<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
------------------------------
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- --- EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
------------------------------------------------
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- --- EXCHANGE ACT OF 1934
For the transition period from
---------------------------------
Commission File Number 0-22210
-----------------------------------------
SUMMA FOUR, INC.
(Exact name of registrant as specified in its charter)
Delaware 02-0329497
(State of Incorporation) (IRS Employer Identification Number)
25 Sundial Avenue, Manchester, New Hampshire 03103
(Address of registrant's principal executive office)
(603) 625-4050
(Registrant's telephone number)
------------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practical date.
Common Stock, $.01 par value 5,913,496
Shares Outstanding as of October 30, 1996
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<PAGE> 2
SUMMA FOUR, INC.
INDEX TO FORM 10-Q
Page(s)
-------
Part I - Financial Information:
Item 1 - Financial Statements (unaudited)
Condensed Consolidated Balance Sheets as of
September 30, 1996 and March 31, 1996 1
Condensed Consolidated Statements of Income for the
three months ended September 30, 1996 and 1995 and the
six months ended September 30, 1996 and 1995 2
Condensed Consolidated Statements of Cash Flows
for the six months ended September 30, 1996 and 1995 3
Notes to Condensed Consolidated Financial Statements 4-6
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 7-11
Part II - Other Information:
Item 1 - Legal Proceedings 12
Item 2 - Changes in Securities 13
Item 3 - Defaults Upon Senior Securities 13
Item 4 - Submission of Matters to a Vote of
Security Holders 13
Item 5 - Other Information 13
Item 6 - Exhibits and Reports on Form 8-K 13
Signature(s) 14-15
<PAGE> 3
FORM 10-Q
PART I
ITEM 1
SUMMA FOUR, INC. PAGE 1
<TABLE>
Condensed Consolidated Balance Sheets
(In thousands, except share data)
<CAPTION>
September 30, 1996 March 31, 1996
------------------ --------------
(Unaudited)
<S> <C> <C>
Assets
------
Current assets:
Cash and cash equivalents $ 3,173 $ 4,681
Investments - current 10,784 12,284
Accounts receivable, net 9,573 9,466
Inventories, net 4,517 3,352
Deferred income taxes 1,988 1,988
Prepaid and other current assets 763 1,075
------- -------
Total current assets 30,798 32,846
Investments - non-current 22,694 20,758
Property and equipment, net 3,453 3,755
Other assets 142 340
------- -------
$57,087 $57,699
======= =======
Liabilities and Stockholders' Equity
- ------------------------------------
Current liabilities:
Accounts payable $ 1,871 $ 1,775
Accrued payroll and related expenses 869 957
Other accrued liabilities 3,594 3,247
Deferred revenues 1,946 1,720
------- -------
Total current liabilities 8,280 7,699
Other long-term liabilities 906 863
Stockholders' equity:
Preferred stock, $.01 par value; authorized
1,000,000 shares -- no shares issued -- --
Common stock, $.01 par value; authorized
20,000,000 shares; issued 6,384,462
at September 30, 1996 and 6,381,437 at
March 31, 1996 64 64
Additional paid-in capital 43,625 43,592
Accumulated earnings 12,240 11,301
Cumulative translation adjustment (57) (125)
Unrealized losses on investments (588) (539)
Treasury stock, at cost, 470,966 shares at
September 30, 1996 and 300,506 (7,383) (5,156)
at March 31, 1996
------- -------
Total stockholders' equity 47,901 49,137
------- -------
$57,087 $57,699
======= =======
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
<PAGE> 4
FORM 10-Q
PART I
ITEM 1
PAGE 2
SUMMA FOUR, INC.
