<PAGE> 1
============================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 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 JUNE 30, 1997
-----------------------------------------
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 5,734,001
Outstanding as of July 25, 1997
============================================================
SUMMA FOUR, INC.
<PAGE> 2
INDEX TO FORM 10-Q
Page(s)
-------
Part I - Financial Information:
Item 1 - Financial Statements
Condensed Consolidated Balance Sheets as of 1
June 30, 1997 and March 31, 1997
Condensed Consolidated Statements of Operations 2
for the three months ended June 30, 1997 and 1996
Condensed Consolidated Statements of Cash Flows 3
for the three months ended June 30, 1997 and 1996
Notes to Condensed Consolidated Financial Statements 4-5
Item 2 - Management's Discussion and Analysis of 6-9
Financial Condition and Results of Operations
Part II - Other Information:
Item 1 - Legal Proceedings 10
Item 2 - Changes in Securities 11
Item 3 - Defaults Upon Senior Securities 11
Item 4 - Submission of Matters to a Vote of 11
Security Holders
Item 5 - Other Information 11
Item 6 - Exhibits and Reports on Form 8-K 11
Signature(s) 12
<PAGE> 3
FORM 10-Q
PART I
ITEM 1
PAGE 1
SUMMA FOUR, INC.
Condensed Consolidated Balance Sheets
(In thousands, except share data)
<TABLE>
<CAPTION>
June 30, 1997 March 31, 1997
------------- --------------
(Unaudited)
ASSETS
- -----------------------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,234 $ 6,169
Investments - current 12,403 7,472
Accounts receivable, net 9,186 10,278
Inventories, net 6,320 5,069
Deferred income taxes 2,288 2,288
Prepaid and other current assets 1,184 1,812
-------- --------
Total current assets 32,615 33,088
Investments - non-current 16,758 18,686
Property and equipment, net 4,710 4,265
Deferred income taxes 226 226
Other assets 249 188
-------- --------
$ 54,558 $ 56,453
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Accounts payable $ 2,080 $ 2,333
Accrued payroll and related expenses 1,082 1,016
Other accrued liabilities 2,527 3,704
Deferred revenues 2,913 3,075
-------- --------
Total current liabilities 8,602 10,128
Other long-term liabilities 624 676
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 6,481,762
at June 30, 1997 and 6,411,762 at
March 31, 1997 65 64
Additional paid-in capital 43,981 43,662
Accumulated earnings 12,583 13,149
Unrealized gains (losses) on investments (28) 43
Treasury stock, at cost, 852,431 shares at
June 30, 1997 and March 31, 1997 (11,269) (11,269)
-------- --------
Total stockholders' equity 45,332 45,649
-------- --------
$ 54,558 $ 56,453
======== ========
</TABLE>
The accompanying notes are an integral part of the condensed
consolidated financial statements.
<PAGE> 4
FORM 10-Q
PART I
ITEM 1
PAGE 2
SUMMA FOUR, INC.
Condensed Consolidated Statements of Operations
(Unaudited)
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended
June 30,
--------
1997 1996
------- -------
<S> <C> <C>
Net revenues $ 9,276 $11,189
Cost of revenues 4,334 4,126
------- -------
Gross profit 4,942 7,063
Operating expenses:
Selling, general and administrative 3,504 3,379
Research and development 2,795 2,762
------- -------
Total operating expenses 6,299 6,141
------- -------
Operating (loss) income (1,357) 922
Interest income, net 525 277
------- -------
(Loss) income before income taxes (832) 1,199
Benefit from provision for income taxes (266) 455
------- -------
Net (loss) income $ (566) $ 744
======= =======
Net (loss) income per share $ (.10) $ .12
Weighted average common and
common equivalent shares
outstanding 5,571 6,301
</TABLE>
The accompanying notes are an integral part of the condensed
consolidated financial statements.
<PAGE> 5
FORM 10-Q
PART I
ITEM 1
PAGE 3
SUMMA FOUR, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Three Months Ended
June 30,
--------
1997 1996
------- -------
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income $ (566) $ 744
------- -------
Adjustments to reconcile net (loss) income to net
cash (used in) provided by operating activities:
Depreciation and amortization 629 553
Provision for doubtful accounts -- 150
Changes in operating assets and liabilities:
Accounts receivable 1,092 452
Inventory (1,251) (71)
Prepaid and other current assets 628 258
Other assets (61) 147
Accounts payable (253) 112
Accrued payroll and related expense 66 8
Other accrued expenses and other liabilities (1,384) 653
------- -------
Total adjustments (534) 2,262
------- -------
Net cash (used in) provided by operating
activities (1,100) 3,006
------- -------
Cash flows from investing activities:
Purchases of property and equipment (1,074) (403)
Purchases of investments, net (3,074) (230)
------- -------
Net cash used in investing activities (4,148) (633)
------- -------
Cash flows from financing activities:
Proceeds from the sale of stock under stock
option plans 320 108
Principal payments under capital lease obligations (7) (8)
------- -------
Net cash provided by financing activities 313 313
------- -------
Net (decrease) increase in cash and cash equivalents (4,935) 2,473
Cash and cash equivalents, beginning of period 6,169 4,681
------- -------
Cash and cash equivalents, end of period $ 1,234 $ 7,154
======= =======
Supplemental disclosure of cash flow information
Cash paid for interest $ 3 $ 3
Cash paid for income taxes $ 709 $ --
</TABLE>
The accompanying notes are an integral part of the condensed
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, 1997
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, 1997 are not necessarily indicative of the
results that may be expected for the year ended March 31, 1998. 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, 1997. The year-end condensed
balance sheet data was derived from audited financial statements, but
does not include all disclosures required by generally accepted
accounting principles.
2. INVENTORIES
Inventories, valued at the lower of cost (determined using the
first-in, first-out method) or market were as follows (in thousands):
<TABLE>
<CAPTION>
JUNE 30, 1997 MARCH 31, 1997
------------- --------------
<S> <C> <C>
Raw materials $ 2,467 $ 1,652
Work-in-process 2,161 1,795
Finished goods 1,692 1,622
----- -----
$ 6,320 $ 5,069
======= =======
</TABLE>
3. MAJOR CUSTOMER INFORMATION
Historically, a significant portion of the Company's net revenues is
derived from a limited number of customers. Approximately 28% of the
Company's net revenues for the three months ended June 30, 1997 were
from three customers accounting for 11%, 10%, and 7%, respectively, of
net revenues. 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.
<PAGE> 7
FORM 10-Q
PART I
ITEM 1
PAGE 5
4. RECENT PRONOUNCEMENT
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128 ("SFAS No. 128"),
"Earnings per Share." SFAS No. 128 establishes a different method of
computing net income per share than is currently required under the
provisions of Accounting Principles Board Opinion No. 15, "Earnings per
Share." Under SFAS No. 128, the Company will be required to present
both basic net income per share and diluted net income per share. Basic
net income (loss) per share for the three months ended June 30, 1997
would have been $(.10) per share as compared with $.12 per share for
the corresponding periods in fiscal 1997. The impact of SFAS No. 128 on
the calculation of diluted net income per share is not expected to be
materially different from primary earnings per share. The Company plans
to adopt SFAS No. 128 in its third quarter for fiscal 1998 and at that
time all historical net income per share data presented will be
restated to conform to the provisions of SFAS No. 128.
5. CONTINGENCIES
On August 2, 1995, Claircom Communications Group, Inc. ("Claircom")
brought an action against the Company in King County (Washington)
Superior Court alleging breach of contract, breach of warranty, and
various related claims and seeking an accounting and damages arising
from the joint development of a cabin telecommunications unit (CTU),
which is part of a cabin communications system, to be installed in
commercial passenger aircraft for providing communications services
between the aircraft and the ground. 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. Claircom filed a 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. On May 9, 1997, the Court allowed Claircom's
motion to amend its counterclaims to add claims for fraudulent
inducement, intentional misrepresentation and a claim under the New
Hampshire Consumer Protection Act. The Company has moved to dismiss
these new counterclaims. Claircom has moved to dismiss, or for partial
summary judgment on, the Company's claim under the New Hampshire
Consumer Protection Act. The Court will hear argument on both motions
at the status conference scheduled for August 27, 1997. Discovery is
ongoing and the Court has set a trial date of May 1998.
