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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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FORM 10-K
Annual Report Pursuant To Section 13 or 15(d) Of The
Securities Exchange Act Of 1934
For the fiscal year ended March 31, 1998
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Commission file number 0-22210
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SUMMA FOUR, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Delaware 02-0329497
(State or other jurisdiction of incorporation or organization) (IRS employer identification number)
</TABLE>
25 Sundial Avenue, Manchester, New Hampshire 03103
(Address of principal executive office)
Registrant's telephone number, including area code: (603) 625-4050
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Securities registered pursuant to Section 12(b) of the Act: None
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
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(Title of Class)
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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
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K ( ).
The aggregate market value of the voting stock held by non-affiliates of the
registrant was approximately $64,536,000 as of May 31, 1998. There were
6,601,981 shares of Common Stock outstanding as of May 31, 1998.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive proxy statement (the "Definitive Proxy Statement") to
be filed with the Securities and Exchange Commission relative to the Company's
1998 annual meeting of stockholders are incorporated by reference in Part III.
Index to Exhibits begins on Page 37
Total Number of Pages 50
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PART I
Item 1 - Business
THE COMPANY
Summa Four, Inc. (the "Company") is a leading provider of open, programmable
switches that enable worldwide telecommunications service providers to build and
deploy advanced networks and applications. Examples of services offered by
companies using Summa Four's products include core transport switching for
personal communications, wireless local loop and wireless networks, enhanced
service delivery for voice and fax messaging, single number routing, intelligent
800 calling, voice activated dialing, calling card applications, and automated
operator services. The Company's products are based on an open architecture and
have a universal application interface which supports the economical and rapid
introduction of these and other public telephone network applications.
Many of the world's largest telecommunications service providers are
end-users of the Company's products, including AT&T, MCI, Sprint, Worldcom,
Qwest, the Regional Bell Operating Companies ("RBOCs"), GTE, British Telecom,
Mercury Communications (a division of Cable and Wireless), Telcom Finland,
Telstra (in Australia), Telefonica (in Spain), Singapore Telecom, Hong Kong
Telecom, and Mesatel (in Mexico). The Company sells its products directly to
end-users and through relationships with systems integrators, including IBM,
Unisys, Tandem, Vicorp, Mosaix, Comverse Technology, Digital Equipment, and
Interactive Technology. Through March 31, 1998, the Company had sold more than
1,900 programmable switches in 38 countries worldwide. For the year ended March
31, 1998, Unisys, Telefonica, and IBM represented approximately 11%, 7%, and 7%,
respectively of the Company's net revenues.
Examples of specific applications of the Company's switches include the
following: (i) a RBOC has built one of the world's largest integrated voice
messaging systems; (ii) a US long distance telephone company has deployed a
voice activated dialing system used in conjunction with their calling card
offering; (iii) a Pacific Asia Public Network Operator has introduced a
network-based conference calling application; (iv) an International Simple
Reseller in Europe has constructed an alternative long distance network
connecting eight European cities; (v) a major wireless vendor has deployed PCS
services.
The Company was incorporated under the laws of Delaware on June 28, 1976.
Its principal executive offices are located at 25 Sundial Avenue, Manchester, NH
03103-7251 and its telephone number is (603) 625-4050.
RECENT DEVELOPMENTS
In July 1997, Jeffrey A. Weber, was appointed Vice President, Finance and
Chief Financial Officer of the Company. Mr. Weber was previously Senior Vice
President Finance, Operations & Finance and Treasurer of Computer Identics, a
manufacturer of bar code data collection products.
In February 1998, the Company entered into a strategic license agreement
with Dialogic, Inc., a leading manufacturer of high-performance computer
telephony components. In April 1998, Summation, LLC. was formed as a jointly
owned entity. The principles are the Company which holds a majority interest,
and Junction, Inc., a Cupertino, California-based development company whose
principles have significant experience in the design and development of
telephony solutions. The purpose of these business relationships is to aid in
the development and deployment of what the Company believes will be the
industry's first telco-capable, programmable switching platform (Sigma) founded
on standards-based hardware and software. This fully-integrated, intelligent
platform is intended to enable telecommunications service providers to reduce,
significantly, the cost and time-to-market for delivery of advanced services.
Litigation related to suits initiated by Claircom Communications, Inc.
("Claircom") against the Company and by the Company against Claircom and AT&T
Wireless Communications Group, Inc. in the States of Washington, New Hampshire,
and Delaware was settled in principle on April 20, 1998, and a definitive
settlement agreement was entered into by the parties on June 1, 1998. The terms
of the settlement included a $7 million payment to the Company. Legal fees of
approximately $2.4 million were paid from the settlement proceeds.
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VCO OPEN PROGRAMMABLE SWITCHES
The Company offers three switching products. The Company's VCO (virtual
central office) 80 Open Programmable Switch accounted for the majority of fiscal
year 1998. VCO/80 sales were supplemented by sales of the Company's VCO/20
switch, which is a lower capacity platform that provides the full functionality
of the VCO/80. The most recent member of the VCO family is the VCO/4K, which was
first introduced in March 1998. The VCO/4K provides twice the capacity of the
VCO/80 with half the system footprint.
The VCO Series of switches can be deployed in a variety of ways -- as a
fully network-compliant switching foundation for an enhanced services platform,
as a core transport switch in wireline networks, and/or as a mobile switching
center, base station controller or local loop controller for wireless networks.
The Company's open, programmable switches are controlled by a host computer
wherein the intelligent network service software resides. The VCO's open
architecture allows the developer to select the computer and operating system
that best suits an application. Each of the Company's VCO switches are comprised
of a non-blocking switching matrix, standards-based interface hardware and
software (to communicate to the public switched telephone networks), service
circuit cards (which perform various functions such as speech prompting and
recording) and call control software (which allows discrete control over all
elements of the voice and data call path). This standards-based, open
architecture platform enables a wide variety of developers to focus their
attention on application development through the application programmatic
interface (API), rather than on complex switching functions.
The VCO switches are modular and scaleable and incorporate advanced
technologies such as SS7, ISDN, hierarchical call control and SNMP network
management.
MARKETING AND SALES
In order to meet the needs of customers with diverse and complex network
requirements, the Company sells its products through the coordinated efforts of
its direct sales force and selected systems integrators, which include value
added resellers and an increasing number of emerging application developers.
These resellers are generally selected for their capacity to offer the Company's
products in combination with related products and services, as well as for their
capability to serve particular markets.
The Company's products have been installed in countries on six continents.
International sales, as a percentage of total sales, were approximately 43% and
40% in fiscal 1998 and fiscal 1997, respectively. The Company believes the
increase in international sales is primarily attributable to the adoption of the
Company's products by public network operations worldwide, spurred by the rapid
expansion of markets and the expansion of the Company's international sales
operations in Europe and Asia.
BACKLOG
The Company's backlog was approximately $6,224,000 and $6,215,000 at
March 31, 1998 and 1997, respectively. The Company includes in its backlog only
written orders for products and related services scheduled to be shipped or
rendered within one year.
CUSTOMER SUPPORT, SERVICE AND CONSULTING
The Company services, repairs and provides technical support for its
products. In addition, the Company provides consulting services. A high level of
continuing customer service and support is integral to the Company's objective
of developing long-term relationships with its customers who require
uninterrupted operations of the Company's products. The Company's products
generally have warranties of 12 months. Support services include 24-hour
technical support, remote access diagnostic and servicing capabilities, extended
maintenance and support programs, comprehensive technical customer training,
customer documentation, field installation and emergency replacement. Special
consulting services are provided on a contractual basis whenever required.
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PRODUCT DEVELOPMENT
The Company's focus upon three major areas of development resulted in the
design and/or release of several important new products during fiscal 1998:
- VCO, hardware and software, improvements were developed including
release version 4.2 which provides the ability to perform "Live
Upgrades" to a system while calls continue to be processed. In addition,
VCO products have received supplemental country certifications,
particularly as relates to SS7 and ISDN connections. Various components
of the VCO product are now certified in over 33 countries.
- The VCO/4K product, which will support up to 4,088 ports within a single
25" enclosure, was developed and released to the market. Design of the
product incorporated a new type of hardware simulation tool(s) in
combination with new, object-oriented software development processes
intended to result in high quality designs with reduced market delivery
time-frames. The VCO/4K introduced two major card types, (i) the ICC
card which is intended to allow multiple protocols to run on a single
board supporting up to 16 spans and, (ii) the SPC card which is intended
to allow the delivery of up to 32 services on a single DSP-based service
card and requires the use of only one slot. Previous technology required
the use of up to 32 slots for delivery of similar services.
- Development of the next generation Open Programmable Switch platform
(Sigma), a telco capable standards based switch, was initiated during
the first quarter of fiscal 1998. Design of this product incorporated
the same hardware simulation and object oriented tools used to design
the VCO/4K product. The new platform is intended to be capable of
switching in excess of 16,000 ports based on new .35 micron ASIC
technology. It is also designed and intended to be compatible with
existing VCO and SDS (a prior product family) applications while
accommodating third-party standard Compact PCI hardware and industry
standard Application Program Interfaces (API) such as S-100 and TAPI.
In fiscal years 1998, 1997 and 1996, the Company's research and development
expenditures were approximately $11,171,000, $10,478,000 and $9,131,000,
respectively. All such costs have been expensed as incurred. In addition, during
fiscal years 1998, 1997 and 1996, the Company received $0, $0 and $188,000,
respectively, from customer sponsored development projects which have been
recorded as a reduction to related research and development expenses. At March
31, 1998, 77 employees and 2 persons, retained on a contract basis for specific
projects, were engaged in product development.
The Company recently entered into a strategic licensing agreement with
Dialogic, Inc. In addition, the Company has continued its relationship with
Junction, Inc. which has been formalized by the formation of Summation, LLC.
These business relationships are associated with the development of the Sigma
product. The expenses associated with these developmental activities are being
funded from operations.
Summa Four believes that the ongoing, timely development of new products and
applications, and enhancements to existing products are essential for the
Company to compete in the programmable switch market, and the Company expects to
continue to devote substantial resources to research and development in fiscal
year 1999.
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MANUFACTURING
The Company's manufacturing operations consist of the purchase and
management of materials and sub- assemblies, final assembly, testing and quality
control. The Company uses independent third party contract manufacturing
companies, with whom the Company has had working relationships ranging from less
than one year to four years, to perform most of the production processes related
to the manufacture of printed circuit board subassemblies. The Company installs
software into the electronically programmable read-only memory (EPROM) of its
systems which enhances maintenance of quality control and security. This
manufacturing process enables the Company to configure the hardware and software
in combinations to meet a wide variety of customer requirements in a timely
manner. The Company uses automated testing equipment, as well as comprehensive
inspection and statistical process control testing, to assure the quality and
reliability of its products. Test programs, fixtures and stations are developed
and maintained by the Company and are capital assets of the Company. To date,
the Company has not experienced significant customer returns.
The Company generally uses industry standard components for its products.
Certain components, including microprocessors and power supplies, are presently
being purchased from a single source or from limited sources. The Company has
been able to obtain adequate supplies of components for its products in a timely
manner from a number of regular sources of supply, or, when necessary, from
alternative sources of supply. The Company believes that in most of these cases,
alternative sources of supply are either currently available or could be
developed over a moderately short period of time. In addition, in certain
instances, components required for certain sub-assemblies used in the Company's
products are no longer being manufactured. The Company has and continues, on an
ongoing basis, to redesign such sub-assemblies in order to eliminate production
interruption that could occur if such components cannot be procured. The
inability to develop alternative sources, if required, or an inability to meet
demand, or an interruption in supply, or a significant increase in the price of
one or more components, would adversely affect the Company's operating results
and could adversely impact customer relationships.
The Company is ISO 9001 and BABT (British Approvals Board for
Telecommunications) certified. Compliance audits are conducted at least
annually.
COMPETITION
The market for programmable switching products is highly competitive and is
subject to price and margin pressures and rapid technological change. At
present, the Company's principal competition comes from Excel Switching
Corporation, Inc., the DTS Division of Harris Corp. and Redcom Laboratories. The
Company expects competition to increase in the future from existing competitors
in the programmable switching market and from other companies which may enter
the Company's existing or future markets, including major central office switch
vendors and PC-based switching vendors. In addition, the Company believes that
as the programmable switch market evolves, competition and/or partnering
arrangements may develop among the companies which currently offer products and
services to particular segments of the programmable switch market, including
private networking companies, central office switch manufacturers, voice
processing companies, PBX manufacturers and others. Many of these current and
potential competitors may have substantially greater financial, marketing and
technical resources than the Company. The development of such competition or of
such partnering arrangements could have a material adverse effect on the
Company's business, results of operation and financial condition.
The Company believes that the principal competitive factors in the market
for programmable switching systems are: knowledge of the requirements applicable
to service providers; broad applications experience; technical benefits of
product design, including an open architecture to permit customer programming;
market distribution strategies; product flexibility and scalability;
reliability; responsiveness to customer needs; service and price.
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PATENTS, PROPRIETARY RIGHTS AND LICENSES
The Company relies on a combination of patent, copyright and trade secret
laws to establish and maintain its proprietary rights in its products. The
Company's products are generally sold pursuant to purchase and license
agreements which contain terms and conditions restricting unauthorized
disclosure or reverse-compiling of the proprietary software embodied in its
products. The Company is the owner of four active United States patents with
expirations ranging from the year 2001 to 2014 and has an application pending
for one additional patent in the United States, covering certain aspects of the
Company's products. No assurance can be given that the Company's patent
application will be granted, or if granted, will be upheld if challenged.
Although the Company relies, to a great extent, on trade secret protection for
much of its technology and has obtained confidentiality agreements from its
employees, there can be no assurance that third parties will not either
independently develop the same or similar technology, obtain unauthorized access
to the Company's proprietary technology or misuse the technology to which the
Company has granted access.
Certain technology used in the Company's products is licensed from various
parties on a non-exclusive basis. Royalties due under these license agreements
have either been fully paid or are payable based upon units shipped. The
non-renewal of these licenses could have a material adverse effect on the
Company's operations.
The telecommunications industry is characterized by the existence of a large
number of companies holding patents and frequent litigation based on allegations
of patent infringement. On May 27, 1998, Excel Switching Corporation filed a
patent infringement suit against the Company. See Item 3 - Legal Proceedings.
