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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 March 28, 1997
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 charter)
Delaware 94-3153847
---------------------------- ------------------------------------
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
48664 Milmont Drive, Fremont, California 94538
--------------------------------------------------
(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
------ ------
The number of shares outstanding of the issuer's common stock, par value
$0.01, as of April 25, 1997 was 25,159,209 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, 1996
and March 31, 1997 3
Condensed Consolidated Statement of Operations - Three
and Nine Month Periods ended March 31, 1996 and March
31, 1997 4
Condensed Consolidated Statement of Cash Flows - Nine
Month Periods ended March 31, 1996 and March 31, 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 19
PART II. OTHER INFORMATION
-----------------
Item 6. Exhibits and Reports on Form 8-K 20
Signatures 21
2
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I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PREMISYS COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED BALANCE SHEET - (UNAUDITED)
(IN THOUSANDS EXCEPT SHARE DATA)
June 30, March 31,
1996 1997
-------- ---------
ASSETS
Current assets:
Cash and cash equivalents $22,058 $ 18,076
Short-term investments 38,803 51,751
Accounts receivable, net 16,267 8,391
Inventory 4,221 10,445
Deferred tax assets 2,915 2,915
Prepaid income taxes and other 440 4,317
------- --------
Total current assets 84,704 95,895
Property and equipment, net 2,700 6,588
Other assets 118 119
------- --------
$87,522 $102,602
------- --------
------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,250 $ 4,477
Accrued and other current liabilities 5,897 7,361
Income taxes payable 580 ----
Current portion of long-term debt 124 84
------- --------
Total current liabilities 9,851 11,922
------- --------
Long-term debt 91 28
------- --------
Stockholders' equity:
Common Stock, $0.01 par value, 100,000,000 shares
authorized; 24,398,519 and 24,830,539 shares
issued and outstanding 244 248
Additional paid-in capital 66,656 70,013
Retained earnings 10,680 20,391
------- --------
Total stockholders' equity 77,580 90,652
------- --------
$87,522 $102,602
------- --------
------- --------
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 Nine Months Ended
March 31, March 31,
--------------------- ---------------------
1996 1997 1996 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues $ 19,674 $ 12,237 $ 51,433 $ 62,888
Cost of revenues 6,863 4,324 18,745 21,624
--------- --------- --------- ---------
Gross profit 12,811 7,913 32,688 41,264
--------- --------- --------- ---------
Operating expenses:
Research and development 2,079 2,607 5,304 7,445
Charge for in-process technologies --- 4,000 --- 4,000
Selling, general and administrative 3,985 5,458 10,279 15,848
--------- --------- --------- ---------
Total operating expenses 6,064 12,065 15,583 27,293
--------- --------- --------- ---------
Income (loss) from operations 6,747 (4,152) 17,105 13,971
Interest and other income, net 516 694 1,374 1,949
--------- --------- --------- ---------
Income (loss) before income taxes 7,263 (3,458) 18,479 15,920
Provision (benefit) for income taxes 2,615 (1,349) 6,653 6,209
--------- --------- --------- ---------
Net income (loss) $ 4,648 $ (2,109) $ 11,826 $ 9,711
--------- --------- --------- ---------
--------- --------- --------- ---------
Net income (loss) per share $ 0.18 $ (0.08) $ 0.45 $ 0.37
--------- --------- --------- ---------
--------- --------- --------- ---------
Weighted average common shares and equivalents 26,351 26,292 26,345 26,497
--------- --------- --------- ---------
--------- --------- --------- ---------
</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>
Nine Months Ended March 31,
---------------------------
1996 1997
-------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 11,826 $ 9,711
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 588 857
Changes in assets and liabilities:
Accounts receivable (4,654) 7,876
Inventories (3,821) (6,224)
Prepaid income taxes and other (922) (3,878)
Accounts payable 2,543 1,227
Accrued liabilities 1,759 1,464
Income taxes payable 5,689 (580)
--------- --------
Net cash provided by operating activities 13,008 10,453
--------- --------
Cash flows from investing activities:
Purchase of property and equipment (1,573) (4,745)
Purchase of short-term investments (7,034) (12,925)
--------- --------
Net cash used in investing activities (8,607) (17,670)
--------- --------
Cash flows from financing activities:
Proceeds from issuance of Common Stock, net 1,446 3,338
