<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the Quarterly Period ended March 31, 1998;
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the Transition Period from
to .
------ ------
Commission File Number 0-22087
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 organization) ( I.R.S. Employer Identification No.)
</TABLE>
8301 PROFESSIONAL PLACE
LANDOVER, MD 20785-2237
(Address of principal executive offices and zip code)
301-352-4600
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. Yes [X] No [ ]
As of April 24, 1998, the registrant had outstanding 25,520,763 shares
of its common stock.
<PAGE> 2
YURIE SYSTEMS, INC. AND SUBSIDIARIES
REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED
MARCH 31, 1998
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C> <C>
PART I: FINANCIAL INFORMATION
ITEM 1. Financial Statements
a. Consolidated Statements of Income for the three
month periods ended March 31, 1998 and 1997 3
(unaudited)
b. Consolidated Balance Sheets as of March 31, 1998
(unaudited) and December 31, 1997 4
c. Consolidated Statements of Cash Flows for the three
month periods ended March 31, 1998 and 1997 5
(unaudited)
d. Notes to Consolidated Financial Statements 6
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
PART II: OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K 10
</TABLE>
2
<PAGE> 3
PART I
ITEM 1. FINANCIAL STATEMENTS
YURIE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME FOR THE THREE MONTHS ENDED
MARCH 31, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
1998 1997
--------------- ------------
<S> <C> <C>
REVENUE:
Product revenue $18,366,044 $7,479,587
Service revenue 741,329 923,085
--------------- ------------
Total revenue (1) 19,107,373 8,402,672
COST OF REVENUE:
Cost of product revenue 5,983,889 2,784,752
Cost of service revenue 631,369 622,487
--------------- ------------
Total cost of revenue 6,615,258 3,407,239
GROSS PROFIT 12,492,115 4,995,433
OPERATING EXPENSES:
Research and development 3,005,960 1,759,531
Sales and marketing 2,332,270 1,288,095
General and administrative 1,548,073 1,103,603
--------------- ------------
Total operating expenses 6,886,303 4,151,229
INCOME FROM OPERATIONS 5,605,812 844,204
Interest income 362,053 282,379
Other income 46,945 -
--------------- ------------
INCOME BEFORE INCOME TAX PROVISION 6,014,810 1,126,583
Provision for income taxes 2,250,000 449,683
--------------- ------------
NET INCOME $ 3,764,810 $ 676,900
=============== ============
BASIC EARNINGS PER SHARE $ 0.15 $ 0.03
=============== ============
BASIC WEIGHTED AVERAGE SHARES
OUTSTANDING 25,385,137 23,400,496
=============== ============
DILUTED EARNINGS PER SHARE $ 0.14 $ 0.03
=============== ============
DILUTED WEIGHTED AVERAGE SHARES
OUTSTANDING 27,529,441 25,077,245
=============== ============
</TABLE>
- ------------
(1) Revenue includes amounts from related parties of $570,582, and $1,703,455
for the three months ended March 31, 1998 and 1997, respectively (unaudited).
See notes to consolidated financial statements.