The Company is not aware of any other allegations of infringement by its
products or technology of the proprietary rights of others. The Excel
litigation, or any other allegation of infringement, regardless of its outcome,
could result in substantial cost to and diversion of effort by the Company. Any
infringement claims or litigation against the Company could materially and
adversely affect the Company's business, results of operations and financial
condition.
EMPLOYEES
At March 31, 1998 the Company employed 207 persons. In addition, the Company
retained, on a contract basis, 4 persons for specific temporary projects. The
Company believes that its future growth and success will depend in large part
upon its ability to continue to attract and retain highly qualified personnel
who are in great demand. The Company has no collective bargaining agreement with
its employees.
Item 2 - Properties
The Company's principal administrative, sales and marketing, development,
manufacturing and support facility is located in Manchester, New Hampshire and
consists of approximately 71,000 square feet under a lease that will expire in
August 1998. The Company is currently in negotiations to extend the lease. In
addition, the Company leases and/or occupies eight additional sales offices in
major metropolitan areas in the United States, and has international offices in
England, Singapore and Japan.
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Item 3 - Legal Proceedings
The previously reported litigation related to suits initiated by Claircom
Communications, Inc. ("Claircom") against the Company and by the Company against
Claircom and AT&T Wireless Communications Group, Inc. in the States of
Washington, New Hampshire, and Delaware was settled in principle on April 20,
1998, and a definitive settlement agreement was entered into by the parties on
June 1, 1998. Under the terms of this agreement, Claircom received a fully paid
up, unlimited, perpetual, irrevocable, and exclusive world-wide license to use
the disputed technology in all avionics applications, and the Company received a
fully paid up, unlimited, perpetual, irrevocable, and exclusive world-wide
license to use the disputed technology in all non-avionics applications. The
Company also received a cash payment of $7 million and incurred related legal
fees of approximately $2.4 million, which was paid from the settlement proceeds.
On May 22, 1998, Excel Switching Corporation ("Excel") filed suit in U. S.
District Court for the district of Massachusetts alleging that certain
unspecified telecommunications products of the Company have infringed U.S.
Patent Nos. 5,546,453, 5,426,694, and 5,349,579 allegedly owned by Excel. The
Company has answered Excel's complaint, alleging that the Company has not
infringed the Excel patents, and that those patents are invalid. The Company has
also asserted appropriate counterclaims and intends to vigorously defend the
litigation. The litigation is, however, in its early stages, discovery has not
begun and its outcome is, therefore, uncertain at this time.
Item 4 - Submission of Matters To a Vote of Security Holders
None.
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PART II
Item 5 - Market For Registrant's Common Equity and Related Stockholder
Matters
The Company completed its Initial Public Offering on September 23, 1993. The
common stock of the Company is listed on the NASDAQ National Market ("NASDAQ")
and is traded in the over-the-counter market under the symbol "SUMA". The
following table sets forth the high and low bid prices for the Common Stock as
reported by Nasdaq for each of the periods indicated:
High Low
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Fiscal Year 1998
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First Quarter $ 9 1/8 $ 7
Second Quarter $11 $ 6 5/8
Third Quarter $13 3/8 $ 8 7/8
Fourth Quarter $12 3/8 $ 8 3/4
Fiscal Year 1997
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First Quarter $20 $12 1/4
Second Quarter $15 7/8 $11 3/8
Third Quarter $14 1/8 $ 7 1/2
Fourth Quarter $11 3/4 $ 7 3/8
At March 31, 1998, there were approximately 80 stockholders of record.
This number does not reflect persons or entities who hold their stock in nominee
or "street name" through various brokerage firms. The Company estimates that
there are approximately 5,000 additional beneficial holders when such "street
name holders" are included.
Dividend Policy
It is not, generally, the Company's policy to declare or pay cash dividends
on its common stock. The Company currently intends to retain substantially all
of its earnings to finance future growth, and therefore does not anticipate
paying any cash dividends in the foreseeable future.
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Item 6 - Selected Financial Data
The following table summarizes certain selected historical consolidated
financial data which should be read in conjunction with the Company's
consolidated financial statements and accompanying notes included elsewhere
herein.
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<CAPTION>
Years ended March 31,
(In thousands, except per share data)
1998 1997 1996 1995 1994
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Statements of Income Data:
Net revenues $41,942 $44,316 $41,193 $37,136 $27,257
Cost of revenues (1) 19,491 18,144 14,467 12,367 9,114
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Gross profit 22,451 26,172 26,726 24,769 18,143
Operating expenses (1):
Selling, general and administrative 16,667 14,196 13,023 11,968 8,434
Research and development 11,171 10,478 9,131 5,863 3,999
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Total operating expenses 27,838 24,674 22,154 17,831 12,433
Operating income (loss) (5,387) 1,498 4,572 6,938 5,710
Other income:
Interest and other income, net 1,371 1,219 1,502 1,540 605
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Income (loss) before income taxes (4,016) 2,717 6,074 8,478 6,315
Provision for (benefit from) income
taxes (2) (1,285) 869 2,309 3,055 1,028
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Net income (loss) $(2,731) $ 1,848 $ 3,765 $ 5,423 $ 5,287
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Net income (loss) per share - basic $ (0.48) $ 0.31 $ 0.61 $ 0.82 $ 0.92
Weighted average common
shares outstanding - basic 5,704 5,951 6,175 6,605 5,738
Net income (loss) per share - diluted $ (0.48) $ 0.30 $ 0.59 $ 0.77 $ 0.82
Adjusted weighted average common
shares outstanding - diluted 5,704 6,095 6,417 7,013 6,418
Balance Sheet Data:
Cash and cash equivalents $ 2,083 $ 6,169 $ 4,681 $ 7,070 $ 2,761
Working capital 27,715 22,960 24,861 28,953 15,686
Total assets 56,596 56,453 57,699 55,175 46,635
Long term liabilities 938 676 863 1,250 205
Stockholders' equity 43,567 45,649 49,137 48,033 40,684
</TABLE>
(1) For the fiscal years ended March 31, 1996, 1995, and 1994, a portion of
customer service ($650, $577 and $21, respectively) and research and
development ($230, $0 and $0, respectively) expenses were reclassified to
cost of revenues. In addition, corporate quality expenses of $214, $181 and
$84, respectively, were reclassified from cost of revenues to selling,
general and administrative expenses. These reclassifications had no effect
on operating or net income. All fiscal 1998 and 1997 amounts are stated in a
manner which is consistent with these reclassifications.
(2) In fiscal 1998 and 1997, the Company reduced its tax rate to 32% from
various other rates in previous years.
(3) There were no cash dividends paid.
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Item 7 - Management's Discussion and Analysis of Financial Condition and
Results of Operations
This Annual Report on Form 10-K contains forward-looking statements that
involve a number of risks and uncertainties. There are a number of factors that
could cause the Company's actual results to differ materially from those
forecasted or projected in such forward-looking statements, including those
discussed below. Investors are cautioned not to place undue reliance on these
forward-looking statements which speak only as of the date hereof.
The following table sets forth, for the periods indicated, certain
consolidated financial data as a percentage of net revenues:
Years ended March 31,
--------------------------------
1998 1997 1996
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Net revenues 100.0% 100.0% 100.0%
Cost of revenues 46.5 40.9 35.1
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Gross profit 53.5 59.1 64.9
Operating expenses:
Selling, general and administrative 39.7 32.0 31.6
Research and development 26.7 23.7 22.2
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Total operating expenses 66.4 55.7 53.8
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Operating income (loss) (12.9) 3.4 11.1
Other income:
Interest and other income, net 3.3 2.7 3.6
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Income (loss) before income taxes (9.6) 6.1 14.7
Provision for income taxes (3.1) 1.9 5.6
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Net income (loss) (6.5)% 4.2% 9.1%
===== ===== =====
RESULTS OF OPERATIONS
FISCAL 1998 COMPARED WITH FISCAL 1997
Net revenues for fiscal 1998 decreased by $2.4 million (5%) to $41.9
million, from $44.3 million in fiscal 1997. Specifically, the decrease resulted
from comparatively lower domestic sales, particularly over the first half of the
year. Shipments to the Company's Inter-exchange Carrier (IXC) customers
continued at minimal levels. Overall revenue, however, increased significantly
over the last half of the year in comparison to the first half, buoyed by
significant fourth quarter sales of the newly released VCO/4K port switch.
Cost of revenues consists of production, shipping, service, and warranty
costs. Gross profit decreased $3.7 million (14%) to $22.5 million for fiscal
1998, compared to $26.2 million in fiscal 1997. Gross margin decreased to 54% in
fiscal 1998 from 59% in fiscal 1997. The decrease in gross margin in fiscal 1998
resulted primarily from the sale of systems with lower margins, an increase in
service revenues, which typically generate lower gross margins, expediting and
reconfiguration costs related to delivery of production materials, and a
one-time write off of obsolete inventories at the end of the second quarter. The
Company does not believe the current gross margins are necessarily indicative of
future gross margins, which may be affected by the level of net revenues,
customer mix, cost of components, competitive pricing pressure, introduction of
new products, and discounts granted to high volume purchasers. Although the
Company's newly released VCO/4K switch may generate higher margins than
traditional products, the Company's gross margin(s) may experience some downward
pressure as a result of competitive pricing and increased use of indirect
channels of distribution.
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Selling, general and administrative expenses increased by $2.5 million (17%)
to $16.7 million in fiscal 1998 compared with $14.2 million in fiscal 1997. This
increase resulted primarily from special charges for Claircom legal expenses,
other costs related to personnel and severance activities, and the
reorganization and expansion of the Company's sales and support functions.
Research and development expenses in fiscal 1998 increased by $0.7 million
(7%) to $11.2 million compared with $10.5 million in fiscal 1997. As a
percentage of net revenues, research and development expenses increased to 27%
in fiscal 1998 as compared with 24% in fiscal 1997. The increase in fiscal 1998
was primarily the result of the expansion of the Company's software engineering
staff, expanded development efforts for international markets, spending for
research and development directed towards the enhanced VCO/4K switch and,
through Summation, LLC, the development of a new line of standards-based
programmable switches. The Company believes that an increased level of
expenditures for research and development will continue through at least its
next fiscal year.
Operating income decreased by $6.9 million to a loss of $5.4 million, or
(13)% of net revenues, in fiscal 1998, compared to $1.5 million, or 3% of net
revenues, in fiscal 1997. The decrease in operating income as a percentage of
net revenues was primarily the result of lower overall gross margins, a series
of one-time special charges incurred in the second quarter and increased
spending for research and development and other operational purposes.
Net interest income of $1.4 million in fiscal 1998, which includes the
effect of foreign exchange gains and losses, increased by $0.2 million as
compared to fiscal 1997. The increase resulted principally from greater interest
earnings in combination with foreign exchange transactional gains.
The Company's effective tax rate in fiscal 1998 and 1997 was 32%.
FISCAL 1997 COMPARED WITH FISCAL 1996
Net revenues for fiscal 1997 increased by $3.1 million (8%) to $44.3
million, from $41.2 million in fiscal 1996. This increase resulted primarily
from increased shipments of VCO 80 systems resulting in part from the broadening
of the Company's indirect sales channels, the introduction of the VCO 20 systems
beginning in the second quarter of fiscal 1997, increased revenues from customer
support and training and growth in international shipments. These revenue
increases were partially offset by a decline in the sale of sub-assemblies for
existing system expansion, lower average selling prices realized as the result
of a price reduction initiated during the year and fewer shipments to the
Company's Inter-exchange Carrier (IXC) customers, which represented 25% of net
revenues in fiscal 1996 and 12% of net revenues in fiscal 1997. International
revenues in fiscal 1997 were $19.3 million, or 44% of net revenues, compared to
$13.2 million, or 32% of net revenues in fiscal 1996. During the fiscal year,
twenty-eight new customers were added.
Cost of revenues consists of production, shipping, service and warranty
costs. Gross profit decreased $0.5 million (2%) to $26.2 million for fiscal
1997, compared to $26.7 million in fiscal 1996. Gross margin decreased to 59% in
fiscal 1997 from 65% in fiscal 1996. The decrease in gross margin in fiscal 1997
resulted primarily from increased discounts associated with growing indirect
distribution channels, a change in the product mix whereby more thinly
configured systems were shipped to customers, a price reduction implemented in
the second quarter of fiscal 1997 to stimulate sales to resellers and the
increase of service revenue as a percent of total revenues at lower gross
margins. A reclassification of a portion of customer service and research and
development operating expenses to cost of revenues are reflected in these
results for the fiscal year ended March 31, 1996. (See note 1 of the Notes to
Consolidated Financial Statements.)
11
<PAGE> 12
Selling, general and administrative expenses increased by $1.2 million (9%)
to $14.2 million in fiscal 1997 compared with $13.0 million in fiscal 1996. This
increase was primarily attributable to expansion of the Company's direct sales
and support organization and increased professional services costs. As a
percentage of net revenues, selling, general and administrative expenses
remained constant at 32%.
Research and development expenses in fiscal 1997 increased by $1.4 million
(15%) to $10.5 million compared with $9.1 million in fiscal 1996. As a
percentage of net revenues, research and development expenses increased to 24%
in fiscal 1997 as compared with 22% in fiscal 1996. The increase in fiscal 1997
was primarily the result of the expansion of the Company's software engineering
staff, increased utilization of contract engineering resources and expanded
development efforts for international markets. This increased spending was
focused towards enhancing the functionality of the Company's VCO product lines,
supporting a higher number of useable ports with the introduction of Release 4.0
Generic Operating Software (1776 ports), increased international certifications,
and ISDN interfaces for Europe, U.S. and Japan. During fiscal 1997, no payment
was received and during fiscal 1996, $188,000 was received from customer
sponsored development projects and recorded as a reduction to the related
research and development expenses.
Operating income decreased by $3.1 million to $1.5 million, or 3% of net
revenues, in fiscal 1997, compared to $4.6 million, or 11% of net revenues, in
fiscal 1996. The decrease in operating income as a percentage of net revenues
was primarily the result of lower gross margins and higher spending for research
and development.