On June 20, 1997 the Company commenced an action in the United States
District Court for the District of Delaware against AT&T Wireless
Services, Inc. and Claircom, Civil No. 97-335. That action asserts that
the defendants have infringed, and will continue to infringe, US Patent
Number 5,553,135 (the " '135 patent") owned by the Company.
Specifically the action contends that the defendants have violated the
'135 patent by making, using, selling or offering to sell cabin
telecommunications units employing the technology claimed and disclosed
in the '135 patent. The suit is in its early stages, and the Company is
unable to express a view as to its outcome.
<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, 1997
The statements contained in this Quarterly Report on Form 10-Q which are not
purely historical are forward-looking statements within the meaning of Section
27a of the Securities Act of 1933 and section 21E of the Securities Exchange Act
of 1934, including statements regarding the Company's expectations, hopes,
intentions or strategies regarding the future. Without limiting the foregoing,
the words "believes," "anticipates," "plans," "expects," and similar expressions
are intended to identify forward-looking statements. All forward-looking
statements included in this document are based on information available to the
Company on the date hereof, and the Company assumes no obligation to update any
such forward-looking statements. It is important to note there are a number of
important factors that could cause the Company's actual results to differ
materially from those indicated in 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
Net revenues decreased by $1.9 million (17%) to $9.3 million for the three
months ended June 30, 1997 compared to $11.2 million for the three months ended
June 30, 1996. This decrease in revenue resulted primarily from a general
decrease in unit shipments to our IXC customers. Shipments to the Company's
application developers and reseller customers approximated 65% of revenues for
the three months ended June 30, 1997 compared to 44% for the three months ended
June 30, 1996. Included in these categories is a growing number of emerging
companies. Shipments to international customers represented approximately 53% of
total revenues for the quarter ended June 30, 1997 versus 41% for the same
quarter in 1996. The Company believes that its net revenues may level off or
even decline in certain periods preceding the introduction of an enhanced
version of its VCO 20 switch targeted for the fourth quarter of fiscal 1998 and
a new line of standards-based programmable switches targeted for fiscal 1999.
Gross profit decreased by $2.1 million (30%) to $4.9 million for the three
months ended June 30, 1997 compared to $7.1 million for the three months ended
June 30, 1996. Gross margin decreased to 53% in the three months ended June 30,
1997 from 63% in the three months ended June 30, 1996. 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, a shift in product mix towards lower margin
systems and a series of charges related to consulting and other manufacturing
items. 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 revenues, customer mix, cost of components, and discounts granted
to high volume purchasers. As stated above, the Company's gross margins have
been declining and may continue to decline as a result of continued competitive
pricing pressure and increased use of indirect channels of distribution.
Selling, general and administrative expenses increased by $.1 million (4%) to
$3.5 million, or 38% of net revenues, for the three months ended June 30, 1997
compared with $3.4 million, or 30% of net revenues, for the three months ended
June 30, 1996. This increase in expenses was primarily attributable to expansion
of the Company's sales and support functions in combination with increased
professional services costs.
<PAGE> 9
FORM 10-Q
PART I
ITEM 2
PAGE 7
Research and development expenses were $2.8 million or 30% of net revenues for
the three months ended June 30, 1997 compared to $2.8 million or 25% of net
revenues for the three months ended June 30, 1996. The Company's spending for
research and development is primarily directed towards the enhancement of it's
VCO-20 switch, its new project with Dialogic Corporation and Junction Inc., and
the provision of additional product functionality as it relates to
integrated SS-7, network management, scalability, certifications, subrate
switching and the development of future products. The Company believes that its
current spending level on research and development is required to advance its
position as a core network supplier for telecommunications service providers.
Operating income decreased by $2.3 million to a loss of $1.4 million for the
three months ended June 30, 1997 compared to a profit of $.9 million for the
three months ended June 30, 1996. The decrease was due primarily to the revenue
shortfall and lower gross margins.
The $.3 million increase in interest income for the three month period ended
June 1997, when compared to the same period for the previous fiscal year, was
principally the result of a one time gain on the sale of an available-for-sale
security and increased interest income from investments.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1997, the Company had $30.4 million in cash and cash equivalents and
current and non-current investments. At March 31, 1997, the Company had $32.3
million in cash and cash equivalents and current and non-current investments.
During the three months ended June 30, 1997, cash and cash equivalents decreased
$4.9 million. Of this decrease, $3 million resulted from a transfer of cash to
investment holdings. The balance of the reduction in cash during the three month
period was a result of increased purchases of property, equipment, and
inventory, a reduction in accounts payables and decreased cash inflow due to
lower sales levels. At June 30, 1997, the ratio of current assets to current
liabilities was 3.8:1 compared to 3.3:1 at March 31, 1997. Purchase commitments
to suppliers of the Company's products were approximately $7.1 million and $9.7
million at June 30, 1997 and March 31, 1997, respectively.
The Company maintains an unsecured bank line of credit in the amount of $6.0
million. At June 30, 1997, no borrowings were outstanding under this line.
Unless renewed, the line expires in September 1997. This line bears interest at
the bank's prime interest rate per annum (8.5% at June 30, 1997). The Company
believes that cash generated from operations and the total of its cash and
current 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 non-current investments in the near term.
On December 16, 1996, the Company's Board of Directors authorized the repurchase
of up to 500,000 shares of common stock as an extension of the Company's
repurchase program. Such repurchases will be funded through the Company's cash
and investments. As of June 30, 1997, the Company had repurchased a cumulative
total of 393,500 shares related to this extension at an average cost of $10.25
per share and had reissued 12,035 shares at an average price of $9.56 related to
purchases under its Employee Stock Purchase Plan. The Company may repurchase
additional shares of its stock 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 I
ITEM 2
PAGE 8
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:
- The Company has recently announced agreements in principle with
Dialogic Corporation and Junction, Inc. which it anticipates will
result in the creation of future products. The Company anticipates
that the expenses associated with this developmental activity will be
partially funded from its fiscal 1998 budget; the balance will be
charged to operating expenses. There can be no assurance that this
relationship will result in the development of salable product(s)
which will be beneficial to the future of the Company or that products
produced by this relationship will be developed in a cost-effective
manner and be available for sale within the time frame required.
- 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 or operational difficulties. In addition,
in certain instances, components required for certain subassemblies
used in the Company's products are no longer being manufactured. The
Company has historically been able to secure such components by
utilizing its network of suppliers. However, the Company is
redesigning such sub-assemblies in order to eliminate production
interruptions that could occur if such components cannot be acquired.
The Company is actively seeking alternative solutions to address
potentially serious delays or shortages from its major component
supplier. If delays or shortages occur and the Company is unable to
effect alternative supply arrangements, its business and results of
operations could be materially adversely affected.
- A variety of factors could influence the level of the Company's net
revenues in a particular quarter, including general economic
conditions in the telecommunications switching industry, the timing of
significant orders, shipment delays, the introduction of new products
by the Company, the introduction of new products by the Company's
competitors, acquisitions by the Company, patterns of capital spending
by customers and other factors, many of which are beyond the Company's
control. Since a substantial portion of the expenses of the Company do
not vary relative to sales levels, if net revenues in particular
quarter do not meet expectations, it could have a material adverse
effect on the Company's results of operations.
- The Company's gross margin has declined in recent periods and may
continue to decline as a result of potential sales price reductions
and increased use of indirect distribution channels. Gross margins are
also affected by other factors such as changes in the cost of
materials, production and quality considerations, and the timing of
new product introductions. 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 is not able to increase the price of such systems to offset
such increased costs.
