<PAGE> 1
============================================================
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 December 31, 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 5,898,031
Shares Outstanding as of January 27, 1997
============================================================
<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 1
December 31, 1996 and March 31, 1996
Condensed Consolidated Statements of Income 2
for the three and nine months
ended December 31, 1996 and 1995
Condensed Consolidated Statements of Cash Flows 3
for the nine months ended December 31, 1996 and 1995
Notes to Condensed Consolidated Financial Statements 4-6
Item 2 - Management's Discussion and Analysis of 7-11
Financial Condition and Results of Operations
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 13
Security Holders
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
PAGE 1
SUMMA FOUR, INC.
<TABLE>
Condensed Consolidated Balance Sheets
(In thousands, except share data)
<CAPTION>
December 31, 1996 March 31, 1996
----------------- --------------
(Unaudited)
Assets
- ----------------------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 9,882 $ 4,681
Short-term Investments 9,943 12,284
Accounts receivable, net 10,349 9,466
Inventories, net 5,213 3,352
Deferred income taxes 1,988 1,988
Prepaid and other current assets 1,086 1,075
------- -------
Total current assets 38,461 32,846
Long-term Investments 16,008 20,758
Property and equipment, net 3,907 3,755
Other assets 157 340
------- -------
$58,533 $57,699
======= =======
Liabilities and Stockholders' Equity
- ------------------------------------
Current liabilities:
Accounts payable $2,454 $ 1,775
Accrued payroll and related expenses 1,434 957
Other accrued liabilities 3,103 3,247
Deferred revenues 1,738 1,720
------ -------
Total current liabilities 8,729 7,699
Other long-term liabilities 763 863
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 December 31, 1996 and 6,381,437 at
March 31, 1996 64 64
Additional paid-in capital 43,625 43,592
Accumulated earnings 12,697 11,301
Cumulative translation adjustment 79 (125)
Unrealized losses on investments (41) (539)
Treasury stock, at cost, 470,966 shares at
December 31, 1996 and 300,506 (7,383) (5,156)
at March 31, 1996
Total stockholders' equity 49,041 49,137
------- -------
$58,533 $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
<TABLE>
SUMMA FOUR, INC.
Condensed Consolidated Statements of Income
(Unaudited)
(In thousands, except per share data)
<CAPTION>
Three Months Ended Nine Months Ended
December 31, December 31,
------------ ------------
1996 1995 1996 1995
------- ------- ------- ------
<S> <C> <C> <C> <C>
Net revenues $11,624 $10,321 $32,795 $29,958
Cost of revenues(*) 4,906 3,559 13,004 10,384
------- ------- ------- -------
Gross profit 6,718 6,762 19,791 19,574
Operating expenses:
Selling, general and administrative(*) 3,714 3,268 10,795 9,583
Research and development(*) 2,500 2,677 7,528 6,542
------- ------- ------- -------
Total operating expenses 6,214 5,945 18,323 16,125
------- ------- ------- -------
Operating income 504 817 1,468 3,449
Interest income, net 234 232 783 1,105
------- ------- ------- -------
Income before income taxes 738 1,049 2,251 4,554
Provision for income taxes 281 399 855 1,732
------- ------- ------- -------
Net income $ 457 $ 650 $ 1,396 $ 2,822
======= ======= ======= =======
Net income per share $.08 $.10 $.23 $.44
Weighted average common and
common equivalent shares
outstanding 6,050,279 6,272,585 6,183,699 6,373,808
<FN>
(*) For the three and nine month periods ended December 31, 1995, a portion of
customer service ($148,000 and $482,000, respectively) and research and
development ($56,000 and $170,000, respectively) expenses were reclassified to
cost of revenues. In addition, corporate quality expenses of $57,000 and
$162,000, respectively, were reclassified from cost of revenues to selling,
general and administrative expenses. These reclassifications had no effect on
operating or net income.
The accompanying notes are an integral part of these condensed
consolidated financial statements.
</TABLE>
<PAGE> 5
FORM 10-Q
PART I
ITEM 1
PAGE 3
<TABLE>
SUMMA FOUR, INC.
