<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 SEPTEMBER 30, 1997
----------------------------
__ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from
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Commission File Number 0-22210
-------------------------
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 5,752,399
Outstanding as of October 31, 1997
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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
September 30, 1997 and March 31, 1997
Condensed Consolidated Statements of Operations 2
for the three months ended September 30, 1997 and 1996
and the six months ended September 30, 1997 and 1996
Condensed Consolidated Statements of Cash Flows 3
for the six months ended September 30, 1997 and 1996
Notes to Condensed Consolidated Financial Statements 4-5
Item 2 - Management's Discussion and Analysis of 6-10
Financial Condition and Results of Operations
Part II - Other Information:
Item 1 - Legal Proceedings 11
Item 2 - Not Applicable 12
Item 3 - Not Applicable 12
Item 4 - Submission of Matters to a Vote of 12
Security Holders
Item 5 - Not Applicable 12
Item 6 - Exhibits and Reports on Form 8-K 12
Signature(s) 13
<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>
September 30, 1997 March 31, 1997
------------------ --------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 658 $ 6,169
Investments - current 13,240 7,472
Accounts receivable, net 11,263 10,278
Inventories, net 5,296 5,069
Deferred income taxes 2,288 2,288
Prepaid and other current assets 2,312 1,812
-------- --------
Total current assets 35,057 33,088
Investments - non-current 11,855 18,686
Property and equipment, net 5,023 4,265
Deferred income taxes 226 226
Other assets 570 188
-------- --------
$ 52,731 $ 56,453
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,617 $ 2,333
Accrued payroll and related expenses 1,044 1,016
Other accrued liabilities 3,182 3,704
Deferred revenues 2,520 3,075
-------- --------
Total current liabilities 8,363 10,128
Other long-term liabilities 581 676
Commitments and Contingencies (Note 5)
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 6,601,147
at September 30, 1997 and 6,411,762 at
March 31, 1997 66 64
Additional paid-in capital 44,183 43,662
Accumulated earnings 10,674 13,149
Unrealized gains on investments 19 43
Treasury stock, at cost, 849,098 shares at
September 30, 1997 and 852,431 at
March 31, 1997 (11,155) (11,269)
Total stockholders' equity 43,787 45,649
-------- --------
$ 52,731 $ 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 Six Months Ended
September 30, September 30,
------------- -------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net revenues $ 10,116 $ 9,982 $ 19,393 $ 21,171
Cost of revenues 5,356 3,972 9,689 8,098
-------- -------- -------- --------
Gross profit 4,760 6,010 9,704 13,073
Operating expenses:
Selling, general and administrative 4,997 3,701 8,502 7,080
Research and development 2,854 2,266 5,649 5,028
-------- -------- -------- --------
Total operating expenses 7,851 5,967 14,151 12,108
-------- -------- -------- --------
Operating (loss) income (3,091) 43 (4,447) 965
Interest
income, net 283 271 807 548
-------- -------- -------- --------
(Loss) income before income taxes (2,808) 314 (3,640) 1,513
(Benefit from) provision for income taxes (899) 119 (1,165) 574
-------- -------- -------- --------
Net (loss) income $ (1,909) $ 195 $ (2,475) $ 939
======== ======== ======== ========
Net (loss) income per share $ (.33) $ .03 $ (.44) $ .15
Weighted average common and
common equivalent shares
outstanding 5,726 6,200 5,648 6,250
</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>
Six Months Ended
September 30,
-------------
1997 1996
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income $(2,475) $ 939
------- -------
Adjustments to reconcile net (loss) income to net
cash (used in) provided by operating activities:
Depreciation and amortization 1,288 1,147
Provision for doubtful accounts 115 150
Changes in operating assets and liabilities:
Accounts receivable (1,100) (189)
Inventory (227) (1,165)
Prepaid and other current assets (500) 312
Other assets (164) 198
Accounts payable (716) 96
Accrued payroll and related expense 28 (88)
Other accrued expenses and other liabilities (1,156) 633
------- -------
Total adjustments (2,432) 1,094
------- -------
Net cash (used in) provided by operating
activities (4,907) 2,033
------- -------
Cash flows from investing activities:
Purchases of property and equipment (2,046) (846)
Sales/purchases of investments, net 1,039 (485)
------- -------
Net cash used in investing activities (1,007) (1,331)
------- -------
Cash flows from financing activities:
Proceeds from the sale of stock under stock
option plans 223 130
Reissuance/(purchase) of treasury stock 196 (2,324)
Principal payments under capital lease obligations (16) (16)
------- -------
Net cash provided by (used in) financing
activities 403 (2,210)
------- -------
Net decrease in cash and cash equivalents (5,511) (1,508)
Cash and cash equivalents, beginning of period 6,169 4,681
------- -------
Cash and cash equivalents, end of period $ 658 $ 3,173
======= =======
Supplemental disclosure of cash flow information
Cash paid for interest $ 6 $ 7
Cash paid for income taxes $ 777 $ 628
Supplemental disclosure of non-cash investing
and financing activities:
Exercise of stock options $ 217 --
</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
September 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 considered necessary for
a fair presentation have been included. Operating results for the three
month period ended September 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 and the Quarterly Report
on Form 10-Q for the quarter ended June 30, 1997, filed with the
Securities and Exchange Commission. 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>
September 30, 1997 March 31, 1997
------------------ --------------
<S> <C> <C>
Raw materials $ 2,282 $ 1,652
Work-in-process 1,797 1,795
Finished goods 1,217 1,622
------- -------
$ 5,296 $ 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 29% of the
Company's net revenues for the six months ended September 30, 1997 were
from three customers accounting for 10%, 10%, and 9%, respectively, of
net revenues. Approximately 27% of the Company's net revenues for the
six months ended September 30, 1996 were from three customers
accounting for 10%, 9%, and 8%, respectively, of net revenues.