<TABLE>
Condensed Consolidated Statements of Income
(Unaudited)
(In thousands, except per share data)
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30,
------------- -------------
1996 1995 1996 1995
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net revenues $9,982 $9,954 $21,171 $19,638
Cost of revenues(*) 3,972 3,583 8,098 6,825
------ ------ ------- -------
Gross profit 6,010 6,371 13,073 12,813
Operating expenses:
Selling, general and administrative(*) 3,701 3,307 7,080 6,317
Research and development(*) 2,266 2,079 5,028 3,863
------ ------ ------- -------
Total operating expenses 5,967 5,386 12,108 10,180
------ ------ ------- -------
Operating income 43 985 965 2,633
Interest income, net 271 407 548 873
------ ------ ------- -------
Income before income taxes 314 1,392 1,513 3,506
Provision for income taxes 119 529 574 1,333
------ ------ ------- -------
Net income $ 195 $ 863 $ 939 $ 2,173
====== ====== ======= =======
Net income per share $.03 $.13 $.15 $.33
Weighted average common and
common equivalent shares
outstanding 6,199,885 6,500,979 6,250,409 6,501,820
<FN>
(*) For the three and six month periods ended September 30, 1995, a portion of
customer service ($156,000 and $334,000, respectively) and research and
development ($74,000 and $114,000, respectively) expenses were reclassified to
cost of revenues. In addition, corporate quality expenses of $50,000 and
$105,000, respectively, were reclassified from cost of revenues to selling,
general and administrative expenses. These reclassifications had no effect on
operating or net income.
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
<PAGE> 5
FORM 10-Q
PART I
ITEM 1
PAGE 3
SUMMA FOUR, INC.
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
<CAPTION>
Six Months Ended September 30,
------------------------------
1996 1995
------- -------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 939 $ 2,173
------- -------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,147 873
Provision for doubtful accounts 150 48
Provision for excess and obsolete inventory -- 130
Changes in operating assets and liabilities:
Accounts receivable (189) (1,169)
Inventory (1,165) (932)
Prepaid and other current assets 312 (456)
Other assets 198 (31)
Accounts payable 96 (118)
Accrued payroll and related expense (88) (221)
Other accrued expenses and other liabilities 633 577
------- -------
Total adjustments 1,094 (1,299)
------- -------
Net cash provided by operating activities 2,033 874
------- -------
Cash flows from investing activities:
Purchases of property and equipment (846) (967)
Purchases of investments, net (485) (643)
------- -------
Net cash used in investing activities (1,331) (1,610)
------- -------
Cash flows from financing activities:
Proceeds from the sale of stock under stock option plans 130 216
Purchase of treasury stock (2,324) (1,547)
Principal payments under capital lease obligation (16) --
------- -------
Net cash used in financing activities (2,210) (1,331)
------- -------
Net decrease in cash and cash equivalents (1,508) (2,067)
Cash and cash equivalents, beginning of period 4,681 7,070
------- -------
Cash and cash equivalents, end of period $ 3,173 $ 5,003
======= =======
Supplemental disclosure of cash flow information
Cash paid for interest $ 7 $ --
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
<PAGE> 6
FORM 10-Q
PART I
ITEM 1
PAGE 4
SUMMA FOUR, INC.
Notes to Condensed Consolidated Financial Statements
September 30, 1996
1. Basis of Presentation
---------------------
The accompanying unaudited condensed consolidated financial statements
of Summa Four, Inc. ("The Company") have been prepared in accordance
with generally accepted accounting principles for interim financial
information and pursuant to the rules and regulations of the Securities
and Exchange Commission. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements.
In the opinion of management, all adjustments (consisting of only
normal recurring adjustments) considered necessary for a fair
presentation have been included. Operating results for the six month
period ended September 30, 1996 are not necessarily indicative of the
results that may be expected for the year ended March 31, 1997. For
further information, refer to the Company's consolidated financial
statements and notes thereto contained in the Company's Annual Report
on Form 10-K for the year ended March 31, 1996 and the Quarterly Report
on Form 10-Q for the quarter ended June 30, 1996, filed with the
Securities and Exchange Commission.
