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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 December 26, 1997
----------------------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________________ to __________________
Commission file number 0-25684
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PREMISYS COMMUNICATIONS, INC.
- --------------------------------------------------------------------------------
(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
- --------------------------------------------------------------------------------
(Address of principal executive offices)
(Zip Code)
(510) 353-7600
- --------------------------------------------------------------------------------
(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 January 23, 1998 was 25,609,950 shares.
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1
<PAGE>
<TABLE>
PREMISYS COMMUNICATIONS, INC.
INDEX
-----------
<CAPTION>
PART I. Financial Information Page No.
-------------------------- -----------
<S> <C> <C>
Item 1. Financial Statements
Condensed Consolidated Balance Sheet - June 30, 1997 and December
31, 1997 3
Condensed Consolidated Statement of Operations - Three and Six Month
Periods ended December 31, 1996 and December 31, 1997 4
Condensed Consolidated Statement of Cash Flows - Six Month Periods
ended December 31, 1996 and December 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 18
PART II. Other Information
----------------------
Item 4. Submission of Matter to a Vote of Security Holders 19
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 20
Signatures 21
</TABLE>
2
<PAGE>
<TABLE>
I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Premisys Communications, Inc.
Condensed Consolidated Balance Sheet - (unaudited)
(in thousands except share and per share data)
<CAPTION>
June 30, December 31,
1997 1997
-------- --------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 28,923 $ 28,956
Short-term investments 44,301 65,247
Accounts receivable, net 7,658 5,307
Inventories 8,775 7,502
Deferred tax assets 7,207 7,207
Prepaid expenses and other assets 3,793 759
-------- --------
Total current assets 100,657 114,978
Property and equipment, net 6,444 7,105
-------- --------
$107,101 $122,083
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 4,756 $ 6,171
Accrued liabilities 5,528 10,275
Income taxes payable -- 627
-------- --------
Total current liabilities 10,284 17,073
-------- --------
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
25,535,948 shares issued and outstanding 252 255
Additional paid-in capital 74,994 76,495
Retained earnings 21,571 28,260
-------- --------
Total stockholders' equity 96,817 105,010
-------- --------
$107,101 $122,083
======== ========
<FN>
See notes to condensed consolidated financial statements
</FN>
</TABLE>
3
<PAGE>
<TABLE>
Premisys Communications, Inc.
Condensed Consolidated Statement of Operations - (unaudited)
(in thousands, except per share data)
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
------------------------ ------------------------
1996 1997 1996 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenues $26,356 $24,616 $50,650 $43,901
Cost of revenues 8,768 8,278 17,299 15,496
------- ------- ------- -------
Gross profit 17,588 16,338 33,351 28,405
------- ------- ------- -------
Operating expenses:
Research and development 2,510 4,184 4,838 7,208
Selling, general and administrative 5,743 6,656 10,390 12,163
------- ------- ------- -------
Total operating expenses 8,253 10,840 15,228 19,371
------- ------- ------- -------
Income from operations 9,335 5,498 18,123 9,034
Interest and other income, net 661 870 1,255 1,583
------- ------- ------- -------
Income before income taxes 9,996 6,368 19,378 10,617
Provision for income taxes 3,898 2,356 7,557 3,928
------- ------- ------- -------
Net income $ 6,098 $ 4,012 $11,821 $ 6,689
======= ======= ======= =======
Net income per share:
Basic $ 0.25 $ 0.16 $ 0.48 $ 0.26
======= ======= ======= =======
Diluted $ 0.23 $ 0.15 $ 0.44 $ 0.24
======= ======= ======= =======
Shares used in computing net income per share:
Basic 24,550 25,462 24,491 25,385
======= ======= ======= =======
Diluted 26,721 27,579 26,600 27,508
======= ======= ======= =======
<FN>
See notes to condensed consolidated financial statements
</FN>
</TABLE>
4
<PAGE>
<TABLE>
Premisys Communications, Inc.