<PAGE> 11
FORM 10-Q
PART I
ITEM 2
PAGE 9
- The Company's future results of operation and financial condition will
depend, in part, on its ability to obtain and maintain patent
protection for its products, to preserve its trade secrets and to
operate without infringing on proprietary rights of third parties.
There can be no assurance that the Company will be able to obtain
and/or adequately protect the intellectual property required for it to
compete effectively.
- The Company's ability to develop marketable products and maintain a
competitive position 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 these key employees is
intense.
- The Company's 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 these and other factors, past financial performance should not
be considered an indictor of future performance.
<PAGE> 12
FORM 10-Q
PART II
ITEM 1-6
PAGE 10
SUMMA FOUR, INC.
Part II - Other Information
June 30, 1997
ITEM 1 - LEGAL PROCEEDINGS
On August 2, 1995, Claircom Communications Group, Inc. ("Claircom")
brought an action against the Company in King County (Washington)
Superior Court alleging breach of contract, breach of warranty, and
various related claims and seeking an accounting and damages arising
from the joint development of a cabin telecommunications unit (CTU),
which is part of a cabin communications system, to be installed in
commercial passenger aircraft for providing communications services
between the aircraft and the ground. 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. Claircom filed a 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. On May 9, 1997, the Court allowed Claircom's
motion to amend its counterclaims to add claims for fraudulent
inducement, intentional misrepresentation and a claim under the New
Hampshire Consumer Protection Act. The Company has moved to dismiss
these new counterclaims. Claircom has moved to dismiss, or for partial
summary judgment on, the Company's claim under the New Hampshire
Consumer Protection Act. The Court will hear argument on both motions
at the status conference scheduled for August 27, 1997. Discovery is
ongoing and the Court has set a trial date of May 1998.
On June 20, 1997 the Company commenced an action in the United States
District Court for the District of Delaware against AT&T Wireless
Services, Inc. and Claircom, Civil No. 97-335. That action asserts that
the defendants have infringed, and will continue to infringe, US Patent
Number 5,553,135 (the " '135 patent") owned by the Company.
Specifically the action contends that the defendants have violated the
'135 patent by making, using, selling or offering to sell cabin
telecommunications units employing the technology claimed and disclosed
in the '135 patent. The suit is in its early stages, and the Company is
unable to express a view as to its outcome.
<PAGE> 13
FORM 10-Q
PART II
PAGE 11
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 May 6, 1997, it was announced that Richard S. Swee was hired as
Vice President, Engineering.
On May 6, 1997, it was announced that Thomas A. St. Germain, Senior
Vice President, and Chief Financial Officer, would retire, effective
June 30, 1997.
On May 28, 1997, it was announced that the Company had accepted the
resignation of Kendrick A. Estey as Vice President , Customer Service
and Operations.
On July 25, 1997, Jeffrey A. Weber joined the Company as Vice
President and Chief Financial Officer. Mr. Weber was previously Senior
Vice President and Chief Financial Officer at Computer Identics
Corporation.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
a. EXHIBITS
The exhibits listed in the Exhibit Index are part of or included
in this report.
b. REPORTS ON FORM 8-K
None.
<PAGE> 14
FORM 10-Q
PART II
PAGE 12
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: August 11, 1997 /s/ Robert A. Degan
------------------------------------------
Robert A. Degan
President and Chief Executive Officer
Date: August 11, 1997 /s/ Jeffrey A. Weber
------------------------------------------
Jeffrey A. Weber
Vice President and Chief Financial Officer
<PAGE> 15
FORM 10-Q
PART II
PAGE 12
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: August 11, 1997 By: /s/ Robert A. Degan
---------------------
Robert A. Degan
President and Chief Executive Officer
Date: August 11, 1997 By: /s/ Jeffrey A. Weber
----------------------
Jeffrey A. Weber
Vice President and Chief Financial Officer
<PAGE> 16
FORM 10-Q
PART II
PAGE 13
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C>
10.36 +Employment Agreement, dated April 15, 1997, by and between the
Registrant and Richard S. Swee.
10.37* Joint Development Agreement, dated June 11, 1997, by and between
the Registrant and Junction, Inc.
11 Statement Re: Computation of per Share Earnings
27 Financial Data Schedule
</TABLE>
* Confidential treatment requested as to certain portions which have
been filed separately with the Securities and Exchange Commission.
+ Management contract or compensatory plan or arrangement filed as an
exhibit pursuant to Item 6(a) of this report.
<PAGE> 1
[SUMMA FOUR LOGO] EXHIBIT 10.36
EMPLOYMENT AGREEMENT
--------------------
THIS EMPLOYMENT AGREEMENT (the "Agreement"), made this 15th day of
April, 1997, is entered into by Summa Four, Inc., a Delaware corporation, with
its principal place of business at Manchester, New Hampshire (the "Company"),
and Richard Swee (the "Employee").
The Company desires to employ the Employee, and the Employee desires to
be employed by the Company. In consideration of the mutual covenants and
promises contained herein, and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged by the parties hereto,
the parties agree as follows:
1. EMPLOYMENT AT WILL. The Company hereby agrees to employ the
Employee as an employee at will, and the Employee hereby accepts such employment
with the Company, upon the terms set forth in this Agreement, for the period
commencing on April 28, 1997 (the "Commencement Date") and ending on the date
the Employee's employment is terminated in accordance with the provisions of
Section 4 (such period, the "Employment Period").
2. TITLE, CAPACITY. The Employee shall serve as the Company's Vice
President, Engineering, currently reporting to the President and CEO, or in such
other more senior or responsible position as the Company or its Board of
Directors (the "Board") may determine from time to time. The Employee shall be
based at the Company's headquarters in Manchester, New Hampshire, or such place
or places in the continental United States as the Board shall reasonably
determine and the Employee shall agree. The Employee shall be subject to the
supervision of, and shall have such authority as is delegated to him by, the
Board or such officer of the Company as may be designated by the Board.
The Employee hereby accepts such employment and agrees to undertake the
duties and responsibilities inherent in such position and such other duties and
responsibilities as the Board or
<PAGE> 2
its designee shall from time to time reasonably assign to him. The Employee
agrees to devote his entire business time, attention and energies to the
business and interests of the Company during the Employment Period. The Employee
agrees to abide by rules, regulations, instructions, personnel practices and
policies of the Company and any changes therein which may be adopted from time
to time by the Company.
3. COMPENSATION AND BENEFITS.
3.1 SALARY. The Company shall pay the Employee, in bi-weekly
installments, an annual base salary of $150,000 (less applicable state and
federal taxes) for the period commencing on the Commencement Date and ending
March 31, 1998, subject to adjustment thereafter as determined annually by the
Board at its first regular meeting following its receipt of the Company's
audited financial results for its preceding fiscal year.
3.2 BONUS. For such period ending March 31, 1998, the Employee
shall be eligible for a bonus of up to 25% of his current base salary (pro-rated
for 11 months of FY'98) based on the achievement of certain goals and the
Company's financial performance. In order for the Employee to be entitled to
payment of his bonus, he must be actively employed by the Company on the date
the bonus is paid. For periods thereafter, the Employee shall be entitled to
participate in such bonus programs, if any, as may be established from time to
time by its Board of Directors.
3.3 FRINGE BENEFITS. The Employee shall be entitled to
participate in all benefit programs that the Company establishes and makes
available to its employees, if any, to the extent that Employee's position,
tenure, salary, age, health and other qualifications make him eligible to
participate, and to vacations in accordance with the Company's vacation policy.
3.4 REIMBURSEMENT OF EXPENSES. The Company shall reimburse the
Employee for all gasoline used by the Employee in one automobile owned or leased
by him and for
-2-
<PAGE> 3
reasonable travel, entertainment and other expenses incurred, per the Company's
Travel and Entertainment Policy, or paid by the Employee in connection with, or
related to, the performance of his duties, responsibilities or services under
this Agreement, as more fully described in section 12.5.3, upon presentation by
the Employee of documentation, expense statements, vouchers and/or such other
supporting information as the Company may request, PROVIDED, HOWEVER, that (i)
the amount available for such travel, entertainment and other expenses may be
fixed in advance by senior management or the Board and (ii) amounts so
reimbursed for gasoline will be included in Employee's taxable income except as
so documented as a business expense.
