, including Cisco Systems/StrataCom, General
DataComm and Newbridge Networks, have already developed networking equipment
that may be competitive with the Company's products. The Company expects that
some of these companies and other networking and computer systems companies may
in the future announce plans to develop ATM access products that are directly
competitive with the Company's products.
15
<PAGE> 16
The Company does not compete solely on the basis of price. Instead, it
competes by offering superior features, performance, reliability and
flexibility at competitive prices. Yurie's management is adopting this strategy
because equipment price is only one component in overall communications costs.
WAN bandwidth and network operating expenses generally exceed the total cost of
the network equipment for a typical customer.
As competition in the ATM access market increases, the Company believes
that the ATM access industry may be characterized by the intense price
competition similar to that present in the broader networking market. In
response to this, the Company has already implemented cost improvement measures
and will continue to seek ways to improve upon the LDR products'
price-to-performance ratio.
INTELLECTUAL PROPERTY, PROPRIETARY INFORMATION AND TECHNICAL KNOW HOW
The Company believes that its future success depends, in part, upon its
ability to develop and protect proprietary technology contained in its
products. The Company currently relies upon a combination of trade secret,
copyright, patent and trademark laws, as well as contractual restrictions, to
establish and protect proprietary rights in its products. The Company also has
entered into nondisclosure, non-compete and invention assignment agreements
with substantially all of its employees and nondisclosure agreements with
certain of its suppliers, distributors and customers so as to limit access to
and disclosure of its proprietary information. There can be no assurance that
these statutory and contractual arrangements will prove sufficient to deter
misappropriation of the Company's technologies or independent third-party
development of similar technologies. The Company also possesses and relies upon
a valuable body of technical know how related to the design and operation of
its products.
The U.S. Patent and Trademark Office recently issued U.S. Patent No.
5,568,482 to the Company for its LANET protocol. LANET is a significant
technological invention that allows ATM to run over transmission media of any
speed or quality. The Company intends to provide the technology covered by the
LANET patent at no cost to the public because it believes that making the LANET
technology freely available to the public would have greater benefits than
licensing the technology to third parties or preserving the technology solely
for its own use. The Company, however, retains its patent rights in the LANET
technology, although third parties are free to use the technology in unmodified
form for their own purposes. The Company anticipates that making LANET
available at no cost to the public will create demand for and facilitate
widespread use of LANET and increase name recognition for Yurie as the
developer of LANET.
Two additional patent applications have been filed for (i) the AQueMan
algorithm developed by the Company to regulate and prioritize the flow of
traffic in ATM access products and (ii) error-tolerant addressing to enhance
the ability to transport ATM cells over noisy links (e.g., wireless circuits).
The Company intends to file another patent application within the next six
months for a method to simplify authentication and key exchange in the
establishment of secure links. The Company does not now intend to make any of
the technologies described in these patent applications available to the public
at no cost. There can be no assurance that the Company's patent applications
will result in issued patents or that the Company's existing patent or future
patents will be upheld as valid or prevent the development of competitive
products. The failure of the Company to obtain a patent for AQueMan, or to be
granted patents for any of its other Company-developed technologies, could have
a material adverse effect on the Company's business and its growth prospects.
16
<PAGE> 17
EMPLOYEES
On March 21, 1997, Yurie employed 168 individuals on a full-time equivalent
basis. Of these, 58 were involved in engineering, 25 were working in
applications engineering in the federal division, 28 were employed in sales,
marketing and customer support, 34 were engaged in manufacturing, and the
remaining 23 were devoted to administration, finance and strategic planning.
Approximately one-half of the Company's employees hold masters or higher
degrees. The Company considers its relations with its employees to be good and
has not experienced any interruption of operations as a result of labor
disagreements, nor are there any collective bargaining agreements in place.
ITEM 2. PROPERTIES
The Company's principal offices are located in a 45,000 square foot
facility leased by the Company at 10000 Derekwood Lane, Lanham, MD (a suburb of
Washington, DC). Approximately 20.0% of the space in this facility is used or
reserved for manufacturing, product development and testing; the balance is
used or reserved for sales, marketing and other general and administrative
activities. In December 1996, the building in which the Company's principal
offices are located was sold. In connection with the sale, the Company and the
purchaser of the building agreed to an amendment to the Company's lease, which
changed the expiration date of the lease from August 31, 1999 to June 30, 1997.
The amendment also gave the purchaser the right to terminate the lease with 60
days notice on either March 1, 1997 or April 1, 1997, and gave Yurie the right
to terminate the lease upon 30 days notice on either April 1, 1997 or May 1,
1997. On March 1, 1997, the purchaser gave the Company 60 days notice of intent
to terminate this lease and the Company must either negotiate a new lease or
relocate to another facility. The Company is currently negotiating a lease for
in excess of 100,000 square feet in a facility in close proximity to its
current location, and expects to relocate during the 2nd quarter of 1997. The
Company believes that this relocation will not materially disrupt its
operations.
The Company also leases 10,000 square feet of space for its federal division
at 4601 Presidents Drive, Suite 210, Lanham, MD, 5,300 square feet of space for
engineering offices at 2020 Challenger Drive, Suite 101, Alameda, CA, and sales
office space at 3420 East Shea Boulevard, Phoenix, Arizona. Yurie believes that
its present facilities are well maintained and in good operating condition
although additional facilities may be needed to meet anticipated levels of
operations in the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On December 20, 1996, by unanimous written consent without a meeting, the
stockholders of the Company approved the adoption of the Yurie Systems, Inc.
Employee Stock Purchase Plan (the "Stock Purchase Plan"). A total of 200,000
shares of Common Stock have been reserved for issuance under the Stock Purchase
Plan. Employees of the Company will be eligible to participate in the Stock
Purchase Plan if they have been employed by the Company for at least 90
consecutive days. Employees who own 5% or more of the outstanding capital stock
of the Company will not be eligible to participate. The Stock Purchase Plan
will permit eligible employees to purchase Common Stock through payroll
deductions, at a price equal to 85% of the fair market value of the Common
Stock at the time of purchase.
The stockholders also resolved to increase the total number of shares
reserved for issuance under the Company's Stock Option Plan from 3.2 million to
5.0 million shares. The Stock Option Plan was amended
17
<PAGE> 18
to provide for automatic annual grants to independent directors of 5,000 stock
options on June 30 of each year beginning on June 30, 1997. In addition, the
Board (or the committee) was given the right to grant options to incoming
directors upon their agreement to serve on the Board. The stockholders also
amended the Stock Option Plan to provide that in the event of a transaction
that constitutes a Change of Control (as defined in the Plan) of the Company,
each outstanding option will automatically become exercisable as to all of the
option shares immediately prior to the effective date of such transaction,
subject to certain exceptions.
The 401(k) Plan was also amended to provide that the Company's matching
contributions will take the form of Common Stock and to provide that employees
may become participants in the 401(k) Plan for the purpose of making salary
contributions as of the first day of the quarter following their date of hire.
The Board has reserved a total of 200,000 shares of Common Stock for issuance
in connection with the 401(k) Plan.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY
The Company completed its initial public offering on February 5, 1997 and
commenced trading on the NASDAQ Stock Market (National Market) under the
trading symbol YURI. From the commencement of trading through March 21, 1997,
the Company's stock traded in the range of $9.25 to $16.75 per share. As of
March 21, 1997, the Company had 41 registered holders, not including holders of
shares registered in street name.
Future stock prices may be subject to volatility particularly on a quarterly
basis. Any shortfall in revenue or net income from amounts expected by
security analysts could have an immediate and significant adverse affect on the
trading price of the Company's stock.
DIVIDEND POLICY
The Company has never paid cash dividends on its common stock. It currently
intends to retain earnings to finance its growth and development, and does not
anticipate paying cash dividends in the foreseeable future. The declaration
and payment by the Company of any future dividends, and the amounts thereof,
will depend upon the Company's results of operations, financial condition, cash
requirements, future prospects, limitations imposed by credit agreements or
senior securities and other factors deemed relevant by the Board of Directors.
