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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(MARK ONE)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 26, 1997
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-25684
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PREMISYS COMMUNICATIONS, INC.
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(Exact name of registrant as specified in its chapter)
Delaware 94-3153847
--------------------------------- -----------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
48664 Milmont Drive, Fremont, California 94538
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(Address of principal executive offices)
(Zip Code)
(510) 353-7600
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(Registrant's telephone number, including area code)
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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The number of shares outstanding of the issuer's common stock, par value $0.01,
as of October 24, 1997 was 25,439,656 shares.
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1
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PREMISYS COMMUNICATIONS, INC.
INDEX
PART I. FINANCIAL INFORMATION PAGE NO.
Item 1. Financial Statements
Condensed Consolidated Balance Sheet -
June 30, 1997 and September 30, 1997 3
Condensed Consolidated Statement of Operations
- Three Month Periods ended September 30, 1996
and 1997 4
Condensed Consolidated Statement of Cash
Flows - Three Month Periods ended September
30, 1996 and 1997 5
Notes to Condensed Consolidated Financial
Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 17
PART II. OTHER INFORMATION
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8K 18
Signatures 19
2
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I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PREMISYS COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED BALANCE SHEET - (UNAUDITED)
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
June 30, September 30,
-------- -------------
1997 1997
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 28,923 $ 29,293
Short-term investments 44,301 54,502
Accounts receivable, net 7,658 6,869
Inventories 8,775 8,043
Deferred tax assets 7,207 7,207
Prepaid expenses and other assets 3,793 2,544
-------- ---------
Total current assets 100,657 108,458
Property and equipment, net 6,444 6,564
-------- ---------
$107,101 $115,022
-------- ---------
-------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 4,756 $ 7,043
Accrued liabilities 5,528 7,596
-------- ---------
Total current liabilities 10,284 14,639
-------- ---------
Stockholders' equity:
Preferred Stock, $0.01 par value, 2,000,000 shares
authorized; no shares issued or outstanding --- ---
Common Stock, $0.01 par value, 100,000,000
shares authorized; 25,190,751 and 25,369,671 shares
issued and outstanding 252 254
Additional paid-in capital 74,994 75,881
Retained earnings 21,571 24,248
-------- ---------
Total stockholders' equity 96,817 100,383
-------- ---------
$107,101 $115,022
-------- ---------
-------- ---------
</TABLE>
See notes to condensed consolidated financial statements
3
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PREMISYS COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS - (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Three Months Ended September 30,
--------------------------------
1996 1997
---- ----
<S> <C> <C>
Revenues $ 24,294 $ 19,285
Cost of revenues 8,531 7,218
------- -------
Gross profit 15,763 12,067
------- -------
Operating expenses:
Research and development 2,328 3,024
Selling, general and administrative 4,647 5,507
------- -------
Total operating expenses 6,975 8,531
------- -------
Income from operations 8,788 3,536
Interest and other income, net 594 713
------- -------
Income before income taxes 9,382 4,249
Provision for income taxes 3,659 1,572
------- -------
Net income $ 5,723 $ 2,677
------- -------
------- -------
Net income per share $ 0.22 $ 0.10
------- -------
------- -------
Shares used in computing net income per share 26,479 27,437
------- -------
------- -------
</TABLE>
See notes to condensed consolidated financial statements
4
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PREMISYS COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS - (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Three Months Ended September 30,
--------------------------------
1996 1997
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 5,723 $ 2,677
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 255 467
Changes in assets and liabilities:
Accounts receivable (130) 789
Inventories (95) 732
Prepaid expenses and other assets 55 1,249
Accounts payable 3,127 2,287
Accrued liabilities (1,473) 2,068
Income taxes payable 3,448 ---
------- -------
Net cash provided by operating activities 10,910 10,269
------- -------
Cash flows from investing activities:
Purchase of property and equipment (388) (587)
Purchase of short-term investments (9,540) (10,201)
------- -------
Net cash used in investing activities (9,928) (10,788)
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Cash flows from financing activities:
Proceeds from issuance of Common Stock, net 798 889
------- -------
Net cash provided by financing activities 798 889
------- -------
Net increase in cash 1,780 370
Cash and cash equivalents at beginning of period 22,058 28,923
------- -------
Cash and cash equivalents at end of period $23,838 $29,293
------- -------
------- -------
Supplemental disclosures:
Cash paid for income taxes $ 214 $ 1
Cash paid for interest 30 6
</TABLE>
See notes to condensed consolidated financial statements
5
<PAGE>
PREMISYS COMMUNICATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 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 with the instructions to Form 10-Q and Rule
10-01 of Regulation S-X. Accordingly, they do not contain all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, the
accompanying unaudited condensed consolidated financial statements have been
prepared on the same basis as the audited consolidated financial statements and
include all adjustments, consisting only of normal recurring adjustments,
necessary for the fair statement of the Company's financial condition as of
September 30, 1997, and the results of its operations and its cash flows for the
three month periods ended September 30, 1996 and 1997. These financial
statements should be read in conjunction with the Company's audited financial
statements as of June 30, 1996 and 1997 and for each of the three years in the
period ended June 30, 1997, including notes thereto, included in the Company's
Annual Report on Form 10-K. Operating results for the three month period ended
September 30, 1997 are not necessarily indicative of the results that may be
expected for the year ending June 30, 1998.