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 September 30,
<PAGE> 7
FORM 10-Q
PART I
ITEM 1
PAGE 5
1997 would have been $(.33) per share as compared with $.03 per share
for the corresponding period in fiscal 1997 and, for the six months
ended September 30, 1997 would have been $ (.44) per share as compared
with $.15 per share for the corresponding period 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
were 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 moved to dismiss these new
counterclaims, and Claircom moved to dismiss, or for partial summary
judgment on, the Company's claim under the New Hampshire Consumer
Protection Act. On August 28, 1997 the Court dismissed both parties'
consumer protection act claims, and denied the Company's motion to
dismiss the new fraud claims. 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 defendants have filed an answer and
counterclaim asserting that the '135 patent is invalid and not
infringed and that three individuals should be added as inventors on
the '135 patent. In addition, the defendants have filed a motion to
stay the patent litigation pending the outcome of the New Hampshire
legal proceedings. The Company opposes this motion, and the Court has
set a hearing for November 24, 1997. The suit is in its early stages,
and the Company is unable to express a view as to its outcome.
The Company, after consultation with external counsel, has estimated
pre-trial costs to be approximately $948 thousand and recorded the
costs in the current period.
<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
September 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 that 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
THREE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED WITH THREE MONTHS ENDED SEPTEMBER
30, 1996.
Net revenues increased by $ 0.1 million (1%) to $10.1 million for the three
months ended September 30, 1997 compared to $10.0 million, for the three months
ended September 30, 1996. Shipments to the Company's application developers and
reseller customers represented approximately 64% of revenues for the three
months ended September 30, 1997 compared to 69% for the three months ended
September 30, 1996. Shipments to international customers represented
approximately 47% of total revenues for the quarter ended September 30, 1997
versus 33% for the same quarter in 1996. The Company believes that its net
revenues may level off 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 $1.2 million (20%) to $4.8 million for the three
months ended September 30, 1997 compared to $6 million for the three months
ended September 30, 1996. Gross margin decreased to 47% in the three months
ended September 30, 1997 from 60% in the three months ended September 30, 1996.
The decrease in gross margin resulted primarily from a special charge, for slow
moving and obsolete inventory, to reflect current business conditions. Without
this one-time inventory write down, gross margin for the three months ended
September 30, 1997 would have been 56%. The remaining decrease in gross margin,
when compared to the same quarter in the previous fiscal year, was primarily
attributable to an increase in international and service revenues which
typically generate lower gross margins and a shift in system mix to systems
which contain certain lower margin components. 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.
Selling, general and administrative expenses increased by $1.3 million (35%) to
$5.0 million, or 49% of net revenues, for the three months ended September 30,
1997 compared with $3.7 million, or 37% of net revenues,
<PAGE> 9
FORM 10-Q
PART I
ITEM 2
PAGE 7
for the three months ended September 30, 1996. This increase in expenses was
primarily a result of a special charge of $1.1 million, the majority of which
($948 thousand) is attributable to estimated probable expenses for the Claircom
litigation. The balance of approximately $200 thousand is attributable to costs
for various personnel and severance related activities.
Research and development expenses were $2.9 million or 29% of net revenues for
the three months ended September 30, 1997 compared to $2.3 million or 23% of net
revenues for the three months ended September 30, 1996. 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. Included are costs attributable to research and development directed
to the enhanced VCO/20 switch and, jointly with Dialogic Corporation and
Junction, Inc., a new line of standards based programmable switches.
Operating income decreased by $3.1 million to a loss of $3.0 million for the
three months ended September 30, 1997 compared to a profit of $43 thousand for
the three months ended September 30, 1996. The decrease was primarily due to
revenue shortfall related to lower domestic sales, lower gross margins
attributable to the special charge for slow moving and obsolete inventory and
estimated legal expenses and other costs attributable to personnel and severance
related activities.