3.5 STOCK OPTION. Subject to Board approval, the Employee
shall be granted an incentive stock option to purchase 30,000 shares of the
Company's common stock under its 1993 Stock Incentive Plan (the "Plan"). The
option price shall be the closing price on the first day of the month following
the employment start date month. The option to purchase 30,000 shares shall vest
over four years at 25% per year. If, in the future, the Board votes to shorten
the vesting schedule for Officers generally, then any of the Employee's unvested
shares would fall under the new, more favorable vesting schedule. Stock options
granted may be exercised by the Employee, to the extent vested in accordance
with the terms of the Plan. If, after completing six months of service,
Employee's employment is involuntarily terminated by the Company for any reason
other than "Cause", any unvested shares, which would have otherwise vested
within 12 months of such involuntary termination, shall vest immediately.
4. EMPLOYMENT TERMINATION WITHOUT CAUSE. The Employee shall have
the status of an employee at will. The Company may terminate the Employee's
employment at any time without cause. The Employee has no obligation to remain
employed by the Company and may terminate his employment at any time.
-3-
<PAGE> 4
4.1 TERMINATION FOR CAUSE. In the event the Employee's
employment is terminated for cause the Company shall pay to the Employee the
compensation and benefits otherwise payable to him under Section 3 through the
last day of his actual employment by the Company. For purposes of this
Agreement, "cause" for termination shall be deemed to exist upon (a) alcohol or
drug abuse affecting the performance of your duties, theft, embezzlement, fraud,
absenteeism, dishonesty, gross negligence or misconduct, or (b) the conviction
of the Employee of, or the entry of a pleading of guilty or nolo contendere by
the Employee to, any crime involving moral turpitude or any felony.
4.2 TERMINATION FOR DEATH OR DISABILITY. If the Employee's
employment is terminated by death or because of disability, the Company shall
pay to the estate of the Employee or to the Employee, as the case may be, the
compensation which would otherwise be payable to the Employee up to the end of
the month in which the termination of his employment because of death or
disability occurs, as well as any benefits due Employee under the benefits
programs, e.g., life insurance. For purposes of this Agreement, the term
"disability" shall mean the inability of the Employee, due to a physical or
mental disability, for a period of 90 days, whether or not consecutive, during
any 360-day period to perform the services contemplated under this Agreement. A
determination of disability shall be made by a physician satisfactory to both
the Employee and the Company, PROVIDED THAT if the Employee and the Company do
not agree on a physician, the Employee and the Company shall each select a
physician and these two together shall select a third physician, whose
determination as to disability shall be binding on all parties.
4.3 TERMINATION BY THE COMPANY OTHER THAN FOR CAUSE. If the
Employee's employment is terminated by the Company for any reason other than for
cause, the Company shall continue paying the Employee's current base salary and
insurance benefits, after the Employee's termination of employment, for up to
twelve (12) months (the "Severance Benefit"). Payment of
-4-
<PAGE> 5
the Severance Benefit shall cease upon the earlier of (a) the first anniversary
of the Employee's date of termination, or (b) the date the Employee begins
employment with another employer (or is re-employed by the Company).
4.4 TERMINATION FOLLOWING CHANGE IN CONTROL. If the Employee's
employment is terminated by the Company for any reason other than cause within
one year after a change in control, or the Employee experiences a substantial
diminution in the nature or status of his responsibilities from those set forth
in his job description, and the Employee chooses to terminate employment, the
Company shall continue paying the Employee's current base salary and benefits,
after the Employee's termination of employment, for up to twelve (12) months
(the "Severance Benefit"). Payment of the Severance Benefit shall cease upon the
earlier of (a) the first anniversary of the Employee's date of termination, or
(b) the date the Employee begins employment with another employer (or is
re-employed by the Company). In the event of change of control, the Employee's
unvested shares shall vest immediately, in accordance with section 16 of the
Company's 1995 stock plan. For the purposes of this paragraph, a change in
control is defined as provided for in Attachment "A".
5. NON-COMPETE.
(a) During the Employment Period and for a period of twelve
(12) months after the Employee's termination of employment for any reason, the
Employee will not knowingly directly or indirectly:
(i) as an individual proprietor, partner, stockholder, officer,
employee, director, joint venturer, investor, lender, consultant or in any other
capacity whatsoever (other than as the holder of not more than one percent (1%)
of the total outstanding stock of a publicly held company), render any services
to any business engaged in the design, manufacture or sale of programmable
switches (including, without limitation, Excel) or to any non-legacy switch
-5-
<PAGE> 6
manufacturer (including, without limitation, Sattel) or any major original
equipment manufacturer customer of Excel (including, without limitation, Boston
Technology, Glenayre or Access Line); or
(ii) recruit, solicit or induce, or attempt to induce, any
employee or employees of the Company to terminate their employment with, or
otherwise cease their relationship with, the Company; or
(iii) solicit, divert or take away, or attempt to divert or to
take away, the business or patronage of any of the clients, customers or
accounts, or prospective clients, customers or accounts, of the Company which
were contacted, solicited or served by the Employee while employed by the
Company.
(b) If any restriction set forth in this Section 5 is found by
any court of competent jurisdiction to be unenforceable because it extends for
too long a period of time or over too great a range of activities or too broad a
geographic area, it shall be interpreted to extend only over the maximum period
of time, range of activities or geographic area as to which it may be
enforceable.
(c) The restrictions contained in this Section 5 are necessary
for the protection of the business and goodwill of the Company and are
considered by the Employee reasonable for such purpose. The Employee agrees that
any breach of this Section 5 will cause the Company substantial and irrevocable
damage and therefore, in the event of any such breach, in addition to such other
remedies which may be available, the Company shall have the right to seek
specific performance and injunctive relief.
6. NOTICES. All notices required or permitted under this Agreement
shall be in writing and shall be deemed effective upon personal delivery or upon
deposit in the United States Post Office, by registered or certified mail,
postage prepaid, addressed to the other party at the address
-6-
<PAGE> 7
shown above, or at such other address or addresses as either party shall
designate to the other in accordance with this Section 6.
7. PRONOUNS. Whenever the context may require, any pronouns used in
this Agreement shall include the corresponding masculine, feminine or neuter
forms, and the singular forms of nouns and pronouns shall include the plural,
and vice versa.
8. ENTIRE AGREEMENT. This Agreement constitutes the entire
agreement between the parties and supersedes all prior agreements and
understandings, whether written or oral, relating to the subject matter of this
Agreement.
9. AMENDMENT. This Agreement may be amended or modified only by a
written instrument executed by both the Company and the Employee.
10. GOVERNING LAW. This Agreement shall be construed, interpreted
and enforced in accordance with the laws of the State of New Hampshire.
11. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and
inure to the benefit of both parties and their respective successors and
assigns, including any corporation with which or into which the Company may be
merged or which may succeed to its assets or business, provided, however, that
the obligations of the Employee are personal and shall not be assigned by him.
12. MISCELLANEOUS.
12.1 No delay or omission by the Company in exercising any
right under this Agreement shall operate as a waiver of that or any right. A
waiver or consent given by the Company on any one occasion shall be effective
only in that instance and shall not be construed as a bar or waiver of any right
on any other occasion.
-7-
<PAGE> 8
12.2 The captions of the sections of this Agreement are for
convenience of reference only and in no way define, limit or affect the scope or
substance of any section of this Agreement.
12.3 In case any provision of this Agreement shall be invalid,
illegal or otherwise unenforceable, the validity, legality and enforceability of
the remaining provisions shall in no way be affected or impaired thereby.
12.4 The Employee shall be entitled to indemnification as an
Officer of the Company under the Company's by-laws and charter.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the
day and year set forth above.
SUMMA FOUR, INC.