18
<PAGE> 19
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data set forth below is derived from the audited
financial statements of the Company for the years ending December 31, 1993,
1994, 1995 and 1996. This information should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included as Item 7 and the financial statements of the Company and
the notes thereto included as Item 8 in this Form 10-K.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1993 1994 1995 1996
---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue:
Product revenue ................. $ --- $ --- $2,870 $18,728
Service revenue ............... 194 1,144 1,993 2,491
Other revenue .................... --- --- 1,108 392
------ ------ ------ -------
Total revenue ................. 194 1,144 5,971 21,611
Cost of Revenue:
Cost of product revenue ....... --- --- 1,327 6,784
Cost of service revenue ........ 143 723 1,184 1,635
--- --- ----- -----
Total Cost of Revenue ...... 143 723 2,511 8,419
--- --- ----- -----
Gross Profit ......................... 52 420 3,460 13,192
Operating Expenses:
Research and Development ... 8 40 428 3,846
Sales and Marketing ............ --- --- --- 1,547
General and Administrative .... 61 219 1,588 2,700
-- --- ----- -----
Total Operating Expenses .. 68 259 2,016 8,093
-- --- ----- -----
Income (loss) from operations .... (17) 161 1,444 5,099
Other Income (expense) (6) 2 13 83
--- - -- --
Income (loss) before income taxes (23) 162 1,458 5,182
Income Taxes ---- 42 561 2,030
Net Income (loss) .................. $ (23) $ 121 $ 897 $ 3,152
====== ====== ====== =======
Net income per common share ... $ (0.00) $ 0.01 $ 0.04 $ 0.14
======== ====== ====== ======
Weighted average common and common
equivalent shares outstanding(1) 17,542 17,542 21,710 21,811
====== ====== ====== ======
BALANCE SHEET DATA (AT END OF YEAR):
Cash and cash equivalents......... $ 5 $ 230 $3,780 $3,229
Working capital................. (82) (130) 552 7,001
Total assets.................... 97 627 6,192 14,216
Stockholders' equity (deficit)... (77) 44 1,103 9,055
</TABLE>
- ---------
(1) Computed on the basis described in Note 1 of Notes to Financial
Statements.
19
<PAGE> 20
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Yurie began developing ATM access products in 1994 and began product
shipments in February 1995. Prior to 1995, the Company's revenue was derived
primarily from telecommunications consulting and related services.
The Company generates revenue primarily from the sale of the LDR200, an ATM
access product released in September 1996. The Company's first generation ATM
access product, the LDR100, was first shipped in February 1995. Yurie continues
to generate revenue from providing telecommunications and networking
applications consulting services, though these services generate an
increasingly smaller portion of total revenue. Since the release of the LDR100
in 1995, revenue generated from the sale of the LDR products continues to
represent an increasingly larger portion of the Company's total revenue, and
the Company expects this trend to continue.
Since 1994, Yurie has had a strategic relationship with AT&T. In August
1995, pursuant to this relationship, AT&T and Yurie entered into the AT&T
Agreement to facilitate the joint technical evaluation and marketing of the
Company's LDR products. Under the AT&T Agreement, as amended, AT&T has the
exclusive right to market and sell the LDR100 and the LDR200 in U.S. federal,
state and local government markets and certain foreign government markets, and
has committed to purchase at least $6.5 million, $10.0 million and $10.0
million of the LDR200 in 1996, 1997 and 1998, respectively. Sales of the LDR
product line to AT&T represented 0.0%, 100.0% and 96.3% of product revenue in
1994, 1995 and 1996, respectively. For the year ended December 31, 1996, the
Company shipped a total of $8.3 million of LDR200s to AT&T, $1.8 million in
excess of AT&T's 1996 purchase order guarantee for this product of $6.5
million.
In 1995 and 1996, the Company also generated non-recurring other revenue
from one-time fees earned under the technology evaluation portion of the AT&T
Agreement, which called for a total of $1.5 million to be earned over six
months beginning in August 1995. All product revenue arising from sales to AT&T
is presented net of the applicable discount.
Prior to the Company's granting AT&T the exclusive right to market and sell
Yurie's products in government markets, the Company made direct sales to
certain government agencies. Since the Company granted this right to AT&T, AT&T
has marketed and sold the Company's products to the government agencies to
which the Company initially made direct sales, and the Company expects that
AT&T will continue to market and sell Yurie's products to a substantial
majority of these agencies as well as additional government agencies. The
Company has now developed a direct sales force in order to pursue the
telecommunications service provider and corporate end user markets.
Revenue from the sale of Yurie's LDR product line is recognized at
shipment. Revenue from the provision of telecommunications and networking
applications consulting services is recognized as the services are performed.
Payments received in advance of product delivery or the performance of services
are recorded as unearned revenue and recognized upon shipment of product or
performance of services by the Company. The LDR200 purchase price includes a
standard warranty on parts and service, which provides that the product will be
free from defects for a period of one year from the date of shipment. The
Company does not anticipate generating revenue from extended service contracts.
Beginning later in 1997, extended service for the Company's products will be
provided by a third party.
20
<PAGE> 21
Cost of product revenue consists primarily of the direct material, direct
labor, subcontract and overhead expenses associated with manufacturing and
shipping the Company's LDR products. This cost also includes a reserve for
warranty expenses. Cost of service revenue consists primarily of direct labor
and overhead expenses associated with providing the Company's
telecommunications and networking applications consulting services. The
Company's other revenue has no associated direct costs.
The Company's operating expenses are composed of research and development,
sales and marketing and general and administrative expenses. Research and
development expenses consist primarily of personnel costs, as well as the cost
of materials, tools and other items associated with product development and
prototyping. All software development costs are included in research and
development expenses and have been expensed as incurred. Sales and marketing
expenses consist primarily of personnel costs, promotional costs and related
operating expenses. General and administrative expenses consist primarily of
personnel costs associated with general management, finance, information
technology and administration, as well as occupancy, accounting, legal and
other general operating expenses.
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.
21
<PAGE> 22
RESULTS OF OPERATIONS
The following table sets forth certain financial data expressed as a percentage
of total revenue, except other data, which is expressed as a percentage of the
applicable revenue type.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1994 1995 1996
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue:
Product revenue ............................ 0.0% 48.1% 86.7%
Service revenue ............................ 100.0 33.4 11.5
Other revenue ............................... 0.0 18.5 1.8
--- ---- ---
Total revenue ........................... 100.0 100.0 100.0
Cost of revenue:
Cost of product revenue .................. 0.0 22.2 31.4
Cost of service revenue ................... 63.3 19.8 7.5
---- ---- ---
Total cost of revenue ................. 63.3 42.1 38.9
---- ---- ----
Gross profit ..................................... 36.7 57.9 61.1
Operating expenses:
Research and Development ............... 3.5 7.2 17.8
Sales and Marketing ...................... 0.0 0.0 7.2
General and Administrative ............... 19.2 26.6 12.5
---- ---- ----
Total operating expenses ............ 22.7 33.8 37.5
---- ---- ----
Income (loss) from operations .............. 14.1 24.2 23.6
Other income (expense) ....................... 0.1 0.2 0.4
--- --- ---
Income (loss) before income taxes .......... 14.2 24.4 24.0
Income taxes ................................... 3.6 9.4 9.4
--- --- ---
Net income (loss) .............................. 10.6% 15.0% 14.6%
===== ===== =====
OTHER DATA:
Gross margin
Product ...................................... 0.0% 53.8% 63.7%
Service ...................................... 36.7 40.6 34.3
</TABLE>
YEAR ENDED DECEMBER 31, 1996 COMPARED WITH YEAR ENDED DECEMBER 31, 1995
Revenue. Total revenue for 1996 was $21.6 million, compared with $6.0
million for 1995. This increase resulted primarily from an increase in sales of
the Company's LDR products. Product revenue was $18.7 million during 1996
compared with $2.9 million during 1995. The Company also experienced a 25.0%
increase in service revenue in 1996 compared to 1995, attributable to growth in
both the number and size of contracts with U.S. government customers and
government contractors. Other revenue in both periods came 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.
During 1996 and 1995, product sales to and service contracts with U.S.
government customers and government contractors comprised 96.3% and 100.0% of
total revenue, respectively. Sales to or through AT&T represented $17.4
million, or 92.9% of product revenue during 1996 compared with $1.6 million, or
57.3% of product revenue during 1995. Sales to or through AT&T represented
87.0% and 71.8% of total revenue during 1996 and 1995, respectively.
Gross Profit. Gross profit increased to $13.2 million in 1996 from $3.5
million in 1995. Gross margins were 61.0% and 57.9% during 1996 and 1995,
respectively. The improvement in gross margins was due primarily to the more
rapid growth in product revenue, which has a higher gross margin than the
Company's
22
<PAGE> 23
service revenue. During 1996, product gross margin was 63.8% compared with
service gross margin of 34.4%. During 1995, product gross margin was 53.8%
compared with service gross margin of 40.6%.
Research and Development. Research and development expenses were $3.8
million, or 17.8% of total revenue, in 1996, compared with $428,000, or 7.2% of
total revenue, in 1995. 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 $1.5 million, or
7.2% of total revenue, in 1996. The Company incurred no sales and marketing
expenses in 1995. The expenses incurred during 1996 resulted from the hiring of
sales and marketing personnel to support the release of the Company's LDR200
product, and the Company's entry into the telecommunications service provider
and corporate end user markets.
General and Administrative. General and administrative expenses increased
to $2.7 million in 1996 from $1.6 million in 1995. 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, on June 1, 1996, the Company began a phased relocation
of its operations to a larger, leased facility, resulting in higher occupancy
costs. As a percentage of total revenue, general and administrative expenses
were 12.5% and 26.6% in 1996 and 1995, respectively. The decrease as a percent
of total revenue between the two years was due to the Company's significant
increase in total revenue.
Provision for Income Taxes. The provision for income taxes in 1996 was
$2.0 million, resulting in an effective tax rate of 39.2%. In 1995, the
provision was $561,000, resulting in an effective tax rate of 38.5%.
