-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, UfpZ2q8I19b2ZnuPnTbw1d0Rl3mZ2PYlD00LWAfJi9YukMEh3saSxLTUbCBgJVrY H3NtgZV57Xui7sHfP0pkMg== 0000950135-97-003370.txt : 19970813 0000950135-97-003370.hdr.sgml : 19970813 ACCESSION NUMBER: 0000950135-97-003370 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970812 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: SUMMA FOUR INC CENTRAL INDEX KEY: 0000900095 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE & TELEGRAPH APPARATUS [3661] IRS NUMBER: 020329497 STATE OF INCORPORATION: DE FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-22210 FILM NUMBER: 97656620 BUSINESS ADDRESS: STREET 1: 25 SUNDIAL AVE CITY: MANCHESTER STATE: NH ZIP: 03103-7251 BUSINESS PHONE: 6036254050 MAIL ADDRESS: STREET 2: 25 SUNDIAL AVE CITY: MANCHESTER STATE: NH ZIP: 03103 10-Q 1 SUMMA FOUR, INC. 1 ============================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ------------------------------ FORM 10-Q X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ----- EXCHANGE ACT OF 1934 For the quarterly period ended JUNE 30, 1997 ----------------------------------------- TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ----- EXCHANGE ACT OF 1934 For the transition period from -------------------------- Commission File Number 0-22210 ------------------------------------------- SUMMA FOUR, INC. (Exact name of registrant as specified in its charter) Delaware 02-0329497 (State of Incorporation) (IRS Employer Identification Number) 25 Sundial Avenue, Manchester, New Hampshire 03103 (Address of registrant's principal executive office) (603) 625-4050 (Registrant's telephone number) ------------------------------ Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the latest practical date. Common Stock, $.01 par value 5,734,001 Outstanding as of July 25, 1997 ============================================================ SUMMA FOUR, INC. 2 INDEX TO FORM 10-Q Page(s) ------- Part I - Financial Information: Item 1 - Financial Statements Condensed Consolidated Balance Sheets as of 1 June 30, 1997 and March 31, 1997 Condensed Consolidated Statements of Operations 2 for the three months ended June 30, 1997 and 1996 Condensed Consolidated Statements of Cash Flows 3 for the three months ended June 30, 1997 and 1996 Notes to Condensed Consolidated Financial Statements 4-5 Item 2 - Management's Discussion and Analysis of 6-9 Financial Condition and Results of Operations Part II - Other Information: Item 1 - Legal Proceedings 10 Item 2 - Changes in Securities 11 Item 3 - Defaults Upon Senior Securities 11 Item 4 - Submission of Matters to a Vote of 11 Security Holders Item 5 - Other Information 11 Item 6 - Exhibits and Reports on Form 8-K 11 Signature(s) 12 3 FORM 10-Q PART I ITEM 1 PAGE 1 SUMMA FOUR, INC. Condensed Consolidated Balance Sheets (In thousands, except share data)
June 30, 1997 March 31, 1997 ------------- -------------- (Unaudited) ASSETS - ----------------------------- Current assets: Cash and cash equivalents $ 1,234 $ 6,169 Investments - current 12,403 7,472 Accounts receivable, net 9,186 10,278 Inventories, net 6,320 5,069 Deferred income taxes 2,288 2,288 Prepaid and other current assets 1,184 1,812 -------- -------- Total current assets 32,615 33,088 Investments - non-current 16,758 18,686 Property and equipment, net 4,710 4,265 Deferred income taxes 226 226 Other assets 249 188 -------- -------- $ 54,558 $ 56,453 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY - ------------------------------------ Current liabilities: Accounts payable $ 2,080 $ 2,333 Accrued payroll and related expenses 1,082 1,016 Other accrued liabilities 2,527 3,704 Deferred revenues 2,913 3,075 -------- -------- Total current liabilities 8,602 10,128 Other long-term liabilities 624 676 Stockholders' equity: Preferred stock, $.01 par value; authorized 1,000,000 shares -- no shares issued -- -- Common stock, $.01 par value; authorized 20,000,000 shares; issued 6,481,762 at June 30, 1997 and 6,411,762 at March 31, 1997 65 64 Additional paid-in capital 43,981 43,662 Accumulated earnings 12,583 13,149 Unrealized gains (losses) on investments (28) 43 Treasury stock, at cost, 852,431 shares at June 30, 1997 and March 31, 1997 (11,269) (11,269) -------- -------- Total stockholders' equity 45,332 45,649 -------- -------- $ 54,558 $ 56,453 ======== ========
The accompanying notes are an integral part of the condensed consolidated financial statements. 4 FORM 10-Q PART I ITEM 1 PAGE 2 SUMMA FOUR, INC. Condensed Consolidated Statements of Operations (Unaudited) (In thousands, except per share data)
Three Months Ended June 30, -------- 1997 1996 ------- ------- Net revenues $ 9,276 $11,189 Cost of revenues 4,334 4,126 ------- ------- Gross profit 4,942 7,063 Operating expenses: Selling, general and administrative 3,504 3,379 Research and development 2,795 2,762 ------- ------- Total operating expenses 6,299 6,141 ------- ------- Operating (loss) income (1,357) 922 Interest income, net 525 277 ------- ------- (Loss) income before income taxes (832) 1,199 Benefit from provision for income taxes (266) 455 ------- ------- Net (loss) income $ (566) $ 744 ======= ======= Net (loss) income per share $ (.10) $ .12 Weighted average common and common equivalent shares outstanding 5,571 6,301
The accompanying notes are an integral part of the condensed consolidated financial statements. 5 FORM 10-Q PART I ITEM 1 PAGE 3 SUMMA FOUR, INC. Condensed Consolidated Statements of Cash Flows (Unaudited) (In thousands)
Three Months Ended June 30, -------- 1997 1996 ------- ------- Cash flows from operating activities: Net (loss) income $ (566) $ 744 ------- ------- Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities: Depreciation and amortization 629 553 Provision for doubtful accounts -- 150 Changes in operating assets and liabilities: Accounts receivable 1,092 452 Inventory (1,251) (71) Prepaid and other current assets 628 258 Other assets (61) 147 Accounts payable (253) 112 Accrued payroll and related expense 66 8 Other accrued expenses and other liabilities (1,384) 653 ------- ------- Total adjustments (534) 2,262 ------- ------- Net cash (used in) provided by operating activities (1,100) 3,006 ------- ------- Cash flows from investing activities: Purchases of property and equipment (1,074) (403) Purchases of investments, net (3,074) (230) ------- ------- Net cash used in investing activities (4,148) (633) ------- ------- Cash flows from financing activities: Proceeds from the sale of stock under stock option plans 320 108 Principal payments under capital lease obligations (7) (8) ------- ------- Net cash provided by financing activities 313 313 ------- ------- Net (decrease) increase in cash and cash equivalents (4,935) 2,473 Cash and cash equivalents, beginning of period 6,169 4,681 ------- ------- Cash and cash equivalents, end of period $ 1,234 $ 7,154 ======= ======= Supplemental disclosure of cash flow information Cash paid for interest $ 3 $ 3 Cash paid for income taxes $ 709 $ --
The accompanying notes are an integral part of the condensed consolidated financial statements. 6 FORM 10-Q PART I ITEM 1 PAGE 4 SUMMA FOUR, INC. Notes to Condensed Consolidated Financial Statements June 30, 1997 1. BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of only normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the three month period ended June 30, 1997 are not necessarily indicative of the results that may be expected for the year ended March 31, 1998. For further information, refer to the Company's consolidated financial statements and notes thereto contained in the Company's Annual Report on Form 10-K for the year ended March 31, 1997. The year-end condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by generally accepted accounting principles. 2. INVENTORIES Inventories, valued at the lower of cost (determined using the first-in, first-out method) or market were as follows (in thousands):
JUNE 30, 1997 MARCH 31, 1997 ------------- -------------- Raw materials $ 2,467 $ 1,652 Work-in-process 2,161 1,795 Finished goods 1,692 1,622 ----- ----- $ 6,320 $ 5,069 ======= =======
3. MAJOR CUSTOMER INFORMATION Historically, a significant portion of the Company's net revenues is derived from a limited number of customers. Approximately 28% of the Company's net revenues for the three months ended June 30, 1997 were from three customers accounting for 11%, 10%, and 7%, respectively, of net revenues. Approximately 27% of the Company's net revenues for the three months ended June 30, 1996 were from three customers accounting for 10%, 9%, and 8%, respectively, of net revenues. 7 FORM 10-Q PART I ITEM 1 PAGE 5 4. RECENT PRONOUNCEMENT In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128 ("SFAS No. 128"), "Earnings per Share." SFAS No. 128 establishes a different method of computing net income per share than is currently required under the provisions of Accounting Principles Board Opinion No. 15, "Earnings per Share." Under SFAS No. 128, the Company will be required to present both basic net income per share and diluted net income per share. Basic net income (loss) per share for the three months ended June 30, 1997 would have been $(.10) per share as compared with $.12 per share for the corresponding periods in fiscal 1997. The impact of SFAS No. 128 on the calculation of diluted net income per share is not expected to be materially different from primary earnings per share. The Company plans to adopt SFAS No. 128 in its third quarter for fiscal 1998 and at that time all historical net income per share data presented will be restated to conform to the provisions of SFAS No. 128. 