Notes receivable from shareholders 138 ---
Principal payments on long-term debt (16) ---
Proceeds of capital lease financing 124 ---
Repayment of capital lease obligations (80) (103)
-------- ---------
Net cash provided by financing activities 1,612 3,235
-------- ---------
Net increase (decrease) in cash 6,013 (3,982)
Cash and cash equivalents at beginning of period 12,273 22,058
-------- ---------
Cash and cash equivalents at end of period $ 18,286 $ 18,076
-------- ---------
-------- ---------
Supplemental disclosures:
Cash paid for interest $ 32 $ 9
Cash paid for income taxes 964 10,644
Unrealized gain on investments 72 23
</TABLE>
5
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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 March 31, 1997, the results of its operations for
the three and nine month periods ended March 31, 1996 and 1997, and its cash
flows for the nine month periods ended March 31, 1996 and 1997. These
financial statements should be read in conjunction with the Company's audited
financial statements as of June 30, 1995 and 1996 and for each of the three
years in the period ended June 30, 1996, including notes thereto, included in
the Company's Form 10-K. Operating results for the three and nine month
periods ended March 31, 1997 are not necessarily indicative of the results
that may be expected for the quarter and year ending June 30, 1997.
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, 1996 and March 31, 1996 and 1997 for financial statement
presentation purposes actually reflect amounts for the fiscal periods ended
on June 28, 1996, March 29, 1996 and March 28, 1997.
NOTE 2 - INVENTORIES (IN THOUSANDS)
June 30, March 31,
1996 1997
-------- -----------
(unaudited)
Raw materials $ 1,587 $ 1,640
Work-in-process 1,175 2,546
Finished goods 2,236 8,919
-------- ---------
4,998 13,105
Less: Reserves (777) (2,660)
-------- ---------
$ 4,221 $ 10,445
-------- ---------
-------- ---------
NOTE 3 - SIGNIFICANT EVENTS
On January 7, 1997, the Company announced the execution of a technology
license agreement with Positron Fiber Systems Corporation ("Positron"). The
Company will license certain SONET and SDH based technology from Positron for
use within its future products.
The licensed technology includes the right to modify and manufacture
products which are based on Positron's OSIRIS-155Mb/s SONET/SDH products.
The technology information is in the form of circuit pack schematics, Field
Programmable Gate Array (FPGA) designs and documentation, shelf backplane and
bus designs, and system software source code. The licensed technology also
includes the right to use and manufacture Positron proprietary
application-specific integrated circuits
6
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(ASICs), and training and integration assistance on all design materials.
The delivery of the technology began in January 1997 and will continue in
phased releases through October 1997.
The Company will pay Positron $4 million of license fees over the next
three years. Positron will also be paid a royalty on the Company's products
utilizing the licensed technology up to a maximum of $4 million. Thus, total
payments to Positron will be between $4 million and $8 million. The Company
expensed the $4 million of license fees in the quarter ended March 31, 1997,
which reduced its earnings per share for such quarter by $0.09. Payments of
license fees to Positron in such quarter totaled $1.5 million.
NOTE 4 - SUBSEQUENT EVENTS
On March 19, 1997 the Compensation Committee of the Board of Directors
approved offering employees the right to amend outstanding stock options
granted under the Company's 1994 Stock Option Plan. The amended stock
options would have an exercised price equal to the closing price of the
Company's common stock on April 23, 1997 and a new vesting schedule beginning
on the same date with a duration equal to that of the original option.
Corporate officers were excluded from this option repricing offer. Employees
elected to amend options for approximately 1,051,000 shares; the new exercise
price was $8.1875 per share.
NOTE 5 - RECENT ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS 128").
SFAS 128, which is effective for the Company's fiscal year ending June 30,
1998, redefines earnings per share under generally accepted accounting
principles. Under the new standard, primary earnings per share is replaced by
basic earnings per share, and fully diluted earnings per share is replaced by
diluted earnings per share. The adoption of SFAS 128 is not expected to have
a material impact on the Company since earnings per share reported under
Accounting Principles Board Opinion No. 15 approximates diluted earnings per
share, which will be reported under SFAS 128.