YEAR ENDED DECEMBER 31, 1995 COMPARED WITH YEAR ENDED DECEMBER 31, 1994
Revenue. Total revenue in 1995 was $6.0 million, compared with $1.1
million in 1994. This increase was due primarily to three factors. The Company
had $2.9 million in revenue from product sales in 1995 compared with none in
1994. Service revenue increased to $2.0 million in 1995 from $1.1 million in
1994 as a result of growth in both the number and size of contracts with U.S.
government customers and government contractors. Also, the Company had $1.1
million of other revenue in 1995 from fees earned under the AT&T Agreement
compared with none in 1994.
During both 1995 and 1994, U.S. government customers and government
contractors comprised 100.0% of total revenue. Sales to or through AT&T
represented 57.3% of product revenue in 1995 and 71.8% and 52.4 % of total 1995
and 1994 revenues, respectively.
Gross Profit. Gross profit increased to $3.5 million in 1995 from
$420,000 in 1994. Gross margins were 57.9% and 36.7% for 1995 and 1994,
respectively. The improvement in 1995 was due primarily to the commencement of
product sales, which have higher gross margins than the Company's service
revenue. In 1995, product gross margin was 53.8% compared with service gross
margin of 40.6%. In 1994, service gross margin was 36.7%.
Research and Development. Research and development expenses were
$428,000, or 7.2% of total revenue in 1995, compared with $40,000, or 3.5% of
total revenue, in 1994. The increase was due primarily to the hiring of
additional engineering personnel related to development of the Company's LDR
product line.
Sales and Marketing. The Company incurred no sales and marketing expenses
for either 1995 or 1994.
23
<PAGE> 24
General and Administrative. General and administrative expenses were $1.6
million, or 26.6% of total revenue in 1995, compared with $219,000, or 19.2% of
total revenue, in 1994. Both the dollar amount and percent of total revenue
increases were due primarily to 1995 bonus payments totaling $1.1 million.
These bonuses were paid primarily to senior executives of the Company. The
Company also increased its personnel-related and general operating expenses in
support of its sales growth.
Provision for Income Taxes. The provision for income taxes in 1995 was
$561,000, resulting in an effective tax rate of 38.5%. In 1994, the provision
was $42,000, resulting in an effective tax rate of 25.6%. The lower effective
tax rate in 1994 was due primarily to the Company being in a lower tax bracket
and a net operating loss carry forward.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its working capital and capital expenditure
requirements primarily through cash generated from operations and the sale of
stock through a private placement. At December 31, 1996, the Company had cash
and cash equivalents of approximately $3.2 million and working capital of $7.0
million, as compared to cash and cash equivalents of $3.8 million and working
capital of $552,000 at December 31, 1995. The Company has available a $3.0
million revolving line of credit with Commerce Bank, located in College Park,
Maryland, under a facility which is available through May 31, 1997 and bears
interest at a floating rate ranging from the prime rate to the prime rate plus
one percent. At December 31, 1996, the prime rate was 8.25%. Borrowings under
this credit facility are secured by accounts receivable and inventory and are
subject to certain maximum advance percentages against eligible accounts
receivable, inventory and purchase orders. The Company does not have any
borrowings outstanding under the line of credit, nor does it have any long-term
debt.
The Company's operating activities used cash of $3.4 million in 1996,
largely to fund the growth it experienced during that period. Accounts
receivable and inventory increased by $3.8 and $1.9 million, respectively, from
year end 1995 to year end 1996. The Company also saw a decrease of $4.0
million in unearned revenue in 1996, due to the delivery of product to AT&T
which had been prepaid at the end of 1995. Operating activities generated $4.0
million and $428,000 for the years 1995 and 1994, respectively. The increase in
cash generated from operations in 1995 as compared to 1994 was due both to
higher net income and to the payments made by AT&T in the fourth quarter of
1995, prior to the 1996 delivery of associated product.
Cash used in investing activities was $1.7 million for 1996 and $436,000
and $202,000 for the years ended December 31, 1995 and December 31, 1994,
respectively. In each period, cash was used for the purchase of property and
equipment, primarily computer hardware and software and assembly and test
equipment.
Financing activities generated cash of $4.5 million in 1996 from the
proceeds of the Company's issuance of common stock, net of certain deferred
offering costs related to the Company's February 1997 Initial Public Offering.
On November 7, 1996, the Company sold 400,000 shares of common stock to
Amerindo Technology Growth Fund, Inc. ("Amerindo") for $4.8 million. This
transaction, along with additional shares purchased from selling shareholders,
gave Amerindo 4.1% of the Company's common stock, after the completion of the
February 1997 Initial Public Offering. There were no financing activities in
either 1994 or 1995.
On February 5, 1997, the Company completed its Initial Public Offering,
selling 4.0 million new common shares and receiving net proceeds of $44.6
million after deducting underwriting discounts.
24
<PAGE> 25
RECENT ACCOUNTING PRONOUNCEMENTS
In October 1995, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 123, "Accounting for Stock-Based Compensation." SFAS 123 requires
expanded disclosures of stock-based compensation arrangements with employees
and encourages (but does not require) compensation expense to be measured based
on the fair market value of the equity instrument awarded. Companies are
permitted, however, to continue to apply APB No. 25, which recognizes
compensation costs based on the intrinsic value of the equity instrument
awarded. The Company has adopted SFAS 123 for disclosure purposes in 1996, but
will continue to apply APB No. 25 with respect to recognition and measurement
of its stock-based compensation awards to employees.
In February 1997, the FASB issued SFAS No. 128, "Earnings per Share". The
new standard specifies the computation, presentation and disclosure
requirements for entities with publicly held common stock. The objective of
the statement is to simplify the computation of earnings per share and to make
the U.S. standard for computing earnings per share more compatible with the
standards of other countries and with that of the International Accounting
Standards Committee. This standard will be effective for the Company beginning
in 1997.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this Item 8 is presented in Item 14, beginning
on page F-1 of this Form 10-K.
ITEM. 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
25
<PAGE> 26
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES OF THE REGISTRANT
The directors, executive officers and key employees of the Company are:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Jeong H. Kim 36 Chief Executive Officer and Chairman of the Board of
Directors
Kwok L. Li 39 President, Chief Operating Officer and Director
Barton Y. Shigemura 37 Senior Vice President, Sales and Marketing and
Director
Charles S. Marantz 51 Vice President, Finance and Administration, Chief
Financial Officer and Treasurer
Quon S. Chow 57 Vice President, Engineering
Anthony J. DeMambro 55 Vice President, Operations
William F. Flynn 40 Vice President, Federal Division
Joseph Miller 40 Vice President, Marketing
John J. McDonnell 50 Corporate Counsel and Secretary
Kenneth D. Brody 53 Director
Herbert Rabin 68 Director
R. James Woolsey 55 Director
William J. Perry 69 Director
Henry W. Sterbenz(1) 53 Vice President, Quality
Catherine A. Graham(1) 36 Vice President, Finance
</TABLE>
- ----------
(1) Key Employee
Dr. Kim is the founder of Yurie and has served as Chief Executive Officer
and a Director of the Company since its inception in February 1992, as well as
President from its inception until March 1996. From 1990 to 1993, Dr. Kim
served as Senior Project Engineer with AlliedSignal Technical Services
Corporation, a subsidiary of AlliedSignal Inc. Previously, he served as an
Engineering Consultant with SFA, Inc., a U.S. Department of Defense contractor
and as a Nuclear Submarine Officer in the U.S. Navy. Dr. Kim holds a Ph.D. in
Reliability Engineering from the University of Maryland, and an M.S. in
Technical Management and a B.E.S. in Electrical Engineering and Computer
Science from The Johns Hopkins University.
Mr. Li has served as President and Chief Operating Officer of the Company
since March 1996, a Director since 1995, and Executive Vice President and Chief
Technical Officer from August 1994 through March 1996. Mr. Li was employed by
Yurie on a part-time basis from its inception in 1992 through August 1994. From
1991 to 1994, Mr. Li was Director of Strategic Planning at WilTel, Inc., an
interexchange carrier, and from 1988 to 1991, he was Manager of Fiber Access
Systems Development for Bell Northern Research, Inc., a subsidiary conducting
technological research and development for Northern Telecom Limited. Mr. Li
holds a B.E.S. in Electrical Engineering from The Johns Hopkins University.
26
<PAGE> 27
Mr. Shigemura has served as Senior Vice President, Sales and Marketing and
a Director of the Company since May 1996. From 1993 to 1996, Mr. Shigemura was
Vice President, Marketing and Services and an executive officer for Premisys
Communications, Inc., a manufacturer of integrated access products for
telecommunications service providers, and from 1990 to 1993, he was Director,
Product Line Management for Northern Telecom Limited, a telecommunications
equipment manufacturer. Prior to that, he served as an Area Vice President,
Sales for General DataComm Industries, Inc., a provider of wide area network
and telecommunication products. Mr. Shigemura holds a B.S. in Marketing and
Finance from the University of Southern California.