2. Inventories
-----------
<TABLE>
Inventories, valued at the lower of cost (determined using the
first-in, first-out method) or market and net of a valuation reserve of
$442 for each period, were as follows (in thousands):
<CAPTION>
September 30, 1996 March 31, 1996
------------------ --------------
<S> <C> <C>
Raw materials $1,917 $1,106
Work-in-process 1,406 1,288
Finished goods 1,194 958
------ ------
$4,517 $3,352
====== ======
</TABLE>
3. Income Taxes
------------
The Company's effective tax rate for the six months ended September
30, 1996 and September 30, 1995 was 38%.
<PAGE> 7
FORM 10-Q
PART I
ITEM 1
PAGE 5
4. Major Customer Information
--------------------------
Historically, a significant portion of the Company's net revenues is
derived from a limited number of customers. Approximately 27% of the
Company's net revenues for the six months ended September 30, 1996 were
derived from three customers accounting for 10%, 9% and 8% respectively
of net revenues. Approximately 36% of the Company's net revenues for
the six months ended September 30, 1995 were from three customers
accounting for 13%, 12% and 11% respectively of net revenues.
5. Treasury Stock Repurchase
-------------------------
On July 21, 1994, the Board of Directors authorized the repurchase of
up to 500,000 shares of the Company's Common Stock (the "Repurchase
Program"). The Company completed the Repurchase Program during its
fiscal quarter ended September 30, 1996. Under the Repurchase Program,
the Company repurchased 500,000 shares at an average cost of $15.44 per
share and reissued 29,034 shares at an average price of $12.83. During
the six month period ended September 30, 1996, the company repurchased
179,000 shares at an average cost of $12.99 and reissued 8,540 shares
at an average price of $12.32. The reissuances relate to purchases
under the Company's Employee Stock Purchase Plan.
6. Legal Proceedings
-----------------
The Company, in the normal course of business, is involved in various
legal proceedings that in the opinion of management, will not have a
material effect on the Company's financial condition or results of
operations. In addition, on July 12, 1994, a civil lawsuit purporting
to assert claims under the federal securities laws and the state law of
negligent misrepresentation was filed against the Company and various
of its officers and directors in the United States District Court for
the District of New Hampshire. The defendants named in the action were
the Company, Barry R. Gorsun (Chief Executive Officer, and Chairman of
the Board), James J. Fiedler (formerly, President and Board Member),
John A. Shane (Board Member), William M. Scranton (Board Member) and
Robert A. Degan (Board Member). The sole named plaintiff is David
Gross, identified in the complaint as a resident of Passaic, New
Jersey. The complaint alleged, upon information and belief, that the
defendants made false or misleading statements concerning the Company's
anticipated results for the first quarter of fiscal 1995 (the quarter
ending June 30, 1994), in connection with various press releases issued
by the Company and its 1994 Annual Report on Form 10-K, filed with the
Securities and Exchange Commission on June 21, 1994. The complaint
requested that the action be permitted to proceed as a class action and
seeks damages in an unspecified amount. A motion to dismiss the action
in its entirety was filed by the defendants and was argued before the
court on January 5, 1995. On November 22, 1995, The United States
District Court granted the motion to dismiss the action. The plaintiff
thereafter appealed the dismissal and the matter was argued before The
United States Court of Appeals for the First Circuit on May 8, 1996. On
August 12, 1996 the United States Court of Appeals for the First
Circuit affirmed the dismissal of the action, thus terminating the
litigation.
<PAGE> 8
FORM 10-Q
PART I
ITEM 1
PAGE 6
Additionally, on August 2, 1995, Claircom Communications Group, Inc.
("Claircom") brought an action against the Company in the King County
(Washington) Superior Court alleging breach of contract, breach of
warranty and various related claims arising from the joint development
of a cabin telecommunications unit (CTU) to be initially installed in
airplanes. On October 11, 1995, the Company filed an Answer in the
Washington action denying Claircom's allegations and asserted a
Counterclaim.