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 the Company's
relationships with its strategic partners and major customers, including
Paradyne Corporation ("Paradyne"); 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; deregulation of, and
legislation regarding the domestic and international telecommunications
industry; rapidly changing technologies and the Company's ability to respond
thereto; the growth of demand for telecommunication services such as
wireless, cellular and the Internet; competition; changes in the mix of
product 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, 1996. 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 asterisks(*), various sentences within this Form 10-Q
which contain such forward-looking statements, and words such as "believes",
"anticipates", "expects", "intends" 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
and associated risks. 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 March 31,
-------------------------------------
1996 % Change 1997
---- -------- ----
Revenues $19,674,000 (38%) $12,237,000
Nine Months Ended March 31,
-------------------------------------
1996 % Change 1997
---- -------- ----
Revenues $51,433,000 22% $62,888,000
Revenues consist primarily of gross sales of products, less discounts and
sales returns and allowances. Substantially all of the decrease in revenues
for the three months ended March 31, 1997, as compared to the same period in
fiscal 1996, resulted from decreases in unit volumes of platforms and modules
sold. This decrease in revenues is primarily due to deferral or loss of
several equipment deployments by Premisys' domestic and international
distribution partners. The increase in revenues for the nine months ended
March 31, 1997, as compared to the same period in fiscal 1996, was due
primarily to an increase in unit volumes of platforms and modules sold during
the first two quarters of fiscal 1997 as compared to the first two quarters of
fiscal 1996, which were partially offset by the decreases previously
described for the three months ended March 31, 1997 as compared to the three
months ended March 31, 1996. The Company's list prices for its products and
average selling prices for
8
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individual products did not change significantly between the three and nine
months ended March 31, 1997, and the comparable periods in fiscal 1996.
The following table sets forth, for the periods indicated, the revenues
generated from the Company's four largest strategic partners as of June 30,
1996, other domestic customers as a group and international customers as a
group, in absolute dollars and as a percentage of total revenues.
SOURCE OF REVENUES
Three Months Ended March 31,
----------------------------------------
1996 % 1997 %
----------------- -----------------
Paradyne Corporation $ 4,919,000 25% $ 2,300.000 19%
Motorola, Inc. 2,860,000 15% 2,197,000 18%
DSC Communication Corp. 756,000 4% 3,052,000 25%
ADC Telecommunications, Inc. 4,185,000 21% 1,042.000 9%
Other Domestic Customers 3,534,000 18% 2,706,000 22%
International Customers 3,420,000 17% 940,000 7%
----------------- -----------------
Total Revenues $19,674,000 100% $12,237,000 100%
----------------- -----------------
----------------- -----------------
Nine Months Ended March 31,
----------------------------------------
1996 % 1997 %
----------------- -----------------
Paradyne Corporation $16,395,000 32% $20,791,000 33%
Motorola, Inc. 6,397,000 12% 7,809,000 12%
DSC Communication Corp. 3,153,000 6% 7,560,000 12%
ADC Telecommunications, Inc. 9,987,000 20% 6,602,000 11%
Other Domestic Customers 7,372,000 14% 16,027,000 25%
International Customers 8,129,000 16% 4,099,000 7%
----------------- -----------------
Total Revenues $51,433,000 100% $62,888,000 100%
----------------- -----------------
----------------- -----------------
As shown in the table above, 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. *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 and
Delays in Deployment."
During both the three and nine month periods ended March 31, 1997, direct
international revenues accounted for 7% of the Company's revenues. Direct
international revenues decreased from 17% to 7% of the Company's revenues
during the three months ended March 31, 1996 and 1997, respectively, and
decreased from 16% to 7% of the Company's revenues during the nine months
ended March 31, 1996 and 1997, respectively. This decrease in direct
international revenues as a percentage of the Company's revenues is
attributed to revenues derived from a single customer in Asia during the
quarters ended September 30, 1995, December 31, 1995 and March 31, 1996 which
were not sustained in the comparable periods in fiscal 1997. Certain of the
Company's domestic customers also sell Premisys products into international
markets. *While international revenues did not meet the Company's
expectations for the three and nine month periods ended March 31, 1997, the
Company intends to continue its attempts 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. *However,
actual results could vary from the foregoing forward looking statement due to
other factors as set forth in "Other Factors that may Affect Future Operating
Results" below. 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,
currency conversion risks, difficulties in
9
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staffing and managing foreign operations, greater difficulty in accounts
receivable collection and potentially adverse tax consequences.