Condensed Consolidated Statement Of Cash Flows - (unaudited)
(in thousands)
<CAPTION>
Six Months Ended December 31,
----------------------------
1996 1997
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 11,821 $ 6,689
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation 564 992
Changes in assets and liabilities:
Accounts receivable (5,651) 2,351
Inventories (1,134) 1,273
Prepaid expenses and other assets (556) 3,034
Accounts payable 3,043 1,415
Accrued liabilities 292 4,791
Income taxes payable (580) 627
-------- --------
Net cash provided by operating activities 7,799 21,172
-------- --------
Cash flows from investing activities:
Purchase of property and equipment (3,761) (1,653)
Purchase of short-term investments (16,365) (20,946)
-------- --------
Net cash used in investing activities (20,126) (22,599)
-------- --------
Cash flows from financing activities:
Proceeds from issuance of Common Stock, net 2,555 1,504
Repayment of capital lease obligations (72) (44)
-------- --------
Net cash provided by financing activities 2,483 1,460
-------- --------
Net increase (decrease) in cash (9,844) 33
Cash and cash equivalents at beginning of period 22,058 28,923
-------- --------
Cash and cash equivalents at end of period $ 12,214 $ 28,956
======== ========
Supplemental disclosures:
Cash paid for income taxes $ 8,421 $ 1
<FN>
See notes to condensed consolidated financial statements
</FN>
</TABLE>
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 December 31, 1997, the
results of its operations for the three and six month periods ended December 31,
1996 and 1997, and its cash flows for the six month periods ended December 31,
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
six month period ended December 31, 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 December 31, 1996 and 1997 for financial statement presentation
purposes actually reflect amounts for the fiscal periods ended on June 27, 1997,
December 27, 1996 and December 26, 1997.
NOTE 2 - Inventories (in thousands)
June 30, December 31,
1997 1997
-------- --------
(unaudited)
Inventories
Raw materials $ 2,010 $ 1,159
Work-in-process 1,390 2,471
Finished goods 7,893 7,150
-------- --------
11,293 10,780
Less: Reserves (2,518) (3,278)
-------- --------
$ 8,775 $ 7,502
======== ========
NOTE 3 - Earnings Per Share
The Company adopted Statement of Financial Accounting Standards No. 128,
"Earnings Per Share" ("SFAS 128") during the second quarter of fiscal 1998. SFAS
128 requires presentation of both Basic EPS and Diluted EPS on the face of the
income statement. Basic EPS, which replaces primary EPS, is computed by dividing
net income available to common stockholders (numerator) by the weighted average
number of common shares outstanding (denominator) during the period. Unlike the
computation of primary EPS, Basic EPS excludes the dilutive effect of stock
options. Diluted EPS replaces fully diluted EPS and gives effect to all dilutive
potential common shares outstanding during a period. In
6
<PAGE>
computing Diluted EPS, the average stock price for the period is used in
determining the number of shares assumed to be purchased under the treasury
stock method from exercise of stock options rather than the higher of the
average or ending stock price as used in the computation of fully diluted EPS.