By: /s/ Robert A. Degan
---------------------------------
Title: President & CEO
------------------------------
RICHARD SWEE
/s/ Richard Swee
------------------------------------
-8-
<PAGE> 9
ATTACHMENT "A"
For the purposes of this Agreement, a change of control shall be deemed
to have occurred if at any shareholders meeting fifty percent (50%) of the total
shares voting of the shares of the Company's common stock outstanding are voted
either directly or by proxy for a person or persons other than those nominated
by the Company's Board of Directors or if the individuals who, as of the date
hereof, constitute the Board of Directors of the Company, cease for any reason
to constitute at least a majority of the Board, provided that any person
becoming a director subsequent to the date hereof whose election or nomination
for election by the Company's shareholders was approved of by a vote of at least
a majority of the Directors then comprising the Board, shall be, for the
purposes of this Agreement, considered as though such person was a member of the
Board as of the date hereof.
-9-
<PAGE> 1
EXHIBIT 10.37
Confidential materials omitted and filed separately with the
Securities and Exchange Commission. Asterisks denote omissions.
JOINT DEVELOPMENT AGREEMENT
This joint Development Agreement is made this 11th day of June, 1991
(the "Effective Date") by and among Summa Four, Inc., a Delaware corporation
("Summa Four") and Junction, Inc., a Delaware corporation ("Junction").
1 DEFINITIONS.
1.1 "Business Plan" means that plan for the development and testing of the
Product by the Joint Venture, and the manufacture and distribution and
marketing of the Product by Summa Four, during Phase II.
1.2 "Joint Approval of the Business Plan" means the date on which each of
Summa Four and Junction have agreed in writing (in the manner
explicitly set forth in Section 2.5) that the Business Plan is
acceptable.
1.3 "Joint Venture" means that limited liability company or other joint
venture entity to be owned and operated by Summa Four and Junction and
to be formed by them for the purpose of carrying out the development
and testing of the Product.
1.4 "Joint Venture Agreement" means the agreement between Summa Four and
Junction describing their relative ownership interests in,
contributions to and rights and responsibilities in connection with
the Joint Venture.
1.5 "Phase I" means the period commencing on the date of this Agreement
and ending as described in Section 6.1.
1.6 "Phase II" means the period commencing upon joint Approval of the
Business Plan, if any, and ending as described in the Joint Venture
Agreement.
1.7 "Product" means the next generation switch platform having the
attributes described on SCHEDULE A.
1.8 "Project" means the development, testing, manufacture, distribution
and maintenance of the Product during Phase II in accordance with the
Business Plan.
2 DESCRIPTION OF PHASE I.
<PAGE> 2
2.1 RESPONSIBILITIES OF THE PARTIES. During Phase I, Summa Four and Junction
will cooperate in the development of the Business Plan. Notwithstanding the
foregoing, the principal responsibilities of the parties relating to
development of the Business Plan will be as follows:
(a) Junction will:
(1) Perform the technical and business analysis necessary to develop
the Business Plan;
(2) Draft the Business Plan and all related designs, diagrams, charts
and other materials;
(3) Use its best efforts to complete the Business Plan as soon as
possible, but no later than the 120th day following the Effective
Date.
(b) Summa Four will:
(1) Provide overall structural and strategic direction for the
Business Plan and cooperate fully in the preparation of the
non-technical portions of the Business Plan, with a view toward
assisting Junction to complete the Business Plan no later than
the 120th day following the Effective Date;
(2) Fund Junction's development costs in the manner and to the extent
described in Section 4;
(3) Timely provide Junction with such information as is necessary to
enable Junction to design the Product in a manner compatible with
Summa Four's existing product lines;
(4) Timely provide Junction with estimates and projections relating
to the manufacture, distribution and marketing of the Product by
Summa Four.
2.2 SUBCONTRACTING. Junction shall not be permitted to subcontract any of its
duties under this Agreement to any third party without the express written
consent of Summa Four, which consent may be granted or withheld in Summa
Four's sole discretion. Any such subcontractor approved by Summa Four must
execute a written agreement in form and substance acceptable to Summa Four.
-2-
<PAGE> 3
2.3 COMMUNICATIONS. Each party will designate one or more representatives
(including business and technical persons) through which all communications
relating to the Business Plan should be communicated. The parties agree
that representatives from their respective teams working on the Business
Plan shall meet at least once per week to discuss the progress of the
Business Plan, and any issues that have arisen since the preceding meeting.
The parties will use all reasonable efforts to communicate openly and
frequently regarding scheduling and technical issues relating to the
development of the Business Plan, and each party agrees to notify the other
of any anticipated delays.
2.4 BUSINESS PLAN DESCRIPTION.
(a) At a minimum, the Business Plan will contain detailed discussions of
the following areas and provide the following information:
(1) Technical: functional technical specifications and design plans
for the Product, preliminary development milestones and
schedules, and a description of how Summa Four's existing APIs
and current expansion plans (i.e. 5.0+) can be coordinated with
the development of the Product;
(2) Marketing: competitive analysis, marketing, sales and production
forecasts, anticipated impact on Summa Four's near-to-mid-term
commitments and revenue projections;
(3) Financial: projected development expenses and budget, including
detailed personnel (management, engineering, design, programming,
marketing, research and contractor), overhead, facilities and
equipment requirements, projected salary/bonus/benefits for
personnel; 5-year projected Product revenues and projections of
Summa Four's revenues operating profits from the Product over the
same term;
(4) Product Life Cycle: schedules and personnel requirements for
regular updates, enhancements and upgrades of the Product, and
Product maintenance and support; and
(5) any other mutually agreed elements customary in a business plan.
-3-
<PAGE> 4
2.5 JOINT APPROVAL OF BUSINESS PLAN. Joint Approval of the Business Plan
shall occur only when the Business Plan has been initialed and dated
by the senior executive officer of each of Summa Four and Junction.
2.6 JOINT VENTURE AGREEMENT. As promptly as possible following Joint
Approval of the Business Plan, the parties shall execute the Joint
Venture Agreement in a form which is reasonably acceptable to them.
The Joint Venture Agreement shall contain, at a minimum, the
provisions attached hereto as SCHEDULE B, and will also incorporate
the schedules, milestones and obligations pertaining to the Project
which are set forth in the Business Plan.
3 EXCLUSIVITY. Junction agrees that during Phase I and, as described in
Section 6.2(c) below, for certain periods following the termination of
Phase I, Junction shall not, and shall require each of its shareholders,
employees and consultants not to, engage, directly or indirectly, in any
activity which is or would be competitive with the Product or any variation
or derivative thereof. Junction agrees and acknowledges that the payments
to be made by Summa Four to Junction hereunder are sufficient to compensate
Junction and its shareholders, employees and consultants for the
non-competition obligation set forth in this Section 3, and that the level
of such payments has been set specifically contemplating this
non-competition obligation. Junction agrees that it shall require its
shareholders, employees and consultants to enter into binding, written
agreements (enforceable by Summa Four) requiring them to comply with the
terms of this Section 3, and Junction shall pay each such person such
amounts as are necessary to compensate them for such non-competition
obligation (it being understood that such amounts will be subject to
reimbursement by Summa Four as Personnel/Salary expense, subject to the
provisions and limitations of Section 4 and the caps set forth in Schedule
D).
4 FUNDING. Summa Four will pay or reimburse Junction's documented expenses
incurred in connection with development of the Business Plan during the
first 120 days of Phase I (or until earlier termination of Phase I pursuant
to Section 6.1), up to the amounts set forth on SCHEDULE D hereto. Summa
Four will reimburse Junction no later than thirty (30) days following the
end of each calendar quarter for such expenses incurred by Junction during
the preceding quarter as to which Junction has submitted an invoice
requesting reimbursement prior to the end of the quarter. At Junction's
option, Summa Four may pay Junction's suppliers directly, on terms and
conditions acceptable to Summa Four and such suppliers. Summa Four will not
be responsible for paying any amounts under this Section 4 in excess of
those shown on SCHEDULE D; provided, however, that if circumstances beyond
Junction's reasonable control result in increased costs to Junction, Summa
Four will in good faith discuss increasing the amount of funding with
Junction.