5. CONTINGENCIES On August 2, 1995, Claircom Communications Group, Inc. ("Claircom") brought an action against the Company in King County (Washington) Superior Court alleging breach of contract, breach of warranty, and various related claims and seeking an accounting and damages arising from the joint development of a cabin telecommunications unit (CTU), which is part of a cabin communications system, to be installed in commercial passenger aircraft for providing communications services between the aircraft and the ground. On October 11, 1995, the Company filed an answer in the Washington action denying Claircom's allegations and asserted a Counterclaim. The Company also brought an action against Claircom, in the Hillsborough County (New Hampshire) Superior Court on September 12, 1995, seeking payment of royalties, protection of its trade secrets and damages for breach of contract under certain New Hampshire statutes. Claircom filed a Motion to Dismiss or Stay the New Hampshire action. On October 12, 1995, the New Hampshire court denied the Company's motion for preliminary injunction and Claircom's motion to dismiss or stay. On October 30, 1995, the Washington court granted the Company's motion to stay the Washington action. Claircom's motions to reconsider the orders of the New Hampshire and the Washington courts have both been denied. On May 9, 1997, the Court allowed Claircom's motion to amend its counterclaims to add claims for fraudulent inducement, intentional misrepresentation and a claim under the New Hampshire Consumer Protection Act. The Company has moved to dismiss these new counterclaims. Claircom has moved to dismiss, or for partial summary judgment on, the Company's claim under the New Hampshire Consumer Protection Act. The Court will hear argument on both motions at the status conference scheduled for August 27, 1997. Discovery is ongoing and the Court has set a trial date of May 1998. On June 20, 1997 the Company commenced an action in the United States District Court for the District of Delaware against AT&T Wireless Services, Inc. and Claircom, Civil No. 97-335. That action asserts that the defendants have infringed, and will continue to infringe, US Patent Number 5,553,135 (the " '135 patent") owned by the Company. Specifically the action contends that the defendants have violated the '135 patent by making, using, selling or offering to sell cabin telecommunications units employing the technology claimed and disclosed in the '135 patent. The suit is in its early stages, and the Company is unable to express a view as to its outcome. 8 FORM 10-Q PART I ITEM 2 PAGE 6 SUMMA FOUR, INC. Management's Discussion and Analysis of Financial Condition and Results of Operations June 30, 1997 The statements contained in this Quarterly Report on Form 10-Q which are not purely historical are forward-looking statements within the meaning of Section 27a of the Securities Act of 1933 and section 21E of the Securities Exchange Act of 1934, including statements regarding the Company's expectations, hopes, intentions or strategies regarding the future. Without limiting the foregoing, the words "believes," "anticipates," "plans," "expects," and similar expressions are intended to identify forward-looking statements. All forward-looking statements included in this document are based on information available to the Company on the date hereof, and the Company assumes no obligation to update any such forward-looking statements. It is important to note there are a number of important factors that could cause the Company's actual results to differ materially from those indicated in any such forward-looking statements. These factors include, without limitation, those set forth under the caption below "Factors That May Affect Future Operating Results. RESULTS OF OPERATIONS Net revenues decreased by $1.9 million (17%) to $9.3 million for the three months ended June 30, 1997 compared to $11.2 million for the three months ended June 30, 1996. This decrease in revenue resulted primarily from a general decrease in unit shipments to our IXC customers. Shipments to the Company's application developers and reseller customers approximated 65% of revenues for the three months ended June 30, 1997 compared to 44% for the three months ended June 30, 1996. Included in these categories is a growing number of emerging companies. Shipments to international customers represented approximately 53% of total revenues for the quarter ended June 30, 1997 versus 41% for the same quarter in 1996. The Company believes that its net revenues may level off or even decline in certain periods preceding the introduction of an enhanced version of its VCO 20 switch targeted for the fourth quarter of fiscal 1998 and a new line of standards-based programmable switches targeted for fiscal 1999. Gross profit decreased by $2.1 million (30%) to $4.9 million for the three months ended June 30, 1997 compared to $7.1 million for the three months ended June 30, 1996. Gross margin decreased to 53% in the three months ended June 30, 1997 from 63% in the three months ended June 30, 1996. The decrease in gross margin resulted primarily from an increase in sales through the more highly discounted indirect revenue channels, an increase in service revenue which generates lower gross margins, a shift in product mix towards lower margin systems and a series of charges related to consulting and other manufacturing items. The Company does not believe that the current rates of gross margins are necessarily indicative of future gross margins which may be affected by the level of net revenues, customer mix, cost of components, and discounts granted to high volume purchasers. As stated above, the Company's gross margins have been declining and may continue to decline as a result of continued competitive pricing pressure and increased use of indirect channels of distribution. Selling, general and administrative expenses increased by $.1 million (4%) to $3.5 million, or 38% of net revenues, for the three months ended June 30, 1997 compared with $3.4 million, or 30% of net revenues, for the three months ended June 30, 1996. This increase in expenses was primarily attributable to expansion of the Company's sales and support functions in combination with increased professional services costs. 9 FORM 10-Q PART I ITEM 2 PAGE 7 Research and development expenses were $2.8 million or 30% of net revenues for the three months ended June 30, 1997 compared to $2.8 million or 25% of net revenues for the three months ended June 30, 1996. The Company's spending for research and development is primarily directed towards the enhancement of it's VCO-20 switch, its new project with Dialogic Corporation and Junction Inc., and the provision of additional product functionality as it relates to integrated SS-7, network management, scalability, certifications, subrate switching and the development of future products. The Company believes that its current spending level on research and development is required to advance its position as a core network supplier for telecommunications service providers. Operating income decreased by $2.3 million to a loss of $1.4 million for the three months ended June 30, 1997 compared to a profit of $.9 million for the three months ended June 30, 1996. The decrease was due primarily to the revenue shortfall and lower gross margins. The $.3 million increase in interest income for the three month period ended June 1997, when compared to the same period for the previous fiscal year, was principally the result of a one time gain on the sale of an available-for-sale security and increased interest income from investments. LIQUIDITY AND CAPITAL RESOURCES At June 30, 1997, the Company had $30.4 million in cash and cash equivalents and current and non-current investments. At March 31, 1997, the Company had $32.3 million in cash and cash equivalents and current and non-current investments. During the three months ended June 30, 1997, cash and cash equivalents decreased $4.9 million. Of this decrease, $3 million resulted from a transfer of cash to investment holdings. The balance of the reduction in cash during the three month period was a result of increased purchases of property, equipment, and inventory, a reduction in accounts payables and decreased cash inflow due to lower sales levels. At June 30, 1997, the ratio of current assets to current liabilities was 3.8:1 compared to 3.3:1 at March 31, 1997. Purchase commitments to suppliers of the Company's products were approximately $7.1 million and $9.7 million at June 30, 1997 and March 31, 1997, respectively. The Company maintains an unsecured bank line of credit in the amount of $6.0 million. At June 30, 1997, no borrowings were outstanding under this line. Unless renewed, the line expires in September 1997. This line bears interest at the bank's prime interest rate per annum (8.5% at June 30, 1997). The Company believes that cash generated from operations and the total of its cash and current investments, together with existing sources of debt financing, will be sufficient to meet its anticipated cash requirements for working capital and capital expenditures for at least the next twelve months. The Company does not currently anticipate that it will be required to sell a substantial percentage of its non-current investments in the near term. On December 16, 1996, the Company's Board of Directors authorized the repurchase of up to 500,000 shares of common stock as an extension of the Company's repurchase program. Such repurchases will be funded through the Company's cash and investments. As of June 30, 1997, the Company had repurchased a cumulative total of 393,500 shares related to this extension at an average cost of $10.25 per share and had reissued 12,035 shares at an average price of $9.56 related to purchases under its Employee Stock Purchase Plan. The Company may repurchase additional shares of its stock depending on stock market conditions, price per share and other factors. The Company does not consider the impact of inflation on its business activities to