The Company has a 52/53 week fiscal accounting year that ends on the Friday
closest to June 30. Accordingly, fiscal periods shown herein as ending on June
30, 1997 and September 30, 1996 and 1997 for financial statement presentation
purposes actually reflect amounts for the fiscal periods ended on June 27, 1997,
September 27, 1996 and September 26, 1997, respectively.
NOTE 2 - INVENTORIES (IN THOUSANDS)
June 30, September 30,
-------- ------------
1997 1997
---- ----
(unaudited)
----------
Inventories
Raw materials $ 2,010 $ 1,533
Work-in-process 1,390 2,365
Finished goods 7,893 7,123
--------- ---------
11,293 11,021
Less: Reserves (2,518) (2,978)
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$ 8,775 $ 8,043
--------- ---------
--------- ---------
6
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NOTE 3 - RECENT ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement No. 128, "Earnings per Share" ("SFAS 128"). SFAS 128, which is
required to be adopted by the Company for its quarter ending December 31, 1997,
redefines earnings per share under generally accepted accounting principles.
Under the new standard, primary earnings per share is replaced by basic earnings
per share (the dilutive effect of stock options will be excluded), and fully
diluted earnings per share, currently reported, is replaced by diluted earnings
per share.
If the Company had adopted SFAS 128 for the quarter ended September 30,
1997, the Company's earnings per share comparisons would have been as follows:
Three Months ended September 30,
---------------------------------
1996 1997
---- ----
Basic earnings per share $.23 $.11
Diluted earnings per share $.22 $.10
7
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
This Form 10-Q contains forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A
of the Securities Act of 1933, as amended. These forward-looking statements
involve a number of risks and uncertainties which are described throughout this
Form 10-Q, including demand from and its relationships with its strategic
partners and major customers, including ADC Telecommunications ("ADC") and
Paradyne Corporation ("Paradyne"); limited order backlog and quarterly
fluctuations; delays and cancellations of actual and projected customer orders;
new product development and introductions by the Company and its competitors
including products based on the technology recently licensed by the Company from
Positron Fiber Systems Corporation ("Positron"); deregulation of, and
legislation regarding the domestic and international telecommunications
industry; timely release and market acceptance of the announced SlimLine and
StreamLine products; rapidly changing technologies and the Company's ability to
respond thereto; the growth of demand for telecommunications services such as
wireless, cellular and the Internet; competition; changes in the mix of products
or customers or in the level of operating expenses; and other factors described
throughout this Form 10-Q, including under "Revenues" and "Other Factors That
May Affect Future Operating Results," and in the Company's Annual Report on Form
10-K for the year ended June 30, 1997. The actual results that the Company
achieves may differ materially from any forward-looking statements due to such
risks and uncertainties. The Company has identified using an asterisk ("*")
various sentences within this Form 10-Q which contain such forward-looking
statements, and words such as "believes", "anticipates", "expects", "intends,"
"will" and similar expressions are intended to identify forward-looking
statements, but are not the exclusive means of identifying such statements. In
addition, the section labeled "Other Factors That May Affect Future Operating
Results", which does not include asterisks for improved readability, consists
primarily of forward-looking statements. The Company undertakes no obligation
to revise any forward-looking statements in order to reflect events or
circumstances that may arise after the date of this report. Readers are urged
to carefully review and consider the various disclosures made by the Company in
this report and in the Company's other reports filed with the Securities and
Exchange Commission, including its Form 10-K, that attempt to advise interested
parties of the risks and factors that may affect the Company's business.
REVENUES
Three Months Ended September 30,
----------------------------------------------------
1996 % Change 1997
---- -------- ----
Revenues $24,294,000 (21%) $19,285,000
Revenues consist primarily of gross sales of products, less discounts and
sales returns and allowances. A majority of the revenue decrease from the
quarter ended September 30, 1996 to the comparable period in fiscal 1998 was
attributable to a reduction in unit volumes of platforms and modules sold. This
reduction in unit volumes in the first fiscal quarter of 1998 versus the first
fiscal quarter of 1997 was primarily due to a reduction in shipments to
Paradyne, DSC Communications Corporation and Motorola, Inc. which was partially
offset by an increase in shipments to ADC. See "Other Factors That May Affect
Future Operating Results - Relationship with Paradyne." However, revenues
increased $3,814,000, or 25%, from $15,471,000 in the quarter ended June 30,
1997 to $19,285,000 in the quarter ended September 30, 1997. This increase in
revenues in the first fiscal quarter of 1998 versus the fourth fiscal quarter of
1997 was due primarily to shipments of the Company's products to one Competitive
Local Exchange Carrier ("CLEC") customer of ADC, one of the Company's strategic
distribution partners. *The
8
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Company expects that revenues will increase in the December 1997 quarter over
those reported for the quarter ended September 30, 1997.
The following table sets forth, for the periods indicated, the revenues
generated from the Company's customers which exceeded 10% of total revenues in
the quarter ended September 30, 1997, other domestic customers as a group and
international customers as a group, in absolute dollars and as a percentage of
total revenues.