-4-
<PAGE> 5
5 INTELLECTUAL PROPERTY.
5.1 OWNERSHIP. Summa Four shall own all right, title and interest in and
to the Business Plan, and all ideas, inventions, designs, algorithms
and methods described therein or formulated during the development
thereof, and all patent, copyright, trademark, trade secret, mask work
and other industrial and intellectual property rights therein
throughout the world, together with all applications, registrations
and renewals thereof (collectively, the "Proprietary Rights").
Junction hereby irrevocably sells and assigns all its right, title and
interest in and to the Proprietary Rights throughout the world,
whether existing now or developed in the future, to Summa Four.
Junction shall ensure that any subcontractor it engages to assist in
the development of the Business Plan or Product also assigns all
Proprietary Rights to Summa Four. At the request of Summa Four,
Junction and any such subcontractor shall execute and deliver all
assignments, instruments, affidavits, powers of attorney and other
documents as are necessary to effect the foregoing assignment. Summa
Four shall have the exclusive right to file patent and copyright
applications to protect the Proprietary Rights, and to assert the
Proprietary Rights against third parties.
5.2 LICENSED SUMMA FOUR TECHNOLOGY.
(a) Summa Four hereby grants to Junction, and Junction accepts, a
non-exclusive, non-transferable license during Phase I to
reproduce, use and create derivative works of that Summa Four
technology described in SCHEDULE C and related documentation (the
"Licensed Summa Four Technology"), solely at Junction's facility
in California and Summa Four's facilities, for the sole purposes
of preparing the Business Plan as described in this Agreement.
Junction shall have no right to sublicense any rights in the
Licensed Summa Four Technology without the express prior written
consent of Summa Four.
(b) Summa Four shall provide the Licensed Summa Four Technology to
Junction in a format which the parties reasonably agree is
necessary for Junction to perform its obligations hereunder.
Junction shall notify Summa Four immediately in the event of any
actual or suspected unauthorized access to, use of or tampering
with the Licensed Summa Four Technology. Junction agrees that the
Licensed Summa Four Technology shall constitute Confidential
Information of Summa Four, as defined in the Confidentiality
Agreement (as defined in Section 8 below).
-5-
<PAGE> 6
5.3 INDEMNIFICATION BY JUNCTION.
(a) Junction shall indemnify, defend and hold Summa Four harmless from and
against any losses, damages, settlements, costs and expenses
(including reasonable attorneys' fees) (collectively, "Damages")
arising from any claim that the Business Plan infringes or violates
any patent, copyright, trademark, trade secret, mask work or other
intellectual or industrial property right of any third party.
(b) Summa Four shall notify Junction promptly in writing of any third
party action (and provide information regarding all prior related
claims) brought against Summa Four based on a claim described in
Section 5.3(a) above and not otherwise described in Section 5.3(d)
below. Junction shall defend such action at its expense and pay all
Damages attributable to such claim incurred by Summa Four (as they are
incurred). Junction shall have sole control of the defense of any such
action and all negotiations for its settlement or compromise. Summa
Four shall reasonably cooperate with Junction in the defense of such
claim, and may be represented at Summa Four's expense, by counsel of
Summa Four's selection.
(c) In the event that a permanent injunction based solely on a claim
indemnified by Junction under Section 5.3(a) is obtained against the
parties' use or development of the Business Plan or their development,
use or distribution of the Product, then Summa Four shall have the
right to terminate this Agreement in accordance with Section 6.
(d) The provisions of Section 5.3(a) notwithstanding, Junction shall not
have any liability to Summa Four (including any obligation to
indemnify, defend or hold harmless) to the extent that any claim of
infringement or violation is based upon the Licensed Summa Four
Technology.
(e) Notwithstanding anything to the contrary contained above, in the event
that this Agreement is terminated by Summa Four pursuant to Sections
6.1(b) or 6.1(c), Junction shall not be required to indemnify Summa
Four with respect to Damages which are, in the aggregate, in excess of
the aggregate amounts paid by Summa Four to Junction under this
Agreement
-6-
<PAGE> 7
5.4 INDEMNIFICATION BY SUMMA FOUR.
(a) Summa Four shall indemnify, defend and hold Junction harmless
from and against any Damages arising from any claim that the
Licensed Summa Four Technology infringes or violates any patent,
copyright, trademark, trade secret, mask work or other
intellectual or industrial property right of any third party.
(b) Junction shall notify Summa Four promptly in writing of any third
party action (and provide information regarding all prior related
claims) brought against Junction based on a claim described in
Section 5.4(a) above. Summa Four shall defend such action at its
expense and pay all Damages attributable to such claim incurred
by Junction (as they are incurred). Summa Four shall have sole
control of the defense of any such action and all negotiations
for its settlement or compromise. Junction shall reasonably
cooperate with Summa Four in the defense of such claim, and may
be represented, at Junction's expense, by counsel of Junction's
selection.
(c) The provisions of Section 5.4(a) notwithstanding, Summa Four
shall not have any liability to Junction to the extent that any
claim of infringement is based upon use of the Licensed Summa
Four Technology for any purpose unrelated to the development of
the Business Plan or the Product as described in this Agreement.
(d) Notwithstanding anything to the contrary contained above, in the
event that this Agreement is terminated by Summa Four pursuant to
Sections 6.1(b) or 6.1(c), Summa Four shall not be required to
indemnify Junction with respect to Damages which are, in the
aggregate, in excess of the aggregate amounts paid by Summa Four
to Junction under this Agreement.
6 TERM AND TERMINATION.
6.1 TERMINATION OF PHASE I. Phase I will terminate upon the earliest to
occur of
(a) Joint Approval of the Business Plan; or
(b) notice by Summa Four that it elects to terminate Phase I; or
-7-
<PAGE> 8
Confidential materials omitted and filed separately with the
Securities and Exchange Commission. Asterisks denote omissions.
(c) at either party's election, if Joint Approval of the Business
Plan has not occurred by the 120th day following the Effective
Date; or
(d) notice of termination by a party following a material breach of
this Agreement by the other party, provided that if such breach
is susceptible of cure, such breach has not been cured within
thirty (30) days following notice thereof by the other party; or
(e) notice of termination by Summa Four upon the issuance of an
injunction described in Section 5.3(c).
6.2 EFFECTS OF TERMINATION OF PHASE I. Upon any termination of Phase I,
all development and finding obligations of the parties under Sections
2 and 3 of this Agreement shall terminate, except as set forth below.
(a) If, and only if, Phase I is terminated pursuant to Section
6.1(a), then (1) Phase II shall commence immediately, (2) the
valuation procedure described in Section 7 shall commence and (3)
the parties shall, no later than 30 days following such
termination, execute the Joint Venture Agreement.
(b) If Phase I is terminated by Summa Four pursuant to Section
6.1(b), or by either party pursuant to Section 6.1(c), then Summa
Four shall, (1) no later than the fifth (5th) business day
following such termination, pay Junction ***** and (2) pay
Junction the Termination Royalty described in Section 6.3.
(c) If Phase I is terminated pursuant to Sections 6.1(b), 6.l(c) or
6.1(d), then the exclusivity described in Section 3 shall
continue during the period beginning on the date of such
termination and ending on the later of (1) the third anniversary
of such termination or (2) if Termination Royalties are required
to be paid by Summa Four, the date on which the last Termination
Royalty payment is required to be made.
(d) Upon any termination of Phase I other than pursuant to Section
6.1(a), Junction shall deliver to Summa Four all software,
documentation, designs, illustrations, flow charts, works in
progress, media and other materials which it has developed or had
developed, or otherwise has in its possession or control,
-8-
<PAGE> 9
Confidential materials omitted and filed separately with the
Securities and Exchange Commission. Asterisks denote omissions.
embodying, describing or including the Business Plan, the
Licensed Summa Four Technology or the Product.