SIX MONTHS ENDED SEPTEMBER 30, 1997 COMPARED WITH SIX MONTHS ENDED SEPTEMBER 30,
1996
Net revenues decreased by $1.8 million (8%) to $19.4 million, for the six months
ended September 30, 1997 from $21.2 for the six months ended September 30, 1996.
Gross profit decreased by $3.4 million (26%), to $ 9.7 million primarily due to
a decrease in revenues in the quarter ended June 30, 1997 and the inventory
write down in the quarter ended September 30, 1997, as compared to $13.1 million
for the six months ended September 30, 1996. Gross margin decreased to 50%
during the six months ended September 30, 1997 from 62% in the six months ended
September 30, 1996. Excluding charges related to the special inventory write
down, gross margin for the six months ended September 30, 1997 would have been
55%.
Selling, general and administrative expenses increased by $1.4 million (20%) to
$8.5 million, or 44% of revenues, for the six months ended September 30, 1997
compared with $7.1 million, or 33% of net revenues, in the same period of fiscal
1997. This increase resulted primarily from special charges for anticipated
Claircom legal expenses, other costs related to personnel and severance
activities, and expansion of the company's sales and support functions in
combination with increased professional services costs.
Research and development expenses increased by $ 0.6 million (12%) to $5.6
million, or 29% of net revenues, for the six months ended September 30, 1997
compared to $5.0 million, or 24% of net revenues, in the same period of fiscal
1997. This increase is primarily due to the Company's spending for research and
development directed to the enhanced VCO/20 switch, a new line of programmable
switches and additional product functionality as it relates to integrated SS-7,
network management, scalability, certifications, subrate switching and the
development of future products.
Operating income decreased by $5.4 million to a loss of $4.0 million, or 21% of
net revenues, for the six months ended September 30, 1997 compared to $1.0
million, or 5% of net revenues for the six months ended September 30, 1996. The
decrease was primarily due to revenue shortfall related to lower domestic sales,
lower gross
<PAGE> 10
FORM 10-Q
PART I
ITEM 2
PAGE 8
margins attributable to the extraordinary inventory write down, special charges
for anticipated legal expenses and other costs related to personnel and
severance related activities.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1997, the Company had $25.8 million in cash, cash equivalents
and investments. At March 31, 1997, the Company had $32.3 million in cash, cash
equivalents and investments. This decrease is primarily due to increased
accounts receivable, severance compensation, expenditures for capital equipment
and a decrease in accounts payable. At September 30, 1997, the ratio of current
assets to current liabilities was 4.2:1 compared to 3.3:1 at March 31, 1997.
Purchase commitments to suppliers of the Company's products were approximately
$5.9 million and $9.7 million at September 30, 1997 and March 31, 1997,
respectively.
The Company maintains an unsecured bank line of credit in the amount of $6.0
million. At September 30, 1997, no borrowings were outstanding under this line.
Unless renewed, the line expires in September 1998. This line bears interest at
the bank's prime interest rate per annum (8.5% at September 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.
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. As of September 30, 1997, the Company had repurchased a
cumulative total of 405,065 shares related to this extension at an average cost
of $10.16 per share and had reissued 26,933 shares at an average price of $7.68
related to purchases under its Employee Stock Purchase Plan. The repurchases
were funded through the Company's cash and investments. The Company has no
immediate plans to continue to repurchase shares but may elect to repurchase
additional shares of it's stock, at some future point, 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> 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:
- The Company has recently announced agreements in principle with
Dialogic Corporation and Junction, Inc. which it anticipates will
result in the development of a new line of standards based
programmable switches targeted for fiscal 1999. The Company
anticipates that the expenses associated with this developmental
activity will be funded from operations. There can be no assurance
that these products will be developed in a cost effective manner
and be available for sale within the time frame anticipated by the
Company. Failure to do so could have a material adverse effect on
the Company's business and results of operation.
- 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 as a
result of sales price variations, an increase in international and
service revenues, and a shift in system mix to systems which
contain certain lower margin components. Gross margins are also
affected by other factors such as changes in the cost of
materials, production and quality considerations, discounts to
high volume purchases, obsolete inventory, and the timing of new
product introductions. The Company from time-to-time adds
functionality and features that could add cost to its products
which would adversely affect gross margins if the Company is not
able to increase the price of such systems to offset such
increased costs.
<PAGE> 12
FORM 10-Q
PART I
ITEM 2
PAGE 10
- 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> 13
FORM 10-Q
PART II
ITEM 1-6
PAGE 11
SUMMA FOUR, INC.