Mr. Marantz has served as Vice President, Finance and Administration, Chief
Financial Officer and Treasurer since August 1996. From 1993 to 1996, he was
Director, Mergers and Acquisitions, of Global One, the joint venture among
Sprint Corporation, a telecommunications service provider, France Telecom, the
French telephone company, and Deutsche Telekom AG, the German telephone
company. From 1992 to 1993, he was an independent financial advisor. From 1991
to 1992, he was with LiTel Communications, Inc., an interexchange carrier,
first as a division CFO and then as Vice President of Corporate Development.
Prior to 1991, Mr. Marantz held Vice President positions with several
investment banking firms and was Chief Financial Officer of Omninet
Corporation, a satellite communications company. Mr. Marantz holds S.B. and
M.S. degrees in aeronautics and astronautics from the Massachusetts Institute
of Technology and Stanford University, respectively, and an M.B.A. from the
Harvard Business School.
Mr. Chow has served as Vice President, Engineering of the Company since
July 1996. Prior to joining the Company, he spent 30 years with Bell Northern
Research, Inc. a subsidiary conducting technological research and development
for Northern Telecom Limited, where his last position was Director, Broadband
Systems Development. Mr. Chow holds an M.S. and a B.S. in Electrical
Engineering from the University of New Brunswick and the University of British
Columbia, respectively.
Mr. DeMambro has served as Vice President, Operations of the Company since
October 1996. From 1993 until to joining the Company, he was Vice President of
Operations for Steinbrecher Corporation, now Tellabs Wireless, Inc. From 1991
to 1993, he was Director of Operations for Aviv Corporation, a manufacturer of
data storage products. From 1989 to 1991 he was Vice President of Manufacturing
for EMC2 Corporation, also a manufacturer of data storage products.
Mr. Flynn has served as Vice President, Federal Division of the Company
since July 1996, and was Director of Government Programs from May 1994 through
June 1996. From 1990 to 1994, he was a Senior Manager, Program Development and
Technical Liaison for McDonnell Douglas Aerospace, a manufacturer of aerospace
systems. Previously, Mr. Flynn was Marketing Manager, Exploitation Systems for
Unisys Defense Systems and a Naval Flight Officer in the U.S. Navy. Mr. Flynn
holds an M.B.A. from Averett College and a B.A. in Journalism from the
University of South Carolina.
Mr. Miller has served as Vice President, Marketing since May 1996. From
1993 to 1996, he was Director of Marketing for Premisys Communications, Inc., a
manufacturer of integrated access products for telecommunications service
providers. From 1986 to 1993, he held various management positions at Network
Equipment Technologies, a network equipment company. Mr. Miller holds a B.S. in
Business from Golden Gate University.
Mr. McDonnell has served as Corporate Counsel and Secretary of the Company
since June 1996 and is presently employed on a part time basis. He founded
Coagulation Diagnostics, Inc., a medical diagnostics device company, in 1995,
and serves as its Chief Executive Officer. From 1990 to 1995, he was Counsel
with Reed Smith Shaw & McClay, a law firm. He previously served as Executive
Vice President and General Counsel
27
<PAGE> 28
for Fairchild Space and Defense Corporation, Senior Vice President and General
Counsel for Fairchild Industries, Inc. and Principal Deputy General Counsel of
the Department of the Navy. Mr. McDonnell serves on the Boards of Directors of
Geraghty and Miller, Inc., an environmental engineering firm and Sequoia
National Bank. Mr. McDonnell holds an A.B. from Boston College and a J.D. from
Fordham Law School.
Mr. Brody has served as a Director of the Company since June 1996. Mr.
Brody is the founding partner of Winslow Partners LLC, a private equity
investment firm in Washington, D.C. From 1993 to early 1996, Mr. Brody served
as President and Chairman of the Export-Import Bank of the United States. Prior
thereto, he was a Partner at Goldman, Sachs & Co., where he served as a member
of the firm's Management Committee and founded and headed the high technology
investment banking group. Mr. Brody is a director of Alex. Brown Incorporated.
Alex. Brown & Sons Incorporated, one of the representatives of the underwriters
for this offering, is a wholly-owned subsidiary of Alex. Brown Incorporated.
Mr. Brody holds an M.B.A. from the Harvard Business School and a B.S. in
Electrical Engineering from the University of Maryland.
Dr. Rabin has served as a Director of the Company since 1995. Dr. Rabin is
Director of the Engineering Research Center and Associate Dean of the College
of Engineering at the University of Maryland, where he has been Professor of
Electrical Engineering since 1983. He was Deputy Assistant Secretary of the
Navy (Research, Applied and Space Technology) from 1979 through 1983 and
Associate Director of Research at the Naval Research Laboratory from 1971
through 1979. He currently serves as a Director of General Research Corporation
International and the National Technological University. Mr. Rabin holds a
Ph.D., an M.S. and a B.S. in Physics from the University of Maryland, the
University of Illinois and the University of Wisconsin, respectively.
Mr. Woolsey has served as a Director of the Company since April 1996. Mr.
Woolsey served the United States as the Director of Central Intelligence from
1993 to 1995, after which he returned to the law firm of Shea & Gardner, in
Washington, DC, where he became a partner in 1979. Mr. Woolsey is a Director of
United States Fidelity & Guaranty Company and Sun Healthcare Group, Inc. Mr.
Woolsey holds an L.L.B. from Yale Law School, an M.A. from Oxford University
and a B.A. from Stanford University.
Dr. Perry has served as a Director of the Company since January 1997. He
served as the Secretary of Defense from 1994 to 1997, and served as Deputy
Secretary of Defense from 1993 to 1994. From 1989 to 1993, Dr. Perry was a
professor in the School of Engineering at Stanford University, and also served
as the Chairman of Technology Strategies Alliances and as a Co-Director of
Stanford's Center for International Security and Arms Control. Dr. Perry holds
a Ph.D. in Mathematics from Penn State University and an M.S. and B.S. in
Mathematics from Stanford University.
Mr. Sterbenz has served as Vice President, Quality of the Company since
July 1996 and was Vice President and Secretary from September 1995 through June
1996. From 1987 to 1995, he was a Program Manager at Kaman Sciences
Corporation, a systems development and integration company, working in weapon
systems engineering and corporate information management. From 1965 to 1987, he
served as an officer in the U.S. Army. Mr. Sterbenz holds an M.B.A. from Long
Island University, an M.S. in Physics from the Naval Post Graduate School and a
B.S. in Engineering from the U.S. Military Academy.
Ms. Graham has served as Vice President, Finance of the Company since
February 1996. From 1994 to 1995, she was a financial consultant with Smith
Barney. From 1991 to 1994, she was Chief Financial Officer, Treasurer and
Senior Investor Relations Officer at DavCo Restaurants, Inc., a franchisee of
Wendy's International, Inc., and from 1988 to 1991, she was Vice President,
Structured Finance for MNC Financial, Inc., a bank holding company. Ms. Graham
holds an M.B.A. from Loyola College and a B.A. in Economics from the University
of Maryland.
28
<PAGE> 29
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Dr. Kim and Mr. Li each filed a Form 4 for the month of February 1997,
reflecting the sale of shares in connection with the underwriters' exercise of
their overallotment option. These forms were filed four days late.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth information concerning compensation for
services rendered in all capacities to the Company by the Chief Executive
Officer and the four most highly compensated executive officers of the Company
other than the Chief Executive Officer for the fiscal years ended December 31,
1996, 1995 and 1994:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
OTHER ANNUAL RESTRICTED ALL OTHER
NAME AND PRINCIPAL YEAR SALARY ($) BONUS ($) COMPENSATION STOCK AWARDS COMPENSATION
POSITIONS(1) ($) ($) ($)
<S> <C> <C> <C> <C> <C> <C>
Jeong H. Kim(4) 1996 200.000 ---- 16,616(2) ---- ----
Chief Executive Officer 1995 206,112 656,865 41,346(3) ---- ----
1994 346,235 26,870 17,715(3) ---- ----
Kwok L. Li(4) 1996 150,000 ---- 11,407(2) ---- ----
President and Chief 1995 140,851 250,077 25,962(3) 154,000(5) 15,940(6)
Operating Officer 1994 52,492 3,366 5,911(3) ---- ----
Barton Y. Shigemura 1996 89,559 5,000 308(2) ---- 4,680(6)
Senior Vice President, 1995 ---- ---- ---- ---- ----
Sales & Marketing(7) 1994 ---- ---- ---- ---- ----
Quon S. Chow(7) 1996 62,645 ---- ---- ---- 10,222(6)
Vice President, 1995 ---- ---- ---- ---- ----
Engineering 1994 ---- ---- ---- ---- ----
William F. Flynn 1996 93,722 20,000 2,458(2) ---- ----
Vice President, Federal 1995 107,164 10,000 11,482(3) ---- ----
Division 1994 59,884 603 2,992(3) ---- ----
</TABLE>
(1) Mr. Marantz, who joined the Company on August 12, 1996, is expected to be
included in the Fiscal 1997 Summary Compensation Table along with Dr. Kim
and Messrs. Li , Shigemura, and Chow.