3
<PAGE> 4
YURIE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS AS OF MARCH 31, 1998 AND DECEMBER 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
ASSETS 1998 1997
-------------- --------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $9,924,603 $8,142,205
Restricted cash 750,000 1,000,000
Short term investments 32,129,762 35,916,699
Accounts receivable (1) 20,192,064 13,314,853
Income tax receivable 533,441 993,478
Interest receivable 248,246 402,228
Inventory 5,014,757 5,467,045
Deferred income taxes 2,365,455 1,246,058
Prepaid expenses 1,279,461 226,956
-------------- --------------
Total current assets 72,437,789 66,709,522
PROPERTY AND EQUIPMENT, net 7,564,281 6,989,876
DEFERRED INCOME TAXES --- 1,028,490
OTHER ASSETS 690,908 674,609
-------------- --------------
TOTAL ASSETS $80,692,978 $75,402,497
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $2,236,740 $2,137,498
Accrued liabilities 6,938,479 7,471,789
Unearned revenue --- 37,500
Note payable 16,620 16,620
-------------- --------------
Total current liabilities 9,191,839 9,663,407
ACCRUED RENT 581,137 584,733
DEFERRED INCOME TAXES 392,198 ---
CAPITAL LEASE OBLIGATIONS 16,514 20,205
STOCKHOLDERS' EQUITY:
Preferred Stock, par value $.01, authorized 10,000,000 --- ---
shares, none issued
Common Stock, par value $.01; 50,000,000 shares authorized;
issued and outstanding, 25,482,461 shares at March 31,
1998 and 25,316,468 shares at December 31, 1997 254,825 253,165
Additional paid-in capital 58,799,490 56,700,676
Treasury Stock, 19,610 and 753 shares outstanding at March
31, 1998 and December 31, 1997, respectively (450,358) (23,127)
Accumulated other comprehensive loss (639,489) (647,948)
Retained earnings 12,546,822 8,851,386
-------------- --------------
Total stockholders' equity 70,511,290 65,134,152
-------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $80,692,978 $75,402,497
============== ==============
</TABLE>
- ----------------
(1) Accounts receivable includes amounts from related parties of $275,576 and
$1,425,601 at March 31, 1998 (unaudited) and December 31, 1997,
respectively.
See notes to consolidated financial statements.
<PAGE> 5
YURIE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS
ENDED MARCH 31, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
1998 1997
--------------- ---------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,764,810 $ 676,900
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation 588,832 167,691
Compensation due to stock issuance - 120,500
Deferred income taxes 301,291 (507,999)
Changes in assets and liabilities:
Accounts receivable (6,877,211) (1,488,421)
Restricted cash 250,000 -
Interest receivable 153,982 -
Inventory 452,288 (1,450,286)
Prepaid expenses (1,052,505) (190,574)
Other assets (16,299) 22,350
Income taxes receivable 460,037 748,441
Accounts payable 99,244 (435,813)
Accrued expenses (533,310) (32,082)
Unearned revenue (37,500) -
Accrued rent (3,596) (2,682)
--------------- ---------------
Net cash used in operating activities (2,449,937) (2,371,975)
--------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Sale (purchase) of short-term investments 3,786,937 (3,978,000)
Change in unrealized gain/loss on investments (19,006) -
Purchase of property and equipment (1,163,237) (1,455,456)
--------------- ---------------
Net cash provided by (used in) investing activities 2,604,694 (5,433,456)
--------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock (36,458) 44,037,908
Proceeds from exercise of stock options including
related tax benefits 1,975,551 -
Acquisition of treasury stock (527,233) -
Stock issued for employee benefit plans 192,007 -
Capital lease obligations (3,691) (4,155)
--------------- ---------------
Net cash provided by financing activities 1,600,176 44,033,753
--------------- ---------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 27,465 -
--------------- ---------------
NET INCREASE IN CASH AND CASH
EQUIVALENTS 1,782,398 36,228,322
CASH AND CASH EQUIVALENTS, BEGINNING OF
PERIOD 8,142,205 5,245,321
--------------- ---------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 9,924,603 $ 41,473,643
=============== ===============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for income taxes $ 107,900 $ 25,450
=============== ===============
</TABLE>
See notes to consolidated financial statements.
5
<PAGE> 6
YURIE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - DESCRIPTION OF BUSINESS
Yurie Systems, Inc. (the "Company") is a Delaware corporation that was
incorporated in February 1992. The Company designs, manufactures, markets and
services asynchronous transfer mode ("ATM") access products for
telecommunications service providers, Internet service providers, corporate end
users and government end users. ATM is a standard for packaging and switching
digital information that facilitates high speed information transmission with a
high degree of efficiency.
NOTE 2 - BASIS OF PRESENTATION
The accompanying unaudited interim financial statements have been prepared
in accordance with Regulation S-X pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations, although management believes that the
disclosures are adequate to make the information not misleading.
In the opinion of management, the unaudited condensed financial statements
contain all adjustments, consisting of only normal recurring adjustments,
necessary to present fairly the financial position as of March 31, 1998, the
results of operations for the three month periods ended March 31, 1998 and
1997, and the cash flows for the three month periods ended March 31, 1998 and
1997. These financial statements should be read in conjunction with the
financial statements and the notes thereto included in the Company's Annual
Report on Form 10-K for the year ended December 31, 1997.