<TABLE>
<CAPTION>
Source of Revenues
Three Months Ended September 30,
-------------------------------------------------------------------------------------
1996 % 1997 %
---- -- ---- --
<S> <C> <C> <C> <C>
ADC $ 2,559,000 11% $ 7,008,000 36%
Paradyne 7,174,000 30% 2,668,000 14%
Other Domestic Customers 13,593,000 55% 8,212,000 43%
International Customers 968,000 4% 1,397,000 7%
---------------------------------- --------------------------------
Total Revenues $24,294,000 100% $19,285,000 100%
---------------------------------- --------------------------------
---------------------------------- --------------------------------
</TABLE>
The Company sells a substantial majority of its products to a limited
number of customers which generally resell the Company's products to public
carriers and end users. For the quarters ended September 30, 1996 and 1997,
revenues from the Company's four (4) major strategic partners generated 70%
and 63% of the Company's total revenues, respectively. These major strategic
distribution partners generated 65% of the Company's revenues in the quarter
ended June 30, 1997. *The loss of any one or more of the Company's major
customers would have a material adverse effect on the Company's business and
operating results. See "Other Factors That May Affect Future Operating
Results - Indirect Channels of Distribution", "-Limited Order Backlog" and
"-Relationship with Paradyne."
During the quarter ended September 30, 1997, direct international revenues
accounted for 7% of the Company's revenues, compared to 4% for the same period
in fiscal 1997. Certain of the Company's domestic customers also sell Premisys
products into international markets. *The Company intends to expand its
operations outside the United States and anticipates that international sales
will increase in the future both in absolute dollars and as a percentage of
revenues. In order to sell its products internationally, the Company must meet
standards established by international telecommunications committees and
authorities in various countries. *Conducting business outside of the United
States is subject to certain risks, including longer payment cycles, unexpected
changes in regulatory requirements and tariffs, more volatile economic
conditions, risks associated with foreign currency exchange rates, difficulties
in staffing and managing foreign operations, greater difficulty in accounts
receivable collection and potentially adverse tax consequences.
GROSS PROFIT
<TABLE>
<CAPTION>
Three Months Ended September 30,
-----------------------------------------------------
1996 % Change 1997
---- -------- -----
<S> <C> <C> <C>
Gross Profit $15,763,000 (23%) $12,067,000
As a percentage of revenues 65% 63%
</TABLE>
Cost of revenues consists of component costs, compensation costs and
overhead related to the Company's manufacturing operations and warranty
expenses. Gross profit decreased from the three
9
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months ended September 30, 1996 to the comparable period in fiscal 1998
primarily as a result of lower unit shipment volumes. The gross margin
decreased from the quarter ended September 30, 1996 to the quarter ended
September 30, 1997, due primarily to the shift in customer mix toward customers
having higher discounts. *The Company expects its gross margins for the
remainder of fiscal 1998 to remain at the same level or decline slightly from
the 63% reported in the quarter ended September 30, 1997. *However, achievement
of the Company's expectations is subject to a number of risks, including
customer mix, the mix of products sold and the Company's ability to realize
expected revenue levels.
RESEARCH AND DEVELOPMENT EXPENSES
<TABLE>
<CAPTION>
Three Months Ended September 30,
-------------------------------------------------
1996 % Change 1997
---- -------- -----
<S> <C> <C> <C>
Research and development expenses $2,328,000 30% $3,024,000
As a percentage of revenues 10% 16%
</TABLE>
Research and development expenses consist of personnel costs, consulting,
testing, supplies and depreciation expenses. All software development costs
have been expensed in the period in which they were incurred. Research and
development expenses increased $696,000, or 30%, from the three months ended
September 30, 1996 to the comparable period in fiscal 1998. This increase was
primarily due to increased personnel for the purposes of expanding the Company's
product line and to a lesser extent to increased expenses for outside services
and materials used in product development. The increase in research and
development expenses as a percentage of the Company's revenues was the combined
result of increased spending and lower revenues in the quarter ended September
30, 1997 versus the comparison quarter for fiscal 1997. *The Company expects
that these expenses will increase in absolute dollars versus the quarter ended
September 30, 1997 during the remaining quarters of fiscal 1998. *However, the
Company expects that the rate of growth of these expenses will be less than the
rate of growth in revenues during the remaining quarters of fiscal 1998. *These
expectations are subject to a number of risks, including the Company's ability
to realize expected revenue levels.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
<TABLE>
<CAPTION>
Three Months Ended September 30,
---------------------------------------------------
1996 % Change 1997
---- -------- -----
<S> <C> <C> <C>
Selling, general and administrative
expenses $4,647,000 19% $5,507,000
As a percentage of revenues 19% 29%
</TABLE>
Selling expenses consist principally of compensation costs for sales and
marketing personnel (including sales commissions and bonuses), travel expenses,
customer support expenses, trade show expenses and advertising expenses.
General and administrative expenses consist primarily of compensation expenses
for administration, finance, and general management personnel, as well as legal
and audit fees. Selling, general and administrative expenses increased
$860,000, or 19%, from the three months ended September 30, 1996 to the
comparable period in fiscal 1998. This increase was primarily a result of
increased staffing and associated expenses, and, to a lesser extent, travel and
customer support expenses. The increase in selling, general and administrative
expenses as a percentage of the Company's revenues was the result of the
increased spending combined with the revenue decline in the quarter ended
September 30, 1997 versus the comparison quarter for fiscal 1997. *The Company
expects that these expenses will increase in absolute dollars versus the quarter
ended September 30, 1997 during the remaining quarters of fiscal 1998.