have been significant to date. 10 FORM 10-Q PART I ITEM 2 PAGE 8 FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS A number of uncertainties exist that could affect the Company's future operating results, including without limitation, the following: - The Company has recently announced agreements in principle with Dialogic Corporation and Junction, Inc. which it anticipates will result in the creation of future products. The Company anticipates that the expenses associated with this developmental activity will be partially funded from its fiscal 1998 budget; the balance will be charged to operating expenses. There can be no assurance that this relationship will result in the development of salable product(s) which will be beneficial to the future of the Company or that products produced by this relationship will be developed in a cost-effective manner and be available for sale within the time frame required. - The Company is dependent upon sole source suppliers for certain key components used in its products. The Company purchases these sole source components pursuant to purchase orders placed from time-to-time. No assurance can be given that sole source suppliers will devote the resources necessary to support the enhancement or continued availability of such components or that any such supplier will not encounter financial or operational difficulties. In addition, in certain instances, components required for certain subassemblies used in the Company's products are no longer being manufactured. The Company has historically been able to secure such components by utilizing its network of suppliers. However, the Company is redesigning such sub-assemblies in order to eliminate production interruptions that could occur if such components cannot be acquired. The Company is actively seeking alternative solutions to address potentially serious delays or shortages from its major component supplier. If delays or shortages occur and the Company is unable to effect alternative supply arrangements, its business and results of operations could be materially adversely affected. - A variety of factors could influence the level of the Company's net revenues in a particular quarter, including general economic conditions in the telecommunications switching industry, the timing of significant orders, shipment delays, the introduction of new products by the Company, the introduction of new products by the Company's competitors, acquisitions by the Company, patterns of capital spending by customers and other factors, many of which are beyond the Company's control. Since a substantial portion of the expenses of the Company do not vary relative to sales levels, if net revenues in particular quarter do not meet expectations, it could have a material adverse effect on the Company's results of operations. - The Company's gross margin has declined in recent periods and may continue to decline as a result of potential sales price reductions and increased use of indirect distribution channels. Gross margins are also affected by other factors such as changes in the cost of materials, production and quality considerations, and the timing of new product introductions. The Company from time-to-time adds functionality and features that add cost to its products, and the Company's gross margins will be adversely affected to the extent the Company is not able to increase the price of such systems to offset such increased costs. 11 FORM 10-Q PART I ITEM 2 PAGE 9 - The Company's future results of operation and financial condition will depend, in part, on its ability to obtain and maintain patent protection for its products, to preserve its trade secrets and to operate without infringing on proprietary rights of third parties. There can be no assurance that the Company will be able to obtain and/or adequately protect the intellectual property required for it to compete effectively. - The Company's ability to develop marketable products and maintain a competitive position in light of continuing technological developments will depend, in large part, on its ability to attract and retain highly qualified management, technical and sales and marketing personnel. Competition for the services of these key employees is intense. - The Company's international business is subject to a number of inherent risks, including the challenges of building and managing foreign operations, unique product requirements, fluctuations in the value of foreign currencies, import/export duties, and unexpected regulatory, economic or political changes in foreign markets. Because of these and other factors, past financial performance should not be considered an indictor of future performance. 12 FORM 10-Q PART II ITEM 1-6 PAGE 10 SUMMA FOUR, INC. Part II - Other Information June 30, 1997 ITEM 1 - LEGAL PROCEEDINGS On August 2, 1995, Claircom Communications Group, Inc. ("Claircom") brought an action against the Company in King County (Washington) Superior Court alleging breach of contract, breach of warranty, and various related claims and seeking an accounting and damages arising from the joint development of a cabin telecommunications unit (CTU), which is part of a cabin communications system, to be installed in commercial passenger aircraft for providing communications services between the aircraft and the ground. On October 11, 1995, the Company filed an answer in the Washington action denying Claircom's allegations and asserted a Counterclaim. The Company also brought an action against Claircom, in the Hillsborough County (New Hampshire) Superior Court on September 12, 1995, seeking payment of royalties, protection of its trade secrets and damages for breach of contract under certain New Hampshire statutes. Claircom filed a Motion to Dismiss or Stay the New Hampshire action. On October 12, 1995, the New Hampshire court denied the Company's motion for preliminary injunction and Claircom's motion to dismiss or stay. On October 30, 1995, the Washington court granted the Company's motion to stay the Washington action. Claircom's motions to reconsider the orders of the New Hampshire and the Washington courts have both been denied. On May 9, 1997, the Court allowed Claircom's motion to amend its counterclaims to add claims for fraudulent inducement, intentional misrepresentation and a claim under the New Hampshire Consumer Protection Act. The Company has moved to dismiss these new counterclaims. Claircom has moved to dismiss, or for partial summary judgment on, the Company's claim under the New Hampshire Consumer Protection Act. The Court will hear argument on both motions at the status conference scheduled for August 27, 1997. Discovery is ongoing and the Court has set a trial date of May 1998. On June 20, 1997 the Company commenced an action in the United States District Court for the District of Delaware against AT&T Wireless Services, Inc. and Claircom, Civil No. 97-335. That action asserts that the defendants have infringed, and will continue to infringe, US Patent Number 5,553,135 (the " '135 patent") owned by the Company. Specifically the action contends that the defendants have violated the '135 patent by making, using, selling or offering to sell cabin telecommunications units employing the technology claimed and disclosed in the '135 patent. The suit is in its early stages, and the Company is unable to express a view as to its outcome. 13 FORM 10-Q PART II PAGE 11 ITEM 2 - CHANGES IN SECURITIES Not applicable. ITEM 3 - DEFAULTS UPON SENIOR SECURITIES Not applicable. ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. ITEM 5 - OTHER INFORMATION On May 6, 1997, it was announced that Richard S. Swee was hired as Vice President, Engineering. On May 6, 1997, it was announced that Thomas A. St. Germain, Senior Vice President, and Chief Financial Officer, would retire, effective June 30, 1997. On May 28, 1997, it was announced that the Company had accepted the resignation of Kendrick A. Estey as Vice President , Customer Service and Operations. On July 25, 1997, Jeffrey A. Weber joined the Company as Vice President and Chief Financial Officer. Mr. Weber was previously Senior Vice President and Chief Financial Officer at Computer Identics Corporation. ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K a. EXHIBITS The exhibits listed in the Exhibit Index are part of or included in this report. b. REPORTS ON FORM 8-K None. 14 FORM 10-Q PART II PAGE 12 SIGNATURES ---------- Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Summa Four, Inc. Date: August 11, 1997 /s/ Robert A. Degan ------------------------------------------ Robert A. Degan President and Chief Executive Officer Date: August 11, 1997 /s/ Jeffrey A. Weber ------------------------------------------ Jeffrey A. Weber Vice President and Chief Financial Officer 15 FORM 10-Q PART II PAGE 12 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Summa Four, Inc. Date: August 11, 1997 By: /s/ Robert A. Degan --------------------- Robert A. Degan President and Chief Executive Officer Date: August 11, 1997 By: /s/ Jeffrey A. Weber ---------------------- Jeffrey A. Weber Vice President and Chief Financial Officer 16 FORM 10-Q PART II PAGE 13
EXHIBIT NO. DESCRIPTION - ----------- ----------- 10.36 +Employment Agreement, dated April 15, 1997, by and between the Registrant and Richard S. Swee. 10.37* Joint Development Agreement, dated June 11, 1997, by and between the Registrant and Junction, Inc. 11 Statement Re: Computation of per Share Earnings 27 Financial Data Schedule