The Company also brought an action in the Hillsborough County (New
Hampshire) Superior Court on September 12, 1995, seeking payment of
royalties, protection of its trade secrets and damages for breach of
contract under certain New Hampshire statutes. The Company also sought
a preliminary injunction against Claircom. The motion for preliminary
injunction was heard on September 26, 1995, along with Claircom's
Motion to Dismiss or Stay the New Hampshire action, and on October 12,
1995 the New Hampshire court denied the Company's motion for
preliminary injunction and Claircom's motion to dismiss or stay. On
October 30, 1995, the Washington court granted the Company's motion to
stay the Washington action. Claircom's motions to reconsider the Orders
of the New Hampshire and the Washington courts have both been denied.
The parties are moving forward in the New Hampshire action and this
case is in discovery. There can be no assurance that an unfavorable
outcome would not have a material adverse effect on the Company's
financial condition, results of operations, or cash flows.
<PAGE> 9
FORM 10-Q
PART I
ITEM 2
PAGE 7
SUMMA FOUR, INC.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
September 30, 1996
This Quarterly Report on Form 10-Q of Summa Four, Inc. ("The Company") may
contain forward-looking statements. For this purpose, any statements contained
herein that are not statements of historical fact may be deemed to be
forward-looking statements. Without limiting the foregoing, the words
"believes," "anticipates," "plans," "expects," and similar expressions are
intended to identify forward-looking statements. There are a number of important
factors that could cause the Company's actual results to differ materially from
those indicated by any such forward-looking statements. These factors include,
without limitation, those set forth under the caption below "Factors That May
Affect Future Operating Results".
Results of Operations
- ---------------------
Three Months Ended September 30, 1996 Compared with Three Months September
- --------------------------------------------------------------------------
30, 1995
- --------
Net revenues for the three months ended September 30, 1996 were $10 million
which closely approximated revenues for the three months ended September 30,
1995. Shipments to the Company's application developers and resellers
approximated 69% of revenues for the three months ended September 30, 1996
compared to 45% for the three months ended September 30, 1995. Included in these
categories is a growing number of emerging companies whose operating performance
is less predictable. Shipments to international customers represented
approximately 33% of total revenues for the quarter ended September 30, 1996
versus 26% for the same quarter in 1995. The Company experienced extended
selling cycles in the three month period ended September 30, 1996 due to longer
evaluation periods by potential customers. The Company expects that extended
selling cycles will continue to affect the Company's operating results for the
foreseeable future.
Gross profit decreased $.4 million (6%) to $6 million for the three months ended
September 30, 1996 compared to $6.4 million for the three months ended September
30, 1995. Gross margin decreased to 60% in the three months ended September 30,
1996 from 64% in the three months ended September 30, 1995. The decrease in
gross margin was caused by a number of factors including increased competition;
a greater use of resellers, which required higher discounts to expand into new
market segments; an increase, as a percentage of net revenues, in service
revenues, which generate lower margins; and a shift in product mix towards
systems which were more lightly configured. The Company believes that it will
continue to experience downward pressures on its gross margins, as a result of
such factors, at least through the end of its current fiscal year. A
reclassification of a portion of customer service ($156,000) and research and
development ($74,000) expenses to cost of revenues and a portion of corporate
quality assurance ($50,000) expenses from cost of revenues to selling, general
and administrative expenses are reflected in the results for the three months
ended September 30, 1995. These reclassifications had no effect on operating or
net income.
<PAGE> 10
FORM 10-Q
PART I
ITEM 2
PAGE 8
Selling, general and administrative expenses increased by $.4 million (12%) to
$3.7 million, or 37% of net revenues, for the three months ended September 30,
1996 compared with $3.3 million, or 33% of net revenues, for the three months
ended September 30, 1995. This increase was primarily attributable to increased
professional services costs and increased legal expenses related to ongoing
litigation.
