<PAGE>
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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 26, 1999
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
PREMISYS COMMUNICATIONS, INC.
(Exact name of registrant as specified in its charter)
Delaware 94-3153847
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
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 April 23, 1999 was 24,060,563 shares.
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<PAGE>
PREMISYS COMMUNICATIONS, INC.
INDEX
PART I. Financial Information Page No.
Item 1. Financial Statements
Condensed Consolidated Balance Sheet -
June 30, 1998 and March 31, 1999 3
Condensed Consolidated Statement of
Operations - Three and Nine Month
Periods ended March 31, 1998 and March 4
31, 1999
Condensed Consolidated Statement of
Cash Flows - Nine Month Periods ended
March 31, 1998 and March 31, 1999 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 22
PART II. Other Information
Item 5. Other Information 24
Item 6. Exhibits and Reports on Form 8-K 24
Signatures 25
<PAGE>
I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Premisys Communications, Inc.
Condensed Consolidated Balance Sheet
(in thousands except per share data)
June 30, March
31,
1998 1999
--------- ---------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $31,006 $13,514
Short-term investments 74,975 74,462
Accounts receivable, net 12,208 16,164
Inventories 3,859 9,991
Deferred tax assets 7,355 7,355
Prepaid expenses and other assets 962 1,180
--------- ---------
Total current assets 130,365 122,666
Property and equipment, net 8,392 9,339
========= =========
$138,757 $132,005
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 6,969 $ 8,178
Accrued liabilities 10,277 9,474
Income taxes payable 735 4,832
--------- ---------
Total current liabilities 17,981 22,484
--------- ---------
Put warrants --- 10,625
--------- ---------
Stockholders' equity:
Preferred Stock, $0.01 par value, 2,000 shares --- ---
authorized; no shares issued or outstanding
Common Stock, $0.01 par value, 100,000 shares
authorized; 25,974 and 26,409 shares issued 260 264
and outstanding
Additional paid-in capital 85,230 76,717
Treasury Stock, 0 and 2,360 shares --- (22,303)
Retained earnings 35,286 44,218
--------- ---------
Total stockholders' equity 120,776 98,896
========= =========
$138,757 $132,005
========= =========
See notes to condensed consolidated financial statements
<PAGE>
Premisys Communications, Inc.
Condensed Consolidated Statement of Operations - (unaudited)
(in thousands, except per share data)
Three Months Ended Nine Months Ended
March 31, March 31,
-------------------- -----------------
1998 1999 1998 1999
---------- -------- -------- --------
Revenues $27,154 $26,734 $71,055 $77,139
Cost of revenues 9,109 11,309 24,605 29,935
---------- -------- -------- --------
Gross profit 18,045 15,425 46,450 47,204
---------- -------- -------- --------
Operating expenses:
Research and development 3,900 4,986 11,108 14,404
Charge for in-process 4,431 --- 4,431 ---
technologies
Selling, general and 7,714 7,542 19,877 21,415
administrative
---------- -------- -------- --------
Total operating expenses 16,045 12,528 35,416 35,819
---------- -------- -------- --------
Income from operations 2,000 2,897 11,034 11,385
Interest and other income, net 923 873 2,506 2,793
---------- -------- -------- --------
Income before income taxes 2,923 3,770 13,540 14,178
Provision for income taxes 1,082 1,395 5,010 5,246
---------- -------- -------- --------
Net income $ 1,841 $ 2,375 $8,530 $8,932
========== ======== ======== ========
Net income per share:
Basic $ 0.07 $ 0.10 $ 0.33 $ 0.36
========== ======== ======== ========
Diluted $ 0.07 $ 0.10 $ 0.31 $ 0.35
========== ======== ======== ========
Shares used in computing net income per share:
Basic 25,630 24,030 25,467 24,776
========== ======== ======== ========
Diluted 27,507 24,628 27,457 25,599
========== ======== ======== ========
See notes to condensed consolidated financial statements
<PAGE>
Premisys Communications, Inc.
Condensed Consolidated Statement of Cash Flows (unaudited)
(in thousands)
Nine Months Ended March 31,
1998 1999
---------- ----------
Cash flows from operating activities:
Net income $ 8,530 $ 8,932
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Depreciation 1,652 2,534
Changes in assets and liabilities:
Accounts receivable 1,711 (3,956)
Inventories 2,992 (6,132)
Prepaid expenses and other assets 2,712 (218)
Accounts payable 828 1,209
Accrued liabilities 3,084 (803)
Income taxes payable 1,630 4,097
---------- ----------
Net cash provided by operating 23,139 5,663
activities
---------- ----------
Cash flows from investing activities:
Purchase of property and equipment (2,664) (3,481)
Purchase of short-term investments (30,365) 513
---------- ----------
Net cash used in investing activities (33,029) (2,968)
---------- ----------
Cash flows from financing activities:
Proceeds from issuance of Common 2,557 2,116
Stock, net
Repurchase of Common Stock --- (22,303)
---------- ----------
Net cash provided by (used in) 2,557 (20,187)
financing activities
---------- ----------
Net decrease in cash (7,333) (17,492)
Cash and cash equivalents at 28,923 31,006
beginning of period
---------- ----------
Cash and cash equivalents at end of
period $ 21,590 $ 13,514
========== ==========
Supplemental disclosures:
Cash paid for income taxes $ 54 $ 1,889
See notes to condensed consolidated financial statements
<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 position as of March 31, 1999, the results
of its operations for the three and nine month periods ended March 31, 1998 and
1999, and its cash flows for the nine month periods ended March 31, 1998 and
1999. These financial statements should be read in conjunction with the
Company's audited financial statements as of June 30, 1997 and 1998 and for each
of the three years in the period ended June 30, 1998, including notes thereto,
included in the Company's Annual Report on Form 10-K. Operating results for the
nine month period ended March 31, 1999 are not necessarily indicative of the
results that may be expected for the year ending June 30, 1999.