Net interest and other income of $1.2 million in fiscal 1997 decreased by
$0.3 million as compared to fiscal 1996. The reduction primarily resulted from
lower interest earned on a smaller investment base and foreign exchange
transaction losses.
The Company's effective tax rate in fiscal 1997 was 32% compared with 38% in
fiscal 1996. This reduction was primarily due to credits attributable to
tax-exempt interest and increases in international sales made through its
foreign sales corporation.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1998, the Company had $27.2 million in cash and cash
equivalents and current and non-current investments as compared to $32.3 million
at March 31, 1997. The decrease of $5.1 million (16%) was consistent with
increased spending levels related to the enhancement of the Company's world-wide
sales force and the continuing development of new products. The ratio of current
assets to current liabilities was 3.3:1 at March 31, 1998 and 1997.
Accounts receivable were $11.4 million and $10.3 million at March 31, 1998
and 1997, respectively. The increase of $1.1 million (11%) was primarily due to
increasing sales levels throughout Asia, Europe and Latin America which
typically require and/or result in longer payment cycles compared to domestic
sales.
Inventory decreased by $1.1 million (20%) to $4.0 million at March 31, 1998
from $5.1 million at March 31, 1997. The reduction primarily the result of
reclassification to depreciable fixed assets, of field technical support and
consignment equipment formerly reported as inventories.
12
<PAGE> 13
Other current assets increased to $3.9 million at March 31, 1998 from $1.8
million at March 31, 1997. The increase of $2.1 million was primarily the result
of a reclassification of accrued income taxes totaling $1.3 million related to
the year's net operating loss, previously reported as a current liability, and
an increase in prepaid insurance costs of $0.3 million related to the purchase
of a multi-year policy.
Gross fixed assets increased by $5.3 million (45%) to $17.1 million at March
31, 1998 from $11.8 million at March 31, 1997. The increase is primarily due to
the purchase of various engineering design and test equipment totaling $1.9
million, computer equipment totaling $1.9 million, and capitalization of spares
totaling $0.5 million. The Company expects that its capital expenditures,
including leasehold improvements, will continue to increase. At March 31, 1998,
there were no material commitments for future capital expenditures.
Accounts payable increased by $1.8 million (76%) to $4.1 million at March
31, 1998 from $2.3 million at March 31, 1997. The increase was primarily due to
accelerated inventory purchases related to the release and production of new
product(s) and enhanced spending levels related to the continuing development of
new products.
The Company maintains an unsecured line of credit in the amount of $6.0
million with a bank. At March 31, 1998, no borrowings were outstanding under
this line. Unless renewed, the line will expire in September 1998. This line
bears interest at the bank's prime interest rate per annum (8.50% at March 31,
1998). The Company anticipates that the line of credit will be renewed.
The Company does not consider the impact of inflation on its business
activities to have been significant to date.
Purchase commitments to suppliers of the Company were approximately $8.2
million and $9.7 million at March 31, 1998 and 1997, respectively. The Company
anticipates funding purchase commitments from operations.
Since 1994, the Board of Directors has authorized the Company to make open
market purchases of up to 1,000,000 shares of the Company's common stock. During
the twelve month periods ended March 31, 1998 and 1997, the Company repurchased
11,565 shares at an average cost of $7.00 and 572,500 shares at an average cost
of $11.10, respectively. Since the original repurchase authorization in July
1994, a total of 905,065 shares have been purchased by the Company at an average
cost of $13.14 per share. During fiscal 1998 and 1997, the Company reissued
28,706 and 20,575 shares, respectively, at an average price of $6.42 and $10.71,
respectively, related to purchases under the Company's Employee Stock Purchase
Plan. The Company may repurchase additional shares of its stock depending on
market conditions, price per share and other factors.
The Company believes that its cash equivalents, together with funds expected
to be generated from operations, will be sufficient to finance the Company's
operations through at least the fiscal year ending March 31, 1999.
13
<PAGE> 14
YEAR 2000 COMPLIANCE
The Company has initiated a program to assess the impact of the year 2000
issue on the Company's computer systems and applications as well as the
Company's product offerings. The Company believes that all of its product
offerings are currently Year 2000 compliant and that its primary internal
information systems used to support its operations are also year 2000 compliant.
However, the Company utilizes third party equipment, telecommunication products,
and other third party software applications which may or may not be year 2000
compliant. Although the Company is currently taking steps to address the impact,
if any, of the year 2000 issue surrounding such third party products, failure of
any critical third party products to operate properly in the year 2000 may have
a material adverse effect on the Company's results of operations or require the
Company to incur unanticipated expenses to remedy any such problem. In addition,
as the Company purchases many critical components from single or sole source
suppliers, failure of any such vendor to adequately address the consequences
relating to the year 2000 issue may have a material adverse effect on the
Company's business, financial condition, and results of operations.
CERTAIN FACTORS THAT MAY AFFECT RESULTS
The statements contained in this Report which are not purely historical and 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. Forward-looking statements include, but are not limited
to: statements regarding future product revenue levels; statements regarding
future international sales; statements regarding future gross profit levels;
statements regarding the level of future selling, general and administrative,
research and development expenses; statements regarding product development,
introduction and marketing; and statements regarding the sufficiency of the
Company's existing cash and available-for-sale securities to meet future
operating cash requirements. 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 the Company's actual results could
differ materially from those in such forward-looking statements.
The market for telecommunication switches is based upon sophisticated
technologies and is subject to rapid technological change, new product
introductions and a number of current and evolving standards. Products marketed
by certain competitors of the Company may have design and functionality
capabilities similar to and/or in certain respects, more advanced than the
Company's products. There can be no assurance that the Company will be able to
compete successfully in the future against existing or new competitors or that
the Company's operating results will not be adversely affected by increased
price competition and technological factors. The Company believes that remaining
competitive depends on a variety of factors, including product selection,
successful and timely completion of product development, and its ability to
offer products at competitive prices.
Some additional factors that could cause actual results to differ materially
from expectations are set forth below.
- The Company has recently entered into a strategic license agreement with
Dialogic, Inc. The Company has also recently formed Summation, LLC, a
jointly owned entity whose principles are the Company which holds a
majority interest, and Junction, Inc., a California based development
company. The Company anticipates that these relationships will result in
the development of a new line of standards based programmable switches
targeted for fiscal 1999. The Company further anticipates that the
expenses associated with these developmental activities will be funded
from operations. There can be no assurance that these or other similar
relationships will result in the development of salable product(s) which
will be beneficial to the future of the Company or that products
produced by these or other similar relationships will be developed in a
cost-effective manner and be available for sale within the time frame
required.
14
<PAGE> 15
- 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 sub-assemblies 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 a 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,
product mix, changing market conditions and increasing 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.
- 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, including the cost of
defending against such claims (see Item 3 - Legal Proceedings). 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 indicator of future performance.
15
<PAGE> 16
Item 8 - Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE(S)
Report of Independent Accountants 17
Consolidated Balance Sheets as of March 31, 1998 and 1997 18
Consolidated Statements of Income for the Years Ended March 31,
1998, 1997 and 1996 19
Consolidated Statements of Changes in Stockholders' Equity for
the Years Ended March 31, 1998, 1997 and 1996 20
Consolidated Statements of Cash Flows for the Years Ended
March 31, 1998, 1997 and 1996 21
Notes to Consolidated Financial Statements 22 - 35
16
<PAGE> 17
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors of Summa Four, Inc.:
We have audited the accompanying consolidated balance sheets of Summa Four,
Inc., as of March 31, 1998 and 1997, and the related consolidated statements of
operations, shareholders' equity, and cash flows for each of the three years in
the period ended March 31, 1998. These financial statements and the financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and the
financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Summa Four,
Inc. as of March 31, 1998 and 1997, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
March 31, 1998, in conformity with generally accepted accounting principles. In
addition, in our opinion, the financial statement schedule referred to above,
when considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included therein.
COOPERS & LYBRAND L.L.P.
Boston, Massachusetts
May 1, 1998
17
<PAGE> 18
SUMMA FOUR, INC.
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1998 AND 1997
(In thousands, except per share data)
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 2,083 $ 6,169
Investments - short-term 16,148 7,472
Accounts receivable, net of allowance
for doubtful accounts of $452 at March 31, 1998 and
$237 at March 31, 1997 11,398 10,278
Inventories, net 4,036 5,069
Deferred income taxes - current 2,208 2,288
Prepaid and other current assets 3,933 1,812
-------- --------
Total current assets 39,806 33,088
Investments - long-term 8,987 18,686
Property and equipment, net 6,842 4,265
Deferred income taxes - non-current 306 226
Other assets 655 188
-------- --------
Total assets $ 56,596 $ 56,453
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 4,103 $ 2,333
Accrued payroll and related expenses 1,217 1,016
Other accrued expenses 3,393 3,704
Deferred revenues 3,378 3,075
-------- --------
Total current liabilities 12,091 10,128
Other long-term liabilities 938 676
Commitments and contingencies (Note 8)
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 6,601,697 shares at March 31, 1998 and
6,411,762 at March 31, 1997 66 64
Additional paid-in capital 44,285 43,657
Retained earnings 10,423 13,154
Cumulative translation adjustment (28)
Unrealized gains (losses) on investments (15) 43
Common stock in treasury, 835,290 shares at March 31, 1998
and 852,431 shares at March 31, 1997, at cost (11,164) (11,269)
-------- --------
Total stockholders' equity 43,567 45,649
-------- --------
Total liabilities and stockholders' equity $ 56,596 $ 56,453
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
18
<PAGE> 19
SUMMA FOUR, INC.
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED MARCH 31, 1998, 1997 AND 1996
(In thousands, except per share data)
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Net revenues $41,942 $44,316 $41,193
Cost of revenues(*) 19,491 18,144 14,467
------- ------- -------
Gross profit 22,451 26,172 26,726
Operating expenses(*):
Selling, general and administrative 16,667 14,196 13,023
Research and development 11,171 10,478 9,131
------- ------- -------
Total operating expenses 27,838 24,674 22,154
------- ------- -------
Operating income (loss) (5,387) 1,498 4,572
Other income:
Interest and other income, net 1,371 1,219 1,502
------- ------- -------
Income (loss) before income taxes (4,016) 2,717 6,074
Provision for (benefit from) income taxes (1,285) 869 2,309
------- ------- -------
Net income (loss) $(2,731) $ 1,848 $ 3,765
======= ======= =======
Net income (loss) per share - basic $ (0.48) $ 0.31 $ 0.61
Weighted average common
shares outstanding - basic 5,704 5,951 6,175
Net income (loss) per share - diluted $ (0.48) $ 0.30 $ 0.59
Adjusted weighted average common
shares outstanding - diluted 5,704 6,095 6,417
</TABLE>
(*) Reflects the reclassification of certain expenses. See note 1
(Reclassification).
The accompanying notes are an integral part of these consolidated financial
statements.
19
<PAGE> 20
<TABLE>
<CAPTION>
SUMMA FOUR, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED MARCH 31, 1998, 1997 AND 1996
(In thousands, except share data)
Common Stock Additional Cumulative Unrealized
------------------- Paid-In Retained Translation Gains (Losses) Treasury Stockholders'
Shares Amount Capital Earnings Adjustment on Investments Stock Equity
--------- ------- ---------- -------- ----------- -------------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, March 31, 1995 6,334,437 $ 63 $42,718 $ 7,541 $(140) $(966) $ (1,183) $48,033
Issuance of common stock
under stock option and
purchase plans 47,000 1 410 176 587
Income tax benefit from
stock option plans 459 459
Foreign currency translation 15 15
Purchase of treasury stock (4,149) (4,149)
Net income 3,765 3,765
Unrealized gains on
investments 427 427
--------- ------- ------- ------- ----- ----- -------- -------
Balance, March 31, 1996 6,381,437 $ 64 $43,587 $11,306 $(125) $(539) $ (5,156) $49,137
========= ======= ======= ======= ===== ===== ======== =======
Issuance of common stock
under stock option and
purchase plans 30,325 88 246 334
Income tax benefit from
stock option plans (18) (18)
Foreign currency translation 125 125
Purchase of treasury stock (6,359) (6,359)
Net income 1,848 1,848
Unrealized gains on
investments 582 582
--------- ------- ------- ------- ----- ----- -------- -------
Balance, March 31, 1997 6,411,762 $ 64 $43,657 $13,154 $ - $ 43 $(11,269) $45,649
========= ======= ======= ======= ===== ===== ======== =======
Issuance of common stock
under stock option and
purchase plans 189,935 2 628 105 735
Foreign currency translation (28) (28)
Net (loss) (2,731) (2,731)
Unrealized (losses) on
investments (58) (58)
--------- ------- ------- ------- ----- ----- -------- -------
Balance, March 31, 1998 6,601,697 $ 66 $44,285 $10,423 $ (28) $ (15) (11,164) $43,567
========= ======= ======= ======= ===== ===== ======== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
20
<PAGE> 21
SUMMA FOUR, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED MARCH 31, 1998, 1997 AND 1996
(In thousands)
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $(2,731) $ 1,848 $ 3,765
------- ------- -------
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 2,751 2,429 1,951
Deferred income taxes -- (526) (223)
Tax benefit from stock option plans -- (18) 459
Provision for doubtful accounts 215 150 274
Provision for excess and obsolete inventory (161) 112 257
Changes in operating assets and liabilities:
Accounts receivable (1,335) (837) (1,174)
Inventory 1,194 (1,829) (1,243)
Prepaid and other current assets (2,121) (737) (293)
Other assets (468) 152 (269)
Accounts payable 1,770 558 (432)
Accrued payroll and related expenses 201 59 9
Deferred revenues 602 1,202 613
Other accrued expenses and other liabilities (311) 454 1,075
------- ------- -------
Total adjustments 2,337 1,169 1,004
------- ------- -------
Net cash provided by (used in) operating activities (394) 3,017 4,769
------- ------- -------
Cash flows from investing activities:
Purchases of property and equipment (5,327) (2,939) (2,469)
Sales (purchases) of investments, net 965 7,466 (1,108)
------- ------- -------
Net cash provided by (used in)
investing activities (4,362) 4,527 (3,577)
------- ------- -------
Cash flows from financing activities:
Proceeds from the sale of stock under stock
option plans 735 334 587
Purchase of treasury stock -- (6,359) (4,149)
Principal payments under capital lease obligations (37) (31) (19)
------- ------- -------
Net cash provided by (used in) financing activities 698 (6,056) (3,581)
Effect of exchange rate on cash (28) -- --
Net increase (decrease) in cash and cash equivalents (4,086) 1,488 (2,389)
Cash and cash equivalents, beginning of period 6,169 4,681 7,070
------- ------- -------
Cash and cash equivalents, end of period $ 2,083 $ 6,169 $ 4,681
======= ======= =======
Supplemental disclosure of cash flow information
Cash paid for interest $ 10 $ 19 $ 7
Cash paid for income taxes $ 752 $ 791 $ 984
Supplemental disclosure of non-cash investing
and financing activities:
Equipment acquired under capital lease obligations $ -- $ -- $ 174
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
21
<PAGE> 22
SUMMA FOUR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies:
Basis of Presentation
The Company is active in only one business segment: developing, marketing,
manufacturing and supporting its open, programmable switches that enable
telecommunications service providers to build and deploy advanced wireline and
wireless services. The consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries. All intercompany transactions
have been eliminated.