(2) For Dr. Kim and Messrs. Li and Flynn, includes the Company's contribution to
their 401(k) plan of $10,000, $7,500 and $2,458, respectively. For Dr. Kim
and Messrs. Li and Shigemura, also includes compensation related to their
use of Company-leased vehicles in the amount of $6,616, $1,846 and $308,
respectively
(3) Includes payments for unused vacation and sick leave and the Company's
contribution to pension plans.
(4) The Company has entered into employment agreements with Dr. Kim and Mr. Li.
(5) Represents 4,000,000 shares of Common Stock granted to Mr. Li in March 1995.
(6) Represents reimbursed relocation expenses and, for Mr. Li, applicable
associated taxes.
(7) Messrs. Shigemura and Chow joined the Company in May 1996 and July 1996,
respectively.
29
<PAGE> 30
COMPENSATION OF DIRECTORS
During 1995 and 1996, each of the Company's independent directors received
$5,000 per year for serving as members of the Board of Directors, and the same
amount is expected to be paid for service in 1997. During 1996, Dr. Rabin and
Messrs. Woolsey and Brody received options to purchase 121,000, 100,000 and
75,000 shares of Common Stock, respectively. During January 1997, Dr. Perry
received options to purchase 75,000 shares of Common Stock. These options have
a weighted average exercise price of $2.23 and vest periodically over 4 years.
In addition, Mr. Brody purchased an option for 1,000,000 additional shares of
Common Stock from Dr. Kim. The Company has amended its Stock Option Plan to
provide for annual automatic option grants of 5,000 options to its independent
directors.
STOCK OPTION PLAN
The Stock Option Plan was adopted by the Company's Board of Directors on
January 31, 1996 and amended on April 2, 1996, July 18, 1996, September 6, 1996
and December 20, 1996. A total of 5.0 million shares have been reserved for
issuance under the Stock Option Plan. As of March 21, 1997, options to acquire
an aggregate of 3,539,122 shares of Common Stock were outstanding pursuant to
the Stock Option Plan. In general, these options vest over a four-year period
from their grant date and expire after a specified period not to exceed ten
years.
Neither Dr. Kim or Mr. Li hold any options to purchase shares of Common
Stock under the Stock Option Plan. Other executive officers, directors and key
employees have been granted options to purchase shares under the Stock Option
Plan as of March 21, 1997 as follows: Barton Y. Shigemura-1,000,000 shares;
Charles S. Marantz-100,000 shares; Quon S. Chow-100,000 shares; Anthony J.
DeMambro-75,000 shares; William F. Flynn-100,000 shares; Joseph Miller-110,000
shares; John J. McDonnell-30,000 shares; Herbert Rabin-121,000 shares; R. James
Woolsey-100,000 shares; Kenneth D. Brody-75,000 shares; William J. Perry-75,000
shares; Henry W. Sterbenz-50,000 shares; and Catherine A. Graham-50,000
shares. These options have exercise prices ranging from $.52 to $9.00 per share
and a weighted average exercise price of $1.22. All of these options vest
periodically through January 2001.
The Stock Option Plan, as amended, provides for automatic annual grants to
independent directors of 5,000 stock options on June 30 of each year beginning
on June 30, 1997. In addition, the Board (or the committee) may grant options
to incoming directors upon their agreement to serve on the Board. The Stock
Option Plan also provides that in the event of a transaction that constitutes a
Change of Control (as defined in the Plan) of the Company, each outstanding
option will automatically become exercisable as to all of the option shares
immediately prior to the effective date of such transaction, subject to certain
exceptions.
The options granted under the Stock Option Plan are not incentive stock
options within the meaning of Section 422 of the Internal Revenue Code.
30
<PAGE> 31
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information known to the Company with
respect to the beneficial ownership of Common Stock as of March 21, 1997, by
(i) each person who is known by the Company to beneficially own 5% or more of
outstanding Common Stock, (ii) each of the Company's directors, (iii) each
executive officer named in the Summary Compensation Table, (iv) certain key
employees of the Company and (v) all directors, executive officers and key
employees of the Company as a group. Unless otherwise indicated, the person or
persons named have sole voting and investment power.
<TABLE>
<CAPTION>
NAME NUMBER OF SHARES(1) PERCENT
---- ------------------- -------
<S> <C> <C>
Jeong H. Kim(2) 14,250,000 57.9%
10000 Derekwood Lane
Lanham, MD 20706
Kwok L. Li(4) 3,650,000 14.8
10000 Derekwood Lane
Lanham, MD 20706
Kenneth D. Brody(4) 750,000 3.0
Barton Y. Shigemura 265,625 1.1
R. James Woolsey(5) 79,167 *
Quon S. Chow 50,000 *
Joseph Miller 50,000 *
William F. Flynn 50,750 *
Herbert Rabin 43,083 *
Anthony J. DeMambro 22,500 *
Henry W. Sterbenz 20,667 *
Catherine A. Graham 14,583 *
Charles S. Marantz ---- ----
John J. McDonnell ---- ----
William J. Perry ---- ----
All executive officers, directors and key 19,246,375 77.8%
employees as a group (15 persons)
- -------------
</TABLE>
* Less than 1%.
(1) Includes shares issuable pursuant to options exercisable currently or
within 60 days of the date of this Form 10-K.
(2) Includes 250,000 shares subject to the Brody Option that have not vested
and will not vest within 60 days of the date of this Prospectus. In
November 1996, Dr. Kim sold 500,000 shares of Common Stock to Amerindo, and
in February 1997, he sold 500,000 shares of Common Stock to satisfy the
underwriters over-allotment in the Company's Initial Public Offering.
(3) In May 1995, the Company granted 4,000,000 shares of Common Stock to Mr.
Li. In October 1996, he sold 150,000 shares to various employees and a
director of the Company. In November 1996, he sold 100,000 shares of Common
Stock to Amerindo, and in February 1997, he sold 100,000 shares of Common
Stock to satisfy the underwriters over-allotment in the Company's Initial
Public Offering. Includes 1,000,000 shares owned by Mr. Li's spouse, as to
which he disclaims beneficial ownership.
(4) Does not include 250,000 shares subject to the Brody Option that will vest
in June 1997.
(5) Mr. Woolsey's shares are held jointly with his spouse.
31
<PAGE> 32
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
CERTAIN STOCK TRANSACTIONS
On July 1, 1996, Dr. Jeong H. Kim and Kenneth D. Brody entered into an
option purchase agreement (the "Option Purchase Agreement"), pursuant to which
Mr. Brody purchased for $500,000 an option (the "Brody Option") to buy
1,000,000 shares of the Common Stock from Dr. Kim at an exercise price of $4.00
per share. The Brody Option vests in four equal installments, provided that Mr.
Brody is still serving or is willing to serve as a director of the Company, on
September 3, 1996, December 3, 1996, March 3, 1997 and June 3, 1997, subject to
early vesting immediately prior to any "Change of Control Event." A Change of
Control Event is defined as any event the result of which is that Dr. Kim
ceases to beneficially own 40% of the voting power of the Company's then
outstanding voting securities. To secure Dr. Kim's obligations to deliver
shares of Common Stock to Mr. Brody upon exercise of the Brody Option, Dr. Kim
granted Mr. Brody a security interest in all of the shares of Common Stock
subject to the Brody Option. Mr. Brody may assign the Brody Option, in whole
or in part, subject to the limitation that each assignee (with the exception of
Affiliates and family members) must be assigned a portion of the Brody Option
covering at least 200,000 shares of Common Stock. The Brody Option is
exercisable for a term of 20 years.
On May 22, 1995, the Company issued 4,000,000 shares of Common Stock to
Kwok Li as compensation for his services to the Company in connection with the
development of the LDR100. The Company also issued 200 Shares of Common Stock
to William F. Flynn as compensation for his services to the Company. Mr. Flynn
was not an officer of the Company at the time this stock was issued.
Certain executive officers and directors of the Company have been granted
options to purchase shares of the Common Stock of the Company as follows:
Barton Y. Shigemura-1,000,000 shares; Charles S. Marantz-100,000 shares; Quon
S. Chow-100,000 shares; Anthony J. DeMambro-75,000 shares; William F.
Flynn-100,000 shares; Joseph Miller-110,000 shares; John J. McDonnell-30,000;
Herbert Rabin-121,000 shares; R. James Woolsey-100,000 shares, Kenneth D.
Brody-75,000 shares and William J. Perry-75,000 shares. These options have
exercise prices ranging from $.52 to $9.00 per share.
On January 14, 1997, the Company entered into a consulting agreement with
In Y. Chung, under which Mr. Chung will perform consulting and business
development activities for the Company in the Pacific Rim area. Pursuant to
this consulting agreement, the Company granted options to purchase 50,000
shares of Common Stock at an exercise price of $9.00 per share to Mr. Chung.
These options vested upon their grant. Mr. Chung is the father-in-law of Dr.
Jeong H. Kim.
The Company has adopted a policy providing that all material transactions
between the Company and its officers, directors and other affiliates must be
approved by a majority of the members of the Company's board of directors and
by a majority of the disinterested members of the Company's board of directors
and be on terms no less favorable to the Company than could be obtained from
unaffiliated third parties.