<TABLE>
Following is a presentation of the numerators and denominators of the Basic
and Diluted EPS computations for the periods presented below:
<CAPTION>
December 31, 1996 December 31, 1997
---------------------------------------- ------------------------------------------
Three Month Period Net Income Shares Per Share Net Income Shares Per Share
Ended (Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----- ----------- ------------- ------ ----------- ------------- ------
(in thousands except per share data)
<S> <C> <C> <C> <C> <C> <C>
Basic EPS
Net income available to common stockholders $ 6,098 24,550 $ 0.25 $ 4,012 25,462 $ 0.16
Effect of Dilutive Securities
Common stock equivalents -- 2,171 -- 2,117
------- ------- ------- -------
Diluted EPS
Net income available to
common stockholders and
assumed conversions $ 6,098 26,721 $ 0.23 $ 4,012 27,579 $ 0.15
======= ======= ======== ======= ======= ========
December 31, 1996 December 31, 1997
---------------------------------------- ------------------------------------------
Six Month Period Net Income Shares Per Share Net Income Shares Per Share
Ended (Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----- ----------- ------------- ------ ----------- ------------- ------
(in thousands except per share data)
Basic EPS
Net income available to common stockholders $11,821 24,491 $ 0.48 $ 6,689 25,385 $ 0.26
Effect of Dilutive Securities
Common stock equivalents -- 2,109 -- 2,123
------- ------- ------- -------
Diluted EPS
Net income available to
common stockholders and
assumed conversions $11,821 26,600 $ 0.44 $ 6,689 27,508 $ 0.24
======= ======= ======== ======= ======= ========
</TABLE>
Options to purchase 95,300, 615,161, 108,003 and 748,623 shares of Common stock
were outstanding at the three month periods ended December 31, 1996 and 1997 and
the six month periods ended December 31, 1996 and 1997, respectively, but were
not included in the computation of Diluted EPS because the options exercise
price was greater than the average market price of the common shares in each
period.
7
<PAGE>
ITEM 2. Management's Discussion and Analysis of Financial Condition and Result
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") Motorola, Inc.
("Motorola") 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 licensed by the
Company from Positron Fiber Systems Corporation ("Positron"); deregulation of,
and legislation regarding the domestic and international telecommunications
industry; market acceptance of the 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 December 31,
---------------------------------------------
1996 % Change 1997
---- -------- ----
Revenues $26,356,000 (7%) $24,616,000
Six Months Ended December 31,
---------------------------------------------
1996 % Change 1997
---- -------- ----
Revenues $50,650,000 (13%) $43,901,000
Revenues consist primarily of gross sales of products, less discounts and
sales returns and allowances. A majority of the revenue decrease from the three
and six month periods ended December 31, 1996 to the comparable periods in
fiscal 1998 was attributable to a reduction in unit volumes of
8
<PAGE>
platforms and modules sold. The reduction in unit volumes in the quarter ended
December 31, 1997 versus the same period in fiscal 1997 was primarily due to a
reduction in shipments to Paradyne, partially offset by an increase in shipments
to ADC and Motorola, Inc. The reduction in unit volumes in the six month period
ended December 31, 1997 versus the same period in fiscal 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, in
particular one of its CLEC customers. See Other Factors That May Affect Future
Operating Results - "Indirect Channels of Distribution." However, revenues
increased $5,331,000, or 28%, from $19,285,000 in the quarter ended September
30, 1997 to $24,616,000 in the quarter ended December 31, 1997. This increase in
revenues in the second quarter of fiscal 1998 versus the first quarter fiscal of
1998 was due to increased shipments of the Company's products to all of the
Company's major strategic distribution partners. *The Company expects that
revenues will increase in the March 1998 quarter over those reported for the
quarter ended December 31, 1997, but at a much lower rate than the increase
between the quarters ended September 30, 1997 and December 31, 1997. However,
these expectations are subject to a number of uncertainties, in particular the
level of demand from ADC and its customers.