Cash Equivalents
Cash equivalents consist of certificates of deposit and money market funds
which have maturities of 90 days or less when acquired, and are carried at cost
which approximates fair value. At March 31, 1998 and 1997, the Company had
approximately $1,296,000 and $5,487,000, respectively, maintained at three
institutions.
Inventory
Inventory is stated at the lower of cost (first-in, first-out) or market
using a standard costing system, which approximates cost. Provision is made for
excess or potentially obsolete inventory and other inventory valuation concerns
in the period such matters are identified.
Property and Equipment
Property and equipment are stated at cost. Depreciation is provided for on
the straight-line method for financial reporting purposes and on accelerated
methods for income tax purposes over the estimated useful lives of the assets.
The estimated useful lives of property and equipment for financial reporting
purposes are as follows: office furniture and equipment, 3-5 years; computers,
3 years; and machinery and equipment, 2-10 years. Leasehold improvements are
amortized over the shorter of their estimated useful life or the lease term.
Expenditures for additions, renewals and betterments of property and
equipment are capitalized. Expenditures for maintenance and repairs are expensed
as incurred. Upon retirement or sale, the cost of the disposed asset and the
related accumulated depreciation are removed from the account and any resulting
gain or loss is credited or charged to operations.
Research and Development
Research and development costs are expensed as incurred. The Company follows
Statement of Financial Accounting Standards No. 86, "Accounting for the Costs of
Computer Software to be Sold, Leased, or Otherwise Marketed", in accounting for
product development expenditures. To date, costs eligible for capitalization
have been immaterial and have not been capitalized.
Revenue Recognition
Revenue from product sales is recognized upon shipment. Revenue under
maintenance agreements is recognized ratably over the life of the related
agreements. Deferred revenue consists of customer deposits and amounts received
for extended maintenance agreements. For the year ended March 31, 1996, payment
of $188,000 was received for customer sponsored development projects and
recorded as a reduction to related research and development expenses. There were
no such receipts for the years ended March 31, 1998 and 1997.
22
<PAGE> 23
Income Taxes
The Company utilizes the liability method of accounting for income taxes as
set forth in Statement of Financial Accounting Standards No. 109 ("SFAS No.
109"), "Accounting for Income Taxes". SFAS No. 109 is an asset and liability
approach that requires the recognition of deferred tax assets and liabilities
for the expected future tax consequences of events that have been recognized in
the Company's financial statements or tax returns. The measurement of deferred
tax assets is reduced by a valuation allowance if, based upon weighted available
evidence, it is more likely than not that some or all of the deferred tax assets
will not be realized.
Product Warranty
The Company generally provides a twelve month warranty on its hardware and
software products. Anticipated warranty costs are accrued upon shipment and are
charged to cost of sales.
Net (Loss) Income per Share
The Company has adopted Statement of Financial Accounting Standards No. 128
(SFAS No, 128), "Earnings per Share," which requires the presentation of basic
and diluted earnings per share. Basic earnings per share excludes the dilutive
effect of common equivalent securities and is computed by dividing income
available to common shareholders by the weighted average number of common shares
outstanding for the period. Diluted earnings per share reflects the potential
dilution that could occur if stock options were exercised that resulted in the
issuance of common stock that then shared in the earnings of the entity. In
accordance with SFAS 128, as of March 31, 1998, the Company has restated all
prior period earnings per share data presented.
Translation of Foreign Currencies
Assets and liabilities of foreign subsidiaries, which are denominated in
currencies other than the U.S. dollar, are remeasured into U.S. dollars at rates
of exchange in effect at the end of the fiscal year except non-monetary assets
and liabilities which are remeasured using historical exchange rates. Revenue
and expense amounts are remeasured using an average of exchange rates in effect
during the year, except those amounts related to non-monetary assets and
liabilities, which are remeasured at historical exchange rates. Net realized and
unrealized gains and losses resulting from currency remeasurement are included
in operations.
Reclassification
A portion of customer service ($650,000) and research and development
($230,000) expenses were reclassified to cost of revenues for the fiscal year
ended March 31, 1996. In addition, in 1996, corporate quality expenses of
$214,000 were reclassified from cost of revenues to selling, general and
administrative expenses. These reclassifications had no effect on operating
income or net income.
Certain items in the consolidated financial statements for the years ended
March 31, 1997 and 1996 have been reclassified to conform with the March 31,
1998 presentation.
Concentration of Credit Risk
Financial instruments which potentially subject the Company to
concentrations of credit risk consist primarily of cash and cash equivalents,
investments and accounts receivable. The Company places its cash in what it
believes are credit-worthy financial institutions. The Company's investments
consist primarily of obligations of the U.S. Government, States and political
sub-divisions.
23
<PAGE> 24
Credit risk with respect to trade receivables is concentrated because the
Company sells to a limited number of large customers. The Company's customer
base includes telephone companies in North and South America, Asia, and Europe
and a number of smaller applications developers and systems integrators.
Although the Company is directly affected by the condition of the
telecommunication industry, management does not believe that significant credit
risk currently exists and monitors this risk on a regular basis. The carrying
amount of the trade receivables approximates fair value and any credit losses
have been within management's expectations.
Risks and Uncertainties
Certain components used in the Company's products are purchased from a
single or limited source, and certain technology used in the Company's products
is licensed from third parties. In addition, in certain instances, components
required for certain sub-assemblies 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 interruption
that could occur if such components cannot be procured. The Company often
obtains parts from only one or limited sources, even where multiple sources are
available, to maintain quality control and strengthen the working relationship
with these parties. These purchases and licensing agreements are made under
existing contracts or purchase orders. However, the inability to develop
alternative sources, if required, due to the vendor's inability to deliver on
schedule, or the licenser's termination of certain licenses, could have a
material adverse effect on the Company's financial condition, results of
operations, and/or cash flows.
The Company's increasing international business is subject to a number of
inherent risks, including the challenges of building and managing foreign
operations, unique product requirements, fluctuations in the value of foreign
currencies, import/export duties, and unexpected regulatory, economic or
political changes in foreign markets.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Recent Pronouncements
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130 ("SFAS No. 130"), "Reporting
Comprehensive Income." SFAS No. 130 requires that changes in comprehensive
income be shown in a financial statement that is displayed with the same
prominence as other financial statements. SFAS No. 130 will be effective for
annual periods beginning after December 15, 1997 and the Company will adopt its
provisions in fiscal 1999. Reclassification for earlier periods is required for
comparative purposes. The Company is currently evaluating the impact SFAS No.
130 will have on its financial statements; however, because SFAS No. 130
requires only additional disclosure, the Company does not expect a material
impact on its financial position or results of operations.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131 (SFAS No. 131"), "Disclosures about
Segments of an Enterprise and Related Information." SFAS No. 131 supersedes SFAS
No. 14, "Financial Reporting for Segments of a Business Enterprise." SFAS No.
131 includes requirements to report selected segment information quarterly and
entity-wide disclosures about products and services, major customers, and the
material countries in which the entity holds assets and reports revenues. SFAS
No. 131 will be effective for annual periods beginning after December 15, 1997
and the Company will adopt its provisions in fiscal 1999. Reclassification for
earlier periods is required, unless impracticable, for comparative purposes. The
Company is currently evaluating the impact SFAS No. 131 will have on its
financial statements; however, because SFAS No. 131 requires only additional
disclosure, the Company does not expect a material impact on its financial
position or results of operations.
24
<PAGE> 25
In October 1997, the American Institute of Certified Public Accountants
("AICPA") issued the Statement of Position ("SOP") 97-2, "Software Revenue
Recognition," which superseded SOP 91-1. SOP 97-2 has not changed the basic
rules of revenue recognition but does provide more guidance, particularly with
respect to multiple deliverables and "when and if available" products. SOP 97-2
is effective for transactions entered into for annual periods beginning after
December 15, 1997. The Company will adopt SOP 97-2 in fiscal 1999 and has not
yet determined its impact.
In February 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 132 (SFAS No. 132"), "Employers'
Disclosures about Pensions and Other Post-retirement Benefits." SFAS No. 132 is
effective for fiscal years beginning after December 15, 1997. The Company has
not assessed the impact of SFAS 132 on its financial statement disclosures.
In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued the Statement of Position ("SOP") 98-1, "Internal Use
Software," which provides guidance on the accounting for the costs of software
developed or obtained for internal use. SOP 98-1 is effective for fiscal years
beginning after December 15, 1998. Management does not expect the statement to
have a material impact on its financial position or results of operations.
2. Investments
The Company determines the appropriate classification of its debt and equity
securities at the time of purchase, and re-evaluates such designations as of
each balance sheet date. The Company has classified its debt and equity
securities as available-for-sale. These securities are carried at fair value
with the unrealized gains and losses reported in a separate component of
stockholders' equity. The amortized cost of debt securities is adjusted for the
amortization of premiums and the accretion of discounts to maturity. Such
amortization is included in interest income.
A summary of available-for-sale securities at March 31, 1998 is as
follows (in thousands):
Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
------- ---------- ---------- ----------
Obligations of U.S. Government
and Agencies $ 1,956 $(21) $ 1,935
Obligations of States and
political sub-divisions 23,194 $14 (8) 23,200
------- --- ---- -------
Total $25,150 $14 $(29) $25,135
======= === ==== =======
A summary of available-for-sale securities at March 31, 1997 is as
follows (in thousands):
Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
------- ---------- ---------- ----------
Obligations of U.S. Government
and Agencies $ 4,130 $ (90) $ 4,040
Obligations of States and
political sub-divisions 21,776 $ 17 (34) 21,759
Other 209 150 -- 359
------- ---- ----- -------
Total $26,115 $167 $(124) $26,158
======= ==== ===== =======
The realized gains and losses on sales of securities calculated on the
specific identification method were $238,137 and ($235) and $20,251 and
($252,228) for the years ended March 31, 1998 and 1997, respectively. The net
adjustment to unrealized gains (losses) on available-for-sale securities
included as a separate component of stockholders' equity totaled $(14,823) and
$43,356 at March 31, 1998 and 1997, respectively.
25
<PAGE> 26
The amortized cost and estimated fair value of debt securities at March 31,
1998, by contractual maturity, are shown below (in thousands). Actual maturities
may differ from contractual maturities because the issuers of these securities
may have the right to prepay obligations without penalty.
Estimated
Maturity Cost Fair Value
-------- ------- ----------
Due within one year $16,163 $16,148
Due between one through five years 8,987 8,987
------- -------
$25,150 $25,135
======= =======
3. Inventories:
Inventories at March 31, 1998 and 1997 consisted of the following (in
thousands):
1998 1997
---- ----
Raw materials $1,898 $1,652
Work-in-process 1,309 1,795
Finished goods 829 1,622
------ ------
$4,036 $5,069
====== ======
4. Property and Equipment:
Property and equipment at March 31, 1998 and 1997 consisted of the following
(in thousands):
1998 1997
-------- -------
Machinery and equipment $ 10,237 $ 7,573
Office furniture and equipment 6,421 4,531
Leasehold improvements 471 427
-------- -------
Total 17,129 12,531
Less: accumulated depreciation and amortization (10,287) (8,266)
-------- -------
$ 6,842 $ 4,265
======== =======
Property and equipment includes $174,000 of office equipment acquired under
capital leases in fiscal 1996 on which accumulated depreciation totaled $90,000
and $52,000 at March 31, 1998 and 1997 respectively. Depreciation and
amortization expense associated with property and equipment totaled
approximately $2,751,000, $2,429,000 and $1,951,000 for the years ended March
31, 1998, 1997 and 1996, respectively.
5. Income Taxes:
The provision for income taxes includes federal, state and foreign income
taxes currently payable and those deferred because of temporary differences
between the financial statement and tax bases of assets and liabilities. The
provision for the years ended March 31, 1998, 1997 and 1996 was as follows (in
thousands):
1998 1997 1996
------- ------ ------
Current
U.S. Federal $(1,697) $ 825 $1,972
Non-U.S 444 369 147
State (32) 200 413
------- ------ ------
$(1,285) $1,394 $2,532
Deferred
U.S. Federal -- $ (458) $ (194)
Non-U.S -- -- --
State -- (67) (29)
------- ------ ------
-- (525) (223)
------- ------ ------
$(1,285) $ 869 $2,309
======= ====== ======
26
<PAGE> 27
The following is a reconciliation between the federal statutory rate and the
effective tax rate:
1998 1997 1996
----- ---- ----
Statutory income tax rate (34.0)% 34.0% 34.0%
State income taxes, net of federal benefit (0.3) 7.4 7.4
Tax effect of foreign activities 1.0 2.1 (0.7)
Disallowed meals and entertainment deductions 1.6 0.7 0.4
Tax-exempt interest income (5.2) (9.7) (3.6)
Change in valuation allowance -- (6.7) (2.4)
Other 4.9 4.2 2.9
----- ---- ----
Effective tax rate (32.0)% 32.0% 38.0%
===== ==== ====
The Company's deferred tax assets and liabilities and related valuation
allowance were as follows at March 31, 1998 and 1997, respectively (in
thousands):
1998 1997
------ ------
Current deferred tax assets (liabilities)
Deferred revenues $1,019 $ 978
Other allowances and reserves 531 780
Allowance for doubtful accounts 187 93
Warranty reserve 362 334
Depreciation 175 125
Unrealized gains (losses) on securities (66) (22)
------ ------
Total current deferred tax assets 2,208 2,288
Valuation allowance -- --
------ ------
Net current deferred tax assets $2,208 $2,288
====== ======
Non-current deferred tax assets
Deferred revenues $ 306 $ 226
------ ------
Non-current deferred tax assets $ 306 $ 226
====== ======
The Company had unrealized losses resulting from SFAS No. 115 of
approximately $539,000 at March 31, 1996. The valuation allowance at March 31,
1996 related to the unrealized capital losses for that year. No such allowance
was recorded at March 31, 1997 and 1998.