* Confidential treatment requested as to certain portions which have been filed separately with the Securities and Exchange Commission. + Management contract or compensatory plan or arrangement filed as an exhibit pursuant to Item 6(a) of this report. EX-10.36 2 EMPLOYMENT AGREEMENT WITH RICHARD S. SWEE 1 [SUMMA FOUR LOGO] EXHIBIT 10.36 EMPLOYMENT AGREEMENT -------------------- THIS EMPLOYMENT AGREEMENT (the "Agreement"), made this 15th day of April, 1997, is entered into by Summa Four, Inc., a Delaware corporation, with its principal place of business at Manchester, New Hampshire (the "Company"), and Richard Swee (the "Employee"). The Company desires to employ the Employee, and the Employee desires to be employed by the Company. In consideration of the mutual covenants and promises contained herein, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged by the parties hereto, the parties agree as follows: 1. EMPLOYMENT AT WILL. The Company hereby agrees to employ the Employee as an employee at will, and the Employee hereby accepts such employment with the Company, upon the terms set forth in this Agreement, for the period commencing on April 28, 1997 (the "Commencement Date") and ending on the date the Employee's employment is terminated in accordance with the provisions of Section 4 (such period, the "Employment Period"). 2. TITLE, CAPACITY. The Employee shall serve as the Company's Vice President, Engineering, currently reporting to the President and CEO, or in such other more senior or responsible position as the Company or its Board of Directors (the "Board") may determine from time to time. The Employee shall be based at the Company's headquarters in Manchester, New Hampshire, or such place or places in the continental United States as the Board shall reasonably determine and the Employee shall agree. The Employee shall be subject to the supervision of, and shall have such authority as is delegated to him by, the Board or such officer of the Company as may be designated by the Board. The Employee hereby accepts such employment and agrees to undertake the duties and responsibilities inherent in such position and such other duties and responsibilities as the Board or 2 its designee shall from time to time reasonably assign to him. The Employee agrees to devote his entire business time, attention and energies to the business and interests of the Company during the Employment Period. The Employee agrees to abide by rules, regulations, instructions, personnel practices and policies of the Company and any changes therein which may be adopted from time to time by the Company. 3. COMPENSATION AND BENEFITS. 3.1 SALARY. The Company shall pay the Employee, in bi-weekly installments, an annual base salary of $150,000 (less applicable state and federal taxes) for the period commencing on the Commencement Date and ending March 31, 1998, subject to adjustment thereafter as determined annually by the Board at its first regular meeting following its receipt of the Company's audited financial results for its preceding fiscal year. 3.2 BONUS. For such period ending March 31, 1998, the Employee shall be eligible for a bonus of up to 25% of his current base salary (pro-rated for 11 months of FY'98) based on the achievement of certain goals and the Company's financial performance. In order for the Employee to be entitled to payment of his bonus, he must be actively employed by the Company on the date the bonus is paid. For periods thereafter, the Employee shall be entitled to participate in such bonus programs, if any, as may be established from time to time by its Board of Directors. 3.3 FRINGE BENEFITS. The Employee shall be entitled to participate in all benefit programs that the Company establishes and makes available to its employees, if any, to the extent that Employee's position, tenure, salary, age, health and other qualifications make him eligible to participate, and to vacations in accordance with the Company's vacation policy. 3.4 REIMBURSEMENT OF EXPENSES. The Company shall reimburse the Employee for all gasoline used by the Employee in one automobile owned or leased by him and for -2- 3 reasonable travel, entertainment and other expenses incurred, per the Company's Travel and Entertainment Policy, or paid by the Employee in connection with, or related to, the performance of his duties, responsibilities or services under this Agreement, as more fully described in section 12.5.3, upon presentation by the Employee of documentation, expense statements, vouchers and/or such other supporting information as the Company may request, PROVIDED, HOWEVER, that (i) the amount available for such travel, entertainment and other expenses may be fixed in advance by senior management or the Board and (ii) amounts so reimbursed for gasoline will be included in Employee's taxable income except as so documented as a business expense. 3.5 STOCK OPTION. Subject to Board approval, the Employee shall be granted an incentive stock option to purchase 30,000 shares of the Company's common stock under its 1993 Stock Incentive Plan (the "Plan"). The option price shall be the closing price on the first day of the month following the employment start date month. The option to purchase 30,000 shares shall vest over four years at 25% per year. If, in the future, the Board votes to shorten the vesting schedule for Officers generally, then any of the Employee's unvested shares would fall under the new, more favorable vesting schedule. Stock options granted may be exercised by the Employee, to the extent vested in accordance with the terms of the Plan. If, after completing six months of service, Employee's employment is involuntarily terminated by the Company for any reason other than "Cause", any unvested shares, which would have otherwise vested within 12 months of such involuntary termination, shall vest immediately. 4. EMPLOYMENT TERMINATION WITHOUT CAUSE. The Employee shall have the status of an employee at will. The Company may terminate the Employee's employment at any time without cause. The Employee has no obligation to remain employed by the Company and may terminate his employment at any time. -3- 4 4.1 TERMINATION FOR CAUSE. In the event the Employee's employment is terminated for cause the Company shall pay to the Employee the compensation and benefits otherwise payable to him under Section 3 through the last day of his actual employment by the Company. For purposes of this Agreement, "cause" for termination shall be deemed to exist upon (a) alcohol or drug abuse affecting the performance of your duties, theft, embezzlement, fraud, absenteeism, dishonesty, gross negligence or misconduct, or (b) the conviction of the Employee of, or the entry of a pleading of guilty or nolo contendere by the Employee to, any crime involving moral turpitude or any felony. 4.2 TERMINATION FOR DEATH OR DISABILITY. If the Employee's employment is terminated by death or because of disability, the Company shall pay to the estate of the Employee or to the Employee, as the case may be, the compensation which would otherwise be payable to the Employee up to the end of the month in which the termination of his employment because of death or disability occurs, as well as any benefits due Employee under the benefits programs, e.g., life insurance. For purposes of this Agreement, the term "disability" shall mean the inability of the Employee, due to a physical or mental disability, for a period of 90 days, whether or not consecutive, during any 360-day period to perform the services contemplated under this Agreement. A determination of disability shall be made by a physician satisfactory to both the Employee and the Company, PROVIDED THAT if the Employee and the Company do not agree on a physician, the Employee and the Company shall each select a physician and these two together shall select a third physician, whose determination as to disability shall be binding on all parties. 4.3 TERMINATION BY THE COMPANY OTHER THAN FOR CAUSE. If the Employee's employment is terminated by the Company for any reason other than for cause, the Company shall continue paying the Employee's current base salary and insurance benefits, after the Employee's termination of employment, for up to twelve (12) months (the "Severance Benefit"). Payment of -4- 5 the Severance Benefit shall cease upon the earlier of (a) the first anniversary of the Employee's date of termination, or (b) the date the Employee begins employment with another employer (or is re-employed by the Company). 4.4 TERMINATION FOLLOWING CHANGE IN CONTROL. If the Employee's employment is terminated by the Company for any reason other than cause within one year after a change in control, or the Employee experiences a substantial diminution in the nature or status of his responsibilities from those set forth in his job description, and the Employee chooses to terminate employment, the Company shall continue paying the Employee's current base salary and benefits, after the Employee's termination of employment, for up to twelve (12) months (the "Severance Benefit"). Payment of the Severance Benefit shall cease upon the earlier of (a) the first anniversary of the Employee's date of termination, or (b) the date the Employee begins employment with another employer (or is re-employed by the Company). In the event of change of control, the Employee's unvested shares shall vest immediately, in accordance with section 16 of the Company's 1995 stock plan. For the purposes of this paragraph, a change in control is defined as provided for in Attachment "A". 