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, 1998 and March 31, 1998 and 1999 for financial statement presentation
purposes actually reflect amounts for the fiscal periods ended on June 26, 1998,
March 27, 1998 and March 26, 1999.
NOTE 2 - Inventories (in thousands)
June 30, March 31,
1998 1999
--------- -----------
(unaudited)
Raw materials $ 582 $ 1,220
Work-in-process 676 1,482
Finished goods 2,601 7,289
--------- -----------
$ 3,859 $ 9,991
========= ===========
NOTE 3 - Earnings Per Share
March 31, 1998 March 31, 1999
------------------------------- -------------------------------
Three Month Net Shares Per Net Shares Per
Period Income (Denominator) Share Income (Denominator) Share
Ended (Numerator) Amount (Numerator) Amount
------------------------------- -------------------------------
(in thousands except per share data)
Basic EPS
Net income
(loss) available
to common $1,841 25,630 $0.07 $2,375 24,030 $0.10
stockholders
Effect of
Dilutive
Securities
Common stock
equivalents ---- 1,877 ---- 598
------------------ ----------------
Diluted EPS
Net income
(loss)
available to
common
stockholders
and assumed
conversions $1,841 27,507 $0.07 $2,375 24,628 $0.10
============================== ===============================
<PAGE>
March 31, 1998 March 31, 1999
------------------------------- -------------------------------
Nine Month Net Shares Per Net Shares Per
Period Income (Denominator) Share Income (Denominator) Share
Ended (Numerator) Amount (Numerator) Amount
------------------------------- -------------------------------
(in thousands except per share data)
Basic EPS
Net income
(loss) available
to common $8,530 25,467 $0.33 $8,932 24,776 $0.36
stockholders
Effect of
Dilutive
Securities
Common stock
equivalents ---- 1,990 ---- 823
------------------ ----------------
Diluted EPS
Net income
(loss)
available to
common
stockholders
and assumed
conversions $8,530 27,457 $0.31 $8,932 25,599 $0.35
============================== ===============================
Options to purchase 712,587, 3,601,629, 833,410 and 2,179,583 shares of
Common Stock were outstanding during the three month periods ended March 31,
1998 and 1999 and the nine month periods ended March 31, 1998 and 1999,
respectively, but were not included in the computation of Diluted EPS because
the exercise prices of the options were greater than the average market price of
the common shares in each period.
NOTE 4 - Changes in Stockholders' Equity
(in thousands)
Stockholders' equity at June 30, 1998 $ 120,776
Put warrants (10,625)
Repurchase of stock (22,303)
Issuance of stock 2,116
Net income 8,932
=============
Stockholders' equity at March 31, 1999 $ 98,896
=============
On August 31, 1998, the Company's Board of Directors authorized the
repurchase, at management's discretion, of up to 4.0 million shares of the
Company's Common Stock at market prices not to exceed $14.00 per share and as
the market and business conditions warrant. As of March 26, 1999, the Company
had repurchased for cash 2.4 million shares at market prices ranging from $6.69
to $10.94 per share. As of September 17, 1998, pursuant to the authorized stock
repurchase program, the Company sold 2.0 million put warrants and purchased 1.5
million call options. On January 26, 1999, the Company dissolved the obligation
for 1.0 million put warrants and 0.75 million call options that were to expire
on January 29, 1999. As a result, the Company currently has a maximum potential
obligation related to the put warrants of $10.65 million. The remaining 1.0
million put warrants and 0.75 million call options expire on September 15, 1999.
NOTE 5 - Comprehensive income
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income," requires companies to report in their financial
statements comprehensive income which, in addition to net income, includes all
changes in equity during a period from non-owner sources including foreign
currency translation adjustments and unrealized gains and losses on certain
investments in debt and equity securities. For the periods presented the
Company's net income was the only material component of comprehensive income.
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 and Section 27A of the Securities Act
of 1933. 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"), Nortel
Networks, Inc. ("Nortel"), Paradyne Corporation ("Paradyne"), Teleport
Communications Group ("Teleport") and XEL Communications, Inc. ("XEL"); 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") and Switched
Network Technologies ("SNT"); deregulation of, and legislation regarding the
domestic and international telecommunications industry; continued success of
competitive local exchange carriers ("CLECs") in taking market share from
incumbent carriers in the U.S. business communications services market;
availability and market acceptance of the SlimLine, StreamLine and Q-155
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, 1998. The actual results that the Company
achieves may differ materially from those described in 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 effect the Company's
business.