CERTAIN RELATIONSHIPS
R. James Woolsey, a director of the Company, is a partner in the law firm
of Shea & Gardner, which is one of several firms that performs legal work for
the Company. Kenneth D. Brody, also a director of the Company, is a director of
Alex. Brown Incorporated. Alex. Brown & Sons Incorporated, one of the
representatives of the underwriters for the Company's recent initial public
offering, is a wholly-owned subsidiary of Alex. Brown Incorporated.
32
<PAGE> 33
In March 1997, Kwok Li, the Company's President, Chief Operating
Officer and a Director, became a substantial minority shareholder in Splitrock
Services, Inc. ("Splitrock"), a Texas corporation recently formed to provide
turnkey communications systems specifically configured to meet the needs of
large network users. In March 1997, Splitrock ordered approximately $1.7
million of Yurie equipment for an end-user system. Management believes that
the terms and conditions of this sale are no less favorable to the Company than
could be obtained from unaffiliated third party purchasers. On that basis, and
as circumstances permit, Yurie intends to make other sales of its product to
Splitrock for use in networks owned by Splitrock or designed by it for third
party end users.
33
<PAGE> 34
PART 1V
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Independent Auditors' Report F-2
Balance Sheets as of December 31, 1995 and 1996 F-3
Statement of Operations for Years Ended December 31, 1994, 1995 and 1996 F-4
Statements of Stockholders' Equity (Deficit) for Years Ended December 31, 1994, 1995 and F-5
1996
Statements of Cash Flows for Years Ended December 31, 1994, 1995 and 1996 F-6
Notes to Financial Statements F-7
</TABLE>
F-1
<PAGE> 35
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
Yurie Systems, Inc.:
We have audited the accompanying balance sheets of Yurie Systems, Inc. as
of December 31, 1995 and 1996, and the related statements of operations,
stockholders' equity (deficit) and cash flows for each of the three years in
the period ended December 31, 1996. 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 our 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 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 Yurie Systems, Inc. as of
December 31, 1995 and 1996, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1996 in
conformity with generally accepted accounting principles.
As discussed in Note 1 to the financial statements, in 1996, the Company
adopted the disclosure requirements of Statement of Financial Accounting
Standards No. 123, "Accounting for Stock Based Compensation."
/s/ Deloitte & Touche LLP
Washington, DC
March 7, 1997
F-2
<PAGE> 36
YURIE SYSTEMS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
1995 1996
-------------------- ---------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $3,779,800 $3,229,069
Accounts receivable - trade 1,172,394 4,931,012
Accounts receivable - other 2,828 54.154
Inventory 654,447 2,599,915
Deferred offering costs --- 910,442
Deferred income taxes --- 9,301
Prepaid expenses 5,164 392,881
-------------------- ---------------------
Total current assets 5,614,633 12,126,774
-------------------- ---------------------
PROPERTY AND EQUIPMENT:
Furniture and equipment 90,250 206,522
Software 50,622 355,168
Computer and office equipment 504,481 1,803,362
-------------------- ---------------------
Total property and equipment 645,353 2,365,052
Less accumulated depreciation and amortization (89,257) (333,751)
-------------------- ---------------------
Net property and equipment 556,096 2,031,301
-------------------- ---------------------
OTHER ASSETS 20,938 57,756
-------------------- ---------------------
TOTAL ASSETS $6,191,667 $14,215,831
==================== =====================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 295,591 $1,969,714
Accrued liabilities 270,279 3,156,385
Unearned revenue 4,000,000 ---
Deferred income taxes 64,995 ---
Income taxes payable 432,059 ---
-------------------- ---------------------
Total current liabilities 5,062,924 5,126,099
ACCRUED RENT 25,661 14,932
DEFERRED INCOME TAXES --- 19,310
STOCKHOLDERS' EQUITY:
Preferred Stock, par value $.01, authorized 10,000,000 --- ---
shares, none issued
Common Stock, par value $.01 per share; authorized
30,000,000 shares in 1995 and 50,000,000 in 1996; issued
and outstanding, 20,208,400 shares at December 31, 1995
and 20,608,400 shares at December 31, 1996 202,084 206,084
Additional paid-in capital 119,939 4,915,939
Retained earnings 781,059 3,933,467
-------------------- ---------------------
Total stockholder's equity 1,103,082 9,055,490
-------------------- ---------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $6,191,667 $14,215,831
==================== =====================
</TABLE>
See notes to financial statements.
F-3
<PAGE> 37
YURIE SYSTEMS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1994 1995 1996
---------------- ------------------ ------------------
<S> <C> <C> <C>
REVENUE:
Product revenue $ --- $2,869,937 $18,728,525
Service revenue 1,143,520 1,992,669 2,490,563
Other revenue --- 1,108,333 391,667
---------------- ------------------ ------------------
Total revenue 1,143,520 5,970,939 21,610,755
COSTS OF REVENUE:
Cost of product revenue --- 1,326,702 6,783,520
Cost of service revenue 723,481 1,184,093 1,635,427
---------------- ------------------ ------------------
Total cost of revenue 723,481 2,510,795 8,418,947
---------------- ------------------ ------------------
GROSS PROFIT 420,039 3,460,144 13,191,808
OPERATING EXPENSES:
Research and development 39,875 427,815 3,846,654
Sales and marketing --- --- 1,547,120
General and administrative 219,344 1,588,154 2,699,606
---------------- ------------------ ------------------
Total operating expenses 259,219 2,015,969 8,093,380
---------------- ------------------ ------------------
INCOME FROM OPERATIONS 160,820 1,444,175 5,098,428
Other income 1,583 13,341 83,375
---------------- ------------------ ------------------
INCOME BEFORE INCOME TAXES 162,403 1,457,516 5,181,803
Provision for income taxes 41,535 560,661 2,029,395
---------------- ------------------ ------------------
NET INCOME $ 120,868 $ 896,855 $3,152,408
================ ================== ==================
NET INCOME PER COMMON SHARE $ 0.01 $ 0.04 $ 0.14
================ ================== ==================
WEIGHTED AVERAGE SHARES OUTSTANDING 17,542,408 21,710,064 21,811,082
================ ================== ==================
</TABLE>
See notes to financial statements.
F-4
<PAGE> 38
YURIE SYSTEMS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL RETAINED
------------------------------- PAID-IN EARNINGS
SHARES AMOUNT CAPITAL (DEFICIT) TOTAL
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1994 16,000,000 $ 160,000 $ $ (236,664) $ (76,664)
Net income --- --- --- 120,868 120,868
----------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1994 16,000,000 160,000 --- (115,796) 44,204
Common stock issuance 4,208,400 42,084 119,939 --- 162,023
Net income --- --- --- 896,855 896,855
----------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1995 20,208,400 202,084 119,939 781,059 1,103,082
Common stock issuance 400,000 4,000 4,796,000 --- 4,800,000
Net income --- --- --- 3,152,408 3,152,408
----------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1996 20,608,400 $ 206,084 $4,915,939 $3,933,467 $9,055,490
==================================================================================
</TABLE>
See notes to financial statements.
F-5
<PAGE> 39
YURIE SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------------------
1994 1995 1996
------------------ ---------------- ----------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 120,868 $ 896,855 $3,152,408
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation 11,220 76,249 244,494
Compensation due to stock issuance ---- 162,023 ---
Deferred income taxes 22,315 42,680 (54,986)
Changes in assets and liabilities:
Accounts receivable (137,943) (1,000,316) (3,809,944)
Inventory --- (654,447) (1,945,468)
Prepaid expenses (10,665) 5,851 (387,717)
Other assets (15,220) (5,718) (36,818)
Accounts payable and other accrued expenses 73,368 318,695 3,907,229
Income taxes payable 19,220 412,839 (432,059)
Due to/from stockholder 50,601 (583) ---
Unearned revenue 275,437 3,724,563 (4,000,000)
Accrued rent 18,511 7,150 (10,729)
------------------ ---------------- ----------------
Net cash provided by (used in) operating activities 427,712 3,985,841 (3,373,590)
------------------ ---------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (202,250) (436,229) (1,719,699)
------------------ ---------------- ----------------
Net cash used in investing activities (202,250) (436,229) (1,719,699)
------------------ ---------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Deferred offering costs --- --- (257,442)
Proceeds from issuance of common stock --- --- 4,800,000
------------------ ---------------- ----------------
Net cash provided by financing activities --- --- 4,542,558
------------------ ---------------- ----------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 225,462 3,549,612 (550,731)
CASH AND CASH EQUIVALENTS, BEGINNING OF
YEAR 4,726 230,188 3,779,800
------------------ ---------------- ----------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 230,188 $ 3,779,800 $ 3,229,069
================== ================ ================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for income taxes $ --- $ 105,142 $ 2,699,000
================== ================ ================
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES:
During 1995, the Company issued 4,208,400 shares of Common Stock that was
recorded as compensation expense in the amount of $162,023.
The Company has accrued deferred offering costs of $653,000.
See notes to financial statements.