6.3 TERMINATION ROYALTY. For purposes of this Agreement, "Termination
Royalty" shall mean ***** of Summa Four's revenue from the Product,
including any variation or derivative of such Product. The Termination
Royalty shall be payable quarterly, and shall be paid, if any is due,
commencing at the time specified in Section 6.2 and ending upon the
earlier of (a) such time as the aggregate Termination Royalty paid by
Summa Four equals ***** or (b) the ***** anniversary of the
termination of Phase I. The Termination Royalty shall be payable only
after termination of Phase I and only if required by Section 6.2.
Summa Four shall provide to Junction, together with each payment of
the Termination Royalty, a report showing the relevant revenues and
other information necessary to calculate the amount of the Termination
Royalty.
6.4 TERMINATION OF AGREEMENT. This Agreement shall remain in force until
the parties mutually agree in writing that it shall be terminated, or
until all obligations required to be discharged hereunder have been
discharged. The termination of Phase I shall not, of itself, cause the
termination of this Agreement.
7 VALUATION.
7.1 Promptly following the commencement of Phase II, the business Plan
will be provided to Wessels, Arnold & Henderson, Montgomery Securities
or other investment banking firm of national standing (as may be
agreed upon by the parties) to determine a formula for the value,
during the Exit Period defined below, of the Product to Summa Four
(assuming that Summa Four had a paid-up, royalty-free, exclusive
license to the Product and variations and derivatives thereof) for
purposes of the put and call arrangements described in SCHEDULE B. The
valuation formula will include such factors as revenues from the
Product, impact of the Product on Summa Four's stock price, Junction's
success during Phase II in meeting time and Product performance
milestones, dilution effect (if any) on the valuation of Summa Four
stock (in the event Summa Four uses its stock to exercise any portion
of its call option under the Joint Venture Agreement) and such other
factors as Summa Four and Junction may agree upon or as the investment
banker may deem relevant. The investment banker will also recommend
-9-
<PAGE> 10
Confidential materials omitted and filed separately with the
Securities and Exchange Commission. Asterisks denote omissions.
a relative percentage ownership of the Joint Venture by Summa Four as
of the commencement of Phase II for the purposes described in Section
7.2, which shall be not less than ***** and not greater than ***** and
which shall be based upon the relative value of (i) Summa Four's
funding of Phase I and Summa Four's contributions to be made during
Phase II pursuant to the Business Plan in relation to (ii) the value
of the contributions, financial or otherwise, made by Junction during
Phase I (to the extent that the value of such contributions during
Phase I are in excess of the amount of the "Personnel" expenses
reimbursed by Summa Four pursuant to Section 4 of this Agreement and
SCHEDULE D), and the contributions, financial or otherwise, to be made
by Junction during Phase II pursuant to the Business Plan. The fees of
the investment banker for such services shall be paid by the Joint
Venture.
7.2 Upon receipt of the investment banker's report pursuant to Section 7.1
the ownership of the Joint Venture will be allocated to Summa Four and
Junction in accordance with such report.
8 CONFIDENTIALITY. All information of the parties developed during the term
of this Agreement shall be subject to the provisions of that
Confidentiality Agreement dated April 15, 1997 between Summa Four and
Junction (the "Confidentiality Agreement"). Junction agrees that the
Business Plan, and all information contained therein, and the Summa Four
Licensed Technology shall constitute the Proprietary Information of Summa
Four, and shall be treated accordingly under the Confidentiality Agreement.
9 MISCELLANEOUS.
9.1 PUBLICITY. Any advertising or promotional literature or announcement
by a party to this Agreement regarding its relationship with the other
party or this Agreement must be approved by the other party in advance
in writing.
9.2 AGREEMENT TERMS. Neither party hereto shall disclose the terms or
conditions of this Agreement to any third party, except as required by
order or rule of a governmental authority including, without
limitation, the United States Securities and Exchange Commission.
9.3 GOVERNING LAWS. This Agreement shall be governed by and construed in
accordance with the laws of the State of New Hampshire, excluding its
choice of law rules.
-10-
<PAGE> 11
9.4 ENTIRE AGREEMENT. This Agreement constitutes the entire agreement
between the parties with respect to the subject matter hereof, and
shall not be released, discharged, supplemented, interpreted, amended,
varied, or modified in any manner except by an instrument in writing
signed by an authorized officer or representative of each of the
parties hereto. The Schedules following the operative part of this
Agreement shall be deemed to be incorporated in this Agreement.
9.5 NO WAIVERS. No delay or omission on the part of either party to this
Agreement in requiring performance by the other party or in exercising
any right hereunder shall operate as a waiver of any provision hereof
or of any right or rights hereunder, and the waiver, omission or delay
in requiring performance or exercising any right hereunder on any one
occasion shall not be construed as a bar to or waiver of such
performance or right on any future occasion.
9.6 SEVERABILITY. If any provision of this Agreement shall for any reason
be held illegal or unenforceable, such provision shall be deemed
separable from the remaining provisions of this Agreement and shall in
no way affect or impair the validity or enforceability of the
remaining provisions of this Agreement.
9.7 SECTION HEADINGS. Section headings of this Agreement are for
descriptive purposes only and shall not control or alter the meaning
of this Agreement.
9.8 RELATIONSHIP OF THE PARTIES. The parties shall for all purposes be
considered independent contractors with respect to each other, and
neither shall be considered an employee, employer, agent, principal,
partner or joint venturer of the other, unless by separate agreement
such relationship is established.
9.9 NOTICES. For the purposes of this Agreement, and for all notices and
correspondence hereunder, the addresses of the respective parties are
as follows:
If to Summa Four: Summa Four, Inc.
25 Sundial Avenue
Manchester, NH 03103-7251
Attn: President
Fax: (603)668-4810
-11-
<PAGE> 12
with a copy to Hale and Dorr LLP
60 State Street
Boston, MA 02109
Fax: (617) 526-5000
Attn.: John K.P. Stone, Esq.
If to Junction: Junction, Inc.
21040 Homestead Avenue
Suite 214
Cupertino, CA 95014
with a copy to Stanwood & Price
260 Sheridan Avenue, Suite 300
Palo Alto, CA 94306
Attn: Daniel Price, Esq.
Fax: (415) 321-4746
No change of address shall be binding upon the other party hereto
until written notice thereof is received by such party at the address
shown herein. All notices shall be in English and shall be effective
upon receipt if delivered personally or sent by facsimile, two days
after shipment by overnight delivery service and five (5) days after
mailing if sent by certified mail return receipt requested.
9.10 ASSIGNMENT AND CORPORATE REORGANIZATION. Except as provided herein,
neither this Agreement nor any rights granted hereby may be assigned
by either party voluntarily or by operation of law without the prior
written consent of the other party, and any such attempted assignment
shall be null and void. For purposes of this Agreement, "assignment"
shall be deemed to include the transfer of all or substantially all of
the assets of, or a majority interest in the voting stock of, a party,
or the merger of a party with one or more entities, in which such
party is not the surviving entity. This Agreement shall inure to the
benefit of and be binding upon any permitted successor or assign of
either party.
[Remainder of Page Intentionally Blank]
-12-
<PAGE> 13
IN WITNESS WHEREOF, the parties have duly executed this Agreement as of
the dates written below:
JUNCTION, INC. SUMMA FOUR, INC.
By: /s/ Ted Griggs By: /s/ Robert A. Degan
---------------------------- ----------------------------
Name: Ted Griggs Name: Robert A. Degan
-------------------------- --------------------------
Title: President Title: President & CEO
------------------------- -------------------------
Date: June 13, 1997 Date: June 13, 1997
-------------------------- --------------------------
(Signature Page to Joint Development Agreement].
-13-
<PAGE> 14
Confidential materials omitted and filed separately with the
Securities and Exchange Commission. Asterisks denote omissions.