Revenues
Three Months Ended March 31,
--------------------------------
1998 % Change 1999
Revenues $27,154,000 (2%) $26,734,000
Nine Months Ended March 31,
--------------------------------
1998 % Change 1999
Revenues $71,055,000 9% $77,139,000
Revenues consist primarily of gross sales of products, less discounts and
sales returns and allowances. The decrease in revenues from the quarter ended
March 31, 1998 to the quarter ended March 31, 1999 is primarily the result of
lower average sales prices for both platforms and modules. While unit volumes
for platforms and modules grew slightly in the quarter ended March 31, 1999,
compared with the March 1998 quarter, the average sales prices of both platforms
and modules decreased during the quarter ended March 31, 1999 versus the quarter
ended March 31, 1998. The decrease in average sales prices is the result of
increased pricing competition in the Company's market. Telecommunications
carriers are having to compete more on price for local access to small and
medium sized businesses and, as a result, the carriers are demanding price
reductions from access equipment suppliers. The increase in revenues from the
nine month period ended March 31, 1998 to the nine month period ended March 31,
1999 is the result of an increase in unit volumes of platforms and modules sold,
partially offset by lower average sales prices for platforms and modules due to
the market forces discussed above. The increase in unit volumes from the nine
month period ended March 31, 1998 to the nine month period ended March 31, 1999
is primarily the result of an increase in shipments of the Company's products to
Teleport, XEL and Nortel. See "Other Factors That May Affect Future Operating
Results - Indirect Channels of Distribution." Revenues increased slightly from
$25,395,000 in the quarter ended December 31, 1998 to $26,734,000 in the quarter
ended March 31, 1999 primarily as a result of increased shipments of the
Company's products to Nortel and Other Domestic Customers, mostly offset by
lower shipments of the Company's products to ADC and Motorola.
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 nine month periods ended March 31, 1998 and 1999, other
domestic customers as a group and international customers as a group, in
absolute dollars and as a percentage of total revenues. The category "Other
Domestic Customers" is the aggregate of all domestic customers individually
representing less than 10% of the Company's revenues for the reported period.
Three Months Ended March 31,
-----------------------------------------
1998 % 1999 %
------------------- --------------------
ADC $ 5,716,000 21% $ (a) ---
Paradyne 3,901,000 14% 7,737,000 29%
Alcatel 3,831,000 14% (a) ---
DSC 2,898,000 11% (a) ---
Teleport (a) --- 3,362,000 13%
XEL (a) --- 3,584,000 13%
Nortel (a) --- 4,939,000 18%
Other Domestic
Customers 10,419,000 38% 6,918,000 26%
International Customers 389,000 2% 194,000 1%
=================== ====================
Total Revenues $27,154,000 100% $26,734,000 100%
=================== ====================
Nine Months Ended March 31,
-----------------------------------------
1998 % 1999 %
------------------- --------------------
ADC $21,171,000 30% $ (a) ---
Paradyne 9,341,000 13% 23,182,000 30%
Motorola, Inc. (a) --- 8,164,000 11%
Teleport (a) --- 7,974,000 10%
Other Domestic
Customers 36,409,000 51% 35,709,000 46%
International Customers 4,134,000 6% 2,110,000 3%
=================== ====================
Total Revenues $71,055,000 100% $77,139,000 100%
=================== ====================
(a) - Amounts not provided as revenues for the period were less than 10% of the
total.
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. Customers individually representing 10% or more of the
Company's revenues for the three month periods ended March 31, 1998 and 1999
totaled 60% and 73% of the Company's total revenues, respectively. For the nine
month periods ended March 31, 1998 and 1999, revenues from customers
individually representing 10% or more of the Company's revenues totaled 43% and
51% of the Company's total revenues, respectively. The change in the percentages
from fiscal 1998 to 1999 reflects the growth of the Company's other domestic
customers and the increased acceptance of the Company's products. *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. *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
"Other Factors That May Affect Future Operating Results - Indirect Channels of
Distribution," "-Limited Order Backlog" and "-Relationship with Paradyne."