NOTE 3 - ACCOUNTS RECEIVABLE
Accounts receivable consisted of the following:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
------------------ ----------------
<S> <C> <C>
Billed $ 19,665,390 $ 13,075,944
Unbilled 425,547 437,420
Other 501,127 101,489
Allowance for doubtful accounts (400,000) (300,000)
------------------ ----------------
Total accounts receivable $ 20,192,064 $ 13,314,853
================== ================
</TABLE>
NOTE 4 - INVENTORY
Inventory consisted of the following:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
--------------- --------------
<S> <C> <C>
Raw materials $ 2,838,012 $ 1,963,926
Work-in-process 377,035 1,755,968
Finished goods 1,799,710 1,747,151
--------------- --------------
Total inventory $ 5,014,757 $ 5,467,045
=============== ==============
</TABLE>
6
<PAGE> 7
NOTE 5 - ACCRUED LIABILITIES
Accrued liabilities consisted of the following:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
--------------- ----------------
<S> <C> <C>
Accrued salaries and employee benefits $ 1,929,545 $ 3,008,492
Accrued sales and use tax 199,614 168,398
Warranty accrual 3,947,595 2,948,918
Other accrued liabilities 861,725 1,345,981
--------------- ----------------
Total accrued liabilities $ 6,938,479 $ 7,471,789
=============== ================
</TABLE>
NOTE 6 - COMMITMENTS
The Company entered into a lease on January 15, 1998 for approximately
5400 rentable square feet for engineering offices in Norcross, Georgia. The
term of the lease expires on February 14, 2003 and the base rent is $7,824 per
month.
NOTE 7 - COMPREHENSIVE INCOME
In January 1998, the Company adopted Statement of Financial Accounting
Standards (SFAS) No.130, "Reporting Comprehensive Income." SFAS No. 130
establishes standards for reporting and the display of comprehensive income and
its components in the Company's financial statements; however, the adoption of
this statement had no impact on the Company's results of operations or
stockholders' equity. SFAS No. 130 requires unrealized gains and losses on the
Company's available-for-sale securities and foreign currency translation
adjustments, which prior to adoption were reported separately in stockholders'
equity, to be included in other comprehensive income. Total comprehensive
income for the quarters ended March 31 were as follows:
<TABLE>
<CAPTION>
1998 1997
-------------- -----------
<S> <C> <C>
Net income $ 3,764,810 $ 676,900
Other comprehensive gain 5,160 ---
-------------- -----------
Total comprehensive income $ 3,769,970 $ 676,900
============== ===========
</TABLE>
During the three months ended March 31, 1998, other comprehensive gain
includes the unrealized gain, net of tax, of $16,754 on foreign currency
translation adjustments and the unrealized loss, net of tax, of $11,594 on
available-for-sale securities.
NOTE 8 - RELATED PARTY TRANSACTIONS
During 1997, one of the Company's officers became a majority shareholder
in and the acting Chairman of the Board of Splitrock Services, Inc.
("Splitrock"), a corporation that provides communications services specifically
configured to meet the needs of large network users. Yurie had sales to this
company totaling $570,582 and $1,703,455 during the three months ended March
31, 1998 and 1997, respectively. At March 31, 1998 and 1997, accounts
receivable from this company totaled $275,576 and $1,554,105, respectively.
NOTE 9 - SUBSEQUENT EVENT
On April 27, 1998, the Company entered into an agreement with Lucent
Technologies, a company that designs, builds and delivers a wide range of
public and private networks, communications systems and software, business
telephone systems and microelectronics components.
In accordance with the terms of the definitive agreement, Lucent has
begun a cash tender offer for all the outstanding shares of Yurie common stock
for $35 a share. The offer is expected to close by May 28. In addition,
shareholders holding in excess of 50 percent of Yurie's common stock on a fully
diluted basis have agreed to tender Yurie stock. Any shares not purchased in
the offer will be acquired for the same price in cash, in a second-step merger.
The Boards of both companies have approved the acquisition. The offer
and merger is subject to the purchase of a majority of the outstanding shares
of Yurie common stock, as well as other customary legal requirements.