6. Line of Credit
As of March 31, 1998, the Company had a $6,000,000 unsecured line of credit
with a bank. Unless renewed, the line expires in September 1998. This line bears
interest at the bank's prime interest rate per annum (8.50% at March 31, 1998)
and the bank charges a 1/8% per annum commitment fee. There were no borrowings
under this line at March 31, 1998 and 1997. The bank agreement contains
covenants, including requirements as to the maintenance of certain levels of
working capital and net worth, and prohibitions on the payment of cash
dividends.
27
<PAGE> 28
7. Stockholders' Equity
Incentive Stock Option Plans
The Company has incentive stock option plans (1995 Employee Stock Incentive
Plan, 1993 Employee Stock Incentive Plan, and the 1992 Employee Stock Incentive
Plan) which provide for the granting of options to purchase an aggregate of
1,200,000 shares of the Company's common stock. While the majority of the
options granted are incentive stock options, the plans allow for the granting of
non-qualified stock options. Under these plans, shares of the Company's Common
Stock have been reserved for the issuance of a variety of awards, including
stock options, appreciation rights, and restricted and unrestricted stock grants
to employees, officers, directors, consultants, and advisors. Under each of the
Company's stock option plans, options expire ten years from date of grant.
Under these plans, options are granted at the fair market value of the stock
on the date of grant (110% of fair market value in certain cases) and are
conditional upon continued employment with the Company. The options generally
become exercisable in increments of 33.3% per year over three years.
As of March 31, 1998, incentive and non-qualified stock options to purchase
725,112 shares and 100,293 shares, respectively, were outstanding under these
plans. Of these outstanding options, incentive stock options to purchase 120,759
shares and non-qualified stock options to purchase 35,948 shares were
exercisable.
In addition to these incentive stock option plans, previous plans provide
for the granting of options to purchase an aggregate of 508,375 shares of the
Company's Common Stock. As of March 31, 1998, options to purchase 3,500 shares
were outstanding, of which 3,500 were exercisable.
Non-Qualified Stock Option Plans
The Company has a non-qualified stock option plan which provides for the
granting of options to purchase 31,500 shares of the Company's common stock. As
of March 31, 1998, no options to purchase shares were outstanding.
The 1993 Director Stock Option Plan authorized a maximum of 63,000 shares of
the Company's Common Stock to be issued. Under this plan, each director who was
not an employee of the Company receives upon his initial election an option to
purchase 7,000 shares of stock at an exercise price equal to the fair market
value of the stock on the date of grant. Such options vest immediately with
respect to twenty percent of such shares, with the remainder vesting in four
equal annual installments commencing one year after the date of grant.
In addition, on the date of each Annual Meeting, each director receives an
option, which vests immediately, to purchase 2,500 shares of the Company's stock
at an exercise price equal to the fair market value at the date of the Annual
Meeting. As of March 31, 1998, options to purchase 48,650 shares were
outstanding, of which 44,450 were exercisable.
28
<PAGE> 29
Stock Purchase Plan
Under the Employee Stock Purchase Plan, employees of the Company are eligible
to participate in semi-annual plan offerings for which payroll deductions may be
used to purchase shares of Common Stock. The purchase price of the shares is the
lower of 85% of the fair market value of the stock on the day the offering
commences or 85% of the fair market value of the stock on the day the offering
terminates. The Company has reserved 175,000 shares of stock under this Plan.
For the years ended March 31, 1998, 1997, and 1996 employees purchased 28,706,
20,575, and 15,339 shares at an average price of $7.69, $10.71 and $12.61,
respectively.
Stock-Based Compensation
In October 1995, Statement of Financial Accounting Standards No. 123 ("SFAS
No. 123"), "Accounting for Stock-Based Compensation", was issued. SFAS No. 123
is effective for periods beginning after December 15, 1995. The Company has
adopted the disclosure only alternative available under the provisions of SFAS
No. 123 in fiscal 1997. Had compensation cost for the Company's stock-based
compensation plans been determined based on the fair value at the grant dates as
calculated in accordance with SFAS No. 123, the Company's net income and diluted
earnings per share for the years ended March 31, 1998, 1997 and 1996 would have
been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1998 1997
------------------------------- -------------------------------
Net Income Earnings Per Share Net Income Earnings Per Share
---------- ------------------ ---------- ------------------
(In thousands) (In thousands)
<S> <C> <C> <C> <C>
As reported $(2,731) $(0.48) $1,848 $0.30
Pro forma $(3,481) $(0.61) $1,108 $0.18
<CAPTION>
1996
-------------------------------
Net Income Earnings Per Share
---------- ------------------
(In thousands)
<S> <C> <C>
As reported $3,765 $0.59
Pro forma $3,005 $0.47
</TABLE>
The fair value of each stock option is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted average
assumptions: an expected option life of six years, expected volatility of 65%
and a weighted-average risk-free interest rate of 6.10%, 6.26%, and 6.26% in the
years ended March 31, 1998, 1997, and 1996. The Company has not paid dividends
nor does it expect to pay dividends in the near future. The weighted average
fair value of stock options granted for the years ended March 31, 1998, 1997,
and 1996 was $5.66, $6.93, and $12.22 respectively.
29
<PAGE> 30
A summary of the Company's stock option plan activity since April 1, 1995 is
presented below:
Number Weighted Average
of Shares Exercise Price
--------- ----------------
Options outstanding at March 31, 1995 493,100 $11.27
--------
Granted 313,585 $19.47
Canceled (55,605) $21.72
Exercised (47,000) $ 7.04
--------
Options outstanding at March 31, 1996 704,080 $14.38
--------
Granted 344,400 $10.73
Canceled (178,012) $21.59
Exercised (30,325) $ 3.76
--------
Options outstanding March 31, 1997 840,143 $11.74
========
Granted 524,905 $ 8.75
Canceled (297,558) $15.27
Exercised (189,935) $ 3.32
--------
Options outstanding March 31, 1998 877,555 $10.57
========
The following table summarizes information about stock options outstanding
at March 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------- ------------------------------
Weighted-Average
Range of Number Remaining Weighted-Average Number Weighted-Average
Exercise Prices Outstanding Contractual Life Exercise-price Exercisable Exercise Price
- --------------- ----------- ---------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$ 2.00-$ 4.00 3,500 4.06 years $ 2.57 3,500 $ 2.57
$ 4.01-$ 8.00 223,231 9.24 years $ 7.53 12,500 $ 7.88
$ 8.01-$12.00 514,936 8.93 years $ 9.66 106,212 $ 9.61
$12.01-$18.00 81,450 7.48 years $14.20 44,957 $14.12
$18.01-$27.00 40,650 6.79 years $24.29 29,130 $24.32
$27.01-$41.00 13,788 6.00 years $34.13 8,358 $34.13
------- -------
877,555 204,657
======= =======
</TABLE>
Shareholders Rights Plan
On February 9, 1995, the Board of Directors voted to adopt a Shareholders
Rights Plan, applicable to shareholders of record on March 10, 1995. In
connection with the adoption of this Plan, the Company declared a dividend
distribution of one Right for each outstanding share of the Company's
outstanding stock. Each Right entitles the registered holder to purchase from
the Company a unit consisting of one one-thousandth of a share of Series A
Junior Participating Stock, $.01 par value (the "Preferred Stock"). The Rights
are not exercisable until the Distribution Date and will expire at the close of
business on February 8, 2005, unless earlier redeemed or exchanged by the
Company. The primary purpose of the plan is to ensure that all shareholders of
the Company receive fair treatment in the event of an unsolicited offer to
acquire control of the Company.
30
<PAGE> 31
8. Earnings Per Share:
Basic earnings per share excludes the dilutive effect of common equivalent
securities and is computed by dividing income available to common shareholders
by the weighted average number of common shares outstanding for the period.
Diluted earnings per share reflects the potential dilution that could occur if
stock options were exercised that resulted in the issuance of common stock that
then shared in the earnings of the entity. In accordance with SFAS 128, as of
March 31, 1998, the Company has restated all prior period earnings per share
data presented. A reconciliation between basic earnings per share and diluted
earnings per share is as follows (in thousands except per share amounts):
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- --------
<S> <C> <C> <C>
Basic
Weighted average common shares outstanding 5,704 5,951 6,175
======= ======= =======
Net income (loss) $(2,731) $ 1,848 $ 3,765
Per share amount $ (0.48) $ 0.31 $ 0.61
======= ======= =======
Diluted
Weighted average common shares outstanding 5,704 5,951 6,175
Net effect of dilutive stock options -
based on the treasury stock method 0 144 242
------- ------- -------
Total 5,704 6,095 6,417
======= ======= =======
Net income (loss) $(2,731) $ 1,848 $ 3,765
Per share amount $ (0.48) $ 0.30 $ 0.59
======= ======= =======
</TABLE>
At March 31, 1998 approximately 95,000 options were not included in the diluted
earnings per share calculation as a result of their antidilutive effect.
31
<PAGE> 32
9. Commitments and Contingencies:
The Company leases its facilities and certain equipment under operating
lease agreements which expire at various dates through fiscal year 2003. The
agreement for the New Hampshire headquarters will terminate on August 31, 1998.
The Company is negotiating a renewal of the current lease. Rental expense
amounted to approximately $912,000, $814,000 and $675,000 in fiscal 1998, 1997
and 1996, respectively.
Future minimum annual commitments under such leases are as follows (in
thousands):
<TABLE>
<CAPTION>
Years ending March 31, Amount
---------------------- ------
<S> <C>
1999 $408
2000 121
2001 91
2002 52
2003 52
-----
$724
=====
</TABLE>
Purchase commitments to suppliers of the Company were approximately $8.2
million and $9.7 million at March 31, 1998 and 1997, respectively.
The previously reported litigation related to suits initiated by Claircom
Communications, Inc. ("Claircom") against the Company and by the Company against
Claircom and AT&T Wireless Communications Group, Inc. in the States of
Washington, New Hampshire, and Delaware was settled in principle on April 20,
1998, and a definitive settlement agreement was entered into by the parties on
June 1, 1998. Under the terms of this agreement, Claircom received a fully paid
up, unlimited, perpetual, irrevocable, and exclusive world-wide license to use
the disputed technology in all avionics applications, and the Company received a
fully paid up, unlimited, perpetual, irrevocable, and exclusive world-wide
license to use the disputed technology in all non-avionics applications. The
Company also received a cash payment of $7 million and incurred related legal
fees of approximately $2.4 million, which was paid from the settlement proceeds.
On May 22, 1998, Excel Switching Corporation ("Excel") filed suit in U.S.
District Court for the district of Massachusetts alleging that certain
unspecified telecommunications products of the Company have infringed U.S.
Patent Nos. 5,546,453, 5,426,694, and 5,349,579 allegedly owned by Excel. The
Company has answered Excel's complaint, alleging that the Company has not
infringed the Excel patents, and that those patents are invalid. The Company has
also asserted appropriate counterclaims and intends to vigorously defend the
litigation The litigation is, however, in its early stages, discovery has not
begun and its outcome is, therefore, uncertain at this time.
10.401(k) Profit Sharing Plan:
The Company maintains a qualified 401(k) profit sharing plan. The plan
covers substantially all employees who have satisfied a one month service
requirement and have attained the age of 21. The Company has a number of fund
options, including: fixed income, balanced, equity income, growth and income,
growth, and international funds available under the Plan. Vesting in the Company
contributions to the Plan is based on a three-year schedule (33.3% per year).
Employee contributions may range from 1-15% of compensation with a
discretionary matching Company contribution not to exceed 6% of compensation.
The Company contributed approximately $179,000, $167,000 and $142,000 relating
to this plan during fiscal 1998, 1997 and 1996, respectively. The Company, at
its discretion, may also make an optional contribution for any plan year,
although no such contribution has been made to date.
32
<PAGE> 33
11.Geographic Data and Major Customers:
A significant portion of the Company's revenues are derived from a limited
number of customers. Approximately 25% of the Company's revenues for the fiscal
year ended March 31, 1998, were from three customers accounting for 11%, 7% and
7% of total revenues. Approximately 29% of the Company's revenues for the fiscal
year ended March 31, 1997 were from three customers accounting for 12%, 9% and
8% of total revenues. Approximately 32% of the Company's revenues for the fiscal
year ended March 31, 1996 were from three customers accounting for 14%, 9% and
9% of total revenues. From time-to-time a significant portion of the Company's
accounts receivable balance may be with these or other major customers. At March
31, 1998, approximately $2,932,000 was outstanding from two customers and at
March 31, 1997, approximately $2,064,000 was outstanding from two customers.
Consideration is given to the financial position of these customers when
determining the appropriate allowance for doubtful accounts. The Company's
standard payment terms are net 30 days. Generally, all customers are subject to
these terms. At the Company's discretion, in order to accommodate a customer's
request, the Company has selectively extended payment terms. At March 31, 1998,
the Company had approximately $5.6 million of accounts receivable with other
than standard payment terms.