5. NON-COMPETE. (a) During the Employment Period and for a period of twelve (12) months after the Employee's termination of employment for any reason, the Employee will not knowingly directly or indirectly: (i) as an individual proprietor, partner, stockholder, officer, employee, director, joint venturer, investor, lender, consultant or in any other capacity whatsoever (other than as the holder of not more than one percent (1%) of the total outstanding stock of a publicly held company), render any services to any business engaged in the design, manufacture or sale of programmable switches (including, without limitation, Excel) or to any non-legacy switch -5- 6 manufacturer (including, without limitation, Sattel) or any major original equipment manufacturer customer of Excel (including, without limitation, Boston Technology, Glenayre or Access Line); or (ii) recruit, solicit or induce, or attempt to induce, any employee or employees of the Company to terminate their employment with, or otherwise cease their relationship with, the Company; or (iii) solicit, divert or take away, or attempt to divert or to take away, the business or patronage of any of the clients, customers or accounts, or prospective clients, customers or accounts, of the Company which were contacted, solicited or served by the Employee while employed by the Company. (b) If any restriction set forth in this Section 5 is found by any court of competent jurisdiction to be unenforceable because it extends for too long a period of time or over too great a range of activities or too broad a geographic area, it shall be interpreted to extend only over the maximum period of time, range of activities or geographic area as to which it may be enforceable. (c) The restrictions contained in this Section 5 are necessary for the protection of the business and goodwill of the Company and are considered by the Employee reasonable for such purpose. The Employee agrees that any breach of this Section 5 will cause the Company substantial and irrevocable damage and therefore, in the event of any such breach, in addition to such other remedies which may be available, the Company shall have the right to seek specific performance and injunctive relief. 6. NOTICES. All notices required or permitted under this Agreement shall be in writing and shall be deemed effective upon personal delivery or upon deposit in the United States Post Office, by registered or certified mail, postage prepaid, addressed to the other party at the address -6- 7 shown above, or at such other address or addresses as either party shall designate to the other in accordance with this Section 6. 7. PRONOUNS. Whenever the context may require, any pronouns used in this Agreement shall include the corresponding masculine, feminine or neuter forms, and the singular forms of nouns and pronouns shall include the plural, and vice versa. 8. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement between the parties and supersedes all prior agreements and understandings, whether written or oral, relating to the subject matter of this Agreement. 9. AMENDMENT. This Agreement may be amended or modified only by a written instrument executed by both the Company and the Employee. 10. GOVERNING LAW. This Agreement shall be construed, interpreted and enforced in accordance with the laws of the State of New Hampshire. 11. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and inure to the benefit of both parties and their respective successors and assigns, including any corporation with which or into which the Company may be merged or which may succeed to its assets or business, provided, however, that the obligations of the Employee are personal and shall not be assigned by him. 12. MISCELLANEOUS. 12.1 No delay or omission by the Company in exercising any right under this Agreement shall operate as a waiver of that or any right. A waiver or consent given by the Company on any one occasion shall be effective only in that instance and shall not be construed as a bar or waiver of any right on any other occasion. -7- 8 12.2 The captions of the sections of this Agreement are for convenience of reference only and in no way define, limit or affect the scope or substance of any section of this Agreement. 12.3 In case any provision of this Agreement shall be invalid, illegal or otherwise unenforceable, the validity, legality and enforceability of the remaining provisions shall in no way be affected or impaired thereby. 12.4 The Employee shall be entitled to indemnification as an Officer of the Company under the Company's by-laws and charter. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year set forth above. SUMMA FOUR, INC. By: /s/ Robert A. Degan --------------------------------- Title: President & CEO ------------------------------ RICHARD SWEE /s/ Richard Swee ------------------------------------ -8- 9 ATTACHMENT "A" For the purposes of this Agreement, a change of control shall be deemed to have occurred if at any shareholders meeting fifty percent (50%) of the total shares voting of the shares of the Company's common stock outstanding are voted either directly or by proxy for a person or persons other than those nominated by the Company's Board of Directors or if the individuals who, as of the date hereof, constitute the Board of Directors of the Company, cease for any reason to constitute at least a majority of the Board, provided that any person becoming a director subsequent to the date hereof whose election or nomination for election by the Company's shareholders was approved of by a vote of at least a majority of the Directors then comprising the Board, shall be, for the purposes of this Agreement, considered as though such person was a member of the Board as of the date hereof. -9- EX-10.37 3 JOINT DEVELOPMENT AGREEMENT 1 EXHIBIT 10.37 Confidential materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. JOINT DEVELOPMENT AGREEMENT This joint Development Agreement is made this 11th day of June, 1991 (the "Effective Date") by and among Summa Four, Inc., a Delaware corporation ("Summa Four") and Junction, Inc., a Delaware corporation ("Junction"). 1 DEFINITIONS. 1.1 "Business Plan" means that plan for the development and testing of the Product by the Joint Venture, and the manufacture and distribution and marketing of the Product by Summa Four, during Phase II. 1.2 "Joint Approval of the Business Plan" means the date on which each of Summa Four and Junction have agreed in writing (in the manner explicitly set forth in Section 2.5) that the Business Plan is acceptable. 1.3 "Joint Venture" means that limited liability company or other joint venture entity to be owned and operated by Summa Four and Junction and to be formed by them for the purpose of carrying out the development and testing of the Product. 1.4 "Joint Venture Agreement" means the agreement between Summa Four and Junction describing their relative ownership interests in, contributions to and rights and responsibilities in connection with the Joint Venture. 1.5 "Phase I" means the period commencing on the date of this Agreement and ending as described in Section 6.1. 1.6 "Phase II" means the period commencing upon joint Approval of the Business Plan, if any, and ending as described in the Joint Venture Agreement. 1.7 "Product" means the next generation switch platform having the attributes described on SCHEDULE A. 1.8 "Project" means the development, testing, manufacture, distribution and maintenance of the Product during Phase II in accordance with the Business Plan. 2 DESCRIPTION OF PHASE I. 2 2.1 RESPONSIBILITIES OF THE PARTIES. During Phase I, Summa Four and Junction will cooperate in the development of the Business Plan. Notwithstanding the foregoing, the principal responsibilities of the parties relating to development of the Business Plan will be as follows: (a) Junction will: (1) Perform the technical and business analysis necessary to develop the Business Plan; (2) Draft the Business Plan and all related designs, diagrams, charts and other materials; (3) Use its best efforts to complete the Business Plan as soon as possible, but no later than the 120th day following the Effective Date. (b) Summa Four will: (1) Provide overall structural and strategic direction for the Business Plan and cooperate fully in the preparation of the non-technical portions of the Business Plan, with a view toward assisting Junction to complete the Business Plan no later than the 120th day following the Effective Date; (2) Fund Junction's development costs in the manner and to the extent described in Section 4; (3) Timely provide Junction with such information as is necessary to enable Junction to design the Product in a manner compatible with Summa Four's existing product lines; (4) Timely provide Junction with estimates and projections relating to the manufacture, distribution and marketing of the Product by Summa Four. 2.2 SUBCONTRACTING. Junction shall not be permitted to subcontract any of its duties under this Agreement to any third party without the express written consent of Summa Four, which consent may be granted or withheld in Summa Four's sole discretion. Any such subcontractor approved by Summa Four must execute a written agreement in form and substance acceptable to Summa Four. -2- 3 2.3 COMMUNICATIONS. Each party will designate one or more representatives (including business and technical persons) through which all communications relating to the Business Plan should be communicated. The parties agree that representatives from their respective teams working on the Business Plan shall meet at least once per week to discuss the progress of the Business Plan, and any issues that have arisen since the preceding meeting. The parties will use all reasonable efforts to communicate openly and frequently regarding scheduling and technical issues relating to the development of the Business Plan, and each party agrees to notify the other of any anticipated delays. 