*However, the Company expects that the rate of growth of these expenses will be
less than the rate of growth in revenues during the remaining quarters of fiscal
1998. *These expectations are subject to a number of risks, including the
Company's ability to realize expected revenue levels.
10
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INTEREST AND OTHER INCOME, NET
<TABLE>
<CAPTION>
Three Months Ended September 30,
-----------------------------------------------------
1996 % Change 1997
---- -------- -----
<S> <C> <C> <C>
Interest and other income, net $594,000 20% $713,000
As a percentage of revenues 2% 4%
</TABLE>
Interest and other income, net consists of interest income less interest
expense, and, to a much lesser extent, foreign currency exchange rate gains and
losses. The increase in interest and other income, net, for the three months
ended September 30, 1997 as compared to the same period in fiscal 1997 was due
to higher cash balances.
PROVISION FOR INCOME TAXES
<TABLE>
<CAPTION>
Three Months Ended September 30,
-----------------------------------------------------
1996 % Change 1997
---- -------- -----
<S> <C> <C> <C>
Provision for income taxes $3,659,000 (57%) $1,572,000
As a percentage of income before
income taxes 39% 37%
</TABLE>
The Company's provision for income taxes represents estimated federal and
state income taxes. The Company's effective tax rate for the quarter ended
September 30, 1997 was 37% which was less than the combined federal and state
statutory rate as a result of tax-exempt interest income from the Company's
municipal securities portfolio and the utilization of research and development
tax credits available in fiscal 1998. The decrease in the Company's income tax
rate from 39% in fiscal 1997 to 37% in fiscal 1998 is due to the extension of
the federal research and development tax credit.
<TABLE>
<CAPTION>
NET INCOME PER SHARE
Three Months Ended September 30,
---------------------------------------------------
1996 % Change 1997
---- -------- -----
<S> <C> <C> <C>
Net income $5,723,000 (53%) $2,677,000
Net income per share $0.22 (55%) $.10
Shares used in calculating
net income per share 26,479,000 4% 27,437,000
</TABLE>
Net income per share decreased from $0.22 in the quarter ended September
30, 1996 to $0.10 in the quarter ended September 30, 1997. This decrease was
due primarily to a decrease of 53% in net income and, to a lesser extent, a
4% increase in shares used in calculating net income per share between the
three-month periods ended September 30, 1996 and 1997.
LIQUIDITY AND CAPITAL RESOURCES
<TABLE>
<CAPTION>
Three Months Ended September 30,
----------------------------------------------------
1996 % Change 1997
---- -------- -----
<S> <C> <C> <C>
Net cash provided by operating
activities $10,910,000 (6%) $10,269,000
Period-end cash, cash equivalents
and short-term investments $72,211,000 16% $83,795,000
Period-end working capital $81,241,000 15% $93,819,000
</TABLE>
At September 30, 1997, the Company had approximately $83.8 million of cash,
cash equivalents and short-term investments. Net cash totaling $10.3 million
was provided by operating activities during the three months ended September 30,
1997, most significantly due to net income of $2.7 million, and increases
11
<PAGE>
in accounts payable and accrued liabilities, and decreases in prepaid expenses
and other assets, aggregating $5.6 million.
Cash used in investing activities during the three months ended September
30, 1997 consisted principally of purchases of short-term securities totaling
$10.2 million. Cash flows from financing activities during the three months
ended September 30, 1997 were provided by the issuance of stock under the
Company's 1995 employee stock purchase plan and the exercise of employee stock
options.
As of September 30, 1997, the Company's working capital was approximately
$93.8 million. Except for the commitment under the Positron Agreement, as
discussed in the Company's Annual Report on Form 10-K for the year ended June
30, 1997, the Company has no significant capital spending or purchase
commitments other than normal purchase commitments and commitments under
facilities and capital leases. *The Company believes that its available funds
and anticipated cash flows from operations will satisfy the Company's projected
working capital and capital expenditure requirements for at least the next
twelve months.
12
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OTHER FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS
As referenced in the first paragraph of this Item 2, this section consists
primarily of forward looking statements but does not include asterisks for
improved readability.