Consolidated Statements Of Cash Flows
(Unaudited)
(In thousands)
<CAPTION>
Nine Months Ended December 31,
------------------------------
1996 1995
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,396 $ 2,822
------- -------
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 1,765 1,453
Provision for doubtful accounts 150 48
Provision for excess and obsolete inventory -- 185
Changes in operating assets and liabilities:
Accounts receivable (829) 447
Inventory (1,861) (1,689)
Prepaid and other current assets (11) (394)
Other assets 183 (44)
Accounts payable 679 (893)
Accrued payroll and related expense 477 50
Other accrued expenses and other liabilities (202) 1,322
------- -------
Total adjustments 351 485
------- -------
Net cash provided by operating
activities 1,747 3,307
------- -------
Cash flows from investing activities:
Purchases of property and equipment (1,917) (1,927)
Sales (Purchases) of investments, net 7,589 (851)
------- -------
Net cash provided by (used in) investing
activities 5,672 (2,778)
------- -------
Cash flows from financing activities:
Proceeds from the sale of stock under stock
option plans 130 329
Purchase of treasury stock (2,324) (4,149)
Principal payments under capital lease obligation (24) (13)
------- -------
Net cash used in financing activities (2,218) (3,833)
------- -------
Net increase (decrease) in cash and cash equivalents 5,201 (3,304)
Cash and cash equivalents, beginning of period 4,681 7,070
------- -------
Cash and cash equivalents, end of period $ 9,882 $ 3,766
======= =======
Supplemental disclosure of cash flow information
Cash paid for interest $ 10 $ 2
</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
December 31, 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 nine month
period ended December 31, 1996 are not necessarily indicative of the
results that may be expected for the fiscal year ending 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
Reports on Form 10-Q for the quarters ended June 30, 1996 and September
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
$324 and $442 respectively, were as follows (in thousands):
<CAPTION>
December 31, 1996 March 31, 1996
----------------- --------------
<S> <C> <C>
Raw materials $1,942 $1,106
Work-in-process 2,002 1,288
Finished goods 1,269 958
------ ------
$5,213 $3,352
====== ======
</TABLE>
3. Income Taxes
------------
The Company's effective tax rate for the nine months ended December
31, 1996 and December 31, 1995 was approximately 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 revenue is
derived from a limited number of customers. Approximately 28% of the
Company's net revenues, for the nine months ended December 31, 1996,
were derived from three customers accounting for 11%, 9% and 8%,
respectively. Similarly, approximately 28% of the Company's net
revenues for the nine months ended December 31, 1995 were derived from
three customers accounting for 11%, 9% and 8%, respectively.
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 such program during its fiscal quarter
ended September 30, 1996, having repurchased 500,000 shares at an
average cost of $15.44 per share and reissued 29,034 shares of these
purchases at an average price of $12.83. During the nine month period
ended December 31, 1996 the Company repurchased 179,000 shares at an
average cost of $12.99 and reissued 8,540 shares of these purchases an
average price of $12.32. All reissuances relate to purchases under the
Company's Employee Stock Purchase Plan. On December 16, 1996, the Board
of Directors authorized the repurchase of an additional 500,000 shares
of the Company's Common Stock as an extension of the Repurchase
Program.
6. Legal Proceedings
-----------------
The Company, in the normal course of business, is involved in various
legal proceedings which, in the opinion of management and the Company's
attorney's, will not have a material effect on the Company's financial
condition or results of operations.
In addition, 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 for
passenger use in commercial aircraft. 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 against
Claircom, 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, together with Claircom's Motion to Dismiss or Stay
the New Hampshire action. 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 while the discovery phase continues, a
May 1998 trial date has been set. There can be no assurance that an
unfavorable outcome would not have a materially adverse effect on the
Company's financial condition, results of operations, and/or cash
flows.
<PAGE> 8
FORM 10-Q
PART I
ITEM 1
PAGE 6
SUMMA FOUR, INC.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
December 31, 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 December 31, 1996 Compared to Three Months December 31, 1995
- -------------------------------------------------------------------------------
Net revenues for the three months ended December 31, 1996 increased by $1.3
million (13%) to $11.6 million, compared to $10.3 million in revenues for the
three months ended December 31, 1995. This increase was related, in part, to
increased unit shipments of the Company's recently introduced VCO-20 product
line and to increased shipments of sub-assemblies for system expansion.