*The Company expects revenues for the three months ended June 30, 1997 to
increase moderately over those for the three months ended March 31, 1997,
however, the Company anticipates that it will take several quarters to fully
recover from the decline in revenues which occurred in the quarter ended
March 31, 1997. *Risks that could cause actual revenues to differ from
expected revenues as set forth in the foregoing forward looking statement
include limited order backlog, customers selling from their inventories,
continued or additional delays in equipment deployment projects and increased
competition. These and other risks are detailed under the section titled
"Other Factors That May Affect Future Operating Results".
GROSS PROFIT
Three Months Ended March 31,
-------------------------------------
1996 % Change 1997
---- -------- ----
Gross Profit $12,811,000 (38%) $ 7,913,000
As a percentage of revenues 65% 65%
Nine Months Ended March 31,
-------------------------------------
1996 % Change 1997
---- -------- ----
Gross Profit $32,688,000 26% $41,264,000
As a percentage of revenues 64% 66%
Cost of revenues consists of component costs, compensation costs,
overhead related to the Company's manufacturing operations and warranty
expenses. Gross profit decreased from the three month period ended March 31,
1996 to the comparable period in fiscal 1997 as a result of decreased unit
volumes. In spite of this unit volume decrease, the percentage gross margin
remained at 65% for the quarters ended March 31, 1996 and 1997. Favorable
production efficiencies and changes in customer and product mix were offset
by increases in reserves for excess inventory in the quarter ended March 31,
1997 versus the quarter ended March 31, 1996.
The increase in gross profit from the nine months ended March 31, 1996 to
the comparable period in fiscal 1997 was primarily the result of increased
unit volumes during fiscal 1997. The percentage gross margin increased from
the nine month period ended March 31, 1996 to the comparable period in fiscal
1997 resulting in part from the combination of both volume increases and
manufacturing efficiencies and, to a lesser extent, a rebate and an
elimination of duty on materials imported from Malaysia. This increase in
percentage gross margin was reduced by increases in reserves for excess
inventories and a shift in product mix toward modules with less favorable
product margins. The Company does not expect further benefits from the
elimination of the duty on materials imported from Malaysia, as such duty was
reinstated as of January 1, 1997. *The Company does not expect further
improvement in its gross margin during the three months ended June 30, 1997
from the level experienced in the three months ended March 31, 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.
10
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RESEARCH AND DEVELOPMENT EXPENSES (EXCLUDING CHARGE FOR IN-PROCESS
TECHNOLOGIES)
Three Months Ended March 31,
-------------------------------------
1996 % Change 1997
---- -------- ----
Research and development expenses $2,079,000 25% $2,607,000
As a percentage of revenues 11% 21%
Nine Months Ended March 31,
-------------------------------------
1996 % Change 1997
---- -------- ----
Research and development expenses $5,304,000 40% $7,445,000
As a percentage of revenues 10% 12%
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 $528,000, or 25%, from the three months ended
March 31, 1996, to the comparable period in fiscal 1997. Increases in
personnel related expenses were primarily responsible for the increase in
absolute spending during the three month period ended March 31, 1997. The
increase in research and development expenses as a percentage of the
Company's revenues was primarily the result of the decline in the Company's
revenues during the third quarter of fiscal 1997.
Research and development expenses increased $2,141,000, or 40%, from the
nine months ended March 31, 1996, to the nine months ended March 31, 1997.
Increases in personnel related expenses were primarily responsible for the
increase in absolute spending. In addition, expenses for materials used in
product development as well as occupancy costs increased during the first
nine months of fiscal 1997 as compared to the same period for fiscal 1996.