The Company has three foreign subsidiaries which sell the Company's products
in their respective geographic areas. Revenues are reflected in the geographic
areas from which the sales are made. Financial information, summarized by
geographic areas, greater than 10%, is as follows (in thousands):
<TABLE>
<CAPTION>
United
States Europe Asia Pacific Elimination Consolidated
------ ------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
Year ended March 31, 1998
- -------------------------
Total revenues
- - Unaffiliated $24,796 $7,435 $9,711 $41,942
- - Inter-Company transfers 6,267 -- -- $(6,267) --
------- ------ ------ ------- -------
Total $31,063 $7,435 $9,711 $(6,267) $41,942
Income from operations $(9,965) $1,412 $3,167 $ (1) $(5,387)
Identifiable assets $53,308 $4,299 $ 997 $(2,008) $56,596
United
States Europe Asia Pacific Elimination Consolidated
------ ------ ------------ ----------- ------------
Year ended March 31, 1997
- -------------------------
Total revenues
- - Unaffiliated $29,717 $5,539 $ 9,060 $44,316
- - Inter-Company transfers 3,040 -- $ 1,677 $(4,717) --
--------- ------ ------- ------- -------
Total $32,757 $5,539 $10,737 $(4,717) $44,316
Income from operations $ 1,966 $ 699 $ 121 $ (69) $ 2,717
Identifiable assets $54,616 $3,225 $ 255 $(1,643) $56,453
</TABLE>
33
<PAGE> 34
<TABLE>
<CAPTION>
United
States Europe Asia Pacific Elimination Consolidated
------ ------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
Year ended March 31, 1996
- -------------------------
Total revenues
- - Unaffiliated $ 33,609 $5,792 $ 1,792 $41,193
- - Inter-Company transfers 3,667 -- $ -- $(3,667) --
-------- ------ ------- ------- -------
Total $ 37,276 $5,792 $ 1,792 $(3,667) $41,193
Income from operations $ 5,669 $ 289 $ 90 26 $ 6,074
Identifiable assets $ 56,977 $2,577 $ 233 $(2,088) $57,699
</TABLE>
The Company's operations are structured to achieve consolidated objectives.
As a result, significant interdependencies and overlaps exist among the
Company's operating entities. Accordingly, the revenues, operating income and
identifiable assets shown for each geographic area may not be indicative of the
amounts which would have been reported if the operating entities were
independent of one another.
The United States intercompany transfers represent shipments of systems to
international subsidiaries. The intercompany transfers are made at prices which
approximate cost plus an appropriate markup, and are eliminated from
consolidated revenues.
Corporate assets, consisting of investments, totaled approximately $25.1
million and $26.2 million at March 31, 1998 and 1997 respectively, and are
included in the identifiable assets in the United States where the Company's
headquarters are located.
Export sales to unaffiliated customers from the Company's United States
operations were as follows (in thousands):
<TABLE>
<CAPTION>
Years ended March 31, 1998 1997 1996
--------------------- ------ ------ ------
<S> <C> <C> <C>
Asia/Pacific $7,332 $ 9,060 $3,453
Canada 872 2,931 2,082
Other 1,356 77 119
------ ------- ------
Total $9,560 $12,068 $5,654
====== ======= ======
</TABLE>
34
<PAGE> 35
12.Other Items
Other accrued expenses at March 31, 1998 and 1997 included accrued sales
taxes of approximately $226,000, and $250,000, respectively. In addition, other
accrued expenses at March 31, 1998 and 1997 included a warranty accrual of
$928,000 and $856,000, respectively.
Other assets at March 31, 1998 and 1997 included approximately $566,000 and
$120,000, respectively, of employee notes receivable relating to the purchase of
the Company's Common Stock.
During the fourth quarter of fiscal 1997, the Company reduced its effective
tax rate for fiscal 1997 to 32%. The 32% effective tax rate remained the same
for fiscal 1998.
13.Supplemental Selected Quarterly Financial Data (unaudited)
<TABLE>
<CAPTION>
(In thousands, except per share data)
Quarters ended
June 30 Sept. 30 Dec. 31 March 31
------- --------- ------- --------
<S> <C> <C> <C> <C>
1998:
Net revenues $ 9,276 $10,116 $11,023 $11,527
Gross profit 4,942 4,760 6,078 6,671
Net income (loss) $ (566) $(1,909) $ (310) $ 54
Net income (loss)
per share - basic $ (0.10) $ (0.34) $ (0.05) $ 0.01
Weighted average common
shares outstanding - basic 5,571 5,648 5,683 5,766
Net income (loss)
per share - diluted $ (0.10) $ (0.34) $ (0.05) $ 0.01
Weighted average common
shares outstanding - diluted 5,571 5,648 5,683 5,861
1997:
Net revenues $11,189 $ 9,982 $11,624 $11,521
Gross profit 7,063 6,010 6,718 6,381
Net income (loss) $ 744 $ 195 $ 457 $ 452
Net income (loss)
per share - basic $ 0.12 $ 0.03 $ 0.08 $ 0.08
Weighted average common
shares outstanding - basic 6,082 6,007 5,913 5,800
Net income (loss)
per share - diluted $ 0.12 $ 0.03 $ 0.08 $ 0.08
Weighted average common
shares outstanding - diluted 6,314 6,203 6,062 5,944
</TABLE>
Item 9 - Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
None.
35
<PAGE> 36
PART III
Item 10 - Directors and Executive Officers of the Registrant
Incorporated by reference from portions of the Definitive Proxy Statement
for its 1998 Annual Meeting of Stockholders.
Item 11 - Executive Compensation
Incorporated by reference from portions of the Definitive Proxy Statement
for its 1998 Annual Meeting of Stockholders.
Item 12 - Security Ownership of Certain Beneficial Owners And Management
Incorporated by reference from the portion of the Definitive Proxy Statement
entitled "Security Ownership of Certain Beneficial Owners and Management".
Item 13 - Certain Relationships and Related Transactions
None.
PART IV
Item 14 - Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) (1) Financial Statements
See index in Part II, Item 8
(2) Financial Statement Schedule
Schedule II Valuation and Qualifying Accounts
All other schedules for which provision is made in the
applicable accounting regulations of the Securities and
Exchange Commission are not required under the related
instructions or are inapplicable, and therefore have been
omitted.
(3) Exhibits
36
<PAGE> 37
EXHIBITS
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<S> <C> <C>
3.1 - Amended and Restated Certificate of Incorporation of the
Registrant. (1)
3.2 - Amended and Restated By-laws of the Registrant. (2)
4.1 - Specimen Certificate representing the Registrant's Common
Stock. (1)
4.2 - Rights Agreement, dated February 22, 1995, by and among the
Registrant and state Street Bank and Trust Company. (4)
10.1 - Lease Agreement, dated July 18, 1990, by and between the
Registrant and Northern Manchester Trust. (1)
10.2 - Lease Agreement, as amended, dated December 21, 1992, by and
between the Registrant and 1100 Corporation. (1)
10.3 - Lease Agreement, dated February 15,1993 by and between the
Registrant and Atrium Executive Center, Inc. (1)
10.4 - Registration Agreement, dated July 25, 1984, as amended, by and
among the Registrant and certain investors.(originally filed as
exhibit 10.5) (1)
10.5 - Purchase Agreement, dated July 25, 1984, by and among the
Registrant and certain investors. (originally filed as exhibit
10.6) (1)
10.6 - 1993 Stock Incentive Plan, as amended. (originally filed as
exhibit 10.8) (1)
10.7 - 1993 Employee Stock Purchase Plan, as amended. (originally
filed as exhibit 10.9) (1)
10.8 - 1993 Director Stock Option Plan, as amended. (originally filed
as exhibit 10.9) (7)
10.9 - Stock Option Plan of August 1, 1992. (originally filed as
exhibit 10.11) (1)
10.10 - Incentive Stock Option Plan of January 1, 1985. (originally
filed as exhibit 10.12) (1)
10.11 - Stock Option Agreement, dated July 23, 1987, by and between the
Registrant and Mr. William M. Scranton. (originally filed as
exhibit 10.13) (1)
10.12 - Non-Qualified Employee Option Agreement, dated July 23, 1987,
by and between the Registrant and Mr. Barry R. Gorsun.
(originally filed as exhibit 10.14) (1)
10.13 - Promissory Note, dated April 1, 1991, by Summa Four, Ltd.
(originally filed as exhibit 10.19) (1)
10.14 - Letter Agreement, dated October 15, 1992, by and between the
Registrant and Fleet Bank of Massachusetts, N.A., as modified.
(originally filed as exhibit 10.21) (1)
10.15 - Customer Purchase Agreement, dated November 20, 1992, by and
between the Registrant and Sprint/United Management Company.
(originally filed as exhibit 10.22) (1)
10.16 - Customer Purchase Agreement, dated September 11, 1991, by and
between the Registrant and United States Advanced Networks.
(originally filed as exhibit 10.24) (1)
</TABLE>
37
<PAGE> 38
EXHIBITS (CONT'd)
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C> <C>
10.17 - Customer Purchase Agreement, dated October 10, 1990, by and
between the Registrant and Unisys Corporation. (originally
filed as exhibit 10.25) (1)
10.18 - Resale Agreement, dated November 5, 1992, by and between the
Registrant and IBM Canada Ltd. (originally filed as exhibit
10.26) (1)
10.19 - Agreement, dated October 14, 1992, by and between the
Registrant and Claircom Communications Group, L.P. (originally
filed as exhibit 10.27) (1)
10.20 - Release, Settlement and License Agreement, dated November 2,
1992, by and among the Registrant, Omnitel Corporation, Aspect
Telecommunications Corporation and Richard L. Scully.
(originally filed as exhibit 10.28) (1)
10.21 - Product Development and Licensing Agreement, dated January 19,
1990, by and between the Registrant and The Telephone
Connection, Inc. (originally filed as exhibit 10.30) (1)
10.22 - Amendment dated August 31, 1994 to Lease Agreement dated July
18, 1990 with Northern Manchester Trust. (originally filed as
exhibit 10.35) (3)
10.23 - Amendment dated August 23, 1995 to Lease Agreement dated July
18, 1990 with Northern Manchester Trust. (originally filed as
exhibit 10.38) (6)
10.24 - 1997 Executive Incentive Bonus Plan. (originally filed as
exhibit 10.26) (8)
10.25 - +Employment Agreement, dated July 23, 1996, by and between the
Registrant and Thomas A. St. Germain. (originally filed as
exhibit 10.27) (8)
10.26 - +Employment Agreement, dated July 22, 1996, by and between the
Registrant and Theresa Pratt Wang. (originally filed as exhibit
10.28) (8)
10.27 - +Employment Agreement, dated July 23, 1996, by and between the
Registrant and John H. Shaw. (originally filed as exhibit
10.29) (8)
10.28 - +Employment Agreement, dated July 23, 1996, by and between the
Registrant and Michael G. Hluchyj. (originally filed as exhibit
10.30) (8)
10.29 - +Employment Agreement, dated July 22,1996, by and between the
Registrant and Kendrick A. Estey. (originally filed as exhibit
10.31) (8)
10.30 - +Employment Agreement, dated October 18, 1996, by and between
the Registrant and Todd P. Hasselbeck. (originally filed as
exhibit 10.32) (8)
10.31 - +Agreement, dated November 16, 1996, by and between the
Registrant and Barry R. Gorsun. (originally filed as exhibit
10.33) (8)
10.32 - +Employment Agreement, dated November 21, 1996, by and between
the Registrant and Robert A. Degan. (originally filed as
exhibit 10.34) (8)
</TABLE>
38
<PAGE> 39
EXHIBITS (CONT'd)
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C> <C>
10.33 - Amendment dated June 12, 1997, to Agreement dated November 16,
1996 by and between the Registrant and Barry R. Gorsun.
(originally filed as exhibit 10.6) (11)
10.34 - Loan Modification Agreement, dated July 28, 1993, by and
between Registrant and Fleet Bank of Massachusetts, N.A.
(originally filed as exhibit 10.32) (2)
10.35 - Promissory Note, dated July 28, 1993, by and between the
Registrant and Fleet Bank of Massachusetts, N.A. (originally
filed as exhibit 10.33) (1)
10.36 - Amendment, dated August 2, 1994, to Letter Agreement dated
October 15, 1992, by and the Registrant and Fleet Bank of
Massachusetts, N.A.(5)
10.37 - Contract for Services Agreement, dated November 27, 1996, by
and between the Registrant and D2 Technologies, Inc. (9)
10.38 - Supply Agreement with Addendum, dated February 17, 1997, by and
between the Registrant and ADC Newnet. (9)
10.39 - Amendment dated August 30, 1996, to Letter Agreement dated
October 15, 1992, by and between the Registrant and Fleet Bank
of Massachusetts, N.A. (9)
10.40 - +1995 Stock Option Plan. (7)
10.41 - +Amendment, Dated August 24, 1995, to Letter Agreement dated
August 24, 1995, by and between the Registrant and Fleet Bank
of Massachusetts, N.A. (originally filed as exhibit 10.43) (7)
10.42 - +Employment Agreement, dated February 14, 1998, by and between
the Registrant and Philip T. Coates.
10.43 - Employment Agreement, dated June 26, 1997, by and between the
Registrant and Jeffrey A. Weber. (originally filed as exhibit
10.5) (11)
10.44 - +Employment Agreement, dated April 15, 1997, by and between the
Registrant and Richard Swee. (originally filed as exhibit
10.36) (10)
10.45 - Customer Agreement, dated June 30, 1997, by and between the
Registrant and Mentor Graphics Corporation. (originally filed
as exhibit 10.3) (11)
10.46 - Lease Agreement dated June 2, 1997, by and between the
Registrant and Atrium Executive Center, Inc. (originally filed
as exhibit 10.4) (11)
10.47 - Lease Agreement, dated July 3, 1997, by and between the
Registrant and Bay Business Centers, Inc. (originally filed as
exhibit 10.1) (12)
10.48 - Products and Services Agreement, dated August 4, 1997, by and
between the Registrant and D2 Technologies, Inc. (originally
filed as exhibit 10.2) (12)
10.49 - Software License and Maintenance Agreement, dated August 4,
1997, by and between the Registrant and D2 Technologies, Inc.
(originally filed as exhibit 10.3) (12)
</TABLE>
39
<PAGE> 40
EXHIBITS (CONT'd)
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C> <C>
10.50 - Loan Modification Agreement, dated December 19, 1997, by and
between the Registrant and Fleet National Bank. (originally
filed as exhibit 10.1) (13)
10.51 - Promissory Note, dated December 19, 1997, by and between the
Registrant and Fleet National Bank.(originally filed as exhibit
10.2) (13)
10.52 - Joint Development Agreement, dated June 11, 1997, by and
between the Registrant and Junction, Inc. (originally filed as
exhibit 10.37) (10)
21 - Subsidiaries of the Registrant.