The following table sets forth, for the periods indicated, the revenues
generated from the Company's customers which exceeded 10% of total revenues
during the three and six month periods ended December 31, 1997, 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 December 31,
----------------------------------------------------
1996 % 1997 %
----------- ---------- ----------- ----------
ADC $ 3,001,000 11% $ 8,447,000 34%
Paradyne 11,317,000 43% 2,772,000 11%
Motorola, Inc. 2,397,000 9% 2,521,000 10%
Other Domestic Customers 7,490,000 28% 8,528,000 35%
International Customers 2,151,000 9% 2,348,000 10%
----------- ---------- ----------- ----------
Total Revenues $26,356,000 100% $24,616,000 100%
=========== ========== =========== ==========
Six Months Ended December 31,
----------------------------------------------------
1996 % 1997 %
----------- ---------- ----------- ----------
ADC $ 5,559,000 11% $15,455,000 35%
Paradyne 18,491,000 37% 5,440,000 12%
Motorola, Inc. 5,612,000 11% 4,035,000 9%
Other Domestic Customers 17,829,000 35% 15,226,000 35%
International Customers 3,159,000 6% 3,745,000 9%
----------- ---------- ----------- ----------
Total Revenues $50,650,000 100% $43,901,000 100%
=========== ========== =========== ==========
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 three month periods ended December 31, 1996 and
1997, revenues from the Company's four major strategic partners represented 65%
and 63% of the Company's total revenues, respectively. For the six month periods
ended December 31, 1996 and 1997, revenues from the Company's four major
strategic partners represented 68% and 63% of the Company's total revenues,
respectively. These major strategic
9
<PAGE>
distribution partners generated 63% of the Company's revenues in the quarter
ended September 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 three and six month periods ended December 31, 1997, direct
international revenues accounted for 10% and 9% of the Company's revenues,
respectively, compared to 9% and 6%, respectively, for the same periods 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
Three Months Ended December 31,
-------------------------------------
1996 % Change 1997
---- -------- ----
Gross Profit $17,588,000 (7%) $16,338,000
As a percentage of revenues 67% 66%
Six Months Ended December 31,
-------------------------------------
1996 % Change 1997
---- -------- ----
Gross Profit $33,351,000 (15%) $28,405,000
As a percentage of revenues 66% 65%
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 and six month periods ended
December 31, 1996 to the comparable periods in fiscal 1998 primarily as a result
of lower unit shipment volumes. The gross margin decreased slightly from the
three and six month periods ended December 31, 1996 to the comparable periods in
fiscal 1998, as favorable shifts in customer and product mix were offset by
increases in manufacturing costs. *The Company expects its gross margins for the
remainder of fiscal 1998 to decline by two to four percentage points from the
66% reported in the quarter ended December 31, 1997 due primarily to changes in
product mix. *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
<PAGE>
Research and Development Expenses
Three Months Ended December 31,
-------------------------------------
1996 % Change 1997
---- -------- ----
Research and development expenses $2,510,000 67% $4,184,000
As a percentage of revenues 10% 17%
Six Months Ended December 31,
-------------------------------------
1996 % Change 1997
---- -------- ----
Research and development expenses $4,838,000 49% $7,208,000
As a percentage of revenues 10% 16%
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 $1,674,000, or 67%, from the three months ended
December 31, 1996 to the comparable period in fiscal 1998 and by $2,370,000, or
49%, from the six month period ended December 31, 1996 to the comparable period
in fiscal 1998. This increase was due to the combination of increased expenses
for outside services and personnel for the purposes of expanding the Company's
product line and for 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 three and
six month periods ended December 31, 1997 versus the comparable periods for
fiscal 1997. *During the remaining quarters of fiscal 1998, the Company expects
that these expenses will increase in absolute dollars as compared to the quarter
ended December 31, 1997. *However, the Company expects that the sequential 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.
<TABLE>
Selling, General and Administrative Expenses
<CAPTION>
Three Months Ended December 31,
-------------------------------
1996 % Change 1997
---- -------- ----
<S> <C> <C> <C>
Selling, general and administrative expenses $5,743,000 16% $ 6,656,000
As a percentage of revenues 22% 27%
Six Months Ended December 31,
-------------------------------
1996 % Change 1997
---- -------- ----
Selling, general and administrative expenses $10,390,000 17% $12,163,000
As a percentage of revenues 21% 28%
</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 $913,000, or
16%, from the three months ended December 31, 1996 to the comparable period in
fiscal 1998 and by $1,773,000, or 17%, from the six month period ended December
31, 1996 to the comparable period in fiscal 1998. These increases were primarily
the result of increased staffing and associated expenses, and, to a lesser
extent,
11
<PAGE>
travel and customer support expenses. The increase in selling, general and
administrative expenses as a percentage of the Company's revenues for the three
and six month periods in fiscal 1998 as compared with the comparable periods in
fiscal 1997 was the result of the increased spending combined with the revenue
decline in the three and six month periods in fiscal 1998 versus the comparable
periods for fiscal 1997. *The Company expects that these expenses will increase
in absolute dollars during the remaining quarters of fiscal 1998 as compared to
the quarter ended December 31, 1997. *However, the Company expects that the
sequential 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.