The increase in research and development expenses as a percentage of revenues
for the nine months ended March 31, 1997 from the comparable period in fiscal
1996 was primarily the result of the lower than expected revenue levels due
to the decline in revenues experienced during the third quarter of fiscal
1997. *The Company expects that these expenses will increase in absolute
dollars during the fourth quarter of fiscal 1997 versus the quarter ended
March 31, 1997.
CHARGE FOR IN-PROCESS TECHNOLOGIES
As previously announced, the Company expensed, in the quarter ended March
31, 1997, the $4.0 million of license fees it will pay to Positron over the
next three years. (See Note 3 - "Significant Events" of the notes to the
condensed consolidated financial statements included in this Form 10-Q.)
This charge is shown separately as "Charge for in-process technologies" in
the Condensed Consolidated Statement of Operations in this Form 10-Q. The
technology is to be used in products that the Company is currently
developing. If the Company is unsuccessful in developing the product, this
technology has no alternative use.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Three Months Ended March 31,
-------------------------------------
1996 % Change 1997
---- -------- ----
Selling, general and administrative
expenses $3,985,000 37% $5,458,000
As a percentage of revenues 20% 45%
Three Months Ended March 31,
-------------------------------------
1996 % Change 1997
---- -------- ----
Selling, general and administrative
expenses $10,279,000 54% $15,848,000
As a percentage of revenues 20% 25%
Selling expenses consist principally of compensation costs for sales and
marketing personnel (including sales commissions and bonuses), travel
expenses, customer support expenses, and
11
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promotion 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 $1,473,000, or 37%, from the three months
ended March 31, 1996, to the comparable period in fiscal 1997. This increase
was the result primarily of increased staffing and, to a lesser extent,
material, travel and occupancy expenses during the three months ended March
31, 1997, over the comparable period in fiscal 1996. The increase in selling,
general and administrative expenses as a percentage of the Company's revenues
between the three months ended March 31, 1996 and 1997 was primarily the
result of lower than expected revenue levels due to the decline in revenues
experienced during the third quarter of fiscal 1997.
Selling, general and administrative expenses increased $5,569,000, or
54%, from the nine months ended March 31, 1996, to the comparable period in
fiscal 1997. Increased staffing, material, travel and occupancy expenses,
were primarily responsible for the absolute dollar increase. The increase in
selling, general and administrative expenses as a percentage of the Company's
revenues for the nine months ended March 31, 1997, from the comparable period
in fiscal 1996 was primarily the result of lower than expected revenue levels
due to the decline in revenues experienced during the third quarter of fiscal
1997. *The Company expects that these expenses will increase in absolute
dollars during the fourth quarter of fiscal 1997 versus the quarter ended
March 31, 1997.
INTEREST AND OTHER INCOME, NET
Three Months Ended March 31,
-------------------------------------
1996 % Change 1997
---- -------- ----
Interest and other income, net $ 516,000 34% $ 694,000
As a percentage of revenues 3% 6%
Nine Months Ended March 31,
-------------------------------------
1996 % Change 1997
---- -------- ----
Interest and other income, net $ 1,374,000 42% $ 1,949,000
As a percentage of revenues 3% 3%
Interest and other income, net consists of interest income, net of
interest expense, and, to a much lesser extent, foreign currency gains and
losses. The increase in interest and other income, net, for the three and
nine months ended March 31, 1997, as compared to the same periods in fiscal
1996 was primarily due to increased income from higher cash balances.
PROVISION (BENEFIT) FOR INCOME TAXES
Three Months Ended March 31,
-------------------------------------
1996 % Change 1997
---- -------- ----
Provision (benefit) for income taxes $2,615,000 (152%) $(1,349,000)
As a percentage of pre-tax income 36% 39%
Nine Months Ended March 31,
-------------------------------------
1996 % Change 1997
---- -------- ----
Provision for income taxes $6,653,000 (7%) $6,209,000
As a percentage of pre-tax income 36% 39%
The Company's provision for income taxes represents estimated federal,
state and foreign income taxes.
During the quarter ended March 31, 1997, the Company incurred a pre-tax loss,
and recorded an income tax benefit due to its ability to recover taxes paid
in prior periods of pre-tax profits.
