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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 4, 1998
REGISTRATION NO. 333-45481
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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POST-EFFECTIVE AMENDMENT NO. 1 TO
FORM S-1
ON FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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YURIE SYSTEMS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 3669 52-1778987
(PRIMARY STANDARD (I.R.S. EMPLOYER
(STATE OR OTHER INDUSTRIAL IDENTIFICATION NO.)
JURISDICTION OF CLASSIFICATION CODE
INCORPORATION OR NUMBER)
ORGANIZATION)
8301 PROFESSIONAL PLACE
LANDOVER, MD 20785-2237
(301) 352-4600
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
JOHN J. MCDONNELL
GENERAL COUNSEL AND SECRETARY
YURIE SYSTEMS, INC.
8301 PROFESSIONAL PLACE
LANDOVER, MD 20785-2237
(301) 352-4600
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
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COPIES TO:
RICHARD A. STEINWURTZEL, ESQUIRE
FRIED, FRANK, HARRIS, SHRIVER & JACOBSON
1001 PENNSYLVANIA AVENUE, N.W.
WASHINGTON, D.C. 20004-2505
(202) 639-7000
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: From time
to time after this registration statement becomes effective.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
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Pursuant to Rule 429 under the Securities Act of 1933, as amended, ("Rule
429") this Registration Statement contains a combined prospectus that relates
to Registration Statement No. 333-45481 (the "1998 Form S-1"), and to
Registration Statement No. 333-36413 (the "1997 Form S-1"). The 1998 Form S-1
contains a combined prospectus pursuant to Rule 429 that includes both the
shares of Common Stock registered on the 1998 Form S-1 and those shares
remaining to be sold on the 1997 Form S-1. This Post-Effective Amendment on
Form S-3 (the "Form S-3") is being filed pursuant to Rule 401(c) under the
Securities Act in order to convert the 1998 Form S-1 to a Form S-3. The
combined prospectus contained in the Form S-3 supersedes those in both the
1998 Form S-1 and the 1997 Form S-1.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933, OR UNTIL THIS REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
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PROSPECTUS
2,155,366 Shares
[LOGO OF YURIE SYSTEMS APPEARS HERE]
Common Stock
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All the 2,155,366 shares of Common Stock, $.01 par value per share (the
"Common Stock"), offered hereby are being sold by certain stockholders of the
Company (the "Selling Stockholders"). The Company has registered these shares,
at its own expense, pursuant to certain registration rights held by the
Selling Stockholders. Of the 2,155,366 shares of Common Stock offered hereby,
20,000 shares of Common Stock are to be issued from time to time upon the
exercise of stock options described herein. The Company will not receive any
proceeds from the sale of the shares to be sold by the Selling Stockholders.
The Company's Common Stock is traded on the Nasdaq National Market under the
trading symbol "YURI." On March 2, 1998, the last reported sale price of the
common stock on the Nasdaq National Market was $21.625 per share. See "Price
Range of Common Stock."
The Company has been advised by the Selling Stockholders that the Selling
Stockholders, each acting as a principal for its own account, directly,
through agents designated from time to time, or through dealers also to be
designated, may sell all or a portion of the Common Stock offered hereby from
time to time, depending on market conditions and other factors, in one or more
transactions on the Nasdaq or otherwise, at market prices prevailing at the
time of sale, at negotiated prices or at fixed prices. To the extent required,
the number of shares of Common Stock to be sold, the names of the Selling
Stockholders, the offering price, the name of any such agent or dealer and any
applicable commissions with respect to a particular offer will be set forth in
an accompanying prospectus supplement or, if appropriate, a post-effective
amendment to the Registration Statement of which this Prospectus is a part.
The aggregate proceeds to the Selling Stockholders from the sale of Common
Stock offered by the Selling Stockholders hereby will be the offering price of
such Common Stock less any commissions. For information concerning
indemnification arrangements between the Company and the Selling Stockholders,
see "Plan of Distribution."
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THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" COMMENCING ON PAGE 7 HEREOF.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS MARCH 4, 1998
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AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Reports, proxy
statements and other information filed by the Company may be inspected and
copied at the public reference facilities maintained by the Commission at 450
Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's Regional
Offices located at Midwest Regional Office, Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661 and Northeast Regional Office, 7
World Trade Center, 7th Floor, New York, New York 10048. Copies of such
materials may be obtained from the Web site that the Commission maintains at
http://www.sec.gov.
The Company has filed with the Commission a registration statement on Form
S-3 (herein, together with all amendments and exhibits, referred to as the
"Registration Statement") under the Securities Act with respect to the Common
Stock offered hereby. This Prospectus does not contain all of the information
set forth in the Registration Statement, certain parts of which are omitted in
accordance with the rules and regulations of the Commission. For further
information, reference is hereby made to the Registration Statement. Any
person to whom this Prospectus is delivered may obtain a copy of the
Registration Statement, including the exhibits thereto, without charge upon
written or oral request to the Secretary of the Company at 8301 Professional
Place, Landover, MD 20785-2237, Telephone: (301) 352-4600.
The common stock of the Company is listed on the Nasdaq National Market
under the trading symbol "YURI". Reports, proxy statements and other
information concerning the Company can be inspected at the offices of the
Nasdaq National Market, 1735 K Street, N.W., Washington, D.C. 20006-1506.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The following documents filed by the Company with the Commission pursuant to
the Exchange Act are incorporated in this Prospectus by reference (File No. 0-
22087):
1. The Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1996.
2. The Company's Quarterly Reports on Form 10-Q for the quarters ended
March 31, 1997, June 30, 1997 and September 30, 1997.
3. The Company's Current Report on Form 8-K, dated December 9, 1997 (the
"Data Labs Form 8-K"), reporting the acquisition by the Company of Data
Labs, Inc., a Delaware corporation ("Data Labs").
4. The Company's Current Report on Form 8-K, dated November 24, 1997.
5. The description of the Company's common stock, $.01 par value per
share, contained in the Registration Statement on Form 8-A, filed under the
Securities Act on January 31, 1997, including any amendment or report filed
for the purpose of updating such description.
All documents subsequently filed by the Company pursuant to Section 13(a),
13(c), 14 or 15(d) of the Exchange Act, prior to the termination of the
offering of the Shares, shall be deemed to be incorporated by reference in
this Prospectus and made a part hereof from the date of filing of such
documents. Any statement contained in a document incorporated or deemed to be
incorporated by reference in this Prospectus shall be deemed to be modified or
superseded for purposes of this Prospectus to the extent that a statement
contained herein or in any other subsequently filed document which also is or
is deemed to be incorporated by reference herein or in any Prospectus
Supplement modifies or supersedes such statement. Any such statement so
modified or superseded shall not be deemed, except as so modified or
superseded, to constitute a part of this Prospectus.
The Company will provide without charge to each person, including any
beneficial owner, to whom a copy of this Prospectus is delivered, upon their
written or oral request, a copy of any or all of the documents incorporated
herein by reference (other than exhibits to such documents, unless such
exhibits are specifically incorporated by reference in such documents).
Written requests for such copies should be addressed to Corporate Secretary,
Yurie Systems, Inc., 8301 Professional Place, Landover, MD 20785.
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THE COMPANY
Yurie Systems, Inc. ("Yurie" or 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. End users of telecommunications services have
traditionally maintained separate wide area networks ("WANs") 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
products can provide savings in WAN communication 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, was released in March 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
adaptive queue management algorithm ("AQueMan") allows the LDR products to
reduce network congestion while maintaining quality of service. The Company's
Limitless ATM Network Protocol ("LANET") 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, and a broad
variety of access interfaces.
The Company's strategy centers on maintaining its technological leadership,
developing the telecommunications service provider, private label partner and
corporate end user markets while continuing to pursue government end user
markets, developing international markets and building strategic relationships.
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 23 sales personnel.
In pursuit of this strategy, Yurie has entered into private-label partner
agreements with Bay Networks, Lucent Technologies, Inc., and Ericcson, Inc.,
the U.S. subsidiary of Telefonaktiebolaget LM Ericsson. These agreements permit
each of Bay, Lucent and Ericcson to market and sell the Company's LDR products
under non-exclusive licenses into commercial and government markets for three
years, subject to renewal. None of these agreements has minimum purchase
guarantees. Previously, Yurie and AT&T had entered into an agreement (the "AT&T
Agreement"), under which AT&T had an exclusive license to sell Yurie's products
in government markets. Pursuant to a recent amendment to the AT&T Agreement,
AT&T no longer has minimum purchase guarantees nor holds an exclusive license
to sell Yurie products in government markets.
The Company has a significant customer relationship with Splitrock Services,
Inc., a Texas corporation that provides communications services specifically
configured to meet the needs of large network users ("Splitrock"). Splitrock
purchased the underlying network assets of Prodigy Services Corporation, an
Internet service provider (the "Prodigy Network") in 1997. During the first
nine months of 1997, Splitrock purchased $11.5 million of LDR products from the
Company. Yurie and Splitrock are parties to an agreement (the "Splitrock
Agreement") that requires Splitrock to purchase a minimum of $20.0 million of
LDR products in the period from July 1997 to December 1998. Under the Splitrock
Agreement, Yurie also provides services to support deployment and
implementation of Yurie's products
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in Splitrock's network on a time and materials basis. Through September 30,
1997, Splitrock had purchased $6.6 million of LDR products from Yurie under the
Spitrock Agreement. Splitrock and Ericsson executed a letter of intent on
February 2, 1998, in which Ericsson agreed to provide Splitrock with certain
services as well as LDR products that Ericsson has purchased or will purchase
under its private-label partner agreement with Yurie. Sales to Splitrock in the
fourth quarter of 1997 totaled approximately $5.9 million, approximately $5.0
million of which Splitrock purchased or leased from Ericsson. These purchases
or leases of LDR products through Ericcson will be credited against Splitrock's
minimum purchase guarantee in the Splitrock Agreement. Kwok L. Li, the Chief
Technology Officer and Vice Chairman of the Board of Yurie, is the majority
shareholder and Chairman of the Board of Directors of Splitrock.
The Company was founded in February 1992 by Dr. Jeong H. Kim, the Company's
Chief Executive Officer and Chairman of the Board of Directors. The Company
began developing ATM products in 1994 and began product shipments in February
1995. Prior to 1994, the Company's business operations consisted primarily of
telecommunications consulting and related service activities. In January 1997,
the Company won Data Communications' Hot Product Award for WAN gear and in May
1997, Business Week magazine named the Company America's #1 Hot Growth Company.
Yurie's executive offices are located at 8301 Professional Place, Landover,
Maryland 20785-2237, its telephone number is (301) 352-4600, its e-mail address
is [email protected] and its World Wide Web site address is http://www.yurie.com.
RECENT DEVELOPMENTS
On December 1, 1997, Yurie acquired Data Labs, Inc., a privately-held
Delaware corporation ("Data Labs"), in a stock-for-stock merger (the "Data Labs
Merger"). Yurie issued 358,414 shares of its common stock in the Data Labs
Merger in exchange for all of the outstanding capital stock of Data Labs and
the Data Labs common stock underlying all of the vested stock options and one-
half of the unvested stock options held by Data Labs directors, officers and
employees. The Data Labs Merger was treated as a pooling-of-interests for
financial reporting purposes. Accordingly, supplemental consolidated financial
statements reflecting this a transaction are included in this Prospectus.