INDIRECT CHANNELS OF DISTRIBUTION. Substantially all of the sales of the
Company's products are through indirect channels of distribution. Thus, the
Company's ability to affect and judge the timing and size of individual user
orders is more limited than for manufacturers selling directly to the end users
of their products. Any of the telecommunications equipment suppliers that market
and sell the Company's products could elect to cease marketing and selling the
Company's products, and there can be no assurance that these telecommunications
equipment suppliers will continue to place orders with the Company or that the
Company will be able to obtain orders from new telecommunications equipment
suppliers or end users. See "-Relationship with Paradyne". These
telecommunications equipment suppliers could develop products that could be sold
for selected applications for which the Company's products are currently
provided, which could reduce the level of demand from these telecommunications
equipment suppliers for the Company's products. See "-Competition". In
addition, the Company's revenues for a given quarter may depend to a significant
degree upon planned product shipments for a single carrier's equipment
deployment project. In the quarter ended September 30, 1997, shipments of the
Company's products to one CLEC customer of ADC, one of the Company's strategic
distribution partners, represented more than 10% of the Company's total revenues
for the quarter. Revenues derived from such projects are often difficult to
forecast due to a relatively long sales cycle and delays in the timing of such
projects. Such delays occurred in the quarter ended March 31, 1997, and
materially adversely affected the Company's business and operating results for
the quarter ended March 31, 1997. The projects that were delayed in the quarter
ended March 31, 1997 for the most part have not recommenced, and the Company is
not forecasting that they will do so. Such delays may occur in the future and
would have a similar impact if they did occur. Delays can be caused by late
deliveries by other vendors, changes in implementation priorities, slower than
anticipated growth in demand for the services that the equipment supports and
delays in obtaining regulatory approvals for new tariffs. Revenues can also be
affected by delays in initial shipments of new products and new software
releases. See "-Rapidly Evolving Technology". In fiscal 1997, a delay of the
development and release of a new feature resulted in a loss of a large,
forecasted shipment. In developing countries, delays and reductions in the
planned deployment of the Company's products can also be caused by sudden
declines in the local economy or capital availability and by new import
controls. Suppliers of the Company's products have in the past and may in the
future build significant inventory in order to facilitate more rapid deployment
of anticipated major projects or for other reasons. Decisions by such suppliers
to sell from their inventory could lead to reductions in purchases from the
Company. These reductions, in turn, could cause fluctuations in the Company's
operating results and have an adverse effect on the Company's business and
operating results in the periods in which the inventory is utilized. In
addition, the Company has in the past experienced delays as a result of the need
to modify its products to comply with unique customer specifications. While such
delays have not to date had a material adverse effect on the Company's business
or operating results, there can be no assurance that any future delays would not
have such an adverse effect.
LIMITED ORDER BACKLOG. The Company typically operates with limited order
backlog, and a majority of its revenues in each quarter result from orders
booked in that quarter. Also, the Company has from time-to-time, including the
four quarters of fiscal 1997, recognized a substantial portion of its revenues
from sales booked and shipped in the last month of a quarter. Due to the
delivery requirements of its customers, the Company expects to continue to
experience limited order backlog. The Company's agreements with its customers
typically allow customers to cancel orders without penalty until a relatively
13
<PAGE>
short period of time before shipment. The Company has experienced cancellation
of orders from time to time, and expects to receive order cancellations from
time to time in the future, which could adversely affect the Company's revenue
for a quarter or series of quarters.
QUARTERLY FLUCTUATIONS. The Company's operating results may fluctuate on a
quarterly and annual basis due to factors such as the timing of new product
announcements and introductions by the Company, its major customers and its
competitors, delays in equipment deployment, market acceptance of new or
enhanced versions of the Company's products, changes in the product or customer
mix of revenues, changes in the level of operating expenses, competitive pricing
pressures, the gain or loss of significant customers, increased research and
development expense associated with new product introductions, component
shortages (see "-Dependendence on Certain Suppliers"), and general economic
conditions. The Company's planned product shipments for a single carrier's
equipment deployment project can be a significant portion of a quarter's
revenues, and delays in the timing of such a project (which have occurred in the
past including the quarter ended March 31, 1997) could and have had a material
adverse effect on the Company's business and operating results. All of the
above factors are difficult for the Company to forecast, and these or other
factors can materially adversely affect the Company's business and operating
results for one quarter or a series of quarters. The Company's expense levels
are based in part on its expectations regarding future revenues and in the short
term are fixed to a large extent. Therefore, the Company may be unable to
adjust spending in a timely manner to compensate for any unexpected future
revenue shortfall. In the quarter ended March 31, 1997, the Company experienced
such an unforecasted revenue shortfall and was not able to compensate for it
through expense reduction, which resulted in a net loss. Any significant
decline in demand relative to the Company's expectations or any material delay
of customer orders would have a material adverse effect on the Company's
business and operating results. The Company's operating results may also be
affected by seasonal trends. Such trends may include lower revenues in the
summer months during the Company's first fiscal quarter when many businesses
experience lower sales, and in the Company's third fiscal quarter, as compared
to its second fiscal quarter, as a result of strong calendar year end purchasing
patterns from certain of the Company's strategic customers.
RAPIDLY EVOLVING TECHNOLOGY. The telecommunications equipment market is
characterized by rapidly changing technologies and frequent new product
introductions, which include ATM and new digital subscriber line technologies
("xDSL"). The Company's success will depend to a substantial degree upon its
ability to respond to changes in technology and customer requirements. This
will require the timely selection, development and marketing of new products and
enhancements on a cost-effective basis. For example, the Company has recently
licensed certain technology from Positron for inclusion in Q-155 XTRA products,
which the Company announced in June 1997 and expects to begin shipping in the
quarter ending September 30, 1998. However, there can be no assurance that the
Company will be able to successfully integrate such technology into a new
product within such time frame, or at all. In addition, in June 1997 the
Company announced two new access products, StreamLine and SlimLine, to address
applications that require less capacity and fewer features than the IMACS
product line. These products are scheduled to begin shipping in the second
quarter of fiscal 1998. However, as development is continuing with respect to
these products, there can be no assurance that the Company will not experience
delays in their introduction. Failure of the Company's newly announced products
to be timely introduced and accepted by the market could have a material adverse
effect on the Company's operating results. The introduction of new and enhanced
products also requires that the Company manage transitions from older products
in order to minimize disruptions in customer orders, avoid excess inventory of
old products and ensure that adequate supplies of new products can be delivered
to meet customer orders. Recently, certain of the Company's newly introduced
products have contained undetected errors and incompatibilities with installed
products, which has resulted in losses and delays in market acceptance of such
products. As the functionality and complexity of the Company's products
continue to grow, the Company has experienced
14
<PAGE>
and may in the future experience an increased incidence of such errors or
failures as well as delays in introducing its products.