12
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The income tax benefit for the three month period ended March 31, 1997, and
the income tax provision for the nine month period ended March 31, 1997, were
recorded at the Company's estimated tax rate of 39% for fiscal 1997, which is
less that the combined federal and state statutory rate primarily as a result
of tax-exempt interest income from the Company's municipal securities
portfolio and anticipated utilization of research and development tax credits
available in fiscal 1997.
The effective tax rate for the three and nine month periods ended March 31,
1996 was less than the combined federal and state statutory rate primarily as
a result of the utilization of net operating loss carryforwards.
NET INCOME (LOSS) PER SHARE
Three Months Ended March 31,
-------------------------------------
1996 % Change 1997
---- -------- ----
Net income (loss) $4,648,000 (145%) $(2,109,000)
Net income (loss) per share $0.18 (144%) $(0.08)
Weighted average common shares 26,351,000 0% 26,292,000
Three Months Ended March 31,
-------------------------------------
1996 % Change 1997
---- -------- ----
Net income $11,826,000 (18%) $9,711,000
Net income per share $0.45 (18%) $0.37
Weighted average common shares 26,345,000 1% 26,497,000
The net loss per share in the quarter ended March 31, 1997 was $0.08 as
compared to net income per share of $0.18 in the quarter ended March 31,
1996. The loss per share included the previously-announced pre-tax charge of
$4,000,000 ($2,440,000 after-tax) for the license of in-process SONET and SDH
technologies from Positron Fiber Systems, Inc. This charge reduced earnings
per share in the three and nine month periods ended March 31, 1997 by $0.09.
Excluding the charge for in-process technology, net income per share
decreased 94% from $0.18 in the quarter ended March 31, 1996 to $0.01 in the
quarter ended March 31, 1997. This decrease is due to a decrease of 93% in
net income in the three month period ended March 31, 1997 as compared to the
same three month period for fiscal 1996. This decrease in net income in the
three month period ended March 31, 1997 as compared to the same three month
period for fiscal 1996 was due primarily to lower revenues and secondarily to
higher operating expenses.
Excluding the charge for in-process technology, net income per share
increased 2% from $0.45 in the nine month period ended March 31, 1996, to
$0.46 in the nine month period ended March 31, 1997. This increase in net
income per share for the nine month period ended March 31, 1997 as compared
to the same period in fiscal 1996 was due to an increase of 3% in net income
between the nine month periods ended March 31, 1996 and 1997. This increase
in net income in the nine month period ended March 31, 1997 as compared to
the same nine month period for fiscal 1996 was due primarily to higher
revenues which were somewhat offset by higher operating expenses.
13
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
March 31, March 31,
1996 % Change 1997
---- -------- ----
Net cash provided by operating
activities in the nine month period $13,008,000 (20%) $10,453,000
Period-end cash, cash equivalents
and short-term investments $56,082,000 25% $69,827,000
Period-end working capital $57,979,000 45% $83,973,000
At March 31, 1997, the Company had approximately $69.8 million of cash, cash
equivalents and short-term investments.
Net cash totaling $10.5 million was provided by operating activities
during the nine months ended March 31, 1997, primarily due to net income of
$9.7 million, a decrease in accounts receivable of $7.9 million and increases
in accrued liabilities and accounts payable of $1.5 million and $1.2 million,
respectively, which were partially offset by increases in inventories and
prepaid income taxes and other expenses of $6.2 million and $3.9 million,
respectively. The accounts receivable decrease for the nine months ended
March 31, 1997 was due to the revenue decline for the quarter ended March 31,
1997 combined with the collection of cash from accounts receivable in the
normal course of business. Inventories increased in the nine months ended
March 31, 1997 due primarily to the revenue decline for the quarter ended
March 31, 1997. The Company had purchase commitments for material based on
anticipated revenue growth rather than the actual revenue decline in the
quarter ended March 31, 1997. The increase in prepaid income taxes and other
was due primarily to the income tax benefit resulting from the net loss for
the three months ended March 31, 1997.