During the three and nine month periods ended March 31, 1999, direct
international revenues accounted for 1% and 3% of the Company's revenues,
respectively, compared to 2% and 6% for the three and nine month periods ended
March 31, 1998. The decrease in revenues for the three and nine month periods
ended March 31, 1999 versus the comparable periods in fiscal 1998 is primarily
the result of uncertain economic conditions in Asian and Russian marketplaces,
areas where the Company has experienced success in the past, and secondarily the
result of a lack of product that has all of the features and meets all of the
protocols demanded in international markets. In order to sell its products
internationally, the Company must meet standards established by international
telecommunications committees and authorities in various countries. While the
Company continues its homologation efforts in various countries to meet such
standards, international telecommunication industry deregulation has complicated
and slowed this process. *Accordingly, the Company does not anticipate that
international sales will increase significantly in the near future either in
absolute dollars or as a percentage of revenues. *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 March 31,
--------------------------------
1998 % Change 1999
Gross Profit $18,045,000 (15%) $15,425,000
As a percentage of revenues 66% 58%
Nine Months Ended March 31,
--------------------------------
1998 % Change 1999
Gross Profit $46,450,000 2% $47,204,000
As a percentage of revenues 65% 61%
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 quarter ended March 31, 1998 to the
quarter ended March 31, 1999 primarily as a result of lower product gross
margins. Gross profit increased from the nine month period ended March 31, 1998
to the nine month period ended March 31, 1999 primarily as a result of higher
unit shipment volumes partially offset by lower product gross margins. The gross
margin decreased from 66% and 65% in the quarter and nine month periods ended
March 31, 1998 to 58% and 61% in the quarter and nine month periods ended March
31, 1999 primarily as a result of: (1) increased sales of the Company's
lower-margin products and (2) lower average sales prices for platforms and
modules. *The Company expects its gross margins for the quarter ending June 30,
1999 to decline slightly from the levels experienced in the quarter ended March
31, 1999 due primarily to continuing competitive pressures on prices and to
increases in the mix of lower-margin products. *However, achievement of the
Company's expectations is subject to a number of risks, including customer mix,
the mix of products sold and the Company's ability to realize expected revenue
levels.
Research and Development Expenses (excluding charge for in-process
technologies)
Three Months Ended March 31,
--------------------------------
1998 % Change 1999
Research and development
expenses $3,900,000 28% $4,986,000
As a percentage of revenues 14% 19%
Nine Months Ended March 31,
--------------------------------
1998 % Change 1999
Research and development
expenses $11,108,000 30% $14,404,000
As a percentage of revenues 16% 19%
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 $1,086,000, or 28%, from the three months ended
March 31, 1998 to the comparable period in fiscal 1999 and by $3,296,000, or
30%, from the nine month period ended March 31, 1998 to the comparable period in
fiscal 1999. This increase was due to the combination of increased expenses for
personnel and equipment associated with the development of the Company's
SlimLine, StreamLine and Q-155 products. Research and development expenses as a
percentage of the Company's revenues increased in the three and nine month
periods ended March 31, 1999 versus the comparable periods ended March 31, 1998
due primarily to the lower than expected revenue growth in each of these
comparison periods. *In the quarter ending June 30, 1999, the Company expects
that these expenses will increase both in absolute dollars and as a percentage
of revenues as compared to the quarter ended March 31, 1999. *These expectations
are subject to a number of risks, including the Company's ability to realize
expected revenue levels and meet spending expectations.
Charge for In-process Technologies
The Company expensed, in the quarter ended March 31, 1998, $4.4 million
for licensing cell and packet technologies and related development software.
This charge is shown separately as "Charge for in-process technologies" in the
Condensed Consolidated Statement of Operations in this Form 10-Q. *The licensed
technologies are to be used in products that the Company is currently
developing. *If the Company is unsuccessful in developing the product, the
technologies have no future alternative use. See "Other Factors That May Affect
Future Operating Results - Rapidly Evolving Technology."
Selling, General and Administrative Expenses
Three Months Ended March 31,
--------------------------------
1998 % Change 1999
Selling, general and
administrative expenses $7,714,000 (2%) $7,542,000
As a percentage of revenues 28% 28%
Nine Months Ended March 31,
--------------------------------
1998 % Change 1999
Selling, general and
administrative expenses $19,877,000 8% $21,415,000
As a percentage of revenues 28% 28%
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 decreased $172,000, or
2%, from the three months ended March 31, 1997 to the comparable period in
fiscal 1998 and increased by $1,538,000, or 8%, from the nine month period ended
March 31, 1998 to the comparable period in fiscal 1999. The decrease in expenses
from the quarter ended March 31, 1998 to the quarter ended March 31, 1999 is
primarily the result of lower compensation, trade show and advertising expenses.
The increase from the nine month period ended March 31, 1998 to the comparable
period in fiscal 1999 was primarily the result of increased staffing and
associated expenses, and, to a lesser extent, customer support expenses in the
first nine months of fiscal 1999 versus the first nine months of fiscal 1998.
There was no change in selling, general and administrative expenses as a
percentage of the Company's revenues between the three and nine month comparison
periods. *The Company expects that these expenses will remain flat during the
fourth quarter of fiscal 1999 as compared to the quarter ended March 31, 1999.
*The Company does not expect that these expenses as a percentage of revenues
will increase during the next several quarters. *However, these expectations are
subject to a number of risks, including the Company's ability to realize
expected revenue levels and meet spending expectations.
Interest and Other Income, net
Three Months Ended March 31,
--------------------------------
1998 % Change 1999
Interest and other income, net $ 923,000 (5%) $ 873,000
As a percentage of revenues 3% 3%
Nine Months Ended March 31,
--------------------------------
1998 % Change 1999
Interest and other income, net $ 2,506,000 11% $2,793,000
As a percentage of revenues 4% 4%
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 decrease in interest and other income, net, from the three
month period ended March 31, 1998 as compared to the same period in fiscal 1999
was due to lower cash balances as cash was used for the repurchase of common
stock. The increase in interest and other income, net, for the nine month period
ended March 31, 1999 as compared to the same period ended March 31, 1998 was due
to increased interest income from higher cash balances invested in high grade,
marketable fixed income securities versus lower yielding bank money market
accounts.