F-6
<PAGE> 40
YURIE SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Yurie Systems, Inc. (formerly Integrated Systems Technology, 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, 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.
Revenue Recognition - For financial reporting purposes, the Company records
revenue from product sales on the ship and bill method. Contract service
revenue is primarily generated from cost-reimbursable contracts, including
cost-plus-fixed-fee contracts, and is recorded on the basis of reimbursable
costs plus a pro rata portion of the fee. A portion of the Company's service
revenue is derived from various fixed-price contracts and is accounted for
using the percentage-of-completion method. Losses on contracts, if any, are
recorded when they become known. Contract costs for services supplied to the
U.S. government, including indirect expenses, are subject to audit by the
government's representatives. All revenue is recorded in amounts that are
expected to be realized upon final settlement.
Cash and Cash Equivalents - The Company considers all highly liquid
temporary investments including those with an original maturity of three months
or less to be cash equivalents. Cash and cash equivalents consist primarily of
interest bearing accounts.
Unbilled Receivables - Unbilled receivables include certain costs and a
portion of the fee and expected profit which is billable upon completion of the
contracts or the completion of certain tasks under terms of the contracts.
Inventories - Inventory is stated at the lower of cost or market using the
first-in, first-out method.
Depreciation and Amortization - Property and equipment is recorded at cost.
The cost of furniture and computer and office equipment is depreciated from the
date of installation using the straight-line method over the estimated useful
lives of the various classes of property, which range from three to seven
years. The costs of software are amortized using the straight-line method over
three years.
Warranty Reserve - Estimated warranty costs are accrued at the time revenue
is recognized and are charged to cost of revenues.
Software Development Costs - Software development costs incurred for
products to be sold are capitalized after technological feasibility has been
established, which is consistent with the guidance under SFAS No. 86,
"Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise
Marketed." As of December 31, 1996, all costs related to software development
have been expensed as incurred.
Deferred Offering Costs - Legal and other incremental costs associated with
raising capital through an initial public offering are capitalized on the
balance sheet. Such costs are subsequently netted against the proceeds of the
stock offering to which they relate. Such costs would be written off to
operations in the period in which the related offering is abandoned. There are
no deferred costs included in the balance sheets at December 31, 1994 and 1995.
Deferred offering cost at December 31, 1996 was $910,442.
Income Taxes - The provision for income taxes includes Federal and state
income taxes currently payable plus the net change during the year in the
deferred tax liability or asset. The current or deferred tax consequences of
all events that have been recognized in the financial statements are measured
based on provisions of enacted tax law to determine the amount of taxes payable
or refundable in future periods.
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,
liabilities, revenues and expenses in the financial statements and in the
disclosures of contingent assets and liabilities. Actual results could differ
from those estimates.
F-7
<PAGE> 41
Concentration of Credit Risk - Financial instruments that potentially
subject the Company to concentration of credit risk principally consist of
trade accounts receivable. The Company's largest commercial customer accounted
for approximately 66% and 63% of gross accounts receivable at December 31, 1995
and 1996, respectively. In addition, other customers with balances in excess of
10% accounted for approximately 23% of gross accounts receivable as of December
31, 1995. There were no other customers with a balance in excess of 10% as of
December 31, 1996. The Company performs ongoing credit evaluations of its
customers, but generally does not require collateral to support customer
receivables. Losses on uncollectible accounts have consistently been within
management's expectations and have historically been minimal.
Net Income (Loss) Per Share - Net income per common and common share
equivalents at December 31, 1994, 1995 and 1996 were computed based upon the
weighted average number of common and common share equivalents, outstanding
during the period. Common share equivalents consist of stock options calculated
using the treasury stock method. Retroactive restatement has been made for the
forty-to-one stock split on January 3, 1995 and the two-to-one stock split on
April 3, 1996. Primary and fully diluted earnings per share are the same.
Pursuant to Securities and Exchange Commission Staff Accounting Bulletin No.
83, common stock and options to purchase common stock issued within one year
prior to the initial filing of the Registration Statement at prices below the
assumed initial public offering price will be included as outstanding for all
periods presented, using the treasury stock method.
New Accounting Pronouncements - As of January 1, 1996, the Company adopted
Statement of Financial Accounting Standards (SFAS) No. 121, Accounting for
Impairment of Long-Lived Assets to be Disposed Of. The adoption had no effect
on the financial position or the results of operations of the Company. SFAS No.
123, Accounting for Stock-Based Compensation, has been adopted by the Company
as of December 31, 1996. However, the Company has not adopted the recognition
and measurement provisions of SFAS No. 123 and therefore, will provide only the
applicable disclosures. (See Note 11).
Reclasssifications - Certain prior year amounts have been reclassified to
conform to the current year financial statement presentation.
2. LINE OF CREDIT
From January 1, 1995 to June 28, 1996, the Company had a credit agreement
with Commerce Bank, which provided for maximum borrowings of $100,000. At
December 31, 1995, there were no borrowings under this agreement.
On June 28, 1996, the Company entered into a revolving loan agreement with
Commerce Bank, which provides for maximum borrowings of $3,000,000, based upon
certain percentages of accounts receivable and inventory as borrowing bases.
The interest varies from prime to prime plus 1% depending upon the amounts
borrowed. At December 31, 1996, the prime rate was 8.25%. The agreement
expires on May 31, 1997. At December 31, 1996, there were no borrowings under
this agreement.
3. ACCOUNTS RECEIVABLE-TRADE
Trade accounts receivable consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1995 1996
--------------- ---------------
<S> <C> <C>
Billed $ 748,372 $4,166,149
Unbilled 424,022 764,863
--------------- ---------------
Total accounts receivable - trade $1,172,394 $4,931,012
=============== ===============
</TABLE>
F-8
<PAGE> 42
4. INVENTORY
Inventory consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1995 1996
--------------- ---------------
<S> <C> <C>
Raw materials $246,291 $1,836,581
Work-in-process 325,101 688,686
Finished goods 83,055 74,648
--------------- ---------------
Total inventory $654,447 $2,599,915
=============== ===============
</TABLE>
5. ACCRUED LIABILITIES
Accrued liabilities consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1995 1996
-------------- --------------
<S> <C> <C>
Accrued salaries and employee benefits $269,386 $1,563,704
Accrued sales and use tax --- 272,784
Warranty accrued --- 544,306
Deferred offering costs --- 653,000
Other accrued liabilities 893 122,591
-------------- --------------
Total accrued liabilities $270,279 $3,156,385
============== ==============
</TABLE>
6. UNEARNED REVENUE
Unearned revenue at December 31, 1995 represents prepayment from AT&T for
purchases of products which had not been delivered as of the end of the
reporting period. All products had been delivered as of December 31, 1996.
7. INCOME TAXES
The provision for income taxes is comprised of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1994 1995 1996
------------- ---------------- ---------------
<S> <C> <C> <C>
Current $19,220 $519,700 $2,084,381
Deferred 22,315 40,961 (54,986)
------------- ---------------- ---------------
Total $41,535 $560,661 $2,029,395
============= ================ ================
</TABLE>
The provision for income taxes differs from the amount computed by applying
the statutory federal income tax rate as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1994 1995 1996
-------------- -------------- -------------
<S> <C> <C> <C>
Expected statutory amount 34.0% 34.0% 34.0%
Utilization of NOL carryforward (6.3) --- ---
Benefit of lower tax bracket (6.3) --- ---
State income taxes, net of federal tax 4.6 4.6 4.6
Other --- (0.1) 0.6
-------------- -------------- -------------
Effective tax rate 26.0% 38.5% 39.2%
============== ============== =============
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and amounts used for income tax purposes and the impact of available
net operating loss carryforwards.
F-9
<PAGE> 43
The tax effect of significant temporary differences, which comprise the
deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1994 1995 1996
-------------- --------------- ------------------
<S> <C> <C> <C>
Deferred tax assets:
Accrued salaries and employee benefits $ 28,621 $ --- $ ---
Warranty reserve --- --- 210,210
Uniform capitalization --- --- 19,310
Deferred rent 7,149 9,987 5,767
-------------- --------------- ------------------
Total deferred tax assets 35,770 9,987 235,287
Deferred tax liabilities:
Depreciation 18,768 25,685 19,310
Unbilled receivables 39,317 49,297 225,986
-------------- --------------- ------------------
Total gross deferred tax liabilities 58,085 74,982 245,296
-------------- --------------- ------------------
Net deferred tax liabilities $(22,315) $(64,995) $(10,009)
============== =============== ==================
</TABLE>
8. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial instruments:
Cash and Cash Equivalents - The carrying amounts reported in the balance
sheets for cash and cash equivalents approximates fair value.
Accounts Receivable and Accounts Payable - The carrying amounts reported in
the balance sheets for accounts receivable and accounts payable approximate
fair value.