Research and development expenses increased $.2 million (9%) to $2.3 million or
23% of net revenues for the three months ended September 30, 1996 compared to
$2.1 million or 21% of net revenues for the three months ended September 30,
1995. This increase in expenses was primarily the result of the expansion of the
Company's software engineering staff. The Company's continued spending for
research and development is focused towards developing an expanded product line
and providing additional functionality to its existing products. The Company
believes that its strategy of increased spending on development and sustaining
engineering is required to advance its position as a core network supplier for
telecommunications service providers.
Operating income decreased by $.9 million (96%) to $43 thousand, or .4% of net
revenues for the three months ended September 30, 1996, compared to $1.0
million, or 9.9% of net revenues for the three months ended September 30, 1995.
The decrease was due primarily to planned higher research and development
expenses, lower gross margin and litigation expenses.
Six Months Ended September 30, 1996 Compared with Six Months Ended September
- ----------------------------------------------------------------------------
30, 1995
- --------
Net revenues for the six months ended September 30, 1996 increased by $1.5
million (8%) to $21.2 million, from $19.6 million for the six months ended
September 30, 1995. This increase resulted principally from increased unit sales
of the Company's Virtual Central Office (VCO) series product line, an open
programmable switching platform. The Company experienced extended selling cycles
in the six month period ended September 30, 1996 due to longer evaluation
periods by potential customers. The Company expects that extended selling cycles
will continue to affect the Company's operating results for the foreseeable
future.
Gross profit increased by $.3 million (2%), primarily as a result of relatively
higher net revenues in the quarter ended June 30, 1996 as compared to quarter
ended September 30, 1996, to $13.1 million for the six months ended September
30, 1996 compared to $12.8 million for the six months ended September 30, 1995.
Gross margin decreased to 62% during the six months ended September 30, 1996
from 65% in the six months ended September 30, 1995. A reclassification of a
portion of customer service ($334,000) and research and development ($114,000)
expenses to cost of revenues and a portion of corporate quality assurance
($105,000) expenses from cost of revenues to selling, general and administrative
expenses are reflected in the results for the six months ended September 30,
1995. These reclassifications had no effect on operating or net income.
Selling, general and administrative expenses increased by $.8 million (12%) to
$7.1 million, or 33% of revenues, for the six months ended September 30, 1996
compared with $6.3 million, or 32% of net revenues, in the same period of fiscal
1996. This increase resulted primarily from increased staffing levels in the
sales and financial functions, facility expansion costs and marketing expenses,
as well as legal expenses related to ongoing litigation.
<PAGE> 11
FORM 10-Q
PART I
ITEM 2
PAGE 9
Research and development expenses increased by $1.2 million (30%) to $5.0
million, or 24% of net revenues, for the six months ended September 30, 1996
compared to $3.9 million, or 20% of net revenues, in the same period of fiscal
1996. This increase was due primarily to an increase in engineering staff, costs
associated with the utilization of contract engineering resources and consulting
services.
Operating income decreased by $1.7 million (63%) to $1 million or 5% of net
revenues for the six months ended September 30, 1996 compared to $2.6 million or
13% of net revenues for the six months ended September 30, 1995. The decrease
was due primarily to planned higher research and development expenses, lower
gross margins and litigation expenses.
The Company's effective tax rate for the six months ended September 30, 1996 and
September 30, 1995 was 38%.
Liquidity and Capital Resources
- -------------------------------
At September 30, 1996, the Company had $36.7 million in cash and cash
equivalents and current and non-current investments. During the six months ended
September 30, 1996, cash and cash equivalents decreased $1.5 million. The
principal reason for the decrease was the expenditure of $2.3 million for
repurchase of common stock. At September 30, 1996, the ratio of current assets
to current liabilities was 3.7:1 compared to 4.3:1 at March 31, 1996. Purchase
commitments of materials used in the production of the Company's products were
approximately $5.7 million and $6.4 million at September 30, 1996 and 1995
respectively.