On February 5, 1998, the Company announced that its pro forma revenue,
excluding the impact of the Data Labs Merger, for the fourth quarter of 1997
was $17.6 million, representing a 168% increase over the $6.6 million reported
in the fourth quarter of 1996 and a 25% sequential increase over the $14.1
million reported in third quarter of 1997. For the year ended December 31,
1997, the Company's pro forma revenue totaled $51.0 million, a 136% increase
over the $21.6 million reported for the year ended December 31, 1996. Pro forma
net income, excluding the impact of the Data Labs Merger and the one time
acquisition related charge of $0.02 per share for the fourth quarter of 1997,
was $3.3 million, or $0.12 per share diluted ($0.13 per share basic), a 696%
increase over the $413,000 in net income, or $0.02 per share (diluted and
basic), reported in the fourth quarter of 1996, and a 39% sequential increase
over the $2.4 million in net income, or $0.09 per share diluted ($0.10 per
share basic), reported in the third quarter of 1997. For the year ended
December 31, 1997, pro forma net income was $8.3 million or $0.31 per share
diluted ($0.34 per share basic), a 162% increase over the $3.2 million in net
income, or $0.14 per share diluted ($.016 per share basic), reported for the
year ended December 31, 1996.
On February 5, 1998, the Company announced that its consolidated revenue,
including Data Labs, was $17.6 million for the fourth quarter of 1997,
representing a 168% increase over $6.6 million for the fourth quarter of 1996
and a 25% sequential increase over $14.1 million for the third quarter of 1997.
For the year ended December 31, 1997, the Company's consolidated revenue
totaled $51.1 million, a 136%
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increase over $21.7 million for the year ended December 31, 1996. Net income on
a consolidated basis for the fourth quarter of 1997 was $2.4 million, or $0.09
per share (diluted or basic), compared to $82,000 in net income for the fourth
quarter of 1996, and a 33% sequential increase over the $1.8 million in net
income, or $0.06 per share (diluted $0.07 per share basic) for the third
quarter of 1997. For the year ended December 31, 1997, net income on a
consolidated basis was $6.1 million, or $0.23 per share diluted ($0.25 per
share basic), a 153% increase over $2.4 million in net income, or $0.11 per
share diluted ($0.12 per share basic), reported for the year ended December 31,
1996. Consolidated results for both the fourth quarter of 1997 and the year
ended December 31, 1997 include a one time pre-tax charge of $1.0 million or
$0.01 per share after tax for expenses related to the acquisition of Data Labs.
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THE OFFERING
Common Stock offered by the
Selling Stockholders.......... 2,155,366 shares
Common Stock outstanding
after the offering............ 25,336,468 shares (1)
Use of proceeds...............
This offering is made by certain Selling
Stockholders. The Company will not receive any
of the proceeds of such sales. See "Use of
Proceeds" and "Principal and Selling
Stockholders".
Nasdaq National Market "YURI"
symbol........................
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(1) Assumes the exercise by Oneline Management, Inc. ("Oneline") of an option
to purchase 20,000 shares of common stock of the Company for an aggregate
exercise price of $240,000 (the "Oneline Option"). Excludes 5,622,229
shares of common stock issuable upon the exercise of stock options
outstanding as of December 31, 1997 at a weighted average exercise price of
approximately $7.69 per share. Also excludes 1,377,771 shares of common
stock reserved for future issuance under the Company's 1996 Non Statutory
Stock Option Plan (the "Stock Option Plan") and the Data Labs 1996 Stock
Option Plan (the "Data Labs Plan"), 186,233 shares of common stock reserved
for future issuance under the Company's Employee Stock Purchase Plan (the
"Stock Purchase Plan") and 194,479 shares of common stock reserved for
future issuance under the Company's 401(k) Savings Plan (the "401(k)
Plan").
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RISK FACTORS
An investment in the shares of Common Stock offered hereby involves a high
degree of risk. Prospective investors should consider carefully the following
risk factors, in addition to the other information contained in this
Prospectus, in evaluating an investment in the shares of Common Stock offered
hereby.
The Private Securities Litigation Reform Act (the "PLSRA") provides a "safe
harbor" for "forward-looking" statements. Certain statements included in this
Prospectus are "forward-looking" within the meaning of the PLSRA. These
include statements regarding the anticipated growth in demand for ATM access
products, the anticipated growth in the Company's revenues from the
development, manufacture and sale of ATM access products, the expectation that
such revenue growth will result largely from sales of ATM access products to
telecommunications service providers and corporate end users, and statements
relating to 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 Prospectus, are based on the Company's current expectations and are
subject to a number of risks and uncertainties that could cause actual results
in the future to differ significantly from results expressed or implied in any
forward-looking statements made by, or on behalf of, the Company. These and
other risks are detailed below. 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.
Limited Operating History and Operating Results. The Company was founded in
1992, began developing ATM access products in 1994 and commenced shipping ATM
access products in February 1995. Accordingly, there is only a limited
operating history upon which to base an evaluation of the Company and its
prospects. The Company's prospects must be considered in light of the risks,
expenses and difficulties frequently encountered by companies in their early
stages of development, particularly companies in new and rapidly evolving
markets. To address these risks, the Company must, among other things, respond
to competitive developments, develop its technologies, commercialize products
incorporating these technologies, and attract, retain and motivate qualified
employees. There can be no assurance that the Company will be successful in
addressing these risks. The Company expects that its operating expenses will
increase in the future, and there can be no assurance that its revenues will
increase sufficiently to allow it to maintain profitability, either on an
annual or quarterly basis.
Dependence on ATM; Product Concentration. Although ATM is an industry
standard, the ATM access market is still emerging and only a limited number of
telecommunications service providers have installed ATM networks. All of the
Company's product revenue to date has been derived from the sale of ATM access
products, and the Company expects that the sale of ATM access products and
related services will continue to account for substantially all of its
revenues for the foreseeable future. The Company's success will depend on the
market acceptance of ATM technology as a preferred networking solution
relative to other existing or newly developed solutions. The failure of ATM-
based networking products to achieve widespread market acceptance would have a
material adverse effect on the Company's business, results of operations and
financial condition.
Sales of the Company's LDR access products have accounted for substantially
all of its revenue to date, and these products and related enhancements are
expected to continue to account for a majority of the Company's revenue for
the foreseeable future. The Company's success depends in large part on
continued sales of the LDR product line. A decline in either demand for or the
average sales prices of the Company's LDR products, whether as a result of new
product introductions by competitors, price competition, technological change,
inability to provide enhancements on a timely basis or otherwise, could have a
material adverse effect on the Company's business, results of operations and
financial condition.
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Dependence on Strategic Relationships. A major component of the Company's
strategy involves the establishment of strategic relationships with
telecommunications equipment providers and telecommunications service
providers to leverage these entities' distribution networks. The failure of
the Company to establish these relationships would have a material adverse
effect on the Company's growth prospects. Yurie has entered into private-label
partner agreements with Bay Networks, Lucent Technologies and Ericsson. These
agreements permit each of Bay, Lucent and Ericsson to market and sell the
Company's LDR products into commercial and government markets for three years,
subject to renewal. None of these agreements have minimum purchase guarantees.
Previously, under the AT&T Agreement, AT&T held an exclusive license to sell
Yurie products in government markets, and had agreed to certain minimum
purchase guarantees. In response to the interest expressed by other parties to
sell Yurie products in both commercial and government markets, Yurie and AT&T
amended the AT&T Agreement on November 3, 1997. Under this amendment, AT&T no
longer has an exclusive license to sell Yurie's products in government
markets, nor is it required to make minimum annual purchases. Sales to AT&T
represented 52.4%, 71.8% and 87.0% of the Company's revenue during 1994, 1995
and 1996, respectively. For the nine months ended September 30, 1997, sales to
AT&T represented 25.8% of the Company's revenue. If the Company fails to
replace the sales that would have been made to AT&T under its minimum purchase
requirements with sales to other customers, there could be a material adverse
effect on the Company's business, results of operations and financial
condition.
Dependence on Related Party Sales. During 1997, the Company made substantial
product sales to Splitrock. Kwok L. Li, the Chief Technology Officer and Vice
Chairman of the Board of Yurie, is the majority shareholder and Chairman of
the Board of Splitrock. During the first nine months of 1997, Splitrock
purchased $11.5 million of LDR products from the Company, and sales to
Splitrock accounted for approximately 34.5% of the Company's gross revenue
during that period. The Splitrock Agreement requires Splitrock to purchase a
minimum of $20.0 million of LDR products from the Company in the period from
July 1997 to December 1998. Through September 30, 1997 Splitrock had purchased
$6.6 million of LDR equipment under the Splitrock Agreement. Sales to
Splitrock in the fourth quarter of 1997 totaled approximately $5.9 million,
approximately $5.0 million of which Splitrock purchased or leased from
Ericsson. These purchases or leases by Splitrock of LDR products from Ericsson
will be credited against Splitrock's minimum purchase guarantee under the
Splitrock Agreement. The failure of Splitrock to purchase the remainder of its
guaranteed minimum of LDR products would have a material adverse effect on the
Company's business, results of operations and financial condition.
Rapid Technological Development; New Products; Product Errors. The market
for the Company's products is generally characterized by rapidly changing
technology, evolving industry standards and frequent new product introductions
that can render existing products obsolete or unmarketable. The Company's
success will depend to a substantial degree upon its ability to develop and
introduce in a timely fashion, enhancements to its existing products and new
products that meet changing customer requirements and emerging industry
standards. The failure of the Company to introduce new products and respond to
industry changes on a timely basis could have a material adverse effect on the
Company's business, results of operations and financial condition.
The development of new, technologically advanced products is a complex and
uncertain process requiring high levels of innovation, as well as the accurate
anticipation of technological and market trends. Furthermore, the introduction
and marketing of new or enhanced products require the Company to manage the
transition from existing products in order to minimize disruption in customer
purchasing patterns. There can be no assurance that the Company will be
successful in developing and marketing, on a timely basis, new products or
product enhancements, that its new products will adequately address the
changing needs of the marketplace, or that it will successfully manage the
transition from existing products. Nor can there be any assurance that the
Company will be able to identify, develop, manufacture or support new products
successfully, that such new products will gain market acceptance or that the
Company will be able to respond effectively to technological changes, emerging
industry standards or
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product announcements by competitors. In addition, the Company has on occasion
experienced delays in the introduction of product enhancements and new
products. There can be no assurance that in the future the Company will be
able to introduce product enhancements or new products on a timely basis.
Products as complex as those offered by the Company may contain undetected
errors or failures when first introduced or as new versions are released, and
such errors have occurred in the Company's products in the past. There can be
no assurance that, despite testing by the Company and by current and potential
customers, errors will not be found in new products after commencement of
commercial shipments. The occurrence of such errors could result in the loss
or delay in market acceptance of the Company's products, diversion of
development resources, damage to the Company's reputation or increased service
or warranty costs, any of which could have a material adverse effect upon the
Company's business, financial condition and results of operations.