2.4 BUSINESS PLAN DESCRIPTION. (a) At a minimum, the Business Plan will contain detailed discussions of the following areas and provide the following information: (1) Technical: functional technical specifications and design plans for the Product, preliminary development milestones and schedules, and a description of how Summa Four's existing APIs and current expansion plans (i.e. 5.0+) can be coordinated with the development of the Product; (2) Marketing: competitive analysis, marketing, sales and production forecasts, anticipated impact on Summa Four's near-to-mid-term commitments and revenue projections; (3) Financial: projected development expenses and budget, including detailed personnel (management, engineering, design, programming, marketing, research and contractor), overhead, facilities and equipment requirements, projected salary/bonus/benefits for personnel; 5-year projected Product revenues and projections of Summa Four's revenues operating profits from the Product over the same term; (4) Product Life Cycle: schedules and personnel requirements for regular updates, enhancements and upgrades of the Product, and Product maintenance and support; and (5) any other mutually agreed elements customary in a business plan. -3- 4 2.5 JOINT APPROVAL OF BUSINESS PLAN. Joint Approval of the Business Plan shall occur only when the Business Plan has been initialed and dated by the senior executive officer of each of Summa Four and Junction. 2.6 JOINT VENTURE AGREEMENT. As promptly as possible following Joint Approval of the Business Plan, the parties shall execute the Joint Venture Agreement in a form which is reasonably acceptable to them. The Joint Venture Agreement shall contain, at a minimum, the provisions attached hereto as SCHEDULE B, and will also incorporate the schedules, milestones and obligations pertaining to the Project which are set forth in the Business Plan. 3 EXCLUSIVITY. Junction agrees that during Phase I and, as described in Section 6.2(c) below, for certain periods following the termination of Phase I, Junction shall not, and shall require each of its shareholders, employees and consultants not to, engage, directly or indirectly, in any activity which is or would be competitive with the Product or any variation or derivative thereof. Junction agrees and acknowledges that the payments to be made by Summa Four to Junction hereunder are sufficient to compensate Junction and its shareholders, employees and consultants for the non-competition obligation set forth in this Section 3, and that the level of such payments has been set specifically contemplating this non-competition obligation. Junction agrees that it shall require its shareholders, employees and consultants to enter into binding, written agreements (enforceable by Summa Four) requiring them to comply with the terms of this Section 3, and Junction shall pay each such person such amounts as are necessary to compensate them for such non-competition obligation (it being understood that such amounts will be subject to reimbursement by Summa Four as Personnel/Salary expense, subject to the provisions and limitations of Section 4 and the caps set forth in Schedule D). 4 FUNDING. Summa Four will pay or reimburse Junction's documented expenses incurred in connection with development of the Business Plan during the first 120 days of Phase I (or until earlier termination of Phase I pursuant to Section 6.1), up to the amounts set forth on SCHEDULE D hereto. Summa Four will reimburse Junction no later than thirty (30) days following the end of each calendar quarter for such expenses incurred by Junction during the preceding quarter as to which Junction has submitted an invoice requesting reimbursement prior to the end of the quarter. At Junction's option, Summa Four may pay Junction's suppliers directly, on terms and conditions acceptable to Summa Four and such suppliers. Summa Four will not be responsible for paying any amounts under this Section 4 in excess of those shown on SCHEDULE D; provided, however, that if circumstances beyond Junction's reasonable control result in increased costs to Junction, Summa Four will in good faith discuss increasing the amount of funding with Junction. -4- 5 5 INTELLECTUAL PROPERTY. 5.1 OWNERSHIP. Summa Four shall own all right, title and interest in and to the Business Plan, and all ideas, inventions, designs, algorithms and methods described therein or formulated during the development thereof, and all patent, copyright, trademark, trade secret, mask work and other industrial and intellectual property rights therein throughout the world, together with all applications, registrations and renewals thereof (collectively, the "Proprietary Rights"). Junction hereby irrevocably sells and assigns all its right, title and interest in and to the Proprietary Rights throughout the world, whether existing now or developed in the future, to Summa Four. Junction shall ensure that any subcontractor it engages to assist in the development of the Business Plan or Product also assigns all Proprietary Rights to Summa Four. At the request of Summa Four, Junction and any such subcontractor shall execute and deliver all assignments, instruments, affidavits, powers of attorney and other documents as are necessary to effect the foregoing assignment. Summa Four shall have the exclusive right to file patent and copyright applications to protect the Proprietary Rights, and to assert the Proprietary Rights against third parties. 5.2 LICENSED SUMMA FOUR TECHNOLOGY. (a) Summa Four hereby grants to Junction, and Junction accepts, a non-exclusive, non-transferable license during Phase I to reproduce, use and create derivative works of that Summa Four technology described in SCHEDULE C and related documentation (the "Licensed Summa Four Technology"), solely at Junction's facility in California and Summa Four's facilities, for the sole purposes of preparing the Business Plan as described in this Agreement. Junction shall have no right to sublicense any rights in the Licensed Summa Four Technology without the express prior written consent of Summa Four. (b) Summa Four shall provide the Licensed Summa Four Technology to Junction in a format which the parties reasonably agree is necessary for Junction to perform its obligations hereunder. Junction shall notify Summa Four immediately in the event of any actual or suspected unauthorized access to, use of or tampering with the Licensed Summa Four Technology. Junction agrees that the Licensed Summa Four Technology shall constitute Confidential Information of Summa Four, as defined in the Confidentiality Agreement (as defined in Section 8 below). -5- 6 5.3 INDEMNIFICATION BY JUNCTION. (a) Junction shall indemnify, defend and hold Summa Four harmless from and against any losses, damages, settlements, costs and expenses (including reasonable attorneys' fees) (collectively, "Damages") arising from any claim that the Business Plan infringes or violates any patent, copyright, trademark, trade secret, mask work or other intellectual or industrial property right of any third party. (b) Summa Four shall notify Junction promptly in writing of any third party action (and provide information regarding all prior related claims) brought against Summa Four based on a claim described in Section 5.3(a) above and not otherwise described in Section 5.3(d) below. Junction shall defend such action at its expense and pay all Damages attributable to such claim incurred by Summa Four (as they are incurred). Junction shall have sole control of the defense of any such action and all negotiations for its settlement or compromise. Summa Four shall reasonably cooperate with Junction in the defense of such claim, and may be represented at Summa Four's expense, by counsel of Summa Four's selection. (c) In the event that a permanent injunction based solely on a claim indemnified by Junction under Section 5.3(a) is obtained against the parties' use or development of the Business Plan or their development, use or distribution of the Product, then Summa Four shall have the right to terminate this Agreement in accordance with Section 6. (d) The provisions of Section 5.3(a) notwithstanding, Junction shall not have any liability to Summa Four (including any obligation to indemnify, defend or hold harmless) to the extent that any claim of infringement or violation is based upon the Licensed Summa Four Technology. (e) Notwithstanding anything to the contrary contained above, in the event that this Agreement is terminated by Summa Four pursuant to Sections 6.1(b) or 6.1(c), Junction shall not be required to indemnify Summa Four with respect to Damages which are, in the aggregate, in excess of the aggregate amounts paid by Summa Four to Junction under this Agreement -6- 7 5.4 INDEMNIFICATION BY SUMMA FOUR. (a) Summa Four shall indemnify, defend and hold Junction harmless from and against any Damages arising from any claim that the Licensed Summa Four Technology infringes or violates any patent, copyright, trademark, trade secret, mask work or other intellectual or industrial property right of any third party. (b) Junction shall notify Summa Four promptly in writing of any third party action (and provide information regarding all prior related claims) brought against Junction based on a claim described in Section 5.4(a) above. Summa Four shall defend such action at its expense and pay all Damages attributable to such claim incurred by Junction (as they are incurred). Summa Four shall have sole control of the defense of any such action and all negotiations for its settlement or compromise. Junction shall reasonably cooperate with Summa Four in the defense of such claim, and may be represented, at Junction's expense, by counsel of Junction's selection. (c) The provisions of Section 5.4(a) notwithstanding, Summa Four shall not have any liability to Junction to the extent that any claim of infringement is based upon use of the Licensed Summa Four Technology for any purpose unrelated to the development of the Business Plan or the Product as described in this Agreement. (d) Notwithstanding anything to the contrary contained above, in the event that this Agreement is terminated by Summa Four pursuant to Sections 6.1(b) or 6.1(c), Summa Four shall not be required to indemnify Junction with respect to Damages which are, in the aggregate, in excess of the aggregate amounts paid by Summa Four to Junction under this Agreement. 