9. COMMITMENTS
Lease Obligations - The Company currently leases two facilities in Lanham,
Maryland, which leases expire in 1998 and 1999. The Company is accounting for
the costs of these leases by recognizing rent expense on a straight-line basis
over the lease term. Each lease contains an escalation clause, one related to
increases in the Consumer Price Index and one providing a fixed 3% annual
increase. Both provide options for extension and one provides an option for
expansion. The following is a composite schedule, by year, of minimum rental
payments as of December 31, 1996:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31, AMOUNT
------------ ------
<S> <C>
1997 $398,941
1998 271,212
1999 167,463
-------
Total minimum lease payments $837,616
========
</TABLE>
Rental expense for the years ended December 31, 1994, 1995 and 1996, was
$38,500, $112,615, and $265,285, respectively.
Employment Agreements - `The Company has employment agreements with two of
its executive officers. The agreements provide for a minimum salary level as
well as for bonuses which are determined by the Board of Directors. Each of the
employment agreements is for a one-year term that renews automatically unless
terminated by either party.
F-10
<PAGE> 44
10. PENSION PLAN
Until December 31, 1995, the Company had an employee pension plan, which
was administered as a self-employment plan under Internal Revenue Service
regulations. It was Company policy to contribute annually an amount equal to
15% of qualified employees' salaries. Pension expense for the years ended
December 31, 1994, and 1995 was $38,119 and $93,557, respectively. The
investment options were employee directed. All employees are fully vested at
the end of one year of consecutive service.
Effective January 1, 1996, the plan is administered as a 401(k) profit
sharing plan that covers substantially all full time employees. Employees are
eligible to participate upon completion of one year of service and may
contribute up to 10% of their annual compensation not to exceed certain
statutory limitations. Eligible employees vest in employer contributions and
investment earnings thereon in 20% increments over a five year period. Pension
expense for the year ended December 31, 1996 totaled $37,661.
11. STOCKHOLDERS' EQUITY
On January 3, 1995, the Board of Directors approved a stock split in the
ratio of forty-to-one that increased the number of shares, all held at that
time by the President of the Company, from 200,000 to 8,000,000.
On May 22, 1995, the Company issued 4,000,000 shares of Common Stock to
Kwok Li as compensation for his services in connection with the development of
the LDR100. Also on May 22, 1995, and June 14, 1995 the Company issued 202,400
and 6,000 shares of Common Stock, respectively, to several employees as
compensation for their services to the Company. The Company recorded these
grants at $.077 per share, the then current fair value of the Common Stock
based on an independent appraisal conducted as of May 22, 1995.
On April 3, 1996, the Board of Directors recommended, and the shareholders
approved, a two-for-one stock split on outstanding shares of common stock as
well as options outstanding. At the same time, the option price per share was
reduced by 50%.
The Company's Board of Directors approved a nonstatutory stock option plan
effective January 31, 1996, for which 395,800 shares of stock were approved to
be issued. On April 2, 1996, the Board of Directors recommended the stock
option plan be amended to increase the number of shares available under the
Plan to 1,250,000. This increase and the two-for-one stock split approved by
the shareholders on April 3, 1996, increased the number of shares available
under the plan to 2,500,000. Subsequently, on July 17, 1996, the Board of
Directors recommended and the shareholders approved another increase of 700,000
shares, bringing the total number of shares available under the plan to
3,200,000. The exercise price per share was determined based upon estimated
fair value on the date of grant. Options are generally exercisable over a four
year period and expire ten years after the date of the grant.
A summary of stock option activity, described above, under the stock option
plan is as follows:
<TABLE>
<CAPTION>
NUMBER OF
SHARES
----------------------
<S> <C>
Outstanding, January 1, 1996 ---
Granted:
At exercise price of $.52 per share 2,103,442
At exercise price of $2.70 per share 841,100
At exercise price of $9.00 per share 251,380
At exercise price of $12.00 per share 17,000
----------------------
Total Granted 3,212,922
Exercised ---
----------------------
Outstanding, December 31, 1996 3,212,922
======================
Exercisable options at December 31, 1996 271,500
======================
</TABLE>
F-11
<PAGE> 45
The Company accounts for its stock-based compensation plans under APB No.
25. No compensation expense has been recognized in connection with the options,
as all options have been granted with an exercise price equal to the fair value
of the Company's common stock on the date of grant. The Company adopted SFAS
No. 123 for disclosure purposes in 1996. For SFAS No. 123 purposes, the fair
value of each option grant has been estimated as of the date of grant using the
Black Scholes option pricing model with the following weighted average
assumptions: risk-free interest rate of 5.96%, expected life of three years,
dividend rate of zero percent, and expected volatility of 68.30%. Using these
assumptions, the fair value of the stock options granted in 1996 is $2,919,254,
which would be amortized as compensation expense over the vesting period of the
options. The options generally vest equally over four years. Had compensation
expense been determined consistent with SFAS No. 123, utilizing the assumptions
detailed above, the Company's net income and earnings per share for the year
ended December 31, 1996 would have been reduced to the following pro forma
amounts:
<TABLE>
<CAPTION>
1996
--------------------
<S> <C>
Net Income:
As Reported $3,152,408
Pro forma $2,993,026
Net income per common share:
As Reported $0.14
Pro forma $0.14
</TABLE>
The resulting pro forma compensation cost may not be representative of
that expected in future years.
On November 7, 1996, the Amerindo Technology Growth Fund Inc. (Amerindo)
acquired 400,000 shares of common stock of the Company for a purchase price of
$12.00 per share. In addition, Amerindo acquired 600,000 shares from officers
of the Company for $12.00 per share. Pursuant to the stock purchase agreement,
the Company granted Amerindo certain registration rights that begin one year
after the date of the effective date of a registration statement relating to an
initial public offering effected by the Company (or February 5, 1998).
12. SIGNIFICANT CUSTOMER
For the years ended December 31, 1994, 1995 and 1996, approximately 53%,
72% and 87%, respectively, of total revenues were generated from sales through
or to one customer, AT&T. Included in Other Revenue in the Statement of
Operations for the years ended December 31, 1995 and 1996 are fees of
$1,108,333 and $391,667, respectively, earned under an agreement entered into
in August 1995 that granted AT&T certain rights to market and sell products of
the Company.
Under an amendment to this agreement, AT&T committed to purchase at least
$6,500,000, $10,000,000 and $10,000,000 of product in 1996, 1997 and 1998,
respectively.
13. SUBSEQUENT EVENT
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.
F-12
<PAGE> 46
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934, AS AMENDED, THE REGISTRANT HAS DULY CAUSED TO BE SIGNED
ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
March 28, 1997 YURIE SYSTEMS, INC.
BY: /s/ Jeong H. Kim
--------------------------------
JEONG H. KIM
CHAIRMAN OF THE BOARD AND
CHIEF EXECUTIVE OFFICER
The undersigned directors and officers of Yurie Systems, Inc. hereby
constitute and appoint Jeong H. Kim as our true and lawful attorney-in-fact
with full power to execute in our name and behalf in the capacities indicated
below this Report on Form 10-K and any and all amendments thereto and file the
same, with all exhibits thereto and other documents in connection therewith,
with the Securities and Exchange Commission and hereby ratify and conform all
that such attorneys-in-fact, or any of them, or their substitutes shall
lawfully do or cause to be done by virtue hereof.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934,
AS AMENDED, THIS REPORT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Jeong H. Kim Chairman of the Board and March 28, 1997
- ------------------------------------------- Chief Executive Officer
JEONG H. KIM
/s/ Kwok Li President, Chief Operating March 28, 1997
- ------------------------------------------- Officer, and a Director
KWOK LI
/s/ Barton Y. Shigemura Senior Vice President, Sales and March 28, 1997
- ------------------------------------------- Marketing, and a Director
BARTON Y. SHIGEMURA
/s/ Charles S. Marantz Vice President, Finance and March 28, 1997
- ------------------------------------------- Administration, Chief Financial
CHARLES S. MARANTZ Officer and Treasurer (also serves
as Chief Accounting Officer)
- ------------------------------------------- Director March , 1997
R. JAMES WOOLSEY
</TABLE>
F-13
<PAGE> 47
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ HERBERT RABIN
- ------------------------------------------- Director March 31, 1997
HERBERT RABIN
- ------------------------------------------- Director March , 1997
KENNETH D. BRODY
- ------------------------------------------- Director March , 1997
WILLIAM J. PERRY
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 3,229,069
<SECURITIES> 0
<RECEIVABLES> 4,985,166
<ALLOWANCES> 0
<INVENTORY> 2,599,915
<CURRENT-ASSETS> 12,126,774
<PP&E> 2,365,052
<DEPRECIATION> 333,751
<TOTAL-ASSETS> 14,215,831
<CURRENT-LIABILITIES> 5,126,099
<BONDS> 0
0
0
<COMMON> 206,084
<OTHER-SE> 8,849,406
<TOTAL-LIABILITY-AND-EQUITY> 14,215,831
<SALES> 18,728,525
<TOTAL-REVENUES> 21,610,755
<CGS> 6,783,520
<TOTAL-COSTS> 8,418,947
<OTHER-EXPENSES> 8,093,380
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 83,375
<INCOME-PRETAX> 5,181,803
<INCOME-TAX> 2,029,395
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,152,408
<EPS-PRIMARY> .14
<EPS-DILUTED> .14
</TABLE>