Furthermore, from time to time, the Company may announce new products,
capabilities or technologies that have the potential to replace or shorten the
life cycle of the Company's existing product offerings. There can be no
assurance that announcements of product enhancements or new product offerings
will not cause customers to defer purchasing existing Company products or
cause resellers to return products to the Company. Failure to introduce new
products or product enhancements effectively and on a timely basis, customer
delays in purchasing products in anticipation of new product introductions and
any inability of the Company to respond effectively to technological changes,
emerging industry standards or product announcements by competitors, could
have a material adverse effect on the Company's business, operating results
and financial condition.
Highly Competitive and Consolidating Market. Although the market for ATM
access products is still evolving, the Company anticipates that it will become
intensely competitive. The Company's direct competitors include ADC Kentrox
and 3Com. Each of these companies has already produced ATM access products
that are directly competitive with the Company's products. In addition, Ascend
Communications has developed an ATM access product that will be directly
competitive with the Company's products. Other companies, including Cisco
Systems/StrataCom, Nortel, General DataComm, Digital Link, Fore Systems and
Newbridge Networks have developed networking equipment that may be competitive
with the Company's products. The Company expects that some or all 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. In addition, companies with interests
in other segments of the ATM market, such as central office equipment vendors,
cable television operators and long-distance telephone carriers, may seek to
apply their expertise to the ATM markets served by the Company.
The entrance of new competitors would be likely to intensify competition in
the ATM access market. Some of the Company's current and possible future
competitors have greater financial, technical, marketing and other resources
than the Company, and some have well established relationships with current
and potential customers of the Company. It is also possible that alliances
among competitors may emerge and rapidly acquire significant market share or
that competition will increase as a result of networking industry
consolidation. Increased competition may result in price reductions, reduced
profitability and loss of market share, any of which would have a material
adverse effect on the Company's business, results of operations and financial
condition.
In addition, there has recently been an increase in acquisitions by large,
well-established networking companies of smaller networking companies that
possess technology that will allow the larger companies to offer a more
complete product line. Among the companies that have announced or completed
acquisitions are Cisco Systems, Bay Networks, Cabletron Systems, Fore Systems,
Ascend Communications and 3Com. Consolidation within the industry could lead
to even greater competition than currently exists. In addition, the ability of
these larger companies to offer customers total networking solutions from one
vendor in the future may have a material adverse effect on the Company's
sales.
9
<PAGE>
Fluctuations in Quarterly and Annual Operating Results. The Company may
experience significant fluctuations in future quarterly and annual operating
results. Fluctuations may be caused by many factors, including the timing of
new product introductions or technological advances by the Company or its
competitors; market acceptance of enhanced or new versions of the Company's
products, including the LDR200 and the LDR50; the size and timing of
individual orders of the Company's products; price reductions by the Company
or its competitors; changes in the distribution channels through which the
Company's products are sold; the addition or loss of significant customers;
the mix of the products sold by the Company; the ability of the Company to
obtain sufficient supplies of sole or limited source components for the
Company's products; and general economic conditions. Quarterly fluctuations in
purchase orders by Splitrock, and the Company's private label partners, such
as Lucent, Bay and Ericcson, or inventory buildups by such customers, also
will cause fluctuations in the Company's operating results. In addition,
changes in the mix of the products sold by the Company or the distribution
channels through which the Company's products are sold may cause fluctuations
in the Company's gross and operating margins. Also, the Company's anticipated
operating expense levels are based, in part, on its expectations as to future
revenue and, as a result, net income may be disproportionately affected by a
reduction in revenue.
The Company has recently experienced a period of revenue growth and a
substantial increase in orders, customers and employees. This growth, however,
is not necessarily indicative of future results. In addition, in view of the
significant growth of the Company's operations in the past three years, the
Company believes that period-to-period comparisons of its financial results
should not be relied upon as an indication of future performance. The Company
has not experienced seasonal trends to date, but the Company's business,
operating results and financial condition may be affected by such trends in
the future. Fluctuations in operating results may result in volatility in the
price of the Company's Common stock. See "Risk Factors--Potential Volatility
of Stock Price."
Management of Growth. The Company's growth has placed, and will continue to
place, strains on its management, operations and systems. To manage its
growth, the Company must continuously evaluate the adequacy of its existing
systems and procedures, including its financial and internal control systems
and management structure. There can be no assurance that the Company's
management will adequately anticipate all of the changing demands that growth
will impose on the Company's systems, procedures and structure. Any failure by
the Company's management to anticipate effectively, implement and manage the
changes required to sustain the Company's growth would have a material adverse
effect on the Company.
Data Labs Merger. Although Yurie expects that the Data Labs Merger will
result in beneficial synergies in the operations and technologies of Yurie and
Data Labs, achieving the anticipated effects of the Data Labs Merger will
depend in part upon whether the integration of the two companies' businesses,
technologies and key personnel is accomplished in an effective and efficient
manner, an outcome which cannot be assured. Achieving these anticipated
synergies will also depend on a number of other factors, including, without
limitation, industry-specific economic factors and Yurie's ability to market
and sell Data Labs' product, the LDR 5, to new customers. Yurie was Data Labs'
largest customer for the year ended December 31, 1997. There can be no
assurance that the anticipated beneficial synergies will be achieved or that
sales of the LDR5 will be significant to the Company's operations. The Data
Labs Merger was dilutive to earnings by approximately $.01 per share for the
quarter ended December 31, 1997, before any one time charges related to
transaction costs and expenses.
Dependence on Proprietary Technology. The Company's ability to compete
successfully will depend, in part, on its ability to protect the proprietary
technology contained in its products. The Company currently relies upon a
combination of trade secret, copyright, patent and trademark laws, as
10
<PAGE>
well as contractual restrictions, to establish and protect its proprietary
rights. The Company also seeks to enter into non-competition, proprietary
information and assignment of invention agreements with its employees and non-
disclosure agreements with certain of its suppliers, distributors and
customers that are designed to limit access to and disclosure of its
proprietary information. There can be no assurance that these statutory and
contractual arrangements can effectively deter misappropriation of the
Company's technology or independent third-party development of competing
technologies.
The Company has one issued patent for its LANET protocol. The Company has
made the technology covered by the LANET patent available in unmodified form,
at no cost to the public, in the belief that this release 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 for a method to simplify authentication and key exchange in the
establishment of secure data links. There can be no assurance that the
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
competing 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. Defense of
patents can be very costly and unsuccessful patent litigation could have a
material adverse effect on the Company's competitive position. In addition,
there can be no assurance that third parties will not accuse the Company of
patent infringement with respect to current or future products. Any such
claims could require the Company to spend significant sums in litigation, pay
damages, develop non-infringing technology or acquire technology licenses.
Also, effective copyright and trade secret protection may not be available in
every foreign country in which the Company's products are or may be deployed.
Dependence on Manufacturers and Suppliers. Yurie relies on three
manufacturers, Sanmina Corporation, Teledyne Electronic Technologies and
Kuchera Industries, Inc., to manufacture the majority of its common equipment
circuit packs, backplanes, chassis and printed circuit board assemblies used
in the Company's products. Yurie does not have contracts with these or any
other manufacturers, and all of the Company's products are manufactured
pursuant to individual purchase orders. The Company believes that its orders
do not represent a significant portion of these subcontract manufacturers'
total business. 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
believes that its strategy of using subcontract manufacturers has increased
its flexibility and responsiveness to changes, as it is in a better position
to reduce product costs, acquire additional capacity and reduce its capital
investment. It is, however, currently relying on a limited number of
manufacturers, and if one or more of these manufacturers should experience
quality or other problems, such problems could result in delays in product
shipments by the Company. To the extent the Company would be required to find
replacements for its manufacturers, a change in manufacturers could result in
short term cost increases and time delays in deliveries of finished
assemblies, which could have a material adverse effect on the Company's
business and operating results and possibly on its relationships with
customers. While Yurie maintains some level of safety stock on critical
components and some level of reserve inventory, these levels would not be
sufficient to meet increases in demand occurring simultaneously with delayed
deliveries from manufacturers.
Certain components used in the Company's products, including microprocessors
and communications chips that are manufactured by PMC-Sierra, Inc., Hewlett-
Packard Company, Integrated Device Technology, Inc., Xilinx, Inc., Texas
Instruments, Analog Devices and Altera Corporation, are currently available
from only one supplier. In the past, the Company has experienced shortages of
certain of these components because of vendor production problems and the
inability of suppliers to increase delivery rates to meet the Company's
requirements. In addition, the Company has experienced shortages
11
<PAGE>
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 used in the Company's products require an order lead time
of up to 16 weeks. Other components that currently are readily available may
become difficult to obtain in the future. Failure of the Company to predict
accurately its required quantities of these long lead time components could
result in either shortages or excess inventory of such components, which could
have a material adverse effect on the Company's business and operating
results.
Any extended delay in deliveries of components or of finished printed
circuit board assemblies would have a material adverse effect on the Company's
business and operating results and possibly on its relationships with
customers. Although Yurie typically maintains some reserve inventory of
components, this inventory would not cover a significant delay in the delivery
of such components.
Dependence on Key Personnel. The Company's success depends to a significant
extent upon a number of key technical and management employees, including
Jeong H. Kim, the Company's Chief Executive Officer and Chairman of the Board
of Directors, Kwok L. Li, the Company's Vice Chairman of the Board and Chief
Technical Officer, Harry J. Carr, the Company's President, Chief Operating
Officer and a Director, and Barton Y. Shigemura, the Company's Senior Vice
President of Sales and Marketing and a Director. Mr. Li is the majority
shareholder and Chairman of the Board of Splitrock and, as such, devotes a
significant amount of time to Splitrock. The loss of the services of any of
the Company's key employees could have a material adverse effect on the
Company. Mr. Carr has served in his position only since June 1997. As a
result, key members of the Company's management team have worked together for
only a short time. In addition, the Company believes that its future success
will depend in large part upon its ability to attract and retain additional
highly-skilled technical, managerial, sales and marketing personnel.
Competition for such personnel, especially engineers, is intense and
competitors often employ aggressive tactics to recruit key employees. There
can be no assurance that the Company will be successful in attracting, hiring,
integrating and retaining the personnel that it requires.
Compliance with Regulations and Evolving Industry Standards. The Company's
products must meet a significant number of voice and data communications
regulations and standards, some of which are evolving as new technologies are
deployed. In the U.S., the Company's products must comply with various
regulations defined by the Federal Communications Commission and Underwriters
Laboratories, as well as standards established by Bell Communications Research
("Bellcore"). Internationally, the Company's products must comply with
standards established by telecommunications authorities in various countries,
as well as with recommendations of the International Telecommunications Union
("ITU"). In addition, telecommunications service providers require that
equipment connected to their networks comply with their own standards, which
may vary from industry standards. A delay in obtaining, or the failure to
obtain, certification of its products domestically or in countries outside of
the U.S. could delay or preclude the Company's sales and marketing efforts,
which could have a material adverse effect on the Company's business and
operating results.