Shipments to the Company's application developers and resellers represented
approximately 62% of net revenues for the three months ended December 31, 1996
compared to 44% for the three months ended December 31, 1995. This increase was
due primarily to the Company's expansion into new markets through the use of
resellers. Included in these categories of customers is a growing number of
emerging companies whose operating performance is less predictable. Shipments to
international customers represented approximately 38% of net revenues for the
quarter ended December 31, 1996 versus 40% for the same quarter in 1995. The
Company expects that, from time to time, extended selling cycles, due in large
part to longer evaluation periods by potential customers, may be a factor
affecting the level of its revenues and therefore, periodically affecting the
Company's operating results.
Gross profit decreased $.1 million (.7%) to $6.7 million for the three months
ended December 31, 1996 compared to $6.8 million for the three months ended
December 31, 1995. Gross margin decreased to 57.8% in the three months ended
December 31, 1996 compared to 65.5% in the three months ended December 30, 1995.
The decrease in gross margin was caused by a number of factors including
increased price competition, shifts in product mix, a higher level of reseller
sales necessary to promote expansion into new market segments which typically
require higher discounts and increases in service revenues as a percentage of
net revenues which generate lower margins than product sales. As a result of
such factors, the Company believes it will continue to experience downward
pressures on its gross margins for the balance of, and potentially beyond, its
current fiscal year.
For the three months ended December 31, 1995, a reclassification of a portion of
customer service ($148,000) and research and development ($56,000) expenses to
cost of revenues and a portion of corporate quality assurance ($57,000) expenses
from cost of revenues to selling, general and administrative expenses were also
reflected in the results. These reclassifications had no effect on operating or
net income.
<PAGE> 9
FORM 10-Q
PART I
ITEM 2
PAGE 7
Selling, general and administrative expenses increased by $.4 million (14%) to
$3.7 million, or 32% of net revenues, for the three months ended December 31,
1996 compared to $3.3 million, or 32% of net revenues, for the three months
ended December 31, 1995. This increase resulted primarily from a non-recurring
compensation charge of $.2 million and increases in commissions consistent with
increased revenues.
Research and development expenses decreased $.2 million (7%) to $2.5 million or
22% of net revenues for the three months ended December 31, 1996 compared to
$2.7 million or 26% of net revenues for the three months ended December 31,
1995. This decrease was primarily the result of reduced material usage
associated with new product development and reduced product certification
expenses. The Company believes that its strategy of continued emphasis on
development and sustaining engineering is necessary to advance its position as a
core network supplier for telecommunications service providers and as a result,
the Company's research and development expenditures may increase in the future.
Operating income decreased by $.3 million (38%) to $.5 million, or 4% of net
revenues for the three months ended December 31, 1996, compared to $.8 million,
or 8% of net revenues for the three months ended December 31, 1995. The decrease
was due primarily to lower gross margins as previously discussed.
Nine Months Ended December 31, 1996 Compared to Nine Months Ended December 31,
- -------------------------------------------------------------------------------
1995
- ----
Net revenues for the nine months ended December 31, 1996 increased by $2.8
million (9%) to $32.8 million, from $30 million for the nine months ended
December 31, 1995. This increase resulted principally from increased unit sales
of the Company's Virtual Central Office (VCO) series product lines and increased
shipments of sub-assemblies for system expansion. The Company periodically
experienced extended selling cycles in the nine month period ended December 31,
1996 due to longer evaluation periods by potential customers. The Company
believes extended selling cycles will remain an ongoing factor thereby
periodically affecting the Company's operating results.
Gross profit increased by $.2 million (1%) to $ 19.8 million, primarily as a
result of higher net revenues for the nine months ended December 31, 1996
compared to $19.6 million for the nine months ended December 31, 1995. Gross
margin decreased to 60.3% during the nine months ended December 31, 1996 from
65.3% in the nine months ended December 31, 1995. The margin decrease for this
period was primarily attributable to strategic price reductions resulting from
increasing competition, higher reseller sales and other factors, as previously
discussed.