The Company maintains an unsecured bank line of credit in the amount of $6.0
million. At September 30, 1996, no borrowings were outstanding under this line.
Unless renewed, the line expires in September 1997. Any borrowings under this
line bear interest at the bank's prime interest rate per annum (8.25% at
September 30, 1996). The Company believes that cash generated from operations
and the total of its cash and short term investments, together with existing
sources of debt financing, will be sufficient to meet its anticipated cash
requirements for working capital and capital expenditures for at least the next
twelve months. The Company does not currently anticipate that it will be
required to sell a substantial percentage of its long term investments in the
near term.
On July 21, 1994, the Board of Directors authorized the repurchase of up to
500,000 shares of the Company's Common Stock (the "Repurchase Program"). The
Company completed the Repurchase Program during its fiscal quarter ended
September 30, 1996. Under the Repurchase Program, the Company repurchased
500,000 shares at an average cost of $15.44 per share and reissued 29,034 shares
at an average price of $12.83. During the six month period ended September 30,
1996, the Company repurchased 179,000 shares at an average cost of $12.99 and
reissued 8,540 shares at an average price of $12.32. The reissuances relate to
purchases under the Company's Employee Stock Purchase Plan.
The Company does not consider the impact of inflation on its business activities
to have been significant to date.
Factors That May Affect Future Operating Results
- ------------------------------------------------
A number of uncertainties exist that could affect the Company's future operating
results, including without limitation, the following:
<PAGE> 12
FORM 10-Q
PART I
ITEM 2
PAGE 10
In Fiscal 1996 and the first six months of Fiscal Year 1997, a majority of the
Company's product sales were to existing customers for upgrade or expansion of
their networks. The Company's results for the remainder of Fiscal Year 1997 will
depend upon its ability both to continue to sell products for use in networks of
existing customers and to attract new customers for the Company's products. In
addition, in Fiscal Year 1996 and the first six months of Fiscal Year 1997, the
Company experienced extended selling cycles due to longer evaluation periods by
potential customers. The Company expects that extended selling cycles will
continue to affect the Company's operating results for the foreseeable future.
The Company's results are partially dependent on its ability to enhance existing
products and introduce new products on a timely basis, and to achieve market
acceptance for such enhanced and new products. The Company believes results in
Fiscal Year 1996 and the first six months of Fiscal Year 1997 were adversely
affected by delays in the release and localization of certain products, and
there can be no assurance that the Company will not experience similar delays in
the future. The Company plans in Fiscal Year 1997 to enhance the scalability,
price performance, and supportability of its products. Any delay in introducing
these products or failure of these products to achieve market acceptance could
materially adversely affect the Company's future results of operations.
The market for telecommunication switches is based upon sophisticated
technologies and is subject to rapid technological change. Competitors of the
Company have, in some cases, developed and marketed products having similar
functionality as the Company's products. There can be no assurance that the
Company will be able to compete successfully in the future against existing or
new competitors or that the Company's operating results will not be materially
adversely affected by increased price competition. To date, the Company's
research and development program has periodically produced system features and
enhancements to address particular customer requirements and to respond to
competitive conditions. The Company believes its ability to compete in the
telecommunication switches market depends on a variety of factors, including
product design, successful and timely completion of product development and its
ability to offer products at competitive prices. The Company may encounter
increased competition from existing competitors and from new market entrants.
The Company is dependent upon sole source suppliers for certain key components
used in its products. The Company purchases these sole source components
pursuant to purchase orders placed from time-to-time. No assurance can be given
that sole source suppliers will devote the resources necessary to support the
enhancement or continued availability of such components or that any such
supplier will not encounter financial difficulties. The Company is actively
seeking alternative solutions to address potentially serious delays or shortages
from its major component supplier. If these delays or shortages occur and the
Company is unable to effect alternative supply arrangements, its business and
results of operations would be materially adversely affected.
The Company's gross margins have been declining recently as a result of a number
of factors, including increased competition; a greater use of resellers, which
required higher discounts, to expand into new market segments; an increase, as a
percentage of net revenues, in service revenues which generate lower margins;
and a shift in product mix towards systems which were more lightly configured.
The Company believes that it will continue to experience downward pressures on
its gross margins, as a result of such factors, at least through the end of its
current fiscal year. The Company from time-to-time adds functionality and
features that add cost to its products, and the Company's gross margins will be
adversely affected to the extent the Company does not increase the price of such
systems to offset such increased costs.
<PAGE> 13
FORM 10-Q
PART I
ITEM 2
PAGE 11
The Company's ability to develop marketable products and maintain a favorable
competitive position in its various markets in light of continuing technological
developments will depend, in large part, on its ability to attract and retain
highly qualified management, technical, and sales and marketing personnel.
Competition for the services of such key employees is intense.
The Company's increasing international business is subject to a number of
inherent risks, including the challenges of building and managing foreign
operations, unique product requirements, fluctuations in the value of foreign
currencies, import/export duties, and unexpected regulatory, economic or
political changes in foreign markets.
Because of the foregoing factors, past financial results should not be relied
upon as an indication of future performance. The Company believes that
period-to-period comparison of its financial results are not necessarily
meaningful and expects that its results of operations may fluctuate from period
to period in the future.
<PAGE> 14
FORM 10-Q
PART II
ITEM 1-6
PAGE 12
SUMMA FOUR, INC.
Part II - Other Information
September 30, 1996
Item 1 - Legal Proceedings
- --------------------------
The Company, in the normal course of business, is involved in various legal
proceedings that in the opinion of management, will not have a material effect
on the Company's financial condition or results of operations. In addition, on
July 12, 1994, a civil lawsuit purporting to assert claims under the federal
securities laws and the state law of negligent misrepresentation was filed
against the Company and various of its officers and directors in the United
States District Court for the District of New Hampshire. The defendants named in
the action were the Company, Barry R. Gorsun (Chief Executive Officer, and
Chairman of the Board), James J. Fiedler (formerly, President and Board Member),
John A. Shane (Board Member), William M. Scranton (Board Member) and Robert A.
Degan (Board Member). The sole named plaintiff is David Gross, identified in the
complaint as a resident of Passaic, New Jersey. The complaint alleged, upon
information and belief, that the defendants made false or misleading statements
concerning the Company's anticipated results for the first quarter of fiscal
1995 (the quarter ending June 30, 1994), in connection with various press
releases issued by the Company and its 1994 Annual Report on Form 10-K, filed
with the Securities and Exchange Commission on June 21, 1994. The complaint
requested that the action be permitted to proceed as a class action and seeks
damages in an unspecified amount. A motion to dismiss the action in its entirety
was filed by the defendants and was argued before the court on January 5, 1995.
On November 22, 1995, The United States District Court granted the motion to
dismiss the action. The plaintiff thereafter appealed the dismissal and the
matter was argued before The United States Court of Appeals for the First
Circuit on May 8, 1996. On August 12, 1996 the United States Court of Appeals
for the First Circuit affirmed the dismissal of the action, thus terminating the
litigation.
Additionally, on August 2, 1995, Claircom Communications Group, Inc.
("Claircom") brought an action against the Company in the King County
(Washington) Superior Court alleging breach of contract, breach of warranty and
various related claims arising from the joint development of a cabin
telecommunications unit (CTU) to be initially installed in airplanes. On October
11, 1995, the Company filed an Answer in the Washington action denying
Claircom's allegations and asserted a Counterclaim. The Company also brought an
action in the Hillsborough County (New Hampshire) Superior Court on September
12, 1995, seeking payment of royalties, protection of its trade secrets and
damages for breach of contract under certain New Hampshire statutes. The Company
also sought a preliminary injunction against Claircom. The motion for
preliminary injunction was heard on September 26, 1995, along with Claircom's
Motion to Dismiss or Stay the New Hampshire action, and on October 12, 1995 the
New Hampshire court denied the Company's motion for preliminary injunction and
Claircom's motion to dismiss or stay. On October 30, 1995, the Washington court
granted the Company's motion to stay the Washington action. Claircom's motions
to reconsider the Orders of the New Hampshire and the Washington courts have
both been denied. The parties are moving forward in the New Hampshire action and
this case is in discovery. There can be no assurance that an unfavorable outcome
would not have a material adverse effect on the Company's financial condition,
results of operations, or cash flows.
<PAGE> 15
FORM 10-Q
PART II
PAGE 13
Item 2 - Changes in Securities
- ------------------------------
Not applicable.
Item 3 - Defaults Upon Senior Securities
- ----------------------------------------
Not applicable.
Item 4 - Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
<TABLE>
On July 19, 1996, the Company held its 1996 Annual Meeting of
Shareholders (the "Annual Meeting"). At the Annual Meeting, the
following persons were elected as directors of the Company. The number
of votes cast for each director, as well as the number of votes
withheld, are listed opposite each director's name.
<CAPTION>
Name of Director Votes Cast for Director Votes Withheld
---------------- ----------------------- --------------
<S> <C> <C>
Barry R. Gorsun 5,182,526 25,152
Edward C. Callahan, Jr. 5,182,526 25,152
Edgar L. Brown, Jr. 5,182,526 25,152
Robert A. Degan 5,182,526 25,152
Gordon T. Ray 5,182,526 25,152
William M. Scranton 5,182,526 25,152
John A. Shane 5,182,526 25,152
</TABLE>
At the Annual Meeting, with 5,188,557 votes cast in favor, the
shareholders ratified the appointment of Coopers & Lybrand L.L.P. as
independent accountants of the Company for the fiscal year ending March
31, 1997. 12,060 votes were cast against such ratification, and there
were 7,061 abstentions.
Item 5 - Other Information
- --------------------------
Not applicable.
Item 6 - Exhibits and Reports on Form 8-K
- -----------------------------------------
Not applicable.
<PAGE> 16
FORM 10-Q
PART II
PAGE 14
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Summa Four, Inc.
Date: November 12, 1996 By: /s/ Edward C. Callahan, Jr.
--------------------------------------------
Edward C. Callahan, Jr.
President
Date: November 12, 1996 By: /s/ Thomas A. St. Germain
--------------------------------------------
Thomas A. St. Germain
Senior Vice President, Treasurer
and Chief Financial Officer
(Principal Financial and Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> APR-01-1996
<PERIOD-END> SEP-30-1996
<EXCHANGE-RATE> 1
<CASH> 3,173
<SECURITIES> 33,478
<RECEIVABLES> 9,810
<ALLOWANCES> 237
<INVENTORY> 4,517
<CURRENT-ASSETS> 30,798
<PP&E> 9,865
<DEPRECIATION> 6,412
<TOTAL-ASSETS> 57,087
<CURRENT-LIABILITIES> 8,280
<BONDS> 0
<COMMON> 64
0
0
<OTHER-SE> 47,837
<TOTAL-LIABILITY-AND-EQUITY> 57,087
<SALES> 21,171
<TOTAL-REVENUES> 21,171
<CGS> 8,098
<TOTAL-COSTS> 8,098
<OTHER-EXPENSES> 12,108
<LOSS-PROVISION> 150
<INTEREST-EXPENSE> 7
<INCOME-PRETAX> 1,513
<INCOME-TAX> 574
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 939
<EPS-PRIMARY> .15
<EPS-DILUTED> .15
</TABLE>