Industry standards for ATM technology are still evolving. One of the bodies
setting industry standards is the ATM Forum, a group of industry participants
including equipment manufacturers, telecommunications service providers and
end users. As these standards evolve, the Company will be required to modify
its products or develop and support new versions of its products. The failure
of the Company's products to comply, or delays in achieving compliance, with
the various existing and evolving industry standards could delay introduction
of the Company's products, which could have a material adverse effect on the
Company's business and operating results.
Government regulatory policies are likely to continue to have a major impact
on the pricing of both existing and new public network services and therefore
are expected to affect demand for such services
12
<PAGE>
and the telecommunications products that support such services. Tariff rates,
whether determined autonomously by telecommunications service providers or in
response to regulatory directives, may affect the cost effectiveness of
deploying public network services. Tariff policies are under continuous review
and are subject to change. User uncertainty regarding future policies may also
affect demand for telecommunications products, including the Company's
products.
Risks Associated With International Sales and Currency Exchanges. Less than
1% of the Company's revenue in each of the years ended December 31, 1994,
December 31, 1995 and December 31, 1996, was derived from orders from
international customers. In the nine months ended September 30, 1997, 11.0% of
the Company's revenue was derived from orders from international customers.
The Company intends to continue its sales and marketing efforts outside of the
U.S. and may enter into international markets, which will require significant
management attention and financial resources. Currently, Yurie maintains
offices in Korea and the U.K. Conducting business outside of the U.S. is
subject to certain risks, including longer payment cycles, unexpected changes
in regulatory requirements and tariffs, difficulties in staffing and managing
foreign operations, greater difficulty in accounts receivable collection and
potentially adverse tax consequences. Moreover, gains and losses on the
conversion to U.S. dollars of accounts receivable not denominated in U.S.
dollars and accounts payable arising from international operations may
contribute to fluctuations in the Company's business and operating results.
Should the Company have a material amount of such sales or purchase
obligations that are denominated in foreign currency in the future, the
Company may engage in currency hedging activities or derivative arrangements.
Fluctuations in exchange rates could affect demand for the Company's products.
For instance, the recent devaluations of certain currencies in Asia, including
the Korean won, could adversely effect the Company's ability to sell LDR
products in that region. The imposition of exchange or price controls or other
restrictions on foreign currencies could have a material adverse effect on the
Company's business and operating results. If the Company increases its
international sales, its revenue may also be affected to a greater extent by
seasonal fluctuations resulting from lower sales that typically occur during
the summer months in Europe and other parts of the world.
Potential Stock Price Volatility. The market price of the Company's common
stock may be volatile. Factors such as fluctuations in the Company's operating
results, announcements of technological innovations or new products by the
Company or its competitors, developments with respect to patents or
proprietary rights, and general market conditions may have a significant
effect on the market price of the common stock. Further, the stock market has
experienced volatility that has particularly affected the market prices of
equity securities of many high technology companies and that often has been
unrelated or disproportionate to the operating performance of such companies.
General Economic Conditions. Demand for the Company's products depends in
large part on the overall demand for communications and networking products,
which has in the past and may in the future fluctuate significantly based on
numerous factors, including capital spending levels and general economic
conditions. There can be no assurance that the Company will not experience a
decline in demand for its products due to general economic conditions. Any
such decline would have a material adverse effect on the Company's business,
operating results and financial condition.
Control by Current Stockholders. Directors and executive officers of the
Company and their affiliates currently own beneficially approximately 69.0% of
the outstanding common stock. As a result, these stockholders are able to
elect a majority of the Company's Board of Directors and approve all matters
requiring stockholder approval, and will have significant control over the
Company and the conduct of its business. Such concentration of ownership may
have the effect of delaying, deferring or preventing a change in control of
the Company.
Shares Eligible for Future Sale. Sales of substantial amounts of the common
stock of the Company in the public market, or the prospect of such sales,
could have a material adverse affect on the market
13
<PAGE>
price of the common stock. As of December 31, 1997, there were 25,316,468
shares of common stock outstanding, and upon the exercise of the Oneline
Option, there will be 25,336,468 shares of common stock outstanding. Of these
shares, approximately 17,471,382 shares are held by "affiliates" (as that term
is defined in Rule 144 under the Securities Act) and are eligible for sale in
accordance with the volume and manner of sale restrictions under Rule 144.
The Company has registered on Form S-8 under the Securities Act 7,000,000
shares of common stock issued or reserved for issuance under the Stock Option
Plan and the Data Labs Plan, 200,000 shares of common stock issued or reserved
for issuance under the Stock Purchase Plan and 200,000 shares of common stock
issued or reserved for issuance under the 401(k) Plan. As of December 31,
1997, there were outstanding options to purchase 5,622,229 shares of common
stock under the Stock Option Plan, outstanding options purchase 27,233 shares
of common stock under the Data Labs Plan, 186,233 shares of common stock
reserved for future issuance under the Stock Purchase Plan and 194,479 shares
of common stock reserved for future issuance under the 401(k) Plan. Shares
registered and issued pursuant to the Form S-8 registration statement will be
freely tradable except to the extent that the holders thereof are deemed to be
affiliates of the Company, in which case the transferability of such shares
will be subject to the volume limitations set forth in Rule 144 under the
Securities Act.
Absence of Dividends. The Company has never paid a cash dividend on its
common stock. The payment of cash dividends on the common stock is unlikely
for the foreseeable future.
Antitakeover Effects of Certain Charter, Bylaws and Other
Provisions. Certain provisions of the Company's Certificate of Incorporation
("Certificate") and Bylaws and Delaware law could have the effect of making it
more difficult for a third party to acquire, or discouraging a third party
from attempting to acquire, control of the Company. Such provisions could
limit the price that certain investors might be willing to pay in the future
for shares of the Company's common stock. Certain of such provisions allow the
Company to issue preferred stock with rights senior to those of the common
stock and impose various procedural and other requirements which could make it
more difficult for stockholders to effect certain corporate actions. In
addition, the Company is subject to the provisions of Section 203 of the
Delaware General Corporation Law ("DGCL").
USE OF PROCEEDS
This Prospectus relates to shares of Common Stock that may be offered from
time to time by the Selling Stockholders. See "Plan of Distribution" and
"Selling Stockholders." The Company will receive none of the proceeds from the
sale of the Common Stock offered hereby by the Selling Stockholders.
The Company may, however, receive cash proceeds to the extent the Oneline
Option is exercised. If the Oneline Option is exercised in full, as to which
there can be no assurance, the net proceeds to the Company would be
approximately $240,000. The Company would use these proceeds, if any, for
general corporate purposes including working capital. See "Selling
Stockholders."
14
<PAGE>
SELLING STOCKHOLDERS
The following table sets forth information known to the Company with respect
to the beneficial ownership of common stock as of December 31, 1997 by the
Selling Stockholders. The table sets forth the number of shares of common
stock beneficially owned by each Selling Stockholder, the percentage of
outstanding shares beneficially owned, and the number of shares offered for
sale in this offering. Unless otherwise indicated, the person or persons named
have sole voting and investment power.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY
OWNED PRIOR TO
OFFERING(1)
--------------------
SHARES TO
NAME NUMBER PERCENT(2) BE OFFERED
- ---- --------- ---------- ----------
<S> <C> <C> <C>
Kenneth D. Brody(3)........................ 822,150 3.2 798,400
Amerindo Technology Growth Fund, Inc.(4)... 2,926,100 11.5 1,000,000
Oneline Management, Inc.(5)................ 20,000 * 20,000
Bessemer Venture Partners IV L.P. ......... 101,706 * 101,706
Edision Venture Fund III, L.P. ............ 96,686 * 96,686
Wenli Yu................................... 87,824 * 87,824
Raul Montalvo.............................. 5,855 * 5,855
Christopher Gabrieli....................... 4,124 * 4,124
G. Felda Hardymon.......................... 3,866 * 3,866
BVP IV Special Situations, L.P. ........... 3,428 * 3,428
Thomas H. Jones............................ 3,174 * 3,174
Jack L. Lewis.............................. 2,442 * 2,442
William T. Burgin.......................... 1,933 * 1,933
Brimstone Island Co. L.P. ................. 1,933 * 1,933
Michael I. Barach.......................... 1,933 * 1,933
Bradford Mills............................. 1,933 * 1,933
G&H Partners............................... 1,933 * 1,933
John R. Peeler............................. 1,744 * 1,744
Jenny Zhou................................. 1,463 * 1,463
Ken Lee.................................... 1,394 * 1,394
David J. Cowan............................. 1,160 * 1,160
Gautam A. Prakash.......................... 1,160 * 1,160
Richard R. Davis........................... 1,160 * 1,160
Quentin Corporation........................ 1,160 * 1,160
Mark Jung.................................. 1,160 * 1,160
Igor Sill.................................. 1,160 * 1,160
John F. Imber.............................. 1,046 * 1,046
Neil H. Brownstein......................... 773 * 773
Robert H. Buescher......................... 773 * 773
Belisarous Corporation..................... 773 * 773
Robi Soni.................................. 695 * 695
Barbara M. Henagan......................... 617 * 617
Gabrielli Family Foundation................ 457 * 457
Joanna A. Strober.......................... 386 * 386
Ravi B. Mhatre............................. 308 * 308
Diane N. McPartlin......................... 154 * 154
Rodney A. Cohen............................ 154 * 154
Adam P. Godfrey............................ 154 * 154
Russell D. Sternlicht...................... 154 * 154
Robert J.S. Roriston....................... 115 * 115
Thomas F. Ruhm............................. 76 * 76
</TABLE>
15
<PAGE>
- --------
* Less than 1%.
(1) Includes shares issuable pursuant to options exercisable currently or
within 60 days of December 31, 1997.
(2) Applicable percentage is based on 25,316,468 shares of common stock
outstanding on December 31, 1997 and assumes exercise of the Oneline
Option.
(3) Includes 798,400 shares subject to an option held by Mr. Brody to purchase
798,400 shares of common stock from Dr. Kim. The option originally covered
1,000,000 shares of common stock; however, as of December 31, 1997, Mr.
Brody had exercised the option as to 201,600 shares of common stock. For
purposes of this table, and until Mr. Brody exercises his option to
purchase the remaining 798,400 shares, Dr. Kim and Mr. Brody share
beneficial ownership of these shares of common stock. Mr. Brody has served
as a director of Yurie since June 1996.
(4) On November 7, 1996, prior to the Company's initial public offering,
Amerindo Technology Growth Fund ("Amerindo"), Inc. purchased an aggregate
of 1,000,000 shares of common stock of the Company from the Company
(400,000 shares), Dr. Jeong Kim (500,000 shares) and Mr. Kwok Li (100,000
shares). Amerindo received registration rights in connection with the
stock it purchased in these transactions.
(5) Represents shares to be issued upon the exercise of the Oneline Option.