RELATIONSHIP WITH PARADYNE. The Company has a strategic relationship with
Paradyne, formerly a wholly-owned subsidiary of AT&T Corporation ("AT&T"), that
involves the joint development, marketing and sale of most of the Company's
products by Paradyne to Lucent Technologies ("Lucent") and AT&T (including its
business units, divisions and majority-owned subsidiaries). The Company's
agreement with Paradyne provides Paradyne exclusive distribution rights with
respect to the products covered by the agreement to AT&T entities.
At the time that the Company entered into its OEM agreement with
Paradyne, Paradyne was a 100%-owned subsidiary of AT&T. In 1996, AT&T
separated into three publicly-held stand-alone businesses, one of which -
Lucent - would focus on the communications equipment market. In June 1996,
Lucent concluded a stock purchase agreement for the sale of Paradyne to the
Texas Pacific Group. In January 1997, Paradyne implemented an organizational
change that moved all sales and support activities for products purchased
from Premisys (the Paradyne AAC product line) from its sales and support
organization to a group dedicated to marketing and servicing these products
to Lucent and AT&T. In the quarter ended March 31, 1997, Paradyne announced
new products which are extensions of its existing line of CSU/DSU products.
Premisys expects that the higher capacity models of Paradyne's 916x series
may offer features that are similar to those of the Company's IMACS and
Streamline products. See "-Competition" and "-Rapidly Evolving Technology".
Although sales to Paradyne declined 63% from the quarter ended September
30, 1996 to the quarter ended September 30, 1997, shipments to Paradyne
continued to represent a substantial portion (14%) of the Company's revenues in
the quarter ended September 30, 1997. Paradyne is not subject to any minimum
purchase requirements, and there can be no assurance that Paradyne will continue
to place orders with the Company. Premisys expects that sales to Paradyne will
decline again in fiscal 1998 as Paradyne focuses its resources on its own
products. Significant reductions in shipments to Paradyne would have a material
adverse effect on the Company's business and operating results.
COMPETITION. The market for telecommunications products is highly
competitive and subject to rapid technological change. The Company's principal
competition to date has been from major telecommunications equipment suppliers,
such as Newbridge Networks Corporation and Tellabs, which offer a broad line of
products including access devices for business applications. The Company
expects substantial additional competition from existing competitors as they
develop products to compete with the functionality and flexibility of the
Company's products. When Premisys begins shipping its new products announced in
June 1997, it expects to face additional competition from both start-ups and
existing telecommunications equipment manufacturers. The SlimLine and
StreamLine products are likely to compete with those sold by channel bank and
CSU/DSU vendors as well as with new startups focusing on the access equipment
market. See "-Relationship With Paradyne." The Q-155 product will likely
compete with broadband access products offered or announced by a number of
vendors. Certain of the telecommunications equipment suppliers that market and
distribute the Company's products may in the future develop products that could
be sold for selected applications for which the Company's products are currently
provided. Successful, timely development of such products could reduce the level
of demand from these telecommunications equipment suppliers for the Company's
products.
DEPENDENCE ON KEY PERSONNEL. The Company's success to date has been
significantly dependent on the contributions of its senior officers and other
key employees. The loss of the services of any one of the Company's senior
officers or key employees could have a material adverse effect on the
15
<PAGE>
Company's business and operating results. The Company's success also depends
to a significant extent on its ability to attract and retain additional
highly-skilled technical, managerial, sales and marketing personnel, the
competition for whom is intense.
INDUSTRY STANDARDS AND REGULATORY MATTERS. The market for the Company's
products is also characterized by the need to meet a significant number of voice
and data communications regulations and standards, including those defined by
the Federal Communications Commission, Underwriters Laboratories, Bell
Communications Research ("Bellcore") and, internationally, various countries and
international standards committees. Regulations can be changed by new
legislation, as occurred with the enactment of the Telecommunications Reform Act
of 1996; these changes can impact service offerings and competitiveness in the
communications marketplace, and thus could have an effect on the timing and size
of the industry's investment in access equipment. New standards are evolving as
new technologies, such as ATM and xDSL, are deployed. As existing and new
standards evolve, the Company will be required to modify its products or develop
and support new versions of its products. It is also important that the
Company's products be easily integrated with carriers' network management
systems. The failure of the Company's products to comply, or delays in
compliance, with the various existing and evolving industry standards could
delay introduction of the Company's products, which could have a material
adverse effect on the Company's business and operating results. In addition,
government regulatory policies are likely to continue to have a major impact on
the pricing of existing as well as new public network services and therefore are
expected to affect demand for such services and the telecommunications products
that support such services.
LIMITED PROTECTION OF INTELLECTUAL PROPERTY. The Company relies upon a
combination of patent, trade secret, copyright and trademark laws and
contractual restrictions to establish and protect proprietary rights in its
products. There can be no assurance that these statutory and contractual
arrangements will prove sufficient to deter misappropriation of the Company's
technologies or independent third-party development of similar technologies.
The telecommunications industry is characterized by the existence of a large
number of patents and frequent litigation based on allegations of patent
infringement. In the event of litigation to determine the validity of any
third-party claims asserting that the Company's products infringe or may
infringe the proprietary rights of such third parties, such litigation, whether
or not determined in favor of the Company, could result in significant expense
to the Company and divert the efforts of the Company's technical and management
personnel from productive tasks. In the event of an adverse ruling in such
litigation, the Company might be required to discontinue the use and sale of
infringing products, expend significant resources to develop non-infringing
technology or obtain licenses from third parties.
DEPENDENCE ON CERTAIN SUPPLIERS. Certain components used in the Company's
products are currently available from only one supplier. In addition, the
Company relies on contract manufacturers to produce its printed circuit board
assemblies. Use of contract manufacturers can expose Premisys to supply
interruptions due to production, quality or financial problems of its
contractors. Shortages or delays in the delivery of the components used in the
Company's products (which have occurred in the past) or extended delays in
deliveries of printed circuit board assemblies could result in delays in the
shipment of the Company's products and/or increase component costs. Failure of
the Company to order sufficient quantities of any required component in advance
could prevent the Company from increasing production of products in response to
customer orders in excess of amounts projected by the Company. Although the
Company typically maintains some reserve inventory of components and printed
circuit board assemblies, this inventory would not cover a significant delay in
the delivery of such items.
16
<PAGE>
STOCK PRICE FLUCTUATIONS. All of the above factors are difficult for the
Company to forecast, and these or other factors, such as changes in earnings
estimates by securities analysts, can materially affect the Company's stock
price for one quarter or a series of quarters. Further, the stock market has
experienced extreme price and volume fluctuations that have particularly
affected the market prices of securities of many high technology companies.
These fluctuations, as well as general economic, political and market
conditions, may materially adversely affect the market price of the Company's
Common Stock. There can be no assurance that the trading price of the Company's
Common Stock will remain at or near its current level.
ITEM 3. QUANTATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
17
<PAGE>
II. OTHER INFORMATION
ITEM 5. OTHER INFORMATION
In October, 1997, Joseph L. Lias became the Company's Vice President, Marketing.
He is responsible for product marketing, international marketing and corporate
communications. Mr. Lias was the company's Vice President, Business Development
from April 1996 until September 1997, and was the Company's Director of Product
Line Management from March 1994 to April 1996.
In October, 1997, Robert A. Fyffe became the Company's Vice President, North
America Sales. He is responsible for Premisys' sales activities in the U.S.A.
and Canada. Mr. Fyffe was the Company's Vice President, U.S. Sales from July
1996 to September 1997, and was the Company's Area Vice President of Sales,
Eastern Region from July 1993 to June 1996.
In October 1997, William J. Smith resigned as the Company's Senior Vice
President, Sales and Marketing. He currently serves as a sales and marketing
advisor to the Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits
Exhibit No. Description of Exhibit
----------- ----------------------
10.41 Employment Status Change Agreement by and between Premisys
Communications, Inc. and William J. Smith dated as of
October 31, 1997
11.01 Computation of Net Income per Share.
27.01 Financial Data Schedule
B. Reports on Form 8-K
None
18
<PAGE>
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.
PREMISYS COMMUNICATIONS, INC.
November 10, 1997 /S/ Robert W. Dilfer
- ------------------------------- ---------------------------------
Date Robert W. Dilfer
Vice President and Controller
(Duly Authorized Officer and Chief Accounting
Officer)
19
<PAGE>
INDEX TO EXHIBITS
Exhibit No. Description of Exhibit
- ---------- -----------------------
10.41 Employment Status Change Agreement by and between Premisys
Communications, Inc. and William J. Smith dated as of
October 31, 1997
11.01 Computation of Net Income per Share
27.01 Financial Data Schedule
20
<PAGE>
This page intentionally left blank awaiting Exhibit 10.41
21
<PAGE>
Exhibit 10.41
September 24, 1997
Mr. William J. Smith
23 Woodhollow Lane
Fort Salonga, NY 11768
Re: Change In Status To Part-Time Employment
Dear Bill:
This letter confirms the agreement between you and Premisys Corporation,
Inc. ("Premisys") concerning the change in the terms of your employment with
Premisys.
1. CHANGE IN EMPLOYMENT STATUS: Effective October 31, 1997, your
employment status with Premisys will change from full-time to part-time. You
and Premisys anticipate you will work approximately ten (10) hours per week
beginning November 1, 1997. In addition, you hereby resign from your position
as the Senior Vice President of North American Sales Operations, and you
further hereby resign from your position as an officer of Premisys, effective
October 31, 1997.
2. COMPENSATION: Premisys will pay you an annual salary of $42,500.00
for your part-time work. You will receive a pro rate portion (for the 4
months of full employment) of your MIP bonus and commissions earned during
the first half of fiscal 1998. Premisys will continue to reimburse you for
all reasonable and necessary business expenses approved in accordance with
Company Policy. As an employee working less than 20 hours per week, you will
no longer be able to participate in certain employee benefit programs (e.g.,
Employee Stock Purchase Plan, 401k savings plan, group life and disability
insurance). You will continue to earn vacation at one-fourth the rate you
would accrue as a full-time employee. You will be able to continue your
medical and dental insurance under COBRA; Premisys will pay the premiums
associated with your coverage; you will continue your current level of
contribution to this insurance.