23 - Consent of Coopers & Lybrand, L.L.P.
27.1 - Financial Data Schedule
27.2 - Restated Financial Data Schedule for Fiscal Year Ended March
31, 1997.
27.3 - Restated Financial Data Schedule for Fiscal Year Ended March
31, 1996.
</TABLE>
(1) Incorporation herein by reference to the Registrant's Registration Statement
on Form S-1 (File No. 33-66602), as declared effective by the Securities and
Exchange Commission (the "Commission") on September 23, 1993.
+ Management contract or compensatory plan or arrangement filed as an exhibit
pursuant to Item 14(c) of this report.
The exhibits filed as part of this Annual Report on Form 10-K are
listed on the exhibit index immediately preceding such exhibits, which
exhibit index is incorporated herein by reference. The Company's current
management contracts and executive compensation plans and arrangements
are listed in the exhibit index incorporated herein by reference at
exhibit numbers 10.6-10.12, 10.25-10.33, 10.40, 10.42-10.44.
The Company will provide copies of the exhibit index, exhibits and Schedule
II to shareholders upon request.
(2) Incorporation herein by reference to the Registrant's Amendment No. 2 to its
Annual Report on Form 10-K for fiscal year ended March 31, 1994 filed with
the Commission on June 19, 1998.
(3) Incorporation herein by reference to the Registrant's Annual Report on Form
10-K for the fiscal year endedMarch 31, 1995, filed with the Commission on
June 27, 1995.
(4) Incorporation herein by reference to the Registrant's Report on Form 8-K
filed with the Commission on March 6, 1995.
(5) Incorporation herein by reference to the Registrant's Amendment No. 2 to its
Annual Report on Form 10-K for the fiscal year ended March 31, 1995 filed
with the Commission on June 19, 1998.
(6) Incorporation herein by reference to the Registrant's Annual Report for the
fiscal year ended March 31, 1996 on Form 10-K filed with the Commission on
June 17, 1996.
(7) Incorporation herein by reference to the Registrant's Amendment No. 1 to its
Annual Report for the fiscalended March 31, 1996 on Form 10-K filed with the
Commission on June 19, 1998.
(8) Incorporation herein by reference to the Registrant's Annual Report for the
fiscal year ended March 31, 1997 on form 10-K filed with the Commission on
June 23, 1997.
40
<PAGE> 41
EXHIBITS (CONT'D)
(9) Incorporation herein by reference to the Registrant's Amendment No. 1 to its
Annual Report for the fiscal year ended March 31, 1997 on form 10-K filed
with the Commission on June 19, 1998.
(10)Incorporation herein by reference to the Registrant's Quarterly Report for
the quarter ended June 30, 1997 on form 10-Q filed with the Commission on
August 2, 1997.
(11)Incorporation herein by reference to the Registrant's Amendment No. 1 to its
Quarterly Report for the quarter ended June 30, 1997 on form 10-Q filed with
the Commission on June 19, 1998.
(12) Incorporation herein by reference to the Registrant's Amendment No. 1 to
its Quarterly Report for the quarter ended September 30, 1997 on form 10-Q
filed with the Commission on June 19, 1998.
(13) Incorporation herein by reference to the Registrant's Amendment No. 1 to
its Quarterly Report for the quarter ended December 31, 1997 on form 10-Q
filed with the Commission on June 19, 2998.
(b) No reports on Form 8-K have been filed during the last quarter of the
period covered by this report.
41
<PAGE> 42
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Dated: June 23, 1998 Summa Four, Inc.
By: /s/ Jeffrey A. Weber
-----------------------------------------
Jeffrey A. Weber
Vice President Finance,
Chief Financial Officer
(Principal Financial & Accounting
Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/ Barry R. Gorsun Chairman of the Board June 23, 1998
- --------------------------------
Barry R. Gorsun
/s/ Robert A. Degan President & Chief Executive Officer June 23, 1998
- -------------------------------
Robert A. Degan
/s/ Jeffrey A. Weber Vice President Finance, June 23, 1998
- ------------------------------- Chief Financial Officer
Jeffrey A. Weber (Principal Financial & Accounting Officer)
/s/ Russell I. Pillar Director June 23, 1998
- --------------------------------
Russell I. Pillar
/s/ Gordon T. Ray Director June 23, 1998
- -------------------------------
Gordon T. Ray
/s/ Edgar L. Brown, Jr. Director June 23, 1998
- -------------------------------
Edgar L. Brown, Jr.
/s/ John A. Shane Director June 23, 1998
- -------------------------------
John A. Shane
</TABLE>
42
<PAGE> 43
<TABLE>
<CAPTION>
SUMMA FOUR, INC.
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED MARCH 31, 1998, 1997 AND 1996
(IN THOUSANDS)
BEGINNING ADDITIONS CHARGED DEDUCTIONS/ ENDING
BALANCE TO COST AND EXPENSES WRITE-OFFS BALANCE
<S> <C> <C> <C> <C>
Allowance for doubtful accounts,
1998 $237 $293 $ 78 $452
1997 480 150 393 237
1996 400 274 194 480
Inventory reserve,
1998 $554 $145 $306 $393
1997 442 112 0 554
1996 200 257 15 442
Warranty reserve,
1998 $856 $ 72 $ 0 $928
1997 856 0 0 856
1996 750 137 31 856
</TABLE>
43
<PAGE> 44
EXHIBITS
Exhibit No. Description
- ----------- -----------
3.1 - Amended and Restated Certificate of Incorporation of the
Registrant. (1)
3.2 - Amended and Restated By-laws of the Registrant. (2)
4.1 - Specimen Certificate representing the Registrant's Common
Stock. (1)
4.2 - Rights Agreement, dated February 22, 1995, by and among the
Registrant and state Street Bank and Trust Company. (4)
10.1 - Lease Agreement, dated July 18, 1990, by and between the
Registrant and Northern Manchester Trust. (1)
10.2 - Lease Agreement, as amended, dated December 21, 1992, by and
between the Registrant and 1100 Corporation. (1)
10.3 - Lease Agreement, dated February 15,1993 by and between the
Registrant and Atrium Executive Center, Inc. (1)
10.4 - Registration Agreement, dated July 25, 1984, as amended, by and
among the Registrant and certain investors. (originally filed
as exhibit 10.5)(1)
10.5 - Purchase Agreement, dated July 25, 1984, by and among the
Registrant and certain investors. (originally filed as exhibit
10.6) (1)
10.6 - + 1993 Stock Incentive Plan, as amended. (originally filed as
exhibit 10.8) (1)
10.7 - + 1993 Employee Stock Purchase Plan, as amended. (originally
filed as exhibit 10.9) (1)
10.8 - + 1993 Director Stock Option Plan, as amended. (originally
filed as exhibit 10.9) (7)
10.9 - + Stock Option Plan of August 1, 1992. (originally filed as
exhibit 10.11) (1)
10.10 - + Incentive Stock Option Plan of January 1, 1985. (originally
filed as exhibit 10.12) (1)
10.11 - + Stock Option Agreement, dated July 23, 1987, by and between
the Registrant and Mr. William M. Scranton. (originally filed
as exhibit 10.13) (1)
10.12 - + Non-Qualified Employee Option Agreement, dated July 23, 1987,
by and between the Registrant and Mr. Barry R. Gorsun.
(originally filed as exhibit 10.14) (1)
10.13 - Promissory Note, dated April 1, 1991, by Summa Four, Ltd.
(originally filed as exhibit 10.19) (1)
10.14 - Letter Agreement, dated October 15, 1992, by and between the
Registrant and Fleet Bank of Massachusetts, N.A., as modified.
(originally filed as exhibit 10.21) (1)
10.15 - Customer Purchase Agreement, dated November 20, 1992, by and
between the Registrant and Sprint/United Management Company.
(originally filed as exhibit 10.22) (1)
10.16 - Customer Purchase Agreement, dated September 11, 1991, by and
between the Registrant and United States Advanced Networks.
(originally filed as exhibit 10.24) (1)
44
<PAGE> 45
EXHIBITS (CONT'd)
<TABLE>
<CAPTION>
Exhibit No. Description
---------- -----------
<S> <C> <C>
10.17 - Customer Purchase Agreement, dated October 10, 1990, by and
between the Registrant and Unisys Corporation. (originally
filed as exhibit 10.25) (1)
10.18 - Resale Agreement, dated November 5, 1992, by and between the
Registrant and IBM Canada Ltd. (originally filed as exhibit
10.26) (1)
10.19 - Agreement, dated October 14, 1992, by and between the
Registrant and Claircom Communications Group, L.P. (originally
filed as exhibit 10.27) (1)
10.20 - Release, Settlement and License Agreement, dated November 2,
1992, by and among the Registrant, Omnitel Corporation, Aspect
Telecommunications Corporation and Richard L. Scully.
(originally filed as exhibit 10.28) (1)
10.21 - Product Development and Licensing Agreement, dated January 19,
1990, by and between the Registrant and The Telephone
Connection, Inc. (originally filed as exhibit 10.30) (1)
10.22 - Amendment dated August 31, 1994 to Lease Agreement dated July
18, 1990 with Northern Manchester Trust. (originally filed as
exhibit 10.35) (3)
10.23 - Amendment dated August 23, 1995 to Lease Agreement dated July
18, 1990 with Northern Manchester Trust. (originally filed as
exhibit 10.38) (6)
10.24 - 1997 Executive Incentive Bonus Plan. (originally filed as
exhibit 10.26) (8)
10.25 - + Employment Agreement, dated July 23, 1996, by and between the
Registrant and Thomas A. St. Germain. (originally filed as
exhibit 10.27) (8)
10.26 - + Employment Agreement, dated July 22, 1996, by and between the
Registrant and Theresa Pratt Wang. (originally filed as exhibit
10.28) (8)
10.27 - + Employment Agreement, dated July 23, 1996, by and between the
Registrant and John H. Shaw. (originally filed as exhibit
10.29) (8)
10.28 - + Employment Agreement, dated July 23, 1996, by and between the
Registrant and Michael G. Hluchyj. (originally filed as exhibit
10.30) (8)
10.29 - + Employment Agreement, dated July 22,1996, by and between the
Registrant and Kendrick A. Estey. (originally filed as exhibit
10.31) (8)
10.30 - + Employment Agreement, dated October 18, 1996, by and between
the Registrant and Todd P. Hasselbeck. (originally filed as
exhibit 10.32) (8)
10.31 - + Agreement, dated November 16, 1996, by and between the
Registrant and Barry R. Gorsun. (originally filed as exhibit
10.33) (8)
10.32 - + Employment Agreement, dated November 21, 1996, by and between
the Registrant and Robert A. Degan. (originally filed as
exhibit 10.34) (8)
</TABLE>
45
<PAGE> 46
EXHIBITS (CONT'd)
Exhibit No. Description
----------- -----------
10.33 - + Amendment dated June 12, 1997, to Agreement dated November
16, 1996 by and between the Registrant and Barry R. Gorsun.
(originally filed as exhibit 10.6) (11)
10.34 - Loan Modification Agreement, dated July 28, 1993, by and
between Registrant and Fleet Bank of Massachusetts, N.A.
(originally filed as exhibit 10.32) (2)
10.35 - Promissory Note, dated July 28, 1993, by and between the
Registrant and Fleet Bank of Massachusetts, N.A. (originally
filed as exhibit 10.33) (1)
10.36 - Amendment, dated August 2, 1994, to Letter Agreement dated
October 15, 1992, by and the Registrant and Fleet Bank of
Massachusetts, N.A.(5)
10.37 - Contract for Services Agreement, dated November 27, 1996, by
and between the Registrant and D2 Technologies, Inc. (9)
10.38 - Supply Agreement with Addendum, dated February 17, 1997, by and
between the Registrant and ADC Newnet. (9)
10.39 - Amendment dated August 30, 1996, to Letter Agreement dated
October 15, 1992, by and between the Registrant and Fleet Bank
of Massachusetts, N.A. (9)
10.40 - +1995 Stock Option Plan. (7)
10.41 - Amendment, Dated August 24, 1995, to Letter Agreement dated
August 24, 1995, by and between the Registrant and Fleet Bank
of Massachusetts, N.A. (originally filed as exhibit 10.43) (7)
10.42 - + Employment Agreement, dated February 14, 1998, by and between
the Registrant and Philip T. Coates.
10.43 - + Employment Agreement, dated June 26, 1997, by and between the
Registrant and Jeffrey A. Weber. (originally filed as exhibit
10.5) (11)
10.44 - + Employment Agreement, dated April 15, 1997, by and between
the Registrant and Richard Swee. (originally filed as exhibit
10.36) (10)
10.45 - Customer Agreement, dated June 30, 1997, by and between the
Registrant and Mentor Graphics Corporation. (originally filed
as exhibit 10.3) (11)
10.46 - Lease Agreement dated June 2, 1997, by and between the
Registrant and Atrium Executive Center, Inc. (originally filed
as exhibit 10.4) (11)
10.47 - Lease Agreement, dated July 3, 1997, by and between the
Registrant and Bay Business Centers, Inc. (originally filed as
exhibit 10.1) (12)
10.48 - Products and Services Agreement, dated August 4, 1997, by and
between the Registrant and D2 Technologies, Inc. (originally
filed as exhibit 10.2) (12)
10.49 - Software License and Maintenance Agreement, dated August 4,
1997, by and between the Registrant and D2 Technologies, Inc.
(originally filed as exhibit 10.3) (12)
46
<PAGE> 47
EXHIBITS (CONT'd)
Exhibit No. Description
- ----------- -----------
10.50 - Loan Modification Agreement, dated December 19, 1997, by and
between the Registrant and Fleet National Bank. (originally
filed as exhibit 10.1) (13)
10.51 - Promissory Note, dated December 19, 1997, by and between the
Registrant and Fleet National Bank. (originally filed as
exhibit 10.2) (13)
10.52 - Joint Development Agreement, dated June 11, 1997, by and
between the Registrant and Junction, Inc. (originally filed as
exhibit 10.37) (10)
21 - Subsidiaries of the Registrant.
23 - Consent of Coopers & Lybrand, L.L.P.