The Oneline Option was granted by the Company to Oneline in April 1997 and
expires in April 1998.
Because the Selling Stockholders may sell all or some of the Common Stock
which they hold pursuant to this Prospectus, no estimate can be given as to
the aggregate amount of shares of Common Stock that are to be offered hereby
or that will be owned by the Selling Stockholders upon completion of the
offering to which this Prospectus relates. Accordingly, the aggregate amount
of Common Stock offered hereby may decrease. In addition, the Selling
Stockholders identified above may have sold, transferred or otherwise disposed
of all or a portion of their Common Stock since the date on which they
provided the information regarding their Common Stock, in transactions exempt
from the registration requirements of the Securities Act. See "Plan of
Distribution."
PLAN OF DISTRIBUTION
The purpose of this Prospectus is to permit the Selling Stockholders, if
they desire, to dispose of some or all of their shares of Common Stock, on a
delayed or continuous basis. Whether offers and sales will be made pursuant to
this Prospectus, and the timing and amount of any offers or sales that are
made, is and will be within the sole discretion of the Selling Stockholders.
Most of the Selling Stockholders are currently not eligible to dispose of
their shares pursuant to Rule 144 under the Securities Act and will not be
eligible to make such sales until they have satisfied the one-year holding
period under Rule 144. Amerindo's one-year holding period expired on November
6, 1997. Each of Mr. Brody's and Oneline's holding periods will expire one
year after they exercise their options. The one-year holding period for each
of the remaining Selling Stockholders, each of whom received its shares
pursuant to the Data Labs Merger (the "Data Labs Holders"), will expire on
December 1, 1998.
If the Selling Stockholders determine, in their discretion, to make sales
pursuant to this Prospectus, they may sell the shares being offered hereby
from time to time (i) through dealers or in ordinary broker transactions, in
the over-the-counter market or otherwise, (ii) "at the market" to or through
marketmakers or into an existing market for the shares, (iii) in other ways
not involving marketmakers or established trading markets, including direct
sales to purchasers or effected through agents, or (iv) in combinations of any
such methods of sale (which may involve block transactions), subject to
applicable state and federal securities laws. One or more of the Selling
Stockholders may coordinate sales of stock pursuant to this registration
statement with sales pursuant to Rule 144 by other stockholders of the
Company. The shares will be sold at market prices prevailing at the time of
sale or negotiated prices. In connection with the distributions of the common
stock or otherwise, the Selling Stockholders may enter into hedging
16
<PAGE>
transactions with broker-dealers or other financial institutions. In
connection with such transactions, broker-dealers or other financial
institutions may engage in short sales of common stock in the course of
hedging the positions they assume with the Selling Stockholders. The Selling
Stockholders may also sell common stock short and redeliver the shares to
close out such short positions. The Selling Stockholders may also enter into
options or other transactions with broker-dealers or other financial
institutions which require the delivery to such broker-dealers or financial
institutions of the common stock offered hereby, which common stock such
broker-dealer or other financial institutions may resell pursuant to this
Prospectus (as supplemented or amended to reflect this transaction). The
Selling Stockholders may also pledge the shares registered hereunder to a
broker-dealer or other financial institution who may effect sales of the
pledged common stock pursuant to this Prospectus (as supplemented or amended
to reflect such transaction). In addition, any shares covered by this
Prospectus which qualify for sale pursuant to Section 4(1) of the Securities
Act or Rule 144 thereunder may be sold under such provisions rather than
pursuant to this Prospectus.
If a dealer is utilized in the sale of the shares in respect of which the
Prospectus is delivered, sales will be made by the Selling Stockholders to or
through a marketmaker, acting as principal or as agent. Other sales may be
made, directly or through an agent, to purchasers outside existing trading
markets. A selling broker may act as agent or may acquire the shares, warrants
or interests therein, as principal or pledgee and may, from time to time,
effect distributions of such sales.
In connection with this offering, the Company will pay all expenses of
preparing and filing the registration statement, including, without
limitation, registration and filing fees, printing expenses, fees and
disbursements of legal counsel and accountants for the Company, transfer
agents' and registrars' fees, fees and disbursements of experts used by the
Company in connection with such registration, expenses of any special audits
of the Company incidental to or required by such registration, and expenses
incidental to any post-effective amendment to any such registration statement.
The Company is also required to pay legal expenses, if any, of one of the
Selling Stockholders not to exceed $10,000.
All dealers', brokers', or agents' commissions, concessions, discounts, fees
or other compensation will be paid by the Selling Stockholders.
The Company has advised the Selling Stockholders that, during such time as
they may be engaged in a distribution of the Shares included herein, they are
required to comply with Regulation M promulgated under the Exchange Act. With
certain exceptions, Regulation M precludes any Selling Stockholder, any
affiliated purchasers and any broker-dealer or other person who participates
is such distribution from bidding for or purchasing, or attempting to induce
any person to bid for or purchase any security which is the subject of the
distribution until the entire distribution is complete. Regulation M also
prohibits any bids or purchases made in order to stabilize the price of a
security in connection with the distribution of that security. All of the
foregoing may affect the marketability of the common stock.
No sales or distributions other than as described herein may be effected
until after this Prospectus shall have been appropriately amended or
supplemented.
17
<PAGE>
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby was passed upon
for the Selling Stockholders by Fried, Frank, Harris, Shriver & Jacobson,
Washington, DC.
EXPERTS
The financial statements of the Company as of December 31, 1995 and 1996 and
for each of the three years ended December 31, 1994, 1995 and 1996
incorporated by reference in this Prospectus have been audited by Deloitte &
Touche LLP, independent auditors, as stated in their report that is
incorporated herein by reference, and have been so incorporated in reliance
upon the report of such firm given upon their authority as experts in
accounting and auditing. The supplemental consolidated financial statements as
of December 31, 1995 and 1996 and for the three years ended December 31, 1994,
1995 and 1996 included herein have been audited by Deloitte & Touche, LLP,
independent auditors, as stated in their report appearing herein and are
included in reliance upon reports of such firm given upon their authority as
experts in accounting and auditing.
The financial statements of Data Labs as of December 31, 1995 and 1996 and
for each of the two years ended December 31, 1995 and 1996 incorporated by
reference to the 8-K Report, dated December 9, 1997, in this Prospectus and
elsewhere in the Registration Statement have been audited by Arthur Andersen
LLP, independent public accountants, as indicated in their reports with
respect thereto, and have been so incorporated in reliance upon the authority
of said firm as experts in giving such reports.
18
<PAGE>
INDEX TO FINANCIAL STATEMENTS
SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS FOR YURIE SYSTEMS, INC. AND
SUBSIDIARIES AS OF DECEMBER 31, 1995 AND 1996 AND FOR THE THREE YEARS ENDED
DECEMBER 31, 1996:
<TABLE>
<S> <C>
Independent Auditors' Report.............................................. F-2
Supplemental Consolidated Balance Sheets as of December 31, 1995 and
1996..................................................................... F-3
Supplemental Consolidated Statements of Operations for the Two Years Ended
December 31, 1994, 1995 and 1996......................................... F-4
Supplemental Consolidated Statements of Stockholders' Equity (Deficit) for
the Two Years Ended December 31, 1994, 1995 and 1996..................... F-5
Supplemental Consolidated Statements of Cash Flows for the Two Years Ended
December 31, 1994, 1995 and 1996......................................... F-6
Notes to Supplemental Consolidated Financial Statements................... F-7
</TABLE>
SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS FOR YURIE SYSTEMS, INC. AND
SUBSIDIARIES AS OF SEPTEMBER 30, 1997 (UNAUDITED) AND DECEMBER 31, 1996
(UNAUDITED) AND FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997
(UNAUDITED):
<TABLE>
<S> <C>
Supplemental Consolidated Balance Sheets as of September 30, 1997 and
December 31, 1996 (Unaudited) ........................................... F-14
Supplemental Consolidated Statements of Operations for the Three and Nine
Months Ended September 30, 1997 and 1996 (Unaudited)..................... F-15
Supplemental Consolidated Statements of Cash Flows for the Three and Nine
Months Ended September 30, 1997 and 1996 (Unaudited)..................... F-16
Notes to Supplemental Consolidated Financial Statements................... F-17
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of Yurie Systems, Inc.
We have audited the accompanying supplemental consolidated balance sheets of
Yurie Systems, Inc. and subsidiaries (the "Company") (formed as a result of
the merger of Yurie Systems, Inc. and Data Labs, Inc.) as of December 31, 1995
and 1996, and the related supplemental consolidated statements of operations,
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 1996. These supplemental consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these supplemental consolidated financial statements
based on our audits. The supplemental consolidated financial statements give
retroactive effect to the merger of the Company and Data Labs, Inc., which has
been accounted for as a pooling of interests as described in Note 13 to the
supplemental consolidated financial statements. We did not audit the balance
sheets of Data Labs, Inc. as of December 31, 1995 and 1996, or the related
statements of operations, stockholders' equity and cash flows of Data Labs,
Inc. for the years then ended, which statements reflect total assets of
$136,698 and $2,317,625 as of December 31, 1995 and 1996, respectively, and
total revenues of $651,192 and $112,318, for the years ended December 31, 1995
and 1996, respectively. Those statements were audited by other auditors whose
report has been furnished to us, and our opinion, insofar as it relates to the
amounts included for Data Labs, Inc. for 1995 and 1996, is based solely on the
report of such other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits and the report of the other
auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors,
the supplemental consolidated financial statements referred to above present
fairly, in all material respects, the supplemental consolidated financial
position of Yurie Systems, Inc. and subsidiaries as of December 31, 1995 and
1996, and the supplemental consolidated results of their operations and their
cash flows for each of the three years in the period ended December 31, 1996,
after giving retroactive effect to the merger of Data Labs, Inc., as described
in the notes to the supplemental consolidated financial statements, in
conformity with generally accepted accounting principles.
January 30, 1998
F-2
<PAGE>
YURIE SYSTEMS, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1995 1996
---------- -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents........................... $3,802,556 $ 5,245,321
Accounts receivable--trade.......................... 1,235,292 4,939,206
Accounts receivable--other.......................... 2,828 54,154
Inventory........................................... 654,447 2,573,559
Deferred offering costs............................. -- 910,442
Deferred income taxes............................... -- 475,214
Prepaid expenses.................................... 8,836 410,200
---------- -----------
Total current assets.............................. 5,703,959 14,608,096
---------- -----------
PROPERTY AND EQUIPMENT:
Furniture and equipment............................. 99,744 220,360
Software............................................ 50,622 355,168
Computer and office equipment....................... 570,321 2,064,471
---------- -----------
Total property and equipment...................... 720,687 2,639,999
Less accumulated depreciation and amortization...... (117,219) (398,728)
---------- -----------
Net property and equipment........................ 603,468 2,241,271
---------- -----------
OTHER ASSETS.......................................... 20,938 57,756
---------- -----------
TOTAL ASSETS...................................... $6,328,365 $16,907,123
========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.................................... $ 295,591 $ 2,013,839
Accrued liabilities................................. 293,704 3,249,972
Unearned revenue.................................... 4,000,000 --
Deferred income taxes............................... 64,995 --
Income taxes payable................................ 432,059 --
---------- -----------
Total current liabilities......................... 5,086,349 5,263,811
ACCRUED RENT.......................................... 25,661 14,932
DEFERRED INCOME TAXES................................. -- 19,310
CAPITAL LEASE OBLIGATIONS............................. -- 38,210
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, 20,566,814 shares at
December 31, 1995 and 20,966,814 shares at December
31, 1996........................................... 205,668 209,668
Additional paid-in capital.......................... 119,604 8,046,437
Retained earnings................................... 891,083 3,314,755
---------- -----------
Total stockholder's equity........................ 1,216,355 11,570,860
---------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY........ $6,328,365 $16,907,123
========== ===========
</TABLE>
See notes to supplemental consolidated financial statements.