7
<PAGE> 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The Private Securities Litigation Reform Act provides a "safe harbor" for
forward-looking statements. Certain statements included in this Quarterly
Report on Form 10-Q are forward-looking. Such forward-looking statements, in
addition to information contained in Management's Discussion and Analysis of
Financial Condition and Results of Operations and elsewhere in this Form 10-Q,
are based on the Company's current expectations and are subject to a number of
risks and uncertainties that could cause actual future results to differ
significantly from results expressed or implied in any forward-looking
statements made by, or on behalf of, the Company. The Company assumes no
obligation to update any forward-looking statements contained herein or that
may be made from time to time by, or on behalf of, the Company. Information
presented in this Form 10-Q should be read in conjunction with the Company's
Annual Report on Form 10-K and prior Quarterly Reports on Form 10-Q filed with
the Securities and Exchange Commission.
References made in this Quarterly Report on Form 10-Q to "Yurie", the
"Company" or the "Registrant" refer to Yurie Systems, Inc. and Subsidiaries.
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.
THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THE THREE MONTHS ENDED MARCH 31,
1997
Revenue. Total revenue for the first quarter of 1998 was $19.1 million,
compared with $8.4 million for the first quarter of 1997. This 127.4% increase
resulted primarily from an increase in sales of the Company's LDR products, and
particularly from increased product sales to the commercial marketplace.
Product revenue was $18.4 million during the 1998 period compared with $7.5
million during the 1997 period. Service revenue was $741,000 in the first
quarter of 1998 compared with $923,000 in the comparable quarter in 1997.
Gross Profit. Gross profit increased to $12.5 million in the first quarter
of 1998 from $5.0 million in the comparable 1997 period. Gross margins were
65.4% and 59.5% during the 1998 and 1997 quarters, respectively. The increase
in gross margin was due largely to a decrease in product cost of goods sold, to
32.6% of product revenue in the 1998 quarter from 37.2% of product revenue in
the 1997 quarter. This reflects the spread of the fixed portion of direct
costs over a larger number of units, an increase in shipments of product to
commercial customers, and an increase in the number of higher margin software
features sold. Cost of service increased to 85.2% of service revenue in the
1998 quarter from 67.4% in the comparable 1997 period.
Research and Development. Research and development expenses were $3.0
million in the first quarter of 1998, compared with $1.8 million in the first
quarter of 1997. This increase was due primarily to the hiring of additional
engineering personnel and increased prototyping expenses related to the
development of the Company's LDR products. As a percentage of total revenue,
research and development expenses were 15.7% and 20.9% in the first quarters of
1998 and 1997, respectively.
Sales and Marketing. Sales and marketing expenses were $2.3 million in the
first quarter of 1998, compared with $1.3 million in the first quarter of 1997.
This increase resulted primarily from the hiring of sales and marketing
personnel to support generally, the Company's entry into the commercial
marketplace, and specifically, the release of the Company's LDR200 product. As
a percentage of total revenue, sales and marketing expenses were 12.2% and 15.3
% in the first quarters of 1998 and 1997 respectively.
General and Administrative. General and administrative expenses were $1.5
million in the first quarter of 1998 compared with $1.1 million in the first
quarter of 1997. 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. In addition, in
June 1996 and again in June 1997, the Company relocated its operations to
larger, leased facilities, resulting in higher occupancy costs in the 1998
period. As a percentage of total revenue, general and administrative expenses
were 8.1% and 13.1% in the first quarters of 1998 and 1997, respectively.
Provision for Income Taxes. The provision for income taxes in the first
quarter of 1998 was $2.3 million, resulting in an effective tax rate of 37.4%.
In the first quarter of 1997, the provision for income taxes was $450,000
resulting in an effective tax rate of 39.9%.
8
<PAGE> 9
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its working capital and capital expenditure
requirements primarily from the proceeds from its February 1997 initial public
offering. At March 31, 1998, the Company had cash and cash equivalents of $9.9
million, short-term investments of $32.1 million and working capital of $63.2
million. This compares to cash and cash equivalents of $8.1 million,
short-term investments of $35.9 million and working capital of $57.0 million at
December 31, 1997. The Company had no long-term debt at either date.