6 TERM AND TERMINATION. 6.1 TERMINATION OF PHASE I. Phase I will terminate upon the earliest to occur of (a) Joint Approval of the Business Plan; or (b) notice by Summa Four that it elects to terminate Phase I; or -7- 8 Confidential materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. (c) at either party's election, if Joint Approval of the Business Plan has not occurred by the 120th day following the Effective Date; or (d) notice of termination by a party following a material breach of this Agreement by the other party, provided that if such breach is susceptible of cure, such breach has not been cured within thirty (30) days following notice thereof by the other party; or (e) notice of termination by Summa Four upon the issuance of an injunction described in Section 5.3(c). 6.2 EFFECTS OF TERMINATION OF PHASE I. Upon any termination of Phase I, all development and finding obligations of the parties under Sections 2 and 3 of this Agreement shall terminate, except as set forth below. (a) If, and only if, Phase I is terminated pursuant to Section 6.1(a), then (1) Phase II shall commence immediately, (2) the valuation procedure described in Section 7 shall commence and (3) the parties shall, no later than 30 days following such termination, execute the Joint Venture Agreement. (b) If Phase I is terminated by Summa Four pursuant to Section 6.1(b), or by either party pursuant to Section 6.1(c), then Summa Four shall, (1) no later than the fifth (5th) business day following such termination, pay Junction ***** and (2) pay Junction the Termination Royalty described in Section 6.3. (c) If Phase I is terminated pursuant to Sections 6.1(b), 6.l(c) or 6.1(d), then the exclusivity described in Section 3 shall continue during the period beginning on the date of such termination and ending on the later of (1) the third anniversary of such termination or (2) if Termination Royalties are required to be paid by Summa Four, the date on which the last Termination Royalty payment is required to be made. (d) Upon any termination of Phase I other than pursuant to Section 6.1(a), Junction shall deliver to Summa Four all software, documentation, designs, illustrations, flow charts, works in progress, media and other materials which it has developed or had developed, or otherwise has in its possession or control, -8- 9 Confidential materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. embodying, describing or including the Business Plan, the Licensed Summa Four Technology or the Product. 6.3 TERMINATION ROYALTY. For purposes of this Agreement, "Termination Royalty" shall mean ***** of Summa Four's revenue from the Product, including any variation or derivative of such Product. The Termination Royalty shall be payable quarterly, and shall be paid, if any is due, commencing at the time specified in Section 6.2 and ending upon the earlier of (a) such time as the aggregate Termination Royalty paid by Summa Four equals ***** or (b) the ***** anniversary of the termination of Phase I. The Termination Royalty shall be payable only after termination of Phase I and only if required by Section 6.2. Summa Four shall provide to Junction, together with each payment of the Termination Royalty, a report showing the relevant revenues and other information necessary to calculate the amount of the Termination Royalty. 6.4 TERMINATION OF AGREEMENT. This Agreement shall remain in force until the parties mutually agree in writing that it shall be terminated, or until all obligations required to be discharged hereunder have been discharged. The termination of Phase I shall not, of itself, cause the termination of this Agreement. 7 VALUATION. 7.1 Promptly following the commencement of Phase II, the business Plan will be provided to Wessels, Arnold & Henderson, Montgomery Securities or other investment banking firm of national standing (as may be agreed upon by the parties) to determine a formula for the value, during the Exit Period defined below, of the Product to Summa Four (assuming that Summa Four had a paid-up, royalty-free, exclusive license to the Product and variations and derivatives thereof) for purposes of the put and call arrangements described in SCHEDULE B. The valuation formula will include such factors as revenues from the Product, impact of the Product on Summa Four's stock price, Junction's success during Phase II in meeting time and Product performance milestones, dilution effect (if any) on the valuation of Summa Four stock (in the event Summa Four uses its stock to exercise any portion of its call option under the Joint Venture Agreement) and such other factors as Summa Four and Junction may agree upon or as the investment banker may deem relevant. The investment banker will also recommend -9- 10 Confidential materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. a relative percentage ownership of the Joint Venture by Summa Four as of the commencement of Phase II for the purposes described in Section 7.2, which shall be not less than ***** and not greater than ***** and which shall be based upon the relative value of (i) Summa Four's funding of Phase I and Summa Four's contributions to be made during Phase II pursuant to the Business Plan in relation to (ii) the value of the contributions, financial or otherwise, made by Junction during Phase I (to the extent that the value of such contributions during Phase I are in excess of the amount of the "Personnel" expenses reimbursed by Summa Four pursuant to Section 4 of this Agreement and SCHEDULE D), and the contributions, financial or otherwise, to be made by Junction during Phase II pursuant to the Business Plan. The fees of the investment banker for such services shall be paid by the Joint Venture. 7.2 Upon receipt of the investment banker's report pursuant to Section 7.1 the ownership of the Joint Venture will be allocated to Summa Four and Junction in accordance with such report. 8 CONFIDENTIALITY. All information of the parties developed during the term of this Agreement shall be subject to the provisions of that Confidentiality Agreement dated April 15, 1997 between Summa Four and Junction (the "Confidentiality Agreement"). Junction agrees that the Business Plan, and all information contained therein, and the Summa Four Licensed Technology shall constitute the Proprietary Information of Summa Four, and shall be treated accordingly under the Confidentiality Agreement. 9 MISCELLANEOUS. 9.1 PUBLICITY. Any advertising or promotional literature or announcement by a party to this Agreement regarding its relationship with the other party or this Agreement must be approved by the other party in advance in writing. 9.2 AGREEMENT TERMS. Neither party hereto shall disclose the terms or conditions of this Agreement to any third party, except as required by order or rule of a governmental authority including, without limitation, the United States Securities and Exchange Commission. 9.3 GOVERNING LAWS. This Agreement shall be governed by and construed in accordance with the laws of the State of New Hampshire, excluding its choice of law rules. -10- 11 9.4 ENTIRE AGREEMENT. This Agreement constitutes the entire agreement between the parties with respect to the subject matter hereof, and shall not be released, discharged, supplemented, interpreted, amended, varied, or modified in any manner except by an instrument in writing signed by an authorized officer or representative of each of the parties hereto. The Schedules following the operative part of this Agreement shall be deemed to be incorporated in this Agreement. 9.5 NO WAIVERS. No delay or omission on the part of either party to this Agreement in requiring performance by the other party or in exercising any right hereunder shall operate as a waiver of any provision hereof or of any right or rights hereunder, and the waiver, omission or delay in requiring performance or exercising any right hereunder on any one occasion shall not be construed as a bar to or waiver of such performance or right on any future occasion. 9.6 SEVERABILITY. If any provision of this Agreement shall for any reason be held illegal or unenforceable, such provision shall be deemed separable from the remaining provisions of this Agreement and shall in no way affect or impair the validity or enforceability of the remaining provisions of this Agreement. 9.7 SECTION HEADINGS. Section headings of this Agreement are for descriptive purposes only and shall not control or alter the meaning of this Agreement. 9.8 RELATIONSHIP OF THE PARTIES. The parties shall for all purposes be considered independent contractors with respect to each other, and neither shall be considered an employee, employer, agent, principal, partner or joint venturer of the other, unless by separate agreement such relationship is established. 9.9 NOTICES. For the purposes of this Agreement, and for all notices and correspondence hereunder, the addresses of the respective parties are as follows: If to Summa Four: Summa Four, Inc. 25 Sundial Avenue Manchester, NH 03103-7251 Attn: President Fax: (603)668-4810 -11- 12 with a copy to Hale and Dorr LLP 60 State Street Boston, MA 02109 Fax: (617) 526-5000 Attn.: John K.P. Stone, Esq. If to Junction: Junction, Inc. 21040 Homestead Avenue Suite 214 Cupertino, CA 95014 with a copy to Stanwood & Price 260 Sheridan Avenue, Suite 300 Palo Alto, CA 94306 Attn: Daniel Price, Esq. Fax: (415) 321-4746 No change of address shall be binding upon the other party hereto until written notice thereof is received by such party at the address shown herein. All notices shall be in English and shall be effective upon receipt if delivered personally or sent by facsimile, two days after shipment by overnight delivery service and five (5) days after mailing if sent by certified mail return receipt requested. 