F-3
<PAGE>
YURIE SYSTEMS, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1994 1995 1996
---------- ---------- -----------
<S> <C> <C> <C>
REVENUE:
Product revenue........................... $ 5,075 $2,879,882 $18,737,693
Service revenue........................... 1,292,393 2,633,916 2,527,823
Other revenue............................. -- 1,108,333 391,667
---------- ---------- -----------
Total revenue........................... 1,297,468 6,622,131 21,657,183
COSTS OF REVENUE:
Cost of product revenue................... 3,045 1,328,966 6,806,202
Cost of service revenue................... 736,997 1,330,102 1,666,312
---------- ---------- -----------
Total cost of revenue................... 740,042 2,659,068 8,472,514
---------- ---------- -----------
GROSS PROFIT................................ 557,426 3,963,063 13,184,669
OPERATING EXPENSES:
Research and development.................. 49,383 562,597 4,427,810
Sales and marketing....................... 22,302 4,701 1,880,019
General and administrative................ 314,114 1,870,639 2,980,320
---------- ---------- -----------
Total operating expenses................ 385,799 2,437,937 9,288,149
---------- ---------- -----------
INCOME FROM OPERATIONS...................... 171,627 1,525,126 3,896,520
Other income.............................. 1,583 (1,776) 90,634
---------- ---------- -----------
INCOME BEFORE INCOME TAXES.................. 173,210 1,523,350 3,987,154
Provision for income taxes................ 43,156 574,685 1,563,482
---------- ---------- -----------
NET INCOME.............................. $ 130,054 $ 948,665 $ 2,423,672
========== ========== ===========
NET INCOME PER COMMON SHARE................. $ 0.01 $ 0.04 $ 0.11
========== ========== ===========
WEIGHTED AVERAGE SHARES OUTSTANDING......... 17,879,393 22,047,049 22,157,786
========== ========== ===========
</TABLE>
See notes to supplemental consolidated financial statements.
F-4
<PAGE>
YURIE SYSTEMS, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED 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................... 16,358,414 $163,584 $ -- $ (187,636) $ (24,052)
Net income............ -- -- -- 130,054 130,054
---------- -------- ---------- ---------- -----------
BALANCE, DECEMBER 31,
1994................... 16,358,414 163,584 -- (57,582) 106,002
Common stock
issuance............. 4,208,400 42,084 119,604 -- 161,688
Net income............ -- -- -- 948,665 948,665
---------- -------- ---------- ---------- -----------
BALANCE, DECEMBER 31,
1995................... 20,566,814 205,668 119,604 891,083 1,216,355
Common stock
issuance............. 400,000 4,000 7,926,833 -- 7,930,833
Net income............ -- -- -- 2,423,672 2,423,672
---------- -------- ---------- ---------- -----------
BALANCE, DECEMBER 31,
1996................... 20,966,814 $209,668 $8,046,437 $3,314,755 $11,570,860
========== ======== ========== ========== ===========
</TABLE>
See notes to supplemental consolidated financial statements.
F-5
<PAGE>
YURIE SYSTEMS, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1994 1995 1996
--------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................... $ 130,054 $ 948,665 $ 2,423,672
Adjustments to reconcile net income to
net cash provided by (used in) operating
activities:
Depreciation........................... 43,436 71,995 281,509
Compensation due to stock issuance..... -- 162,023 --
Deferred income taxes.................. 22,315 42,680 (520,899)
Changes in assets and liabilities:
Accounts receivable.................... (137,943) (1,063,214) (3,755,240)
Inventory.............................. -- (654,447) (1,919,112)
Prepaid expenses....................... (10,665) 2,179 (401,364)
Other assets........................... (15,220) (5,718) (36,818)
Accounts payable and other accrued
expenses.............................. 77,316 342,120 4,674,516
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.............................. 473,062 3,990,252 (3,696,524)
--------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment..... (245,931) (467,882) (1,919,312)
--------- ----------- -----------
Net cash used in investing activities.... (245,931) (467,882) (1,919,312)
--------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Deferred offering costs................ -- -- (910,442)
Capital Lease Obligations.............. -- -- 38,210
Proceeds from issuance of Data Labs
preferred stock....................... -- 48,329 3,130,833
Proceeds from issuance of common
stock................................. -- -- 4,800,000
--------- ----------- -----------
Net cash provided by financing
activities.............................. -- 48,329 7,058,601
--------- ----------- -----------
NET INCREASE IN CASH AND CASH
EQUIVALENTS.............................. 227,131 3,570,699 1,442,765
CASH AND CASH EQUIVALENTS, BEGINNING OF
YEAR..................................... 4,726 231,857 3,802,556
--------- ----------- -----------
CASH AND CASH EQUIVALENTS, END OF YEAR.... $ 231,857 $ 3,802,556 $ 5,245,321
========= =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for income taxes............. $ -- $ 119,166 $ 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 as of December
31, 1996.
In 1996, Data Labs, Inc. entered into capital leases totaling $55,000 for
equipment.
See notes to supplemental consolidated financial statements.
F-6
<PAGE>
YURIE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED 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.
Basis of Presentation--The accompanying supplemental consolidated financial
statements include the accounts of Yurie Systems, Inc. and its subsidiaries,
including Data Labs, Inc. (the "Company"). All significant intercompany
transactions have been eliminated. These supplemental consolidated financial
statements have been restated to give retroactive effect to the merger with
Data Labs, Inc. on December 1, 1997, in a transaction accounted for as a
pooling of interests as if the merger had occurred at the beginning of fiscal
1994. (See note 13). These supplemental consolidated financial statements will
become the historical financial statements of the Company when financial
results for the year ended December 31, 1997 are issued.
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.
F-7
<PAGE>
YURIE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
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).
Reclassifications--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.
In October 1996, Data Labs entered into a line of credit agreement for
$400,000 that matures on April 5, 1998. The line of credit accrues interest at
a rate of prime plus 1 1/2 percent. There were no borrowings outstanding at
December 31, 1996.
F-8
<PAGE>
YURIE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
3. ACCOUNTS RECEIVABLE--TRADE
Trade accounts receivable consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1995 1996
---------- ----------
<S> <C> <C>
Billed.............................................. $ 811,270 $4,174,343
Unbilled............................................ 424,022 764,863
---------- ----------
Total accounts receivable--trade.................. $1,235,292 $4,939,206
========== ==========
4. INVENTORY
Inventory consisted of the following:
<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 48,292
---------- ----------
Total inventory................................... $ 654,447 $2,573,559
========== ==========
5. ACCRUED LIABILITIES
Accrued liabilities consisted of the following:
<CAPTION>
DECEMBER 31,
---------------------
1995 1996
---------- ----------
<S> <C> <C>
Accrued salaries and employee benefits.............. $ 292,811 $1,639,481
Accrued sales and use tax........................... -- 272,784
Warranty accrued.................................... -- 544,306
Deferred offering costs............................. -- 653,000
Other accrued liabilities........................... 893 140,401
---------- ----------
Total accrued liabilities......................... $ 293,704 $3,249,972
========== ==========
</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....................................... $20,841 $533,724 $1,618,468
Deferred...................................... 22,315 40,961 (54,986)
------- -------- ----------
Total....................................... $43,156 $574,685 $1,563,482
======= ======== ==========
</TABLE>
F-9
<PAGE>
YURIE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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............................................. (1.0) (0.9) 0.6
------- ------- -------
Effective tax rate.............................. 25.0% 37.7% 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.
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
Valuation allowance reversal................. -- -- 465,913
-------- -------- --------
Total deferred tax assets.................. 35,770 9,987 701,200
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)/assets...... $(22,315) $(64,995) $455,904
======== ======== ========
</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
F-10
<PAGE>
YURIE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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. Data Lab, Inc. is also obligated under an operating lease for space
in Gaithersburg, Maryland and capital lease obligations for equipment. The
lease terms expire in March 1999 and May 2000, respectively. 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......................................................... $ 509,476
1998......................................................... 384,567
1999......................................................... 208,809
2000......................................................... 4,970
----------
Total minimum lease payments............................... $1,107,822
==========
</TABLE>
Rental expense for the years ended December 31, 1994, 1995 and 1996, was
$49,800, $149,204, and $320,897, 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.
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%.
F-11
<PAGE>
YURIE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 $3.41 per share.......................... 24,510
At exercise price of $9.00 per share.......................... 251,380
At exercise price of $12.00 per share......................... 17,000
---------
Total Granted................................................... 3,237,188
Exercised....................................................... (244)
---------
Outstanding, December 31, 1996.................................. 3,237,188
=========
Exercisable options at December 31, 1996........................ 281,969
=========
</TABLE>
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 $2,959,222, 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.................................................. $2,423,672
Pro forma.................................................... $2,260,792
Net income per common share:
As Reported.................................................. $0.11
Pro forma.................................................... $0.10
</TABLE>
The resulting pro forma compensation cost may not be representative of that
expected in future years.
F-12
<PAGE>
YURIE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 46.7%,
64.9% 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 EVENTS
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.
On December 1, 1997, the Company issued 358,414 shares of its common stock
for all of the outstanding common stock of Data Lab, Inc. The merger has been
accounted for as a pooling of interests, and accordingly, the Company's
financial statements have been restated to include the accounts and operations
of Data Lab, Inc.