Interest and Other Income, net
Three Months Ended December 31,
--------------------------------
1996 % Change 1997
---- -------- ----
Interest and other income, net $661,000 32% $870,000
As a percentage of revenues 3% 4%
Six Months Ended December 31,
--------------------------------
1996 % Change 1997
---- -------- ----
Interest and other income, net $ 1,255,000 26% $ 1,583,000
As a percentage of revenues 3% 3%
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 and six
month periods ended December 31, 1997 as compared to the same period in fiscal
1997 was due to higher cash balances.
<TABLE>
Provision for Income Taxes
<CAPTION>
Three Months Ended December 31,
----------------------------------
1996 % Change 1997
---- -------- ----
<S> <C> <C> <C>
Provision for income taxes $3,898,000 (40%) $2,356,000
As a percentage of income before taxes 39% 37%
Six Months Ended December 31,
----------------------------------
1996 % Change 1997
---- -------- ----
Provision for income taxes $7,557,000 (48%) $3,928,000
As a percentage of income before 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 three and six month
periods ended December 31, 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.
12
<PAGE>
<TABLE>
Net Income per Share
<CAPTION>
Three Months Ended December 31,
-----------------------------------------------------
1996 % Change 1997
---- -------- ----
<S> <C> <C> <C>
Net income $ 6,098,000 (34%) $ 4,012,000
Net income per share (diluted) $ 0.23 (35%) $ 0.15
Shares used in computing diluted net income per share 26,721,000 3% 27,579,000
Six Months Ended December 31,
-----------------------------------------------------
1996 % Change 1997
---- -------- ----
Net income $11,821,000 (43%) $ 6,689,000
Net income per share (diluted) $ 0.44 (45%) $ 0.24
Shares used in computing diluted net income per share 26,600,000 3% 27,508,000
</TABLE>
Net income per share (diluted) decreased by $0.08, or 35%, in the quarter
ended December 31, 1997 and by $0.20, or 45%, in the six month period ended
December 31, 1997 as compared to the same periods in fiscal 1997. The decrease
in both comparative periods was due primarily to a decrease in net income and,
to a lesser extent, an increase in shares used in calculating net income per
share between the three and six month periods ended December 31, 1996 and 1997.
<TABLE>
Liquidity and Capital Resources
<CAPTION>
December 31, December 31,
1996 % Change 1997
---- -------- ----
<S> <C> <C> <C>
Net cash provided by operating activities $ 7,799,000 171% $21,172,000
Period end cash, cash equivalents and
short-term investments $67,477,000 40% $94,203,000
Period end working capital $86,084,000 14% $97,905,000
</TABLE>
At December 31, 1997, the Company had approximately $94.2 million of cash,
cash equivalents and short-term investments. Net cash totaling $21.2 million was
provided by operating activities during the six months ended December 31, 1997,
due primarily to net income of $6.7 million and increases in accrued liabilities
and accounts payable, and decreases in prepaid expenses and other assets,
accounts receivable and inventories, aggregating $12.9 million.
Cash used in investing activities during the six months ended December 31,
1997 consisted principally of purchases of short-term securities totaling $20.9
million. Cash flows from financing activities during the six months ended
December 31, 1997 consisted primarily of $1.5 million from the exercise of
employee stock options and the issuance of stock under the Company's 1995
employee stock purchase plan, which was offset somewhat by payments on capital
lease obligations.