27.1 - Financial Data Schedule
27.2 - Restated Financial Data Schedule for Fiscal Year Ended March
31, 1997.
27.3 - Restated Financial Data Schedule for Fiscal Year Ended March
31, 1996.
(1) Incorporation herein by reference to the Registrant's Registration Statement
on Form S-1 (File No. 33-66602), as declared effective by the Securities and
Exchange Commission (the "Commission") on September 23, 1993.
+ Management contract or compensatory plan or arrangement filed as an
exhibit pursuant to Item 14(c) of this report.
The exhibits filed as part of this Annual Report on Form 10-K are
listed on the exhibit index immediately preceding such exhibits, which
exhibit index is incorporated herein by reference. The Company's current
management contracts and executive compensation plans and arrangements
are listed in the exhibit index incorporated herein by reference at
exhibit numbers 10.6-10.12, 10.25-10.33, 10.40, 10.42-10.44.
The Company will provide copies of the exhibit index, exhibits and Schedule
II to shareholders upon request.
(2) Incorporation herein by reference to the Registrant's Amendment No. 2 to its
Annual Report on Form 10-K for fiscal year ended March 31, 1994 filed with
the Commission on June 19, 1998.
(3) Incorporation herein by reference to the Registrant's Annual Report on Form
10-K for the fiscal year ended March 31, 1995, filed with the Commission on
June 27, 1995.
(4) Incorporation herein by reference to the Registrant's Report on Form 8-K
filed with the Commission on March 6, 1995.
(5) Incorporation herein by reference to the Registrant's Amendment No. 2 to its
Annual Report on Form 10-K for the fiscal year ended March 31, 1995 filed
with the Commission on June 19, 1998.
(6) Incorporation herein by reference to the Registrant's Annual Report for the
fiscal year ended March 31, 1996on Form 10-K filed with the Commission on
June 17, 1996.
(7) Incorporation herein by reference to the Registrant's Amendment No. 1 to its
Annual Report for the fiscal yeaended March 31, 1996 on Form 10-K filed with
the Commission on June 19, 1998.
(8) Incorporation herein by reference to the Registrant's Annual Report for the
fiscal year ended March 31, 1997 on form 10-K filed with the Commission on
June 23, 1997.
47
<PAGE> 48
EXHIBITS (CONT'd)
(9) Incorporation herein by reference to the Registrant's Amendment No. 1 to
its Annual Report for the fiscal year ended March 31, 1997 on form 10-K
filed with the Commission on June 19, 1998.
(10) Incorporation herein by reference to the Registrant's Quarterly Report for
the quarter ended June 30, 1997 on form 10-Q filed with the Commission on
August 2, 1997.
(11) Incorporation herein by reference to the Registrant's Amendment No. 1 to
its Quarterly Report for the quarter ended June 30, 1997 on form 10-Q filed
with the Commission on June 19, 1998.
(12) Incorporation herein by reference to the Registrant's Amendment No. 1 to
its Quarterly Report for the quarter ended September 30, 1997 on form 10-Q
filed with the Commission on June 19, 1998.
(13) Incorporation herein by reference to the Registrant's Amendment No. 1 to
its Quarterly Report for the quarter ended December 31, 1997 on form 10-Q
filed with the Commission on June 19, 2998.
(b) No reports on Form 8-K have been filed during the last quarter of the
period covered by this report.
48
<PAGE> 1
EMPLOYMENT AGREEMENT
--------------------
THIS EMPLOYMENT AGREEMENT (the "Agreement") is entered into by Summa Four,
Inc., a Delaware corporation, with its principal place of business at
Manchester, New Hampshire (the "Company"), and Philip T. Coates (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 June 1, 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,
International Sales, currently reporting to the Vice President, World-Wide
Sales, 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 United Kingdom location, or
such place or places elsewhere internationally or in the continental United
States as the Board shall reasonably determine and the Employee shall
agree, for a minimum of twelve months from the Commencement Date. Upon
completion of the minimum twelve months period from the Commencement Date,
<PAGE> 2
the Agreement will continue in force subject to the sections 4. Through 4.4 of
this Agreement. The Employee's performance and salary will be reviewed annually
and Employee will be eligible for merit increases in line with the company's
policy. 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 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 US$125,000 (less any applicable deductions
for taxes, etc.) for the period beginning on the Commencement Date,
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. The Employee
shall receive the full benefit of the Company's Tax Equalization
Program such that the Employee shall not incur liability for taxes on
wages or other benefits in excess of that which would have been
incurred if he was located in the United States.
-2-
<PAGE> 3
3.2 BONUS. For such period ending March 31, 1998, the Employee shall be
eligible for commissions and bonuses approximating to $US86,000 at
goal as laid out in the Company Compensation Agreement signed in May
1997 with subsequent amendments. In order for the Employee to be
entitled to payment of his commissions and bonus, he must be actively
employed by the Company on the date they are earned, in accordance
with the Company's Compensation Plan signed by Employee. For periods
subsequent to March 31, 1998, the Employee shall be entitled to
participate in such commission and bonus programs, if any, as may be
established from time to time by its Board of Directors.
3.3 GOODS AND SERVICES ALLOWANCE. The Company agrees to pay the Employee
$1388.11 bi-weekly as an offset for the higher costs of goods and
services in London. Payments will be less any applicable deductions
for taxes, etc., commencing with the Employee's move to London and
concluding with his return to the United States or any change in
location of assignment.
3.4 HOUSING ALLOWANCE. The Company agrees to pay the Employee 16,900
Pounds Sterling quarterly as an offset for the higher cost of housing
in London. Payments will be less any applicable deductions for taxes,
etc., commencing with the Employee's move to London and concluding
with his return to the United States or any change in location of
assignment. In the event that the Employee's employment is terminated
by the employer after the twelve month period from the Commencement
date, the employer will be responsible for the rent and costs
associated with any unused portion of the Employee's housing
accommodations.
3.5 AUTOMOBILE ALLOWANCE. The Company agrees to pay the Employee 861.28
Pounds Sterling per month to provide for use of an automobile while in
London. Payments will
-3-
<PAGE> 4
be less any applicable deductions for taxes, etc., commencing with the
Employee's move to London and concluding with his return to the United
States or any change in location of assignment.
3.6 MOVING EXPENSES. The Company shall cover reasonable moving and travel
expenses associated with the Employee and his immediate family
relocating to London. As provided under policy, the Company will also
cover reasonable moving and travel expenses relating to the Employee's
return to the United States at the completion of one (1) year from the
Commencement Date or such earlier date that the Company chooses or
later date mutually agreed upon.
3.7 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.
3.8 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 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
-4-
<PAGE> 5
gasoline will be included in Employee's taxable income except as so
documented as a business expense.
3.9 STOCK OPTION. Subject to Board approval, the Employee shall be granted
an incentive stock option to purchase 18,670 shares (5,000 of which
are to be re-issued shares to replace the 5,000 shares the employee
received on April 1, 1996) 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 Monday in May, 1997. The option to purchase
18,670 shares shall vest over three years at 33 1/3% 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.
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
-5-
<PAGE> 6
performance of Employee's 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 six (6) months (the "Severance Benefit").
Payment of the Severance Benefit shall cease upon the earlier of (a)
the date six (6) months after the Employee's date of
-6-
<PAGE> 7
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). For the purposes
of this paragraph, a change in control is defined as provided for in
Attachment "A".
5. REIMBURSEMENT TO THE COMPANY. In the event that the Employee terminates his
employment with the Company other than for illness or injury within one (1) year
from the Commencement date as defined in paragraph one (1) of this Agreement,
the Employee agrees to reimburse the Company for the full amount of the Goods
and Services Allowance (as specified under provision 3.3) and the full amount
the Company paid for the Employee's moving and travel expenses associated with
his move to London (as specified under provision 3.6).
6. NON-COMPETE.
-7-
<PAGE> 8
(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 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 6 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
-8-
<PAGE> 9
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 6 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 6 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.
7. 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 shown above, or at such other
address or addresses as either party shall designate to the other in accordance
with this Section 7.
8. 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.
9. 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.
10. AMENDMENT. This Agreement may be amended or modified only by a written
instrument executed by both the Company and the Employee.
11. GOVERNING LAW. This Agreement shall be construed, interpreted and enforced
in accordance with the laws of the State of New Hampshire.
-9-
<PAGE> 10
12. 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.
13. MISCELLANEOUS.
13.1 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.
13.2 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.
13.3 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.
13.4 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 this
fourteenth day of February, 1998.
SUMMA FOUR, INC. PHILIP T. COATES
By: /s/ Todd P. Hausmann By: /s/ P. Coates
------------------------------- ---------------------------------------
Title: V.P. Worldwide Sales Title: Vice President, International Sales
--------------------------- ------------------------------------
-10-
<PAGE> 11
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.
-11-
<PAGE> 12
ADDENDUM A
Summa Four agrees to waive the recovery of any overpayment of the Goods and
Services Allowance in 3.3.3, which may have been paid to Employee between June
1, 1997 and December 4, 1997 following Employee's relocation from Singapore to
London.
SUMMA FOUR, INC. PHILIP T. COATES
By: /s/ Lacey Achausmann By: /s/ P. Coates
------------------------------- ---------------------------------------
Title: Director, Human Resources Title: Vice President, International Sales
--------------------------- ------------------------------------
Date 3/11/98 Date 3.28.98
----------------------------- -------------------------------------
-12-
<PAGE> 1
SUMMA FOUR, INC.
EXHIBIT 21
SUBSIDIARIES
The following is a list of the Company's subsidiaries at March 31, 1998:
<TABLE>
<CAPTION>
Percentage of Voting
Organized Securities Owned
Name Under Laws of By Summa Four, Inc.
- ---- ------------- --------------------
<S> <C> <C>
Summa Four Limited United Kingdom 100%
Summa Four International Barbados 100%
Summa Four Pte., Limited Singapore 100%
Summa Four, Japan, Inc. Delaware 100%
Summa Four Japan, KK Japan 100%
Summation, L.L.C. Delaware 75%
</TABLE>
49
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the Registration Statements of
Summa Four, Inc. on Form S-8 (File Nos. 333-2596, 33-69614, 33-69616, 33-69618,
33-69620, and 33-69622) of our report dated May 1, 1998, on our audits of the
consolidated financial statements and financial statement schedule of Summa
Four, Inc. as of March 31, 1998 and 1997 and for the three years in the period
ended March 31, 1998, which report is included in this Annual Report on Form
10-K.
COOPERS & LYBRAND L.L.P.
Boston, Massachusetts
June 23, 1998
50
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> MAR-31-1998
<EXCHANGE-RATE> 1
<CASH> 2,083
<SECURITIES> 16,148
<RECEIVABLES> 11,850
<ALLOWANCES> 452
<INVENTORY> 4,036
<CURRENT-ASSETS> 39,806
<PP&E> 17,129
<DEPRECIATION> 10,287
<TOTAL-ASSETS> 56,596
<CURRENT-LIABILITIES> 12,091
<BONDS> 0
0
0
<COMMON> 66
<OTHER-SE> 43,501
<TOTAL-LIABILITY-AND-EQUITY> 56,596
<SALES> 41,942
<TOTAL-REVENUES> 41,942
<CGS> 19,491
<TOTAL-COSTS> 19,491
<OTHER-EXPENSES> 27,838
<LOSS-PROVISION> 293
<INTEREST-EXPENSE> 10
<INCOME-PRETAX> (4,016)
<INCOME-TAX> (1,285)
<INCOME-CONTINUING> (2,731)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,731)
<EPS-PRIMARY> (0.48)
<EPS-DILUTED> (0.48)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> APR-01-1996
<PERIOD-END> MAR-31-1997
<EXCHANGE-RATE> 1
<CASH> 6,169
<SECURITIES> 26,158
<RECEIVABLES> 10,515
<ALLOWANCES> 237
<INVENTORY> 5,069
<CURRENT-ASSETS> 33,088
<PP&E> 11,901
<DEPRECIATION> 7,636
<TOTAL-ASSETS> 56,453
<CURRENT-LIABILITIES> 10,128
<BONDS> 0
0
0
<COMMON> 64
<OTHER-SE> 45,585
<TOTAL-LIABILITY-AND-EQUITY> 56,453
<SALES> 44,316
<TOTAL-REVENUES> 44,316
<CGS> 18,144
<TOTAL-COSTS> 18,144
<OTHER-EXPENSES> 24,674
<LOSS-PROVISION> 150
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 2,717
<INCOME-TAX> 869
<INCOME-CONTINUING> 1,848
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,848
<EPS-PRIMARY> 0.31
<EPS-DILUTED> 0.30<F1>
<FN>
<F1> Net income per share for the fiscal year ended March 31, 1997 has been
restated to conform to SFAS 128. Primary and fully diluted net income per share
computed under the provisions of APB 15 was historically reported as $0.30 and
$0.30 per share, respectively.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<CURRENCY> U.S.DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1996
<PERIOD-START> APR-01-1995
<PERIOD-END> MAR-31-1996
<EXCHANGE-RATE> 1
<CASH> 4,681
<SECURITIES> 12,284
<RECEIVABLES> 9,946
<ALLOWANCES> 480
<INVENTORY> 3,352
<CURRENT-ASSETS> 32,846
<PP&E> 9,608
<DEPRECIATION> 5,853
<TOTAL-ASSETS> 57,699
<CURRENT-LIABILITIES> 7,699
<BONDS> 0
0
0
<COMMON> 64
<OTHER-SE> 49,073
<TOTAL-LIABILITY-AND-EQUITY> 57,699
<SALES> 41,193
<TOTAL-REVENUES> 41,193
<CGS> 14,467
<TOTAL-COSTS> 14,467
<OTHER-EXPENSES> 22,154
<LOSS-PROVISION> 274
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 6,074
<INCOME-TAX> 2,309
<INCOME-CONTINUING> 3,765
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,765
<EPS-PRIMARY> 0.61<F1>
<EPS-DILUTED> 0.59<F1>
<FN>
<F1>Net income per share for the fiscal year ended March 31, 1996 has been
restated to conform to SFAS 128. Primary and fullly dilutd net income per share
computed under the provisions of APB 15 was historically reported as $0.59 and
$0.59 per share, respectively.
</FN>
</TABLE>