Provision (Benefit) for Income Taxes
Three Months Ended March 31,
--------------------------------
1998 % Change 1999
Provision for income taxes $1,082,000 29% $1,395,000
As a percentage of income 37% 37%
before taxes
Nine Months Ended March 31,
--------------------------------
1998 % Change 1999
Provision for income taxes $5,010,000 5% $5,246,000
As a percentage of income 37% 37%
before taxes
The Company's provision for income taxes represents estimated federal
and state income taxes. The Company's effective tax rate for the quarter and
nine month period ended March 31, 1999 remained at 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.
Net Income per Share
Three Months Ended March 31,
--------------------------------
1998 % Change 1999
Net income $1,841,000 29% $2,375,000
Net income per share (diluted) $0.07 43% $0.10
Shares used in computing diluted 27,507,000 (10%) 24,628,000
net income per share
Nine Months Ended March 31,
--------------------------------
1998 % Change 1999
Net income $8,530,000 5% $8,932,000
Net income per share (diluted) $0.31 13% $0.35
Shares used in computing diluted 27,457,000 (7%) 25,599,000
net income per share
In comparison to the quarter ended March 31, 1998, net income for the
March 1999 quarter increased from $1,841,000 to $2,375,000 or 29%. Net income in
the nine month period ended March 31, 1999 increased $402,000 or 5% from the
nine month period ended March 31, 1998. However, net income in the quarter ended
March 31, 1998 was reduced by a $4.4 million pre-tax charge for in-process
technologies (see "Charge For In-Process Technologies" above). This charge
reduced net income in the three and nine month periods ended March 31, 1998 by
$2.8 million or $0.10 per share. Without this charge, diluted earnings per share
would have decreased from $0.17 in the March 1998 quarter to $0.10 in the March
1999 quarter and from $0.41 in the nine month period ended March 31, 1998 to
$0.35 for the comparable period in fiscal 1999.
Liquidity and Capital Resources
Nine Months Ended March 31,
1998 % Change 1999
Net cash provided by operating
activities $23,139,000 (76%) $5,663,000
Period end cash, cash
equivalents and short-term
investments $96,256,000 (9%) $87,976,000
Period end working capital $100,448,000 (0%) $100,182,000
At March 31, 1999, the Company had approximately $88 million of cash, cash
equivalents and short-term investments. Net cash totaling $5.7 million was
provided by operating activities during the nine months ended March 31, 1999,
due primarily to net income of $8.9 million and increases in income taxes
payable and accounts payable aggregating $5.3 million, offset partially by
increases in inventories and accounts receivable, aggregating $10.1 million.
Cash used in investing activities during the nine months ended March 31,
1999 consisted primarily of purchases of property and equipment totaling $3.5
million. Financing activities during the nine months ended March 31, 1999
resulted in a net use of cash of $20.2 million. The net use of cash is the
result of $22.3 million of cash used in the repurchase of the Company's Common
Stock partially offset by cash provided by the issuance of Common Stock in
connection with the Company's employee benefit plans.
As of March 31, 1999, the Company's working capital was approximately $100
million. Except for the potential obligation related to put warrants, as
discussed below and in the Company's Quarterly Reports on Form 10-Q for the
quarters ended September 30, 1998 and December 31, 1998, 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.
On August 31, 1998, the Company's Board of Directors authorized the
repurchase, at management's discretion, of up to 4.0 million shares of the
Company's Common Stock at market prices not to exceed $14.00 per share and as
market and business conditions warrant. As of March 26, 1999, the Company had
repurchased for cash 2.4 million shares at market prices ranging from $6.69 to
$10.94 per share. As of September 17, 1998, pursuant to the authorized stock
repurchase program, the Company sold 2.0 million put warrants and purchased 1.5
million call options. On January 26, 1999, the Company dissolved the obligation
for 1.0 million put warrants and 0.75 million call options that were to expire
on January 29, 1999. As a result, the Company currently has a maximum potential
obligation related to the put warrants of $10.65 million. The remaining 1.0
million put warrants and 0.75 million call options expire on September 15, 1999.
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 and associated risks but, for improved
readability, does not include asterisks.
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, Inc., which offer a broad
line of products including access devices for business applications and from
newer companies, such as Carriers Access Corporation ("CAC") and Vina
Technologies ("VINA"). The Company has experienced and expects substantial
additional competition from existing competitors as they develop products to
compete with the functionality and flexibility of the Company's products. As
shipments of the Company's SlimLine and StreamLine products increase, it expects
to face additional competition from channel bank and CSU/DSU vendors as well as
with new startups focusing on the access equipment market. The Q-155 product
will likely compete with broadband access products offered or announced by a
number of vendors including Fibex which was recently acquired by Cisco Systems.