F-13
<PAGE>
YURIE SYSTEMS, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS AS OF SEPTEMBER 30, 1997 AND DECEMBER
31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents......................... $23,084,690 $ 5,245,321
Restricted cash................................... 1,000,000 --
Short term investments............................ 21,883,297 --
Accounts receivable(1)............................ 10,099,691 4,993,360
Interest receivable............................... 302,483 --
Inventory......................................... 4,973,292 2,573,559
Deferred offering costs........................... -- 910,442
Deferred income taxes............................. 2,183,808 475,214
Prepaid expenses.................................. 414,407 410,200
----------- -----------
Total current assets............................ 63,941,668 14,608,096
PROPERTY AND EQUIPMENT, net......................... 6,286,737 2,241,271
OTHER ASSETS........................................ 145,546 57,756
----------- -----------
TOTAL ASSETS...................................... $70,373,951 $16,907,123
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.................................. $ 2,637,666 $ 2,013,839
Accrued liabilities............................... 5,535,926 3,249,972
Unearned revenue.................................. 41,250 --
Income taxes payable.............................. 300,000 --
----------- -----------
Total current liabilities....................... 8,514,842 5,263,811
ACCRUED RENT........................................ 390,621 14,932
DEFERRED INCOME TAXES............................... 326,463 19,310
CAPITAL LEASE OBLIGATION............................ 25,745 38,210
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, 25,268,390
shares at September 30, 1997 and 20,966,814
shares at December 31, 1996...................... 252,684 209,668
Treasury Stock, 15,950 shares outstanding at
September 30, 1997............................... (461,166) --
Additional paid-in capital........................ 54,228,930 8,046,437
Retained earnings................................. 7,095,832 3,314,755
----------- -----------
Total stockholders' equity...................... 61,116,280 11,570,860
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY...... $70,373,951 $16,907,123
=========== ===========
</TABLE>
- --------
(1) Accounts receivable includes amounts from related parties of $1,051,460 at
September 30, 1997 (unaudited).
See notes to supplemental consolidated financial statements.
F-14
<PAGE>
YURIE SYSTEMS, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED
SEPTEMBER 30, 1997 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- -----------------------
1997 1996 1997 1996
----------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUE:
Product revenue.............. $13,083,829 $5,632,023 $30,532,134 $13,024,246
Service revenue.............. 1,034,844 613,513 2,913,927 1,659,874
Other revenue................ -- -- -- 391,667
----------- ---------- ----------- -----------
Total revenue(1)........... 14,118,673 6,245,536 33,446,061 15,075,787
COSTS OF REVENUE:
Cost of product revenue...... 4,651,165 2,178,989 10,989,750 4,536,284
Cost of service revenue...... 783,547 372,045 2,152,620 1,113,991
----------- ---------- ----------- -----------
Total costs of revenue..... 5,434,712 2,551,034 13,142,370 5,650,275
----------- ---------- ----------- -----------
GROSS PROFIT................... 8,683,961 3,694,502 20,303,691 9,425,512
OPERATING EXPENSES:
Research and development..... 2,317,243 1,141,668 6,107,262 2,703,332
Sales and marketing.......... 1,707,316 547,604 4,436,777 920,354
General and administrative... 2,136,999 970,745 4,727,935 1,954,854
----------- ---------- ----------- -----------
Total operating expenses... 6,161,558 2,660,017 15,271,974 5,578,540
----------- ---------- ----------- -----------
INCOME FROM OPERATIONS......... 2,522,403 1,034,485 5,031,717 3,846,972
Other income................. 402,155 9,099 1,159,453 66,741
----------- ---------- ----------- -----------
INCOME BEFORE INCOME TAX
PROVISION..................... 2,924,558 1,043,584 6,191,170 3,913,713
Provision for income taxes... 1,135,519 419,606 2,410,093 1,572,002
----------- ---------- ----------- -----------
NET INCOME................. $ 1,789,039 $ 623,978 $ 3,781,077 $ 2,341,711
=========== ========== =========== ===========
NET INCOME PER COMMON SHARE.... $ 0.06 $ 0.03 $ 0.14 $ 0.11
=========== ========== =========== ===========
WEIGHTED AVERAGE SHARES
OUTSTANDING................... 27,689,070 22,104,813 26,718,836 22,099,764
=========== ========== =========== ===========
</TABLE>
- --------
(1) Revenue includes amounts from related parties of $7,172,832 and $11,991,002
for the three and nine months ended September 30, 1997, respectively
(unaudited).
See notes to supplemental consolidated financial statements.
F-15
<PAGE>
YURIE SYSTEMS, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE AND NINE MONTHS
ENDED SEPTEMBER 30, 1997 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- -------------------------
1997 1996 1997 1996
----------- ---------- ------------ -----------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income................ $ 1,789,039 $ 623,978 $ 3,781,077 $ 2,341,711
Adjustments to reconcile
net income to net cash
provided by (used in)
operating activities:
Depreciation............ 376,695 76,305 784,787 176,183
Compensation due to
stock issuance......... -- -- 120,500 --
Deferred income taxes... (280,649) (147,929) (1,401,441) 21,504
Changes in assets and
liabilities:
Accounts receivable..... (1,189,183) 1,899,451 (5,106,331) (495,056)
Restricted cash......... (1,000,000) -- (1,000,000) --
Interest receivable..... 105,132 -- (302,483) --
Advances................ 740,477 -- -- --
Inventory............... (723,742) (657,861) (2,399,733) (621,890)
Prepaid expenses........ (12,262) (136,343) (4,207) (203,918)
Other assets............ (9,084) (5,644) (87,790) (31,784)
Accounts payable........ 780,503 1,121,514 623,827 2,022,117
Accrued expenses........ 2,162,106 983,354 2,285,954 1,608,797
Income taxes payable.... 1,116,256 (118,031) 1,857,784 (238,920)
Unearned revenue........ 41,250 2,004,235 41,250 (1,153,765)
Accrued rent............ 291,868 (3,576) 375,689 (8,047)
----------- ---------- ------------ -----------
Net cash provided by (used
in) operating
activities............... 4,188,400 5,639,453 (431,117) 3,416,932
----------- ---------- ------------ -----------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Short term investments.. (9,002,185) -- (21,883,297) --
Purchase of property and
equipment.............. (1,856,056) (280,632) 4,830,254 (859,940)
----------- ---------- ------------ -----------
Net cash used in investing
activities............... 10,858,241 (280,632) (26,713,551) (859,940)
----------- ---------- ------------ -----------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Loan for equipment...... 100,000 -- (12,465) --
Capital lease
obligations............ (4,155) -- 300,000 --
Net proceeds from
issuance of common
stock.................. (126,791) (146,815) 44,696,502 2,984,018
----------- ---------- ------------ -----------
Net cash provided by (used
in) financing
activities............... (30,946) (146,815) 44,984,037 2,984,018
----------- ---------- ------------ -----------
NET INCREASE (DECREASE) IN
CASH AND CASH
EQUIVALENTS............... (6,700,781) 5,212,006 17,839,369 5,541,010
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD....... 29,785,471 4,131,560 5,245,321 3,802,556
----------- ---------- ------------ -----------
CASH AND CASH EQUIVALENTS,
END OF PERIOD............. $23,084,690 $9,343,566 $ 23,084,690 $ 9,343,566
=========== ========== ============ ===========
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION:
Cash paid for income
taxes.................. $ 600,000 $ 855,000 $ 2,075,450 $ 2,296,000
=========== ========== ============ ===========
</TABLE>
See notes to supplemental consolidated financial statements.
F-16
<PAGE>
YURIE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL 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 September 30, 1997,
the results of operations for the three and nine month periods ended September
30, 1997 and 1996, and the cash flows for the three and nine month periods
ended September 30, 1997 and 1996. These financial statements should be read
in conjunction with the financial statements and the notes thereto included in
the Company's Annual Report on Form 10-K for the year ended December 31, 1996.
NOTE 3--SHORT TERM INVESTMENTS
The Company's short term investments at September 30, 1997 are classified as
held-to-maturity because the Company has the positive intent and ability to
hold the securities to maturity. Held-to-maturity securities are stated at
amortized cost, adjusted for amortization of premiums and accretion of
discounts to maturity.
NOTE 4--ACCOUNTS RECEIVABLE
Accounts receivable consisted of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
<S> <C> <C>
Billed.......................................... $ 9,936,021 $4,174,343
Unbilled........................................ 407,331 764,863
Other........................................... 13,239 54,154
Allowance for doubtful accounts................. (256,900) --
----------- ----------
Total accounts receivable..................... $10,099,691 $4,993,360
=========== ==========
NOTE 5--INVENTORY
Inventory consisted of the following:
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
<S> <C> <C>
Raw materials................................... $ 2,058,719 $1,836,581
Work-in-process................................. 1,324,768 688,686
Finished goods.................................. 1,589,805 48,292
----------- ----------
Total inventory............................... $ 4,973,292 $2,573,559
=========== ==========
</TABLE>
F-17
<PAGE>
YURIE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 6--ACCRUED LIABILITIES
Accrued liabilities consisted of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
<S> <C> <C>
Accrued salaries and employee benefits.......... $2,607,379 $1,639,481
Accrued sales and use tax....................... 418,747 272,784
Warranty accrual................................ 1,819,620 544,306
Deferred offering costs......................... -- 653,000
Other accrued liabilities....................... 690,180 140,401
---------- ----------
Total accrued liabilities..................... $5,535,926 $3,249,972
========== ==========
</TABLE>
NOTE 7--COMMITMENTS
On May 1, 1997, the Company entered into a lease for approximately 137,000
rentable square feet. This facility is being used as the Company's principal
offices. The lease commenced on June 1, 1997 and expires on November 30, 2004.
Rental payments begin on December 1, 1997, with the monthly rent being
recorded on a straight line basis over the life of the lease.
NOTE 8--RELATED PARTY TRANSACTIONS
In March 1997, one of the Company's officers became a majority shareholder
in and the acting Chairman of the Board of SplitRock Services, Inc.
("Splitrock"), a corporation that provides communications services
specifically configured to meet the needs of large network users. Yurie had
product sales to this company totaling $6,645,840 and $11,464,010 during the
three and nine months ended September 30, 1997, respectively. In addition,
during the third quarter of this year, Yurie generated service revenue
totaling $526,992 from Splitrock. At September 30, 1997, accounts receivable
from this company totaled $1,051,460.
NOTE 9--EARNINGS PER SHARE
In March 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" (EPS) which
simplifies the standards for computing EPS previously found in APB Opinion No.
15 and makes them comparable to international EPS standards. The Statement is
effective for financial statements issued for periods ending after December
15, 1997. Had the following statement been effective for the three and nine
months ended September 30, 1997 and 1996, earnings per share would have been
presented as follows:
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
1997 1996 1997 1996
------ ------ ------ ------
<S> <C> <C> <C> <C>
Earnings per common share.................... $ .07 $ .03 $ .15 $ .11
====== ====== ====== ======
Earnings per common share--assuming
dilution.................................... $ .07 $ .03 $ .14 $ .11
====== ====== ====== ======
</TABLE>
NOTE 10--INITIAL PUBLIC OFFERING
On February 5, 1997, the Company completed its initial public offering and
sold an aggregate of 4,000,000 shares of Common Stock at $12.00 per share,
resulting in net proceeds of $44,640,000 after
F-18
<PAGE>
YURIE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
deducting underwriting discounts. Other deferred offering costs related to the
initial public offering totaling $1,403,863 as of September 30, 1997 have been
netted against paid-in capital.
NOTE 11--SUBSEQUENT EVENT
On December 1, 1997, the Company issued 358,414 shares of its common stock
for all of the outstanding common stock of Data Lab, Inc. The merger has been
accounted for as a pooling-of-interests, and accordingly, the Company's
financial statements have been restated to include the accounts and operations
of Data Labs, Inc.
F-19
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED IN CONNECTION WITH THE OFFERING MADE HEREBY TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PRO-
SPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER
TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY PERSON OR BY ANYONE IN ANY
JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEI-
THER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER
ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN
IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.