For the nine months ended December 31, 1995, a reclassification of a portion of
customer service ($482,000) and research and development ($170,000) expenses to
cost of revenues and a portion of corporate quality assurance ($162,000)
expenses from cost of revenues to selling, general and administrative expenses
are reflected in the results. These reclassifications had no effect on operating
or net income.
Selling, general and administrative expenses increased by $1.2 million (13%) to
$10.8 million, or 33% of revenues, for the nine months ended December 31, 1996
compared to $9.6 million, or 32% of net revenues, in the same period of fiscal
1996. This increase was due primarily to a non-recurring compensation charge and
expenses related to ongoing litigation.
<PAGE> 10
FORM 10-Q
PART I
ITEM 2
PAGE 8
Research and development expenses increased by $1 million (15%) to $7.5 million,
or 23% of net revenues, for the nine months ended December 31, 1996 compared to
$6.5 million, or 22% of net revenues, in the same period of fiscal 1996. This
increase was due primarily to an increase in staffing levels and reflects the
Company's longer term strategic intentions to maintain Product Development and
Sustaining engineering initiatives at a relatively high percentage of its net
revenues.
Operating income decreased by $2.0 million (57.4%) to $1.5 million or 4% of net
revenues for the nine months ended December 31, 1996 compared to $3.4 million or
12% of net revenues for the nine months ended December 31, 1995. The decrease
was due primarily to lower gross margins, increased spending for staffing
additions within the engineering functions and litigation expenses.
The Company's effective tax rate for the nine months ended December 31, 1996 and
December 31, 1995 was approximately 38%.
Liquidity and Capital Resources
- -------------------------------
At December 31, 1996, the Company had $35.8 million in cash and equivalents and
short-term and long-term investments. During the nine months ended December 31,
1996, cash and investments decreased $1.9 million. This decrease was due
primarily to the expenditure of $2.2 million related to the repurchase of the
Company's common stock under its Repurchase Program. At December 31, 1996, the
ratio of current assets to current liabilities was 4.4:1 compared to 4.3:1 at
March 31, 1996. Purchase commitments related to materials required to meet
product production demands were approximately $7.0 million and $4.1 million at
December 31, 1996 and 1995 respectively.
The Company maintains an unsecured bank line of credit in the amount of $6.0
million. At December 31, 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
December 31, 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 such purchases during the quarter ended September 30, 1996,
having repurchased 500,000 shares at an average cost of $15.44 per share and
reissued 29,034 shares of these purchases at an average price of $12.83. During
the nine month period ended December 31, 1996, the Company repurchased 179,000
shares at an average cost of $12.99 and reissued 8,540 shares of these purchases
at an average price of $12.32. All reissuances related to purchases under the
Company's Employee Stock Purchase Plan. On December 16, 1996, the Board of
Directors authorized the purchase of up to 500,000 additional shares of The
Company's Common Stock as an extension of the Repurchase Program.
The Company does not consider the impact of inflation on its business activities
to have been significant to date.
<PAGE> 11
FORM 10-Q
PART I
ITEM 2
PAGE 9
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:
In fiscal 1996 and the first nine 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 nine months of fiscal year 1997, the
Company periodically experienced extended selling cycles due to longer
evaluation periods by potential customers. The Company expects that extended
selling cycles will periodically 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 while achieving market
acceptance of both the enhanced and the new products. The Company believes
results in fiscal year 1996 and the first nine 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. During the balance of fiscal year 1997 and beyond,
the Company plans to enhance the scalability, price performance, and
supportability of its products. Any delay in introducing these features 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. Certain companies
have been aggressively developing and marketing product to compete with 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 new products and system features and
enhancements to respond to competitive conditions and to address particular
customer requirements. 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
featuring new technologies.
In light of continuing technological developments, the Company's ability to
develop marketable products and maintain a favorable competitive position in its
various markets will also depend, in large part, on its ability to attract and
retain highly qualified management, technical, sales and marketing personnel.
Competition for the services of such key employees is intense.