Certain of the telecommunications equipment suppliers which market the Company's
products have recently either acquired or expressed an interest in acquiring
companies which have products or technologies that either do or may compete with
the Company's products. Other telecommunications equipment suppliers that market
and distribute the Company's products may in the future develop or acquire
products that could be sold for selected applications for which the Company's
products are currently provided. Successful development or acquisition of such
products could reduce the level of demand from these telecommunications
equipment suppliers for the Company's products. In addition, the Company
believes that there will be an increase in the intensity of price competition in
the markets served by the Company's products. Thus, while unit volumes are
expected to increase, the Company believes that the rate of increase of revenues
will be lower than the rate of increase in units. While the Company has recently
begun selling is StreamLine and SlimLine products, which are more price
competitive than its IMACS platform, these new products must compete with an
increasing number of low priced integrated access devices ("IADs"). As a result,
the Company may find it more difficult to achieve expected levels of revenues
and profitability.
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 recognized a
majority of its revenues from sales booked and shipped in the last month of a
quarter, including the quarter ended March 31, 1999. Due to the delivery
requirements of its customers, the Company expects to continue to experience
limited order backlog. The Company's manufacturing procedures are designed to
assure rapid response to customer demand, but may, in some circumstances, create
risk of excess or inadequate inventory, which may have an adverse affect on the
Company's business and operating results. The Company's agreements with its
customers typically allow customers to cancel orders or delay scheduled
shipments without penalty until a relatively short period of time before planned
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 revenues for a quarter or series of
quarters. Because a substantial portion of customer orders are filled within the
fiscal quarter of receipt, and because of the ability of customers to revise or
cancel orders and change delivery schedules without significant penalty, the
Company believes that its backlog as of any given date is not necessarily
indicative of actual revenues for any succeeding period.
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 and sales and marketing personnel, the
competition for whom is intense. In December 1998, Nicholas Williams, the
Company's President and CEO suffered exposure to sub-freezing weather. Mr.
Williams returned to work on a full-time basis in March 1999.
INDIRECT CHANNELS OF DISTRIBUTION. Substantial portions 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 thc strategic partners 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 strategic partners will
continue to place orders with the Company or that the Company will be able to
obtain orders from new strategic partners or end users. See "-Relationship with
Paradyne." Strategic partners 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 thc quarters ended September 30 and December 31, 1997, March 31,
1998 and June 30, 1998, shipments of the Company's products to MCI
Communications Corporation ("MCI"), through ADC, one of the Company's strategic
distribution partners, represented more than 10% of the Company's total revenues
for such quarters. Revenues derived from particular carrier projects have been
and continue to be difficult to forecast due to a relatively long sales cycle
and delays in the timing of such projects. For example, the Company's financial
results for the first quarter of fiscal 1999 were adversely affected when
product shipments for MCI were lower than expected. The Company's business and
operating results were also adversely affected in the quarter ended March 31,
1997 as a result of deployment delays by particular carriers. Similar delays may
occur in the future and would have a significant 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 or in the capital expenditures of the end
user customer, consolidation among carriers and delays in obtaining regulatory
approvals for new tariffs. See "-Mergers of the Company's Customers." 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 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. There can be no assurance that any future delays would
not have an adverse effect.
MERGERS OF THE COMPANY'S CUSTOMERS. A number of the largest CLECs which
use the Company's products have either merged or announced plans to merge with
larger carriers over the next several quarters. MCI has merged with WorldCom,
Inc. ("WorldCom"), Teleport has merged with AT&T Corporation ("AT&T"), and GTE
Network Services ("GTE") has announced an intention to merge with Bell Atlantic
Corporation ("Bell Atlantic"). The Company believes that part of the impetus for
each of these mergers is to increase the combined carrier's ability to compete
for local access markets. In the long term, the Company believes that this
should cause capital spending on local access, in which the type of products
provided by the Company serve a vital function, to grow. However, over the next
several quarters, as these mergers are implemented, it is likely that capital
expenditures will be temporarily deferred as the newly combined companies
evaluate inventories of undeployed equipment, potential overlaps in network
deployment plans, strategies for on-net versus off-net deployments, and
assignment of responsibilities for deployments in targeted local markets. This
risk of a deferral in expenditures on local access, including expenditures for
the Company's products, has already materialized in the case of MCI. The Company
anticipates that it also may see a deferral of expenditures for its products by
Teleport in connection with its merger and GTE in connection with its
anticipated merger. In addition, the Company anticipates that the slowdown in
expenditures may persist for multiple quarters following the mergers. In
addition, the increased buying power wielded by these merged carriers and by
merged equipment suppliers, such as Alcatel and DSC Communications Corp.
("DSC"), is likely to place added competitive price pressure on equipment
manufacturers such as Premisys.
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, availability and 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) or reductions
in expected shipments to a single carrier (which occurred in the quarter ended
September 30, 1998) 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. The Company has on
several occasions, including the quarters ended September 30, and December 31,
1998, experienced such an unforecasted revenue shortfall and was not able to
compensate for it through expense reductions. 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 cell and packet technologies 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 and cost effective products and enhancements. The Company has
licensed certain technology from Positron for inclusion in the Company's Q-155
products, which were announced in June 1997. The Company began field trials for
this product in the quarter ending December 31, 1998 and shipped its first Q-155
product in the quarter ended March 31, 1999. Also, in the quarter ended March
31, 1998, the Company licensed cell and packet technologies from SNT. The
Company intends to ship products based upon the SNT technology in calendar 1999.