Cash used in investing activities during the nine months ended March 31,
1997 consisted principally of purchases of short-term securities totaling
$12.9 million and, to a lesser extent, investment of $4.7 million in property
and equipment primarily related to the office expansion which occurred in
November 1996.
Cash flows from financing activities during the nine months ended March
31, 1997 consisted principally of an aggregate of $3.3 million from the
exercise of employee stock options and the issuance of stock under the
Company's employee stock purchase plan.
As of March 31, 1997, the Company's working capital was approximately
$84.0 million. Except for the Positron agreement discussed in Note 3 to the
Condensed Consolidated Financial Statements in this Form 10-Q, 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 12 months.
OTHER FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS
As referenced in the first paragraph of Part 1, Item 2, this section
consists primarily of forward-looking statements and associated risks but,
for improved readability, does not include asterisks.
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
14
<PAGE>
orders with the Company or that the Company will be able to obtain orders
from new telecommunications equipment suppliers or end users. 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. 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. 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. 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. 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. Such
delays occurred in the quarter ended March 31, 1997, and may occur in the
future. Such delays materially adversely affected the Company's business and
operating results for the quarter ended March 31, 1997, and would have a
similar impact if they occurred in the future. 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
in the four most recently completed quarters, recognized a substantial
portion of its revenues from sales booked and shipped in the last month of a
quarter. 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 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 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 and
which occurred in the quarter ended March 31, 1997) could and did have 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 shortfall and was not able
to compensate for it through expense reduction, which
15
<PAGE>
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 lower
revenues 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.
RELATIONSHIP WITH PARADYNE. The Company has a strategic relationship
with Paradyne, formerly a wholly-owned subsidiary of AT&T, that involves the
joint development, marketing and sale of most of the Company's products by
Paradyne to Lucent Technologies and AT&T (to include Business Units,
divisions or majority-owned subsidiaries) (hereafter "AT&T"). The Company's
agreement with Paradyne provides Paradyne exclusive distribution rights with
respect to the products covered by such agreement to AT&T and Lucent
Technologies. Although sales to Paradyne declined in the quarter ended March
31, 1997, shipments to Paradyne represent a substantial portion of the
Company's revenues to date. 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. There can be no assurance that possible
changes in the Company's relationship with Paradyne will not have a material
adverse effect on the Company's business and operating results.
Among recent changes, in January 1997, Paradyne implemented an
organizational change that assigns all sales and support activities for
products purchased from Premisys (the Paradyne ACCULINK-TM- Access Controller
(AAC) product line) to a group dedicated to marketing and servicing these
products to Lucent Technologies and AT&T. In addition to this dedicated
group, the Company has added sales and support staff to provide coverage of
Lucent and AT&T. Also, in the quarter ended March 31, 1997, Paradyne
announced a new product which is an extension of its existing line of CSU/DSU
products. Based on information currently available to the Company, Premisys
believes that this product is not competitive with current IMACS products,
but will likely compete with the Company's newly announced Streamline and
Slimline products (discussed below under "Other Factors that may Affect
Future Operating Results-Rapidly Evolving Technology"). However, there can
be no assurance of the foregoing, and 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. The Company's principal competition to date has been from major
telecommunications equipment suppliers, such as Newbridge Networks
Corporation, Tellabs, Inc. Nokia, Inc. and NEC Corporation, 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. In addition, Premisys expects to
compete with other new entrants, including both start-ups and existing data
communications companies, to the telecommunications access equipment
marketplace, including those targeting low-end channel bank and DSU/CSU
products and broadband integrated access products. The Company also
anticipates that certain of the telecommunications equipment suppliers that
market and distribute the Company's products may 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.
RAPIDLY EVOLVING TECHNOLOGY. The telecommunications equipment market is
also affected by rapidly changing technologies, which include ATM and high
speed digital subscriber lines (HDSL), and frequent new product
introductions. The Company's success will depend to a substantial degree
upon its ability to respond to changes in technology and customer
requirements. This will
16
<PAGE>
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 certain of the
Company's products under development, the first of which the Company expects
to announce in conjunction with the Supercomm exhibition in New Orleans in
June 1997. 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, the Company recently 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 first and second quarters of fiscal 1998,
respectively. 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. 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 and may in
the future experience an increased incidence of such errors or failures as
well as delays in introducing its products.