-------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information...................................................... 2
Incorporation of Certain Information by Reference.......................... 2
The Company................................................................ 3
Recent Developments........................................................ 4
Risk Factors............................................................... 7
Use of Proceeds............................................................ 14
Selling Stockholders....................................................... 15
Plan of Distribution....................................................... 16
Legal Matters.............................................................. 18
Experts.................................................................... 18
Index to Financial Statements.............................................. F-1
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
2,155,366 Shares
LOGO
Common Stock
-----------------
PROSPECTUS
-----------------
March 4, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
Estimated expenses payable by the Company in connection with the sale of the
Common Stock offered hereby are as follows:
<TABLE>
<S> <C>
Registration fee................................................. $ 2,109.22
Printing and engraving expenses.................................. 7,000.00
Legal fees and expenses.......................................... 50,000.00
Accounting fees and expenses..................................... 20,000.00
Transfer agent and registrar fees and expenses................... 500.00
Miscellaneous.................................................... 390.78
----------
Total.......................................................... $80,000.00
==========
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Company's Certificate and Bylaws provide that the Company shall
indemnify to the fullest extent authorized by the DGCL, each person who is
involved in any litigation or other proceeding because such person is or was a
director or officer of the Company or is or was serving as an officer or
director of another entity at the request of the Company, against all expense,
loss or liability reasonably incurred or suffered in connection therewith. The
Certificate and Bylaws provide that the right to indemnification includes the
right to be paid expenses incurred in defending any proceeding in advance of
its final disposition; provided, however, that such advance payment will only
be made upon delivery to the Company of an undertaking, by or on behalf of the
director or officer, to repay all amounts so advanced if it is ultimately
determined that such director is not entitled to indemnification. If the
Company does not pay a proper claim for indemnification in full within 60 days
after a written claim for such indemnification is received by the Company, the
Certificate of Incorporation and Bylaws authorize the claimant to bring an
action against the Company and prescribe what constitutes a defense to such
action.
Section 145 of the DGCL permits a corporation to indemnify any director or
officer of the corporation against expenses (including attorney's fees),
judgments, fines and amounts paid in settlement actually and reasonably
incurred in connection with any action, suit or proceeding brought by reason
of the fact that such person is or was a director or officer of the
corporation, if such person acted in good faith and in a manner that he
reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, if he had
no reason to believe his conduct was unlawful. In a derivative action, (i.e.,
one brought by or on behalf of the corporation), indemnification may be made
only for expenses, actually and reasonably incurred by any director or officer
in connection with the defense or settlement of such an action or suit, if
such person acted in good faith and in a manner that he reasonably believed to
be in or not opposed to the best interests of the corporation, except that no
indemnification shall be made if such person shall have been adjudged to be
liable to the corporation, unless and only to the extent that the court in
which the action or suit was brought shall determine that the defendant is
fairly and reasonably entitled to indemnity for such expenses despite such
adjudication of liability.
Pursuant to Section 102(b)(7) of the DGCL, Article EIGHT of the Company's
Certificate eliminates the liability of a director to the corporation or its
stockholders for monetary damages for such breach of fiduciary duty as a
director, except for liabilities arising (i) from any breach of the director's
duty of loyalty to the corporation or its stockholders, (ii) from acts or
omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) under Section 174 of the DGCL, or (iv) from
any transaction from which the director derived an improper personal benefit.
II-1
<PAGE>
The Company has obtained primary and excess insurance policies insuring the
directors and officers of the Company against certain liabilities that they
may incur in their capacity as directors and officers. Under such policies,
the insurers, on behalf of the Company, may also pay amounts for which the
Company has granted indemnification to the directors or officers.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
2.1** Agreement and Plan of Merger by and among Yurie Systems Inc., Nicole
Acquisition Corporationand Data Labs, Inc., dated December 1, 1997
(filed as Exhibit 2.1 to the Data Labs Form 8 K) (Schedules not
included pursuant to Rule 601(b)(2) of Regulation S-K).
4.1** Specimen Certificate representing the Common Stock (filed as Exhibit
4.1 to the November 1996 Form S-1).
4.2** Registration Rights Agreement by and among Yurie Systems, Inc. and
the shareholders of Data Labs, Inc., dated as of December 1, 1997
(filed as Exhibit 4.1 to the Data Labs Form 8-K).
5.1* Opinion of Fried, Frank, Harris, Shriver & Jacobson as to legality
of the securities registered hereunder.
23.1 Consent of Deloitte & Touche, LLP.
23.2 Consent of Arthur Andersen, LLP.
23.3* Consent of Fried, Frank, Harris, Shriver & Jacobson (included in
Exhibit 5.1).
24.1* Power of Attorney (included on signature page).
27.1 Financial Data Schedule.
</TABLE>
- --------
* Previously filed.
** Incorporated herein by reference.
ITEM 17. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the
registrant in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with
the securities being registered, the registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Act and will be governed by
the final adjudication of such issue.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933.
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the Registration Statement. Notwithstanding the foregoing, any
increase or decrease in the volume
II-2
<PAGE>
of securities offered (if the total dollar value of securities offered
would not exceed that which was registered) and any deviation from the
low or high end of the established maximum offering range may be
reflected in the form of Prospectus filed with the Commission pursuant
to Rule 424(b) if, in the aggregate, the changes in volume and price
represent no more than a 20% change in the maximum aggregate offering
price set forth in the "Calculation of Registration Fee" table in the
effective registration statement.
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statement or
any material change to such information in the Registration Statement.
(2) That, for the purposes of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new Registration Statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
II-3
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THE
REGISTRANT CERTIFIES THAT IT HAS REASONABLE GROUNDS TO BELIEVE THAT IT MEETS
ALL THE REQUIREMENTS FOR FILINGS ON FORM S-1 AND HAS DULY CAUSED THIS
REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO
DULY AUTHORIZED, IN LANDOVER, MARYLAND ON MARCH 4, 1998.
Yurie Systems, Inc.
/s/ Jeong H. Kim
By: _________________________________
JEONG H. KIM
CHAIRMAN OF THE BOARD AND
CHIEF EXECUTIVE OFFICER
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THIS 4TH DAY OF MARCH, 1998.
SIGNATURE TITLE DATE
* Chairman of the March 4, 1998
- ------------------------------------- Board and Chief
JEONG H. KIM Executive Officer
* Vice Chairman of the March 4, 1998
- ------------------------------------- Board and Chief
KWOK L. LI Technical Officer
* President, Chief March 4, 1998
- ------------------------------------- Operating Officer,
HARRY J. CARR and a Director
* Senior Vice March 4, 1998
- ------------------------------------- President, Sales
BARTON Y. SHIGEMURA and Marketing and a
Director
* Chief Financial March 4, 1998
- ------------------------------------- Officer and
HARRY J. D'ANDREA Treasurer (also
serves as Chief
Accounting Officer)
* Director March 4, 1998
- -------------------------------------
R. JAMES WOOLSEY
* Director March 4, 1998
- -------------------------------------
HERBERT RABIN
* Director March 4, 1998
- -------------------------------------
WILLIAM J. PERRY
* Director March 4, 1998
- -------------------------------------
KENNETH D. BRODY
/s/ Jeong H. Kim
*By: ________________________________ Attorney-in-fact March 4 1998
JEONG H. KIM
II-4
<PAGE>
EXHIBIT INDEX
ITEM 16. EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
2.1** Agreement and Plan of Merger by and among Yurie Systems Inc., Nicole
Acquisition Corporation and Data Labs, Inc., dated December 1, 1997
(filed as Exhibit 2.1 to the Data Labs Form 8 K) (Schedules not
included pursuant to Rule 601(b)(2) to Regulation S-K.
4.1** Specimen Certificate representing the Common Stock (filed as Exhibit
4.1 to the November 1996 Form S-1).
4.2** Registration Rights Agreement by and among Yurie Systems, Inc. and
the shareholders of Data Labs, Inc., dated as of December 1, 1997
(filed as Exhibit 4.1 to the Data Labs
Form 8-K).
5.1* Opinion of Fried, Frank, Harris, Shriver & Jacobson as to legality
of the securities registered hereunder.
23.1 Consent of Deloitte & Touche, LLP.
23.2 Consent of Arthur Andersen, LLP.
23.3* Consent of Fried, Frank, Harris, Shriver & Jacobson (included in
Exhibit 5.1).
24.1* Power of Attorney (included on signature page).
27.1 Financial Data Schedule.
</TABLE>
- --------
* Previously filed.
** Incorporated herein by reference.
II-5
<PAGE>
Exhibit 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in this Post Effective Amendment
No. 1 to Form S-1 on Form S-3 Registration Statement No. 333-45481 of Yurie
Systems, Inc. on Form S-3 of our report dated March 7, 1997 on the financial
statements and also to the use in this Registration Statement of our report
dated January 30, 1998 on the supplemental consolidated financial statements
appearing in the Prospectus, which is part of the Registration Statement, and
the reference to us under the heading "Experts" in such Prospectus.
Washington, D.C.
March 2, 1998
<PAGE>
Exhibit 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the
incorporation by reference in this Post Effective Amendment No. 1 to Form S-1 on
Form S-3 of our report on Data Labs, Inc.'s Financial Statements for the years
ended December 31, 1996 and 1995 dated March 10, 1997 included in Yurie Systems,
Inc.'s Report on Form 8-K dated December 9, 1997 and to all references to our
Firm included in this Registration Statement.
ARTHUR ANDERSEN LLP
Washington, D.C.
February 26, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> YEAR 9-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1997
<PERIOD-START> JAN-01-1996 JAN-01-1997
<PERIOD-END> DEC-31-1996 SEP-30-1997
<CASH> 5,245,321 23,084,690
<SECURITIES> 0 21,883,297
<RECEIVABLES> 4,993,350 10,399,691
<ALLOWANCES> 0 (300,000)
<INVENTORY> 2,573,559 4,973,292
<CURRENT-ASSETS> 14,608,096 63,941,668
<PP&E> 2,639,999 7,470,252
<DEPRECIATION> (398,728) 1,183,515
<TOTAL-ASSETS> 16,907,123 70,373,951
<CURRENT-LIABILITIES> 5,263,811 8,514,842
<BONDS> 0 0
0 0
0 0
<COMMON> 209,668 252,684
<OTHER-SE> 11,361,192 60,863,596
<TOTAL-LIABILITY-AND-EQUITY> 16,907,123 70,373,951
<SALES> 21,265,516 33,446,061
<TOTAL-REVENUES> 21,657,183 33,446,061
<CGS> 8,472,514 13,142,370
<TOTAL-COSTS> 8,472,514 13,142,370
<OTHER-EXPENSES> 9,288,149 15,271,974
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> (90,634) (1,159,453)
<INCOME-PRETAX> 3,987,520 6,191,170
<INCOME-TAX> 1,563,482 2,410,093
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 2,423,672 3,781,077
<EPS-PRIMARY> 0 0
<EPS-DILUTED> 0.11 0.14
</TABLE>