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
<PAGE> 12
FORM 10-Q
PART I
ITEM 2
PAGE 10
or provide availability of such components or that any such supplier will not
encounter financial difficulties. The Company is actively seeking alternative
solutions to address potential 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. These include increased competition, higher discounts as a
percentage of net revenues related to the increased use of resellers
strategically directed toward expansion into new market segments and increases,
as a percentage of net revenues, in service revenues which traditionally
generate lower margins than product sales. In addition, while the Company's new
VCO-20 product line is intended to drive significant increases in unit sales
volumes, comparative margins on the VCO-20 are somewhat lower than the Company's
other products. 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 as a result, the
Company's gross margins will be adversely affected to the extent that the
Company does not increase the price of such systems to offset increased cost.
The Company's increasing international business is subject to a number of
inherent risks which include, among others, the challenges of building and
managing foreign operations, unique product/technical requirements, fluctuations
in the value of foreign currencies, import/export duties/logistics, 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 comparisons 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> 13
FORM 10-Q
PART II
ITEM 1-5
PAGE 11
SUMMA FOUR, INC.
Part II - Other Information
December 31, 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 and the Company's attorney's, will
not have a material effect on the Company's financial condition or results of
operations.
In addition, 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 for passenger use in commercial aircraft. 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
against Claircom 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 while the discovery phase continues, a May 1998 trial
date has been set. 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.
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
- --------------------------
On November 18, 1996, Edward C. Callahan, Jr. resigned as President and
Director of the Company.
<PAGE> 14
FORM 10-Q
PART II
ITEMS 6
PAGE 12
Item 6 - Exhibits and Reports on Form 8-K
- -----------------------------------------
a. Material Contracts Entered Into in Quarter
------------------------------------------
10.1 Employment Agreement dated November 21, 1996 between the
Company and Robert A. Degan
27 Financial Data Schedule
b. On December 10, 196, the Company filed a report on Form 8-K with
respect to an announcement that effective January 1997, Robert A.
Degan, a member of the Company's Board of Directors since 1984,
had become President and Chief Executive Officer of the Company.
c. Exhibit 11
----------
<TABLE>
Computation of Earnings Per Share
(Unaudited)
(In thousands, except for per share data)
<CAPTION>
Three Months Ended Nine Months Ended
December 31, December 31,
1996 1995 1996 1995
------ ------ ------ ------
<S> <C> <C> <C> <C>
Primary
Average shares outstanding
Common Stock 5,913 6,102 6,001 6,169
Net effect of dilutive stock options-based
on the treasury stock method using
average market price Common Stock 137 171 183 205
------ ------ ------ ------
Total 6,060 6,273 6,184 6,374
====== ====== ====== ======
Net Income $ 457 $ 650 $1,396 $2,822
Per share amount $ 0.08 $ 0.10 $ 0.23 $ 0.44
</TABLE>
<PAGE> 15
FORM 10-Q
PART II
PAGE 13
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: February 3, 1997 -------------------------------
Robert A. Degan
President and CEO
Date: February 3, 1997 -------------------------------
Thomas A. St. Germain
Senior Vice President, Treasurer
and Chief Financial Officer
(Principal Financial and Accounting Officer)
<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: February 3, 1997 By: /s/ Robert A. Degan
-----------------------
Robert A. Degan
President and Chief Executive Officer
Date: February 3, 1997 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> 9-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> APR-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 9,882
<SECURITIES> 25,951
<RECEIVABLES> 10,586
<ALLOWANCES> 237
<INVENTORY> 5,213
<CURRENT-ASSETS> 38,461
<PP&E> 10,915
<DEPRECIATION> 7,008
<TOTAL-ASSETS> 58,533
<CURRENT-LIABILITIES> 8,729
<BONDS> 0
64
0
<COMMON> 0
<OTHER-SE> 48,977
<TOTAL-LIABILITY-AND-EQUITY> 58,533
<SALES> 32,795
<TOTAL-REVENUES> 32,795
<CGS> 13,004
<TOTAL-COSTS> 13,004
<OTHER-EXPENSES> 18,323
<LOSS-PROVISION> 150
<INTEREST-EXPENSE> 10
<INCOME-PRETAX> 2,251
<INCOME-TAX> 855
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,396
<EPS-PRIMARY> .23
<EPS-DILUTED> .23
</TABLE>