As of December 31, 1997, the Company's working capital was approximately
$97.9 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.
13
<PAGE>
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, 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 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. For example, in the quarters ended September 30 and December 31, 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 each quarter. Revenues derived from particular
carrier 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 developed by the Company.
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
14
<PAGE>
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 (see "-Dependence 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 licensed
certain technology from Positron for inclusion in the Company's Q-155 XTRA
products, which were announced in June 1997 and are expected 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, failure to achieve
market acceptance of the SlimLine and StreamLine products 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. In the past, 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.
15
<PAGE>
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. The Company's agreement with Paradyne provides Paradyne
exclusive distribution rights with respect to the products covered by the
agreement to AT&T entities, as defined under the agreement.
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 from the three and six month periods
ended December 31, 1996 to the comparable periods ended December 31, 1997,
shipments to Paradyne continued to represent a substantial portion (11% and 12%)
of the Company's revenues in the three and six month periods ended December 31,
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. As 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 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.
16
<PAGE>
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. The Company also utilizes independent contractors
for some new product developments. Delays in completing assigned development
projects or design errors could cause delays in new product releases and poor
market acceptance.
17
<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. Quantitative and Qualitative Disclosures About Market Risk.
Not applicable.
18
<PAGE>
II. OTHER INFORMATION
ITEM 4. Submission of Matter to a Vote of Security Holders
At the Company's Annual Meeting of Stockholders held on December 10, 1997 (the
"Annual Meeting"), the following individuals were elected to the Company's Board
of Directors by the votes indicated:
FOR WITHHELD
--- --------
Boris J. Auerbuch 23,717,733 25,328
Robert C. Hawk 23,713,933 29,128
Edward A. Keible, Jr 23,718,973 24,088
Raymond C. Lin 23,718,823 24,238
Gary J. Morgenthaler 23,713,973 24,088
Marino R. Polestra 23,713,073 29,988
Lip-Bu Tan 23,719,623 23,438
In addition, the Company's 1994 Stock Option Plan was amended to increase the
number of shares of Common Stock reserved for issuance thereunder from 4,000,000
to 5,200,000. The following votes were cast in connection with such amendment:
BROKER
FOR AGAINST ABSTAIN NON-VOTES
- --- ------- ------- ---------
16,607,286 6,939,246 23,934 172,595
Finally, the appointment of Price Waterhouse LLP as auditors for the fiscal year
ended June 30, 1998 was ratified by the following vote:
BROKER
FOR AGAINST ABSTAIN NON-VOTES
- --- ------- ------- ---------
23,675,123 50,330 17,608 -0-
ITEM 5. Other Information
In December, 1997, Joseph L. Lias resigned as the Company's Vice President,
Marketing.
In January 1998, Peter Hauser became the Company's Vice President, International
Sales. He is responsible for Premisys' sales activities in Europe, the Middle
East, Africa, Central and South America and Asia. Mr. Hauser was formerly with
General DataComm as the Company's Vice President, International Sales - Europe,
Middle East and Africa.
19
<PAGE>
ITEM 6. Exhibits and Reports on Form 8-K
A. Exhibits
Exhibit No. Description of Exhibit
---------- ----------------------------
10.42 Employment Agreement by and between Premisys Communications,
Inc. and Peter Hauser dated as of January 5, 1998.
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.
February 2, 1998 /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
- ----------- ---------------------------
10.42 Employment Agreement by and between Premisys Communications, Inc.
and Peter Hauser dated as of January 5, 1998.
27.01 Financial Data Schedule
22
Exhibit 10.42
January 5, 1998
Mr. Peter Hauser
The Tudor Lodge
22 Winkfield Road
Windsor, SL 44BG
United Kingdom
Dear Peter:
This letter supersedes our letter to you dated September 2, 1997. I am pleased
to offer you the position of Vice President, International Sales, reporting
directly to me.