However, there can be no assurance that the Company will be able to successfully
develop new products or new enhancements to existing products on a timely and
cost-effective basis. The Company may also experience delays in connection with
its product development efforts, which can impact expected operating results.
For example, the Company's shipment of its new SlimLine product had been delayed
for several quarters due to hardware and software revisions necessary to make
the product more acceptable in the marketplace. In addition, failure to achieve
market acceptance of new 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.
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 the Company's IMACS product 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 the quarter ended March 31, 1997, Paradyne announced
new products which are extensions of its existing line of CSU/DSU products.
Premisys believes that the higher capacity models of Paradyne's 916x series
offer features that are similar to those of the Company's IMACS and StreamLine
products. See "-Competition" and "-Rapidly Evolving Technology." In the quarter
ended December 31, 1997, the Company entered into an OEM agreement with Lucent
for the purchase of the SlimLine and StreamLine products directly from Premisys.
Although sales to Paradyne declined 34% from fiscal 1997 to fiscal 1998,
shipments to Paradyne represented a significant portion of the Company's
revenues in fiscal 1998 and continue to represent a significant portion of the
Company's revenues in fiscal 1999. Neither Paradyne nor Lucent is subject to any
minimum purchase requirements, and there can be no assurance that they will
continue to place orders with the Company. Significant reductions in shipments
to Paradyne could have a material adverse effect on the Company's business and
operating results.
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 CERTA1N 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.
YEAR 2000 RISKS. The Company has a formal Year 2000 Conformance Project in
place that focuses on four key readiness areas: (1) internal infrastructure
readiness, addressing internal information systems and non-information
technology systems; (2) supplier readiness, addressing the preparedness of our
supplier base; (3) product readiness, addressing the Company's product
functionality, which includes customer support of the installed base of the
Company's products, and (4) customer readiness, addressing the preparedness of
our customer base. For each readiness area, a task force is systematically
performing a Company-wide risk assessment, conducting testing and remediation,
and communicating with employees, suppliers, customers and other third party
business partners to raise awareness of the Year 2000 problem. Following are
overviews of each readiness area and the Company's progress for becoming ready
for the Year 2000.
Internal infrastructure readiness: An assessment of internal computer
software and hardware has been completed with the assistance of a third party.
The Company has migrated to an upgraded version of its enterprise-wide
accounting and manufacturing system, which is Year 2000 compliant. For other
systems, the Company has identified all non-compliant systems, established a
project for prioritized system compliance, and is in the process of executing
under such compliance project. Other systems are scheduled to be compliant no
later than August 1999. In addition to applications and information technology
hardware, the Company is testing and developing remediation plans for embedded
systems, facilities and other operations.
Supplier readiness: This program is focused on minimizing the risk
associated with suppliers in two areas: (1) a supplier's business capability to
continue providing products and services, and (2) compliance of a supplier's
products with Year 2000. Suppliers have been identified and contacted based on
their criticality to the Company. The Company has received responses from a
significant number of its preferred suppliers. Most of the respondents are in
the process of developing remediation plans. Supplier issues that potentially
affect the Company's products are targeted to be resolved by July 1999.
Product readiness: The Company has completed a comprehensive program which
focused on identifying and resolving Year 2000 issues existing in the Company's
products. The program encompassed a number of key efforts including testing,
evaluation, engineering and manufacturing implementation. In addition, the
program focused on customer support of the installed base, including
coordination of retrofit activity and testing existing customer electronic
transaction capability. Based on these efforts, the Company believes that its
products are Year 2000 compliant.
Customer readiness: The Company sells a substantial portion of its product
to large, publicly traded companies who themselves are addressing Year 2000
compliance issues. Premisys has been working directly with these customers, who
are also our strategic distribution partners or major distributors, to resolve
any issues between them and the Company. The Company has also reviewed their
readiness statements as filed in public documents with the Securities and
Exchange Commission. Based on these efforts, the Company believes that Year 2000
issues will not materially affect shipment of product to these customers.
However, there can be no assurances that unforeseen problems or problems with
customers of Premisys' partners or distributors will not occur and have a
material impact on the Company's revenues in the future. In the event that any
of the Company's significant customers do not successfully and timely achieve
Year 2000 compliance of their own products, the Company's business and
operations could be adversely affected. Use of the Company's products in
connection with customer products which are not Year 2000 compliant, including
non-compliant hardware and software, may result in inaccurate exchange of dates,
performance problems or system failure. If the businesses of the Company's
significant customers are materially and adversely affected by Year 2000 issues,
the Company's business will also be materially and adversely affected to the
extent that such customers delay, postpone or cancel orders for the Company's
products as they divert resources to fixing their own Year 2000 compliance
problems. In addition, the Company believes that the businesses of the Company's
strategic partners may be adversely affected to the extent that the Year 2000
compliance concerns of their own end user customers affect the purchasing
patterns of such customers in the short-term. Such end user customers may defer
purchases of telecommunications equipment generally until early in the next
millennium to avoid Year 2000 problems. Any such deferral of purchases could
reduce demand for the Company's products by the Company's strategic partners,
which could have a material adverse effect on the Company's business, operating
results and financial condition.