9.10 ASSIGNMENT AND CORPORATE REORGANIZATION. Except as provided herein, neither this Agreement nor any rights granted hereby may be assigned by either party voluntarily or by operation of law without the prior written consent of the other party, and any such attempted assignment shall be null and void. For purposes of this Agreement, "assignment" shall be deemed to include the transfer of all or substantially all of the assets of, or a majority interest in the voting stock of, a party, or the merger of a party with one or more entities, in which such party is not the surviving entity. This Agreement shall inure to the benefit of and be binding upon any permitted successor or assign of either party. [Remainder of Page Intentionally Blank] -12- 13 IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the dates written below: JUNCTION, INC. SUMMA FOUR, INC. By: /s/ Ted Griggs By: /s/ Robert A. Degan ---------------------------- ---------------------------- Name: Ted Griggs Name: Robert A. Degan -------------------------- -------------------------- Title: President Title: President & CEO ------------------------- ------------------------- Date: June 13, 1997 Date: June 13, 1997 -------------------------- -------------------------- (Signature Page to Joint Development Agreement]. -13- 14 Confidential materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. SCHEDULE A DESCRIPTION OF PRODUCT ***************************************************************************** ***************************************************************************** ************* ****************************************************************** ****************************************************************** ****** ****************************************************************** *********************************** ****************************************************************** ****************************************************************** *********************************** -14- 15 Confidential materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. SCHEDULE B PROVISIONS TO BE INCLUDED IN JOINT VENTURE AGREEMENT 1 At the commencement of Phase II, Summa Four and Junction will each contribute all rights and interest they may have in the Product to the Joint Venture. The interests of Summa Four and Junction in the Joint Venture shall initially be **% for Summa Four, and **% for Junction, subject to adjustment as described in Paragraph 6 below. 2 Summa Four will engage the Joint Venture to develop and test the Product according to the Business Plan, pursuant to a Development Agreement which is mutually acceptable to Summa Four and Junction, and which will include customary arm's-length warranties and indemnities for a software development contract. Summa Four will make cash payments to the Joint Venture sufficient to fund those expenses called for in the Business Plan. Summa Four will also procure and contribute or lease to the Joint Venture equipment and software required to conduct development of the Product and any variation or derivative thereof. Summa Four will license any necessary Licensed Summa Four Technology to the Joint Venture for purposes of its development of the Product. In the event that the expenses of the Joint Venture exceed those estimated in the Business Plan, the parties will explore in good faith means of funding the ongoing operations of the Joint Venture, including but not limited to additional capital contributions by the parties and outside sources of funding. 3 The Joint Venture will subcontract the development of the Product to Junction, which will be responsible for providing a sufficient number of qualified technical personnel (including engineering, design and programming personnel) to successfully complete the Project and procuring and providing sufficient office and laboratory space for the Project. 4 Upon the commencement of Phase II, the Joint Venture will grant Summa Four a five-year, paid-up, royalty-free, exclusive, worldwide license to use, manufacture, distribute and exercise all other rights with respect to the Product and all other technology developed or owned by the Joint Venture, under all intellectual property therein. Such license shall provide that at the expiration of such five-year period, Summa Four shall be entitled to extend the term of the license for such fees and/or royalties as Summa Four, Junction and the Joint Venture shall unanimously reasonably agree upon. -15- 16 Confidential materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. 5 The Joint Venture will be managed by a Board of Managers appointed by Summa Four and Junction. The Board of Managers will be comprised of the President of Junction, the President of Summa Four, and one additional member designated by Summa Four and such additional members as Junction and Summa may agree upon, provided that at all times a majority of the Board shall be designees of Summa Four. The Board will act by majority vote on all matters. 6 Between the second and fifth anniversaries of the commencement of Phase II (the "Exit Period"), a set of puts and calls will be exercisable to allow either Junction to sell all or any portion of its interest in the Joint Venture to Summa Four at a specified discount to the valuation at the time of exercise (which discount shall be determined by the financial advisor described in Section 7.1 by reference to the valuation formula provided for in Section 7.1), or to allow Summa Four to purchase from Junction all or any portion of Junction's interest in the Joint Venture at a specified premium over such valuation, but subject to a minimum value (to be determined by reference to the valuation formula), which minimum value shall be used only if Product sales are less than projected in the Business Plan due to causes other than Product underperformance or other factors primarily the responsibility of Junction. The price payable by Summa Four in any such purchase may be payable, at Summa Four's election, in whole or in part in cash or in shares of stock in Summa Four valued at market, subject to any dilution discount provided for in the investment banker's report. 7 Phase II shall continue until the earlier of (i) Summa Four's acquisition of ***** of the interests in the Joint Venture pursuant to the exercise of the put or call arrangements described in Section 7.1, or (ii) the fifth anniversary of the commencement of Phase II. During Phase II and following the development of the first commercial version of the Product, the Joint Venture shall perform (or subcontract Junction or another entity to perform) such maintenance and further development functions with respect to the Product as shall be provided for in the Business Plan. 8 For a ****** following the termination of Phase II, none of the shareholders, employees or consultants of Junction will directly or indirectly engage in any activity which is or would be competitive with the Joint Venture, the Product or any variation or derivative thereof. 9 Each party shall indemnify and hold harmless the other party and the Joint Venture, without limitation as to amount, on terms similar to those set forth in Section 5.3 and 5.4, in respect of intellectual property infringements by the technology contributed by such party to the Business Plan. -16- 17 SCHEDULE C LICENSED SUMMA FOUR TECHNOLOGY a. All marketing requirement, functional specification and design documents associated with Summa Four's current products and planned enhancements; b. All system source code associated with Summa Four's current products and planned enhancements; c. All documentation related to next generation product definition and system/hardware/software architectures; d. Any other proprietary Summa Four technology that Summa Four makes available to Junction during Phase I in connection with the development of the Business Plan. -18- 18 Confidential materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. SCHEDULE D FUNDING OBLIGATION
Expense Unit Charge Units Est. Total - ------- ----------- ----- ---------- Personnel (salary/benefits) --- --- ***** California office space *****/month ** months ***** N.H. corporate apartment *****/person/month **months ***** ** persons Travel ***** per CA-NH *** round ***** round trip trips Cal. Office Setup --- 1 time ***** Misc. ***** Moving buyout *****/person ** people ***** TOTAL *****
-19- 19 I have read and agree to the Summa Four, Inc. & Junction, Inc. Joint Venture Business Plan executed on this day of 13 June 1997, on behalf of: SUMMA FOUR, INC. JUNCTION, INC. /s/ Robert A. Degan /s/ Ted Griggs - ---------------------------------- ---------------------------------- Robert A. Degan, President and CEO Ted Griggs, President June 13, 1997 June 13, 1997 - ---------------------------------- ---------------------------------- Date Date -20- EX-11 4 STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS 1 EXHIBIT 11.0 FORM 10-Q PART II PAGE 14 Computation of Earnings per Share (In thousands, except per share data)
Three Months Ended June 30, -------- 1997 1996 ---- ---- Primary Average shares outstanding of Common Stock 5,571 6,082 Net effect of dilutive stock options- based on the treasury stock method -- 219 ------- ------- Total 5,571 6,301 ======= ======= Net (loss) income $ (566) $ 744 Per share amount $ (.10) $ .12 ======= =======
1997 1996 ---- ---- Fully Diluted Average shares outstanding of Common Stock 5,571 6,082 Net effect of dilutive stock options- based on the treasury stock method -- 219 ------- ------- Total 5,571 6,301 ======= ======= Net (loss) income $ (566) $ 744 Per share amount $ (.10) $ .12 ======= =======
EX-27 5 FINANCIAL DATA SCHEDULE
5 1,000 3-MOS MAR-31-1998 APR-01-1997 JUN-30-1997 1,234 29,161 9,423 237 6,320 32,615 12,952 8,242 54,558 8,602 0 0 0 65 45,267 54,558 9,276 9,276 4,334 4,334 6,299 0 0 (832) (266) (566) 0 0 0 (566) (.10) (.10)
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