3. VESTING OF SHARES: Premisys agrees that all stock options granted
to you during the term of your full-time employment with Premisys will
continue to vest.
4. SERVICES FOR OTHER ENTITIES: You agree that during the term of your
part-time employment with Premisys, you will not accept full-time employment
with any other company or business entity. You may accept a position as a
Board member for another company, but you agree not to accept a position on
the Board of any competitors of Premisys, and you agree to notify Premisys in
advance of accepting membership on the Board of any company. You may also
perform consulting services for other companies during the term of your
part-time employment with Premisys, but you agree not to perform consulting
services for any competitors of Premisys and you agree to notify Premisys in
advance of performing any consulting services for other companies.
1
<PAGE>
5. RETURN OF COMPANY PROPERTY: You hereby warrant to Premisys that you
will return to Premisys at the end of your part-time employment (November 30,
1998) all property or data to Premisys of any type whatsoever that has been
in your possession or control.
6. CONFIDENTIAL INFORMATION: You acknowledge that you have acquired
and will acquire information and materials from Premisys and knowledge about
the business, products, programming techniques, experimental work,
customers, clients and suppliers of Premisys and that all such knowledge,
information and materials acquired are and will be the trade secrets and
confidential and proprietary information of Premisys (collectively
"Confidential Information"). Confidential Information will not include,
however, any information which is or becomes part of the public domain
through no fault of yours or that Premisys regularly gives to third parties
without restriction on use or disclosure. You agree to hold all such
Confidential Information in strict confidence, not to disclose it to others
or use it in any way, commercially or otherwise, except in performing
services for Premisys, and not to allow any unauthorized person access to it,
either before or after expiration or termination of this Agreement. You
further agree to take all action reasonably necessary and satisfactory to
protect the confidentiality of the Confidential Information in your
possession, including, without limitation, implementing and enforcing
operating procedures to minimize the possibility of unauthorized use or
copying of the Confidential Information.
7. AT-WILL EMPLOYMENT: You acknowledge that your employment with
Premisys is "at will", and that you may terminate your employment with
Premisys at any time, with or without cause, and Premisys may terminate your
employment at any time, with or without cause.
8. ENTIRE AGREEMENT: This agreement constitutes the entire agreement
between you and Premisys with respect to the subject matter hereof and
supersedes all prior negotiations and agreements, whether written or oral,
relating to such subject matter. You acknowledge that neither Premisys nor
their agents or attorneys have made any promise, representation or warranty
whatsoever, either express or implied, written or oral, which is not
contained in this agreement for the purpose of inducing you to execute the
agreement, and you acknowledge that you have executed this agreement in
reliance only upon such promises, representations and warranties as are
contained herein.
9. MODIFICATION: It is expressly agreed that this agreement may not be
altered, amended, modified, or otherwise changed in any respect except by
another written agreement that specifically refers to this agreement,
executed by authorized representatives of each of the parties to this
agreement.
2
<PAGE>
If you agree to abide by the terms outlined in this letter, please sign the
attached copy and return it to me.
Sincerely,
PREMISYS CORPORATION, INC.
By: /s/ Raymond C. Lin
--------------------------------
READ, UNDERSTOOD AND AGREED
/s/ William J. Smith Date: September 30, 1997
- --------------------------------
3
<PAGE>
Exhibit 11.01
PREMISYS COMMUNICATIONS, INC.
COMPUTATION OF NET INCOME PER SHARE - (UNAUDITED)
---------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Three Months Ended September 30,
------------------------------------
1996 1997
----- ----
<S> <C> <C>
Weighted average shares outstanding:
Common Stock 24,432 25,308
Common stock equivalents related to options using the
treasury stock method 2,047 2,129
---------- ----------
Weighted-average common shares and equivalents 26,479 27,437
---------- ----------
---------- ----------
Net income $ 5,723 $ 2,677
---------- ----------
---------- ----------
Net income per share $ 0.22 $ 0.10
---------- ----------
---------- ----------
</TABLE>
22
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET, CONSOLIDATED STATEMENT OF OPERATIONS AND
CONSOLIDATED STATEMENT OF CASH FLOWS INCLUDED IN THE COMPANY'S FORM 10-Q FOR THE
PERIOD ENDED SEPTEMBER 26, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-26-1998
<PERIOD-START> JUN-28-1997
<PERIOD-END> SEP-26-1997
<CASH> 29,293
<SECURITIES> 54,502
<RECEIVABLES> 6,869
<ALLOWANCES> 0
<INVENTORY> 8,043
<CURRENT-ASSETS> 108,458
<PP&E> 10,141
<DEPRECIATION> 3,577
<TOTAL-ASSETS> 115,022
<CURRENT-LIABILITIES> 14,639
<BONDS> 0
0
0
<COMMON> 254
<OTHER-SE> 100,129
<TOTAL-LIABILITY-AND-EQUITY> 115,022
<SALES> 19,285
<TOTAL-REVENUES> 19,285
<CGS> 7,218
<TOTAL-COSTS> 15,749
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 4,249
<INCOME-TAX> 1,572
<INCOME-CONTINUING> 2,677
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,677
<EPS-PRIMARY> .10
<EPS-DILUTED> .10
</TABLE>