Part II - Other Information
September 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
were 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 moved to dismiss these new
counterclaims, and Claircom moved to dismiss, or for partial summary
judgment on, the Company's claim under the New Hampshire Consumer
Protection Act. On August 28, 1997 the Court dismissed both parties'
consumer protection act claims, and denied the Company's motion to
dismiss the new fraud claims.
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 defendants have filed an answer and
counterclaim asserting that the '135 patent is invalid and not
infringed and that three individuals should be added as inventors on
the '135 patent. In addition, the defendants have filed a motion to
stay the patent litigation pending the outcome of the New Hampshire
legal proceedings. The Company opposes this motion, and the Court has
set a hearing for November 24, 1997. The suit is in its early stages,
and the Company is unable to express a view as to its outcome.
<PAGE> 14
FORM 10-Q
PART II
PAGE 12
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
On July 25, 1997, the Company held its 1997 Annual Meeting of
Shareholders (the "Annual Meeting"). At the Annual Meeting, the
following persons were elected as directors of the Company. The number
of votes cast for each director, as well as the number of votes
withheld, are listed opposite each director's name.
<TABLE>
<CAPTION>
Votes Cast Votes Cast
---------- ----------
Name of Director For Director Against Director Votes Withheld
---------------- ------------ ---------------- --------------
<S> <C> <C> <C>
Barry R. Gorsun 4,812,971 0 138,530
Edgar L. Brown, Jr. 4,895,112 0 56,389
Robert A. Degan 4,892,612 0 58,889
Gordon T. Ray 4,892,612 0 58,889
John A. Shane 4,820,112 0 131,389
Russell I. Pillar 4,892,571 0 58,930
</TABLE>
At the Annual Meeting, with 4,852,654 votes cast in favor, the
shareholders ratified the appointment of Coopers & Lybrand L.L.P. as independent
accountants of the Company for the fiscal year ending March 31, 1998. 88,545
votes were cast against such ratification, and there were 10,302 abstentions.
ITEM 5 - OTHER INFORMATION
Not applicable.
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> 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: , 1997
--------------------------
Robert A. Degan
President and Chief
Executive Officer
Date: , 1997
--------------------------
Jeffrey A. Weber
Vice President and Chief
Financial Officer
<PAGE> 16
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: , 1997 By: /s/ Robert A. Degan
----------------------
Robert A. Degan
President and Chief
Executive Officer
Date: , 1997 By: /s/ Jeffrey A. Weber
----------------------
Jeffrey A. Weber
Vice President and Chief
Financial Officer
<PAGE> 17
FORM 10-Q
PART II
PAGE 14
EXHIBIT NO. DESCRIPTION
11.0 Statement Re: Computation of per Share Earnings
27 Financial Data Schedule
<PAGE> 1
EXHIBIT 11.0
FORM 10-Q
PART II
PAGE 15
Computation of Earnings per Share
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30,
------------- -------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Primary
Average shares outstanding of
Common Stock 5,726 6,007 5,648 6,045
Net effect of dilutive stock options-
based on the treasury stock method -- 177 -- 198
Total 5,726 6,184 5,648 6,243
======= ======= ======= =======
Net (loss) income $(1,909) $ 95 $(2,475) $ 939
Per
share amount $ (.33) $ .03 $ (.44) $ .15
======= ======= ======= =======
1997 1996 1997 1996
---- ---- ---- ----
Fully Diluted
Average shares outstanding of
Common Stock 5,726 6,007 5,648 6,045
Net effect of dilutive stock options-
based on the treasury stock method -- 193 -- 205
Total
5,726 6,200 5,648 6,250
======= ======= ======= =======
Net (loss) income $(1,909) $ 195 $(2,475) $ 939
Per share amount $ (.33) $ .03 $ (.44) $ .15
======= ======= ======= =======
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> SEP-03-1997
<CASH> 658
<SECURITIES> 25,095
<RECEIVABLES> 11,590
<ALLOWANCES> 327
<INVENTORY> 5,296
<CURRENT-ASSETS> 35,057
<PP&E> 13,894
<DEPRECIATION> 8,871
<TOTAL-ASSETS> 52,731
<CURRENT-LIABILITIES> 8,363
<BONDS> 0
0
0
<COMMON> 66
<OTHER-SE> 43,721
<TOTAL-LIABILITY-AND-EQUITY> 52,731
<SALES> 19,393
<TOTAL-REVENUES> 19,393
<CGS> 9,689
<TOTAL-COSTS> 9,689
<OTHER-EXPENSES> 14,151
<LOSS-PROVISION> 115
<INTEREST-EXPENSE> 6
<INCOME-PRETAX> (3,640)
<INCOME-TAX> (1,165)
<INCOME-CONTINUING> (2,475)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,475)
<EPS-PRIMARY> (.44)
<EPS-DILUTED> (.44)
</TABLE>