General Risk Factors: The Company's Year 2000 project is currently in the
remediation phase. The Company believes that its greatest potential risks are
associated with its suppliers. In many cases, the Company is relying on
assurances from suppliers that new and upgraded information systems and other
products will be Year 2000 compliant. The Company plans to test such third-party
products, but cannot be sure that its tests will be adequate or that, if
problems are identified, they will be addressed by the supplier in a timely and
satisfactory way. The Company is at the remediation phase for its operations and
infrastructure, and, while the Company cannot foresee any significant problems
or issues, it cannot predict whether or not significant problems or issues will
be identified in the future. The Company has not yet determined the extent of
contingency planning that may be required. Based on the status of the
assessments made and remediation plans developed to date, the Company is not in
a position to state the total cost of remediation of all Year 2000 issues;
however, the Company believes such costs will not exceed $500,000. However, the
Company has not yet developed remediation for all problems, developed all
contingency plans, or completely implemented or tested any of its remediation
plans. As the Year 2000 project continues, the Company may discover additional
Year 2000 problems, may not be able to develop, implement, or test remediation
or contingency plans, or may find that the costs of these activities exceed
current expectations. Because the Company uses a variety of information systems
and has additional systems embedded in its operations and infrastructure, it
cannot be sure that all of its systems will work together in a Year
2000-compliant fashion. Furthermore, the Company cannot be sure that it will not
suffer business interruptions, either because of its own Year 2000 problems or
those of its customers or suppliers whose Year 2000 problems may make it
difficult or impossible for them to fulfill their commitments to the Company. If
the Company fails to satisfactorily resolve Year 2000 issues related to its
products in a timely manner, it could be exposed to liability to third parties.
RISKS FROM CONVERSION TO SINGLE EUROPEAN CURRENCY. On January 1, 1999,
certain member states of the European Economic Community fixed their respective
currencies to a new currency, commonly known as the Euro. During the three years
beginning on January 1, 1999, business in these countries will be conducted both
in the existing national currency, such as the French Franc or the Deutsche
Mark, as well as the Euro. Companies operating in or conducting business in
these countries will need to ensure that their financial and other software
systems are capable of processing transactions and properly handling the
existing currencies and the Euro. Based on the current level of direct
international business being conducted by the Company, the Company does not
expect that introduction and use of the Euro will materially affect the
Company's business. However, if the Company encounters unexpected opportunities
and/or difficulties, the Company's business could be adversely affected,
including the inability to bill customers and to pay suppliers for transactions
denominated in the Euro and the inability to properly record transactions
denominated in the Euro in the Company's financial statements.
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.
The Company, in the normal course of business, is subject to the risks
associated with foreign currency exchange rates, fluctuations in the market
value of its fixed income securities available-for-sale, and changes in interest
rates. Please refer to Item 7A - "Quantitative and Qualitative Disclosures About
Market Risk" of the Company's Form 10-K for the fiscal year ended June 26, 1998
for a more detailed discussion.
There has been no significant change in the Company's exposure to foreign
currency fluctuations during the quarter ended March 31, 1999 versus the
quarters ended June 30, September 30, and December 31, 1998.
The fair market value of the Company's fixed income securities portfolio
at June 30, 1998 and March 31, 1999 was $89 million and $85 million,
respectively, with the corresponding unrealized gain included as a component of
shareholders' equity. The average weighted duration of the portfolio increased
from 0.99 years at June 30, 1998 to 1.28 years at March 31, 1999.
The following table presents the hypothetical change in the aggregate fair
market value of the Company's fixed income securities portfolio at March 31,
1999 which would result if the Federal Funds Rate changed as shown. Market
changes reflect immediate hypothetical parallel shifts in the yield curve of
plus or minus 50 basis points (BPS), 100 BPS and 150 BPS.
Decrease in Federal Increase in Federal
Funds Rate Funds Rate
-------------------------------------------
Change in Federal Funds (150 (100 (50 50 100 150
Rate (BPS) BPS) BPS) BPS) BPS BPS BPS
- ----------------------------------------------------------------------
Change in Securities $1,651 $1,090 $529 ($545)($1,082)($1,610)
Valuation ($000's)
The Company also has a potential obligation related to put warrants. See
Note 4, "Changes in Stockholders' Equity," of "Notes to Condensed Consolidated
Financial Statements" in this Form 10-Q.
<PAGE>
II. OTHER INFORMATION
ITEM 5. Other Information
In March 1999, Claude Dupuis, Vice President, Premisys Communications (Canada)
Inc., assumed the role of Senior Vice President, Engineering, replacing Boris
Auerbuch who has been acting in this capacity since October 1998. Boris Auerbuch
has resumed his role as Senior Vice President and Chief Technical Officer of the
Company.
ITEM 6. Exhibits and Reports on Form 8-K
A. Exhibits
Exhibit No. