<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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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 June 30, 1996
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__ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from
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Commission File Number 0-22210
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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 6,382,187
Outstanding as of July 18, 1996
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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 1
June 30, 1996 and March 31, 1996
Condensed Consolidated Statements of Income 2
for the three months ended June 30, 1996 and 1995
Condensed Consolidated Statements of Cash Flows 3
for the three months ended June 30, 1996 and 1995
Notes to Condensed Consolidated Financial Statements 4-5
Item 2 - Management's Discussion and Analysis of 6-7
Financial Condition and Results of Operations
Part II - Other Information:
Item 1 - Legal Proceedings 8
Item 2 - Changes in Securities 9
Item 3 - Defaults Upon Senior Securities 9
Item 4 - Submission of Matters to a Vote of 9
Security Holders
Item 5 - Other Information 9
Item 6 - Exhibits and Reports on Form 8-K 9
Signature(s) 10
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<TABLE>
FORM 10-Q
PART I
ITEM 1
SUMMA FOUR, INC. PAGE 1
Condensed Consolidated Balance Sheets
(Unaudited)
(In thousands, except share data)
<CAPTION>
June 30, 1996 March 31, 1996
------------- --------------
<S> <C> <C>
Assets
- ----------------------------------
Current assets
Cash and cash equivalents $ 7,154 $ 4,681
Investments - current 11,725 12,284
Accounts receivable, net 8,903 9,466
Inventories, net 3,423 3,352
Deferred income taxes 1,988 1,988
Prepaid and other current assets 817 1,075
------- -------
Total current assets 34,010 32,846
Investments - non-current 21,480 20,758
Property and equipment, net 3,605 3,755
Other assets 193 340
------- -------
$59,288 $57,699
======= =======
Liabilities and Stockholders' Equity
- ------------------------------------
Current liabilities:
Accounts payable $1,887 $ 1,775
Accrued payroll and related expenses 965 957
Other accrued liabilities 3,644 3,247
Deferred revenues 1,846 1,720
------- -------
Total current liabilities 8,342 7,699
Other long-term liabilities 985 863
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 6,382,187
at June 30, 1996 and 6,381,437 at
March 31, 1996 64 64
Additional paid-in capital 43,603 43,592
Accumulated earnings 12,045 11,301
Cumulative translation adjustment (86) (125)
Unrealized losses on investments (606) (539)
Treasury stock, at cost, 291,966 shares at
June 30, 1996 and 300,506 at March 31, 1996 (5,059) (5,156)
------- -------
Total stockholders' equity 49,961 49,137
------- -------
$59,288 $57,699
======= =======
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
<PAGE> 4
<TABLE>
FORM 10-Q
PART I
ITEM 1
PAGE 2
SUMMA FOUR, INC.
Condensed Consolidated Statements of Income
(Unaudited)
(In thousands, except share data)
<CAPTION>
Three Months Ended
------------------
June 30,
1996 1995
---- ----
<S> <C> <C>
Net revenues $11,189 $9,684
Cost of revenues(*) 4,126 3,242
------- ------
Gross profit 7,063 6,442
Operating expenses:
Selling, general and administrative(*) 3,379 3,010
Research and development(*) 2,762 1,784
------- ------
Total operating expenses 6,141 4,794
------- ------
Operating income 922 1,648
Interest income, net 277 466
------- ------
Income before income taxes 1,199 2,114
Provision for income taxes 455 804
------- ------
Net income $ 744 $1,310
======= ======
Net income per share $ .12 $ .20
Weighted average common and
common equivalent shares
outstanding 6,300,934 6,550,195
<FN>
(*) For the quarter ended June 30, 1995, a portion of customer service
($178,000) and research and development ($40,000) expenses were reclassified to
cost of revenues and corporate quality assurance expenses of $55,000 were
reclassified from cost of revenue 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 the
consolidated financial statements.
<PAGE> 5
<TABLE>
FORM 10-Q
PART I
ITEM 1
PAGE 3
SUMMA FOUR, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
<CAPTION>
Three Months Ended June 30,
---------------------------
1996 1995
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 744 $1,310
------ ------
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 553 438
Provision for doubtful accounts 150 18
Provision for excess and obsolete inventory -- 80
Changes in operating assets and liabilities:
Accounts receivable 452 744
Inventory (71) (867)
Prepaid and other current assets 258 (321)
Other assets 147 (16)
Accounts payable 112 (199)
Accrued payroll and related expense 8 (144)
Other accrued expenses and other liabilities 653 916
------ ------
Total adjustments 2,262 649
------ ------
Net cash provided by operating
activities 3,006 1,959
------ ------
Cash flows from investing activities:
Purchases of property and equipment (403) (409)
(Purchase) sale of investments, net (230) (357)
------ ------
Net cash used in investing activities (633) (766)
------ ------
Cash flows from financing activities:
Proceeds from the sale of stock under stock
option plans 108 211
Purchase of treasury stock -- (553)
Principal payments under capital lease obligation (8) --
------ ------
Net cash provided by (used in)
financing activities 100 (342)
------ ------
Net increase in cash and cash equivalents 2,473 851
Cash and cash equivalents, beginning of period 4,681 7,070
------ ------
Cash and cash equivalents, end of period $7,154 $7,921
====== ======
Supplemental disclosure of cash flow information
Cash paid for interest $ 3 $ --
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
<PAGE> 6
FORM 10-Q
PART I
ITEM 1
PAGE 4
SUMMA FOUR, INC.
Notes to Condensed Consolidated Financial Statements
June 30, 1996
1. Basis of Presentation
---------------------
The accompanying unaudited condensed consolidated financial statements 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 three month period ended June 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 Form 10-K for the year ended March 31, 1996.
2. Inventories
-----------
Inventories, valued at the lower of cost (determined using the first-in,
first-out method) or market and net of a valuation reserve of $442,000 for
each period, were as follows (in thousands):
June 30, 1996 March 31, 1996
------------- --------------
Raw materials $1,385 $1,106
Work-in-process 1,061 1,288
Finished goods 977 958
------ ------
$3,423 $3,352
====== ======
3. Income Taxes
------------
The Company's effective tax rate for the three months ended June 30, 1996
and June 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 three months ended June 30, 1996 were from
three customers accounting for 10%, 9% and 8% respectively of net revenues.
Approximately 33% of the Company's net revenues for the three months ended
June 30, 1995 were from three customers accounting for 13%, 11% and 9%
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. During the three months ended
June 30, 1996, the Company reissued 8,540 shares at a price of $12.32.
Since the inception of the repurchase program, the Company has repurchased
321,000 shares at an average cost of $16.81 per share and has reissued
29,034 shares at an average price of $12.83. The reissuances relate to
purchases under the Company's Employee Stock Purchase Plan. The Company may
repurchase additional shares of its stock depending on stock market
conditions, price per share and other factors.
<PAGE> 8
FORM 10-Q
PART I
ITEM 2
PAGE 6
SUMMA FOUR, INC.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
June 30, 1996
This Quarterly Report on Form 10-Q 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 "Certain Factors That May Affect Results" in the Company's Annual Report
on Form 10-K for the year ended March 31, 1996.
Results of Operations
- ---------------------
Three Months Ended June 30, 1996 Compared with Three Months June 30, 1995
- -------------------------------------------------------------------------
Net revenues for the three months ended June 30, 1996 increased by $1.5 million
(16%) to $11.2 million, compared to $9.7 million for the three months ended June
30, 1995. This increase in revenue resulted primarily from increased unit
shipments of the Company's VCO 80 product line and increased customer support
and training activities. Shipments to the Company's application developers and
resellers approximated 44% of revenues for the three months ended June 30, 1996
compared to 42% for the three months ended June 30, 1995. Included in these
categories is a growing number of emerging companies. Shipments to international
customers represented approximately 41% of total revenues for the quarter ended
June 30, 1996 versus 39% for the same quarter in 1995. The Company does not
believe that the percentage increase in net revenues in the three months ended
June 30, 1996 is necessarily indicative of the percentage increase in net
revenues to be generated for any subsequent three month period.
Gross profit increased $.7 million (11%) to $7.1 million for the three months
ended June 30, 1996 compared to $6.4 million for the three months ended June 30,
1995. Gross margin decreased to 63% in the three months ended June 30, 1996 from
66.5% in the three months ended June 30, 1995. The decrease in gross margin
resulted primarily from an increase in sales through the more highly discounted,
indirect revenue channels, an increase in service revenue which generates lower
gross margins and a shift in product mix towards lower margin systems. The
Company does not believe that the current rates of gross margins are necessarily
indicative of future gross margins which may be affected by the level of net
revenue, customer mix, cost of components, and discounts granted to high volume
purchasers. A reclassification of a portion of customer service ($178,000) and
research and development ($40,000) expenses to cost of revenues and a portion of
corporate quality assurance ($55,000) expenses from cost of revenues to selling,
general and administrative expenses are reflected in the results for the three
months ended June 30, 1995. These reclassifications had no effect on operating
or net income.
Selling, general and administrative expenses increased by $.4 million (13%) to
$3.4 million, or 30% of net revenues, for the three months ended June 30, 1996
compared with $3.0 million, or 31% of net revenues, for the three months ended
June 30, 1995. This increase in expenses was primarily attributable to expansion
of the Company's direct sales and support organization and increased
professional services costs.
<PAGE> 9
FORM 10-Q
PART I
ITEM 2
PAGE 7
Research and development expenses increased $1 million (55%) to $2.8 million or
25% of net revenues for the three months ended June 30, 1996 compared to $1.8
million or 18% of net revenues for the three months ended June 30, 1995. This
increase in expenses was primarily the result of the expansion of the Company's
software engineering staff, increased utilization of contract engineering
resources and increased testing and certification costs and material
acquisitions for the fabrication of prototype units of new products. The
Company's increased spending for research and development is focused towards
providing additional product functionality in terms of integrated SS-7, network
management, scalability, certifications, and subrate switching. The Company
believes that its strategy of increased spending on research and development is
required to help advance its position as a core network supplier for
telecommunications service providers. The Company believes that the present
level of expenditures for research and development will continue through at
least the next several quarters.
Operating income decreased by $.7 million (44%) to $.9 million, or 8% of net
revenues for the three months ended June 30, 1996, compared to $1.6 million, or
17% of net revenues for the three months ended June 30, 1995. The decrease was
due primarily to planned higher research and development expenses.
Liquidity and Capital Resources
- -------------------------------
At June 30, 1996, the Company had $40.4 million in cash and cash equivalents and
current and non-current investments. During the three months ended June 30,
1996, cash and cash equivalents increased $2.5 million. At June 30, 1996, the
ratio of current assets to current liabilities was 4.1:1 compared to 4.3:1 at
March 31, 1996. Purchase commitments to suppliers of the Company's products were
approximately $9.1 million and $4.7 million at June 30, 1996 and 1995
respectively.
The Company maintains an unsecured bank line of credit in the amount of $6.0
million. At June 30, 1996, no borrowings were outstanding under this line.
Unless renewed, the line expires in September 1996. This line bears interest at
the bank's prime interest rate per annum (8.25% at June 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 common stock. Such repurchases will be funded through the
Company's cash and investments. As of June 30, 1996, the Company had repurchased
a cumulative total of 321,000 shares at an average cost of $16.81 per share and
had reissued 29,034 shares at an average price of $12.83 related to purchases
under its Employee Stock Purchase Plan. The Company may repurchase additional
shares depending on stock market conditions, price per share and other factors.
The Company does not consider the impact of inflation on its business activities
to have been significant to date.
<PAGE> 10
FORM 10-Q
PART II
ITEM 1-6
PAGE 8
SUMMA FOUR, INC.
Part II - Other Information
June 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 alleges, 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 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 has been
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. To date, no decision has been rendered. While the
ultimate outcome of the lawsuit cannot be predicted with certainty, management
of the Company currently believes that the disposition of the lawsuit will not
have a material adverse effect on the Company's financial condition, results of
operations or cash flows.
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, 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 the early stages of 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> 11
FORM 10-Q
PART II
PAGE 9
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
- ------------------------------------------------------------
Not applicable.
Item 5 - Other Information
- --------------------------
Not applicable.
Item 6 - Exhibits and Reports on Form 8-K
- -----------------------------------------
Not applicable.
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FORM 10-Q
PART II
PAGE 10
SIGNATURES
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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: July 25, 1996 By: /s/ Edward C. Callahan, Jr.
---------------------------
Edward C. Callahan, Jr.
President
Date: July 25, 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
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> APR-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 7,154
<SECURITIES> 33,205
<RECEIVABLES> 9,383
<ALLOWANCES> 480
<INVENTORY> 3,423
<CURRENT-ASSETS> 34,010
<PP&E> 9,457
<DEPRECIATION> 5,852
<TOTAL-ASSETS> 59,288
<CURRENT-LIABILITIES> 8,342
<BONDS> 0
<COMMON> 64
0
0
<OTHER-SE> 49,897
<TOTAL-LIABILITY-AND-EQUITY> 59,288
<SALES> 11,189
<TOTAL-REVENUES> 11,189
<CGS> 4,126
<TOTAL-COSTS> 4,126
<OTHER-EXPENSES> 6,141
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,199
<INCOME-TAX> 455
<INCOME-CONTINUING> 744
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 744
<EPS-PRIMARY> .12
<EPS-DILUTED> .12
</TABLE>