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. Some of these new standards
are evolving as new technologies, such as ATM and frame relay, 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 are 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.
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. Certain of the Company's senior officers, including its
President and Chief Operating Officer and its Senior Vice President,
Engineering, have only recently joined the Company. 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 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.
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.
17
<PAGE>
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, primarily Eltech
Electronics Technology (M) SDN BHD, and, to a lesser extent, AlphaSource
Manufacturing Solutions Public Company Limited to produce its printed circuit
board assemblies. 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.
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
operating results and 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.
18
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable
19
<PAGE>
II. OTHER INFORMATION
ITEM 5. OTHER INFORMATION
On April 14, 1997 Nicholas J. Williams joined the Company as President and
Chief Operating Officer. He is responsible for all development,
manufacturing, marketing and sales operations. Mr. Williams reports
directly to Raymond C. Lin, who will continue to serve as the Company's
Chief Executive Officer and a Director.
Prior to joining Premisys, Mr. Williams was Vice President and General
Manager, International of Tellabs, Inc. Prior to joining Tellabs in 1993,
he held positions of Vice President and General Manager of Advanced
Technology Division and Vice President of North American Sales at AT&T
Paradyne.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits
EXHIBIT NO. DESCRIPTION OF EXHIBIT
----------- ----------------------
11.01 Computation of Net Income (Loss) per Share.
27.01 Financial Data Schedule
B. Reports on Form 8-K
None
20
<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.
May 12, 1997 /s/ Robert W. Dilfer
- ------------------------------ -------------------------------------
Date Robert W. Dilfer
Vice President and Controller
(Duly Authorized Officer and
Chief Accounting Officer)
21
<PAGE>
INDEX TO EXHIBITS
-----------------
EXHIBIT NO. DESCRIPTION OF EXHIBIT
- ----------- ----------------------
11.01 Computation of Net Income (Loss) per Share
27.01 Financial Data Schedule
22
<PAGE>
Exhibit 11.01
PREMISYS COMMUNICATIONS, INC.
COMPUTATION OF NET INCOME (LOSS) PER SHARE - (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Three Months Ended March 31,
----------------------------
1996 1997
---- ----
Weighted average shares outstanding:
Common Stock 23,990 24,764
Common stock equivalents related to options
using the treasury stock method 2,361 1,528
-------- --------
Weighted-average common shares and equivalents 26,351 26,292
-------- --------
-------- --------
Net income (loss) $ 4,648 $ (2,109)
-------- --------
-------- --------
Net income (loss) per share $ 0.18 $ (0.08)
-------- --------
-------- --------
Nine Months Ended March 31,
---------------------------
1996 1997
---- ----
Weighted average shares outstanding:
Common Stock 23,743 24,604
Common stock equivalents related to options
using the treasury stock method 2,602 1,893
-------- --------
Weighted-average common shares and equivalents 26,345 26,497
-------- --------
-------- --------
Net income $ 11,826 $ 9,711
-------- --------
-------- --------
Net income per share $ 0.45 $ 0.37
-------- --------
-------- --------
<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 MARCH 28, 1997, AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-27-1997
<PERIOD-START> JUN-29-1996
<PERIOD-END> MAR-28-1997
<CASH> 18,076
<SECURITIES> 51,751
<RECEIVABLES> 8,391
<ALLOWANCES> 0
<INVENTORY> 10,445
<CURRENT-ASSETS> 95,895
<PP&E> 9,245
<DEPRECIATION> 2,657
<TOTAL-ASSETS> 102,602
<CURRENT-LIABILITIES> 11,922
<BONDS> 28
0
0
<COMMON> 248
<OTHER-SE> 90,404
<TOTAL-LIABILITY-AND-EQUITY> 102,602
<SALES> 62,888
<TOTAL-REVENUES> 62,888
<CGS> 21,624
<TOTAL-COSTS> 48,917
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 15,920
<INCOME-TAX> 6,209
<INCOME-CONTINUING> 9,711
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,711
<EPS-PRIMARY> 0.37
<EPS-DILUTED> 0.37
</TABLE>