The Company's operating activities used $2.4 million of cash for the first
three months of 1998. Accounts receivable increased by $6.9 million, from
December 31, 1997 to March 31, 1998, primarily as a result of a delayed payment
from one customer, as well as the growth in sales. Restricted cash decreased by
$250,000 consistent with a decrease in the collateral requirements associated
with the lease on the company's headquarters facility. The Company provided
collateral of $1.0 million for a letter of credit relating to the lease on its
new headquarters facility, which will be reduced periodically until it
terminates in December 1998. Inventory decreased by $452,000 because of
stability in the Company's product line and customer base. Prepaid expenses
increased by $1.1 million, primarily due to pre-payment of certain multi-year
insurance policies. Accounts payable increased and income taxes receivable
decreased by $99,000 and $460,000, respectively, from December 31, 1997.
Accrued expenses increased by $533,000 million, primarily due to an increase in
warranty accrual. The Company anticipates that the warranty accrual portion of
accrued liabilities may fluctuate significantly from period to period due to
the timing of customer upgrades and other warranty work.
Investing activities generated cash of $2.6 million for first three months
of 1998. The Company sold $3.8 million of short-term investments to finance its
ongoing activities. A portion of this amount was used to purchase $1.2 million
of property and equipment, primarily computer hardware and software as well as
assembly and test equipment.
Financing activities generated cash of $1.6 million in the first three
months of 1998, reflecting primarily the receipt of proceeds from the exercise
of employee stock options, including the related tax benefits.
9
<PAGE> 10
PART II
ITEMS 1 THROUGH 5.
Not Applicable.
ITEM 6.
EXHIBITS
11.1 Statement regarding Computation of Earnings per Share
27.1 Financial Data Schedule
REPORTS ON FORM 8-K
None
10
<PAGE> 11
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THE
REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED THEREUNTO DULY AUTHORIZED.
YURIE SYSTEMS, INC. AND SUBSIDIARIES
DATE: May 15, 1998 BY: /s/ Harry J. D'Andrea
---------------------------------------
HARRY J. D'ANDREA
Chief Financial Officer and Treasurer
(also serves as Chief Accounting Officer)
11
<PAGE> 1
YURIE SYSTEMS, INC. AND SUBSIDIARIES
COMPUTATION OF DILUTED EARNINGS PER COMMON AND COMMON
EQUIVALENT SHARES FOR THE THREE MONTH PERIODS ENDED
MARCH 31, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
1998 1997
-------------- ---------------
<S> <C> <C>
Net Income $ 3,764,810 $ 676,900
============== ===============
Average shares outstanding during the period 25,385,137 23,400,496
Dilutive effect of stock options after application
of treasury stock method 2,144,304 1,676,749
-------------- ---------------
Average number of shares and equivalent shares
outstanding during the period 27,529,441 25,077,245
============== ===============
Diluted earnings per common and common
equivalent share $ 0.14 $ 0.03
============== ===============
</TABLE>
12
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 9,924,603
<SECURITIES> 32,129,762
<RECEIVABLES> 20,592,064
<ALLOWANCES> (400,000)
<INVENTORY> 5,014,757
<CURRENT-ASSETS> 72,437,789
<PP&E> 9,790,987
<DEPRECIATION> (2,226,706)
<TOTAL-ASSETS> 80,692,978
<CURRENT-LIABILITIES> 9,191,841
<BONDS> 0
0
0
<COMMON> 254,824
<OTHER-SE> 70,256,464
<TOTAL-LIABILITY-AND-EQUITY> 80,692,978
<SALES> 19,107,373
<TOTAL-REVENUES> 19,107,373
<CGS> 6,615,258
<TOTAL-COSTS> 6,615,258
<OTHER-EXPENSES> 6,886,303
<LOSS-PROVISION> 100,000
<INTEREST-EXPENSE> 362,053
<INCOME-PRETAX> 6,014,810
<INCOME-TAX> 2,250,000
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,764,810
<EPS-PRIMARY> 0.15
<EPS-DILUTED> 0.14
</TABLE>