SCHEDULE A
DESCRIPTION OF PRODUCT
*****************************************************************************
*****************************************************************************
*************
******************************************************************
******************************************************************
******
******************************************************************
***********************************
******************************************************************
******************************************************************
***********************************
-14-
<PAGE> 15
Confidential materials omitted and filed separately with the
Securities and Exchange Commission. Asterisks denote omissions.
SCHEDULE B
PROVISIONS TO BE INCLUDED IN JOINT VENTURE AGREEMENT
1 At the commencement of Phase II, Summa Four and Junction will each
contribute all rights and interest they may have in the Product to the
Joint Venture. The interests of Summa Four and Junction in the Joint
Venture shall initially be **% for Summa Four, and **% for Junction,
subject to adjustment as described in Paragraph 6 below.
2 Summa Four will engage the Joint Venture to develop and test the Product
according to the Business Plan, pursuant to a Development Agreement which
is mutually acceptable to Summa Four and Junction, and which will include
customary arm's-length warranties and indemnities for a software
development contract. Summa Four will make cash payments to the Joint
Venture sufficient to fund those expenses called for in the Business Plan.
Summa Four will also procure and contribute or lease to the Joint Venture
equipment and software required to conduct development of the Product and
any variation or derivative thereof. Summa Four will license any necessary
Licensed Summa Four Technology to the Joint Venture for purposes of its
development of the Product. In the event that the expenses of the Joint
Venture exceed those estimated in the Business Plan, the parties will
explore in good faith means of funding the ongoing operations of the Joint
Venture, including but not limited to additional capital contributions by
the parties and outside sources of funding.
3 The Joint Venture will subcontract the development of the Product to
Junction, which will be responsible for providing a sufficient number of
qualified technical personnel (including engineering, design and
programming personnel) to successfully complete the Project and procuring
and providing sufficient office and laboratory space for the Project.
4 Upon the commencement of Phase II, the Joint Venture will grant Summa Four
a five-year, paid-up, royalty-free, exclusive, worldwide license to use,
manufacture, distribute and exercise all other rights with respect to the
Product and all other technology developed or owned by the Joint Venture,
under all intellectual property therein. Such license shall provide that at
the expiration of such five-year period, Summa Four shall be entitled to
extend the term of the license for such fees and/or royalties as Summa
Four, Junction and the Joint Venture shall unanimously reasonably agree
upon.
-15-
<PAGE> 16
Confidential materials omitted and filed separately with the
Securities and Exchange Commission. Asterisks denote omissions.
5 The Joint Venture will be managed by a Board of Managers appointed by Summa
Four and Junction. The Board of Managers will be comprised of the President
of Junction, the President of Summa Four, and one additional member
designated by Summa Four and such additional members as Junction and Summa
may agree upon, provided that at all times a majority of the Board shall be
designees of Summa Four. The Board will act by majority vote on all
matters.
6 Between the second and fifth anniversaries of the commencement of Phase II
(the "Exit Period"), a set of puts and calls will be exercisable to allow
either Junction to sell all or any portion of its interest in the Joint
Venture to Summa Four at a specified discount to the valuation at the time
of exercise (which discount shall be determined by the financial advisor
described in Section 7.1 by reference to the valuation formula provided for
in Section 7.1), or to allow Summa Four to purchase from Junction all or
any portion of Junction's interest in the Joint Venture at a specified
premium over such valuation, but subject to a minimum value (to be
determined by reference to the valuation formula), which minimum value
shall be used only if Product sales are less than projected in the Business
Plan due to causes other than Product underperformance or other factors
primarily the responsibility of Junction. The price payable by Summa Four
in any such purchase may be payable, at Summa Four's election, in whole or
in part in cash or in shares of stock in Summa Four valued at market,
subject to any dilution discount provided for in the investment banker's
report.
7 Phase II shall continue until the earlier of (i) Summa Four's acquisition
of ***** of the interests in the Joint Venture pursuant to the exercise of
the put or call arrangements described in Section 7.1, or (ii) the fifth
anniversary of the commencement of Phase II. During Phase II and following
the development of the first commercial version of the Product, the Joint
Venture shall perform (or subcontract Junction or another entity to
perform) such maintenance and further development functions with respect to
the Product as shall be provided for in the Business Plan.
8 For a ****** following the termination of Phase II, none of the
shareholders, employees or consultants of Junction will directly or
indirectly engage in any activity which is or would be competitive with the
Joint Venture, the Product or any variation or derivative thereof.
9 Each party shall indemnify and hold harmless the other party and the Joint
Venture, without limitation as to amount, on terms similar to those set
forth in Section 5.3 and 5.4, in respect of intellectual property
infringements by the technology contributed by such party to the Business
Plan.
-16-
<PAGE> 17
SCHEDULE C
LICENSED SUMMA FOUR TECHNOLOGY
a. All marketing requirement, functional specification and design documents
associated with Summa Four's current products and planned enhancements;
b. All system source code associated with Summa Four's current products and
planned enhancements;
c. All documentation related to next generation product definition and
system/hardware/software architectures;
d. Any other proprietary Summa Four technology that Summa Four makes available
to Junction during Phase I in connection with the development of the
Business Plan.
-18-
<PAGE> 18
Confidential materials omitted and filed separately with the
Securities and Exchange Commission. Asterisks denote omissions.
SCHEDULE D
FUNDING OBLIGATION
<TABLE>
<CAPTION>
Expense Unit Charge Units Est. Total
- ------- ----------- ----- ----------
<S> <C> <C> <C>
Personnel (salary/benefits) --- --- *****
California office space *****/month ** months *****
N.H. corporate apartment *****/person/month **months *****
** persons
Travel ***** per CA-NH *** round *****
round trip trips
Cal. Office Setup --- 1 time *****
Misc. *****
Moving buyout *****/person ** people *****
TOTAL *****
</TABLE>
-19-
<PAGE> 19
I have read and agree to the Summa Four, Inc. & Junction, Inc. Joint Venture
Business Plan executed on this day of 13 June 1997, on behalf of:
SUMMA FOUR, INC. JUNCTION, INC.
/s/ Robert A. Degan /s/ Ted Griggs
- ---------------------------------- ----------------------------------
Robert A. Degan, President and CEO Ted Griggs, President
June 13, 1997 June 13, 1997
- ---------------------------------- ----------------------------------
Date Date
-20-
<PAGE> 1
EXHIBIT 11.0
FORM 10-Q
PART II
PAGE 14
Computation of Earnings per Share
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended
June 30,
--------
1997 1996
---- ----
<S> <C> <C>
Primary
Average shares outstanding of
Common Stock 5,571 6,082
Net effect of dilutive stock options-
based on the treasury stock method -- 219
------- -------
Total 5,571 6,301
======= =======
Net (loss) income $ (566) $ 744
Per share amount $ (.10) $ .12
======= =======
</TABLE>
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Fully Diluted
Average shares outstanding of
Common Stock 5,571 6,082
Net effect of dilutive stock options-
based on the treasury stock method -- 219
------- -------
Total 5,571 6,301
======= =======
Net (loss) income $ (566) $ 744
Per share amount $ (.10) $ .12
======= =======
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 1,234
<SECURITIES> 29,161
<RECEIVABLES> 9,423
<ALLOWANCES> 237
<INVENTORY> 6,320
<CURRENT-ASSETS> 32,615
<PP&E> 12,952
<DEPRECIATION> 8,242
<TOTAL-ASSETS> 54,558
<CURRENT-LIABILITIES> 8,602
<BONDS> 0
0
0
<COMMON> 65
<OTHER-SE> 45,267
<TOTAL-LIABILITY-AND-EQUITY> 54,558
<SALES> 9,276
<TOTAL-REVENUES> 9,276
<CGS> 4,334
<TOTAL-COSTS> 4,334
<OTHER-EXPENSES> 6,299
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (832)
<INCOME-TAX> (266)
<INCOME-CONTINUING> (566)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (566)
<EPS-PRIMARY> (.10)
<EPS-DILUTED> (.10)
</TABLE>