Cash Compensation
- -----------------
o Annual Base Salary of L106,000. Your base and commission will be spilt
in accordance with your efforts expended inside the UK and outside the
UK, which is estimated to be 35% and 65% respectively. We understand
from you that your status in the UK is "Resident but not ordinarily a
resident in the UK". Therefore based on this status you should be
eligible for relief from UK taxes in respect to your efforts outside
the UK. For details on your status, you may want to refer to your own
UK tax advisor. Premisys is also willing to have you speak with one of
our tax representatives should you have additional questions about the
eligibility requirements for this tax relief.
o Commission Plan for FY 98 will be L48,000 annually. Premisys will
guarantee commission payment of L4,000 per month for the first six
months, thereafter commission will be paid based upon achievement
against quota.
o During your first month of employment, you will be paid a sign-on bonus
of L20,000 (less appropriate deductions). In the event you terminate
your employment prior to your 12 month anniversary date, you will be
required to repay the sign-on bonus to Premisys on a pro-rata basis.
o We will also recommend to the Board of Directors or its designee that
they issue you options for 80,000 shares of Premisys stock as governed
by the Premisys Employee Stock Plan, which will vest as set forth in
the Plan (a copy of this plan was faxed to you earlier).
o You will be eligible to receive, per company policy, a car allowance in
the amount of L800 per month. The car allowance is to assist you in
covering your automobile expenses inside the UK.
23
<PAGE>
Mr. Peter Hauser
January 5, 1998
Page 2
o Tuition allowance for your children of up to L10,000 per year will be
paid to you based upon presentation of itemized receipts. This will be
paid only for the first two years of your employment.
It is understood that as part of the company's effort to protect its proprietary
information, you will assist in safeguarding the Company's trade secrets and
related sensitive information. Consequently, you will enter into an Invention
Assignment and Proprietary Information Agreement with the company on your first
day of work.
You will be eligible to participate in the benefits program offered by Premisys,
in accordance with our policies. These benefits may change from time to time,
and may require that you meet applicable eligibility requirements, if any. These
benefits include medical, life insurance, vacation, holidays, and Employee Stock
Purchase Plan. Please refer to the benefit summary. that was faxed to you
earlier.
The offer contained in this letter constitutes the entire compensation agreement
between you and the Company. Any verbal agreement, assurances or understanding
will not alter this offer.
Peter, should you have any questions about this offer, please contact me at
(510) 353-7667. Also, if you are in agreement with this offer, sign it and fax
it back to my attention at (510) 353-2310.
Sincerely,
/S/ Nicholas Williams
Nicholas Williams
President and Chief Operating Officer
I accept the above offer of employment, pursuant to the items and conditions set
forth in this letter.
Signature: /S/ Peter Hauser Date: January 5, 1998
---------------------- -----------------
24
<TABLE> <S> <C>
<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 December 26, 1997, and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-26-1998
<PERIOD-START> JUN-28-1997
<PERIOD-END> DEC-26-1997
<CASH> 28,956
<SECURITIES> 65,247
<RECEIVABLES> 5,309
<ALLOWANCES> 2
<INVENTORY> 7,502
<CURRENT-ASSETS> 114,978
<PP&E> 11,278
<DEPRECIATION> 4,173
<TOTAL-ASSETS> 122,083
<CURRENT-LIABILITIES> 17,073
<BONDS> 0
0
0
<COMMON> 255
<OTHER-SE> 104,755
<TOTAL-LIABILITY-AND-EQUITY> 105,010
<SALES> 43,901
<TOTAL-REVENUES> 43,901
<CGS> 15,496
<TOTAL-COSTS> 34,867
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 10,617
<INCOME-TAX> 3,928
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,689
<EPS-PRIMARY> 0.26
<EPS-DILUTED> 0.24
</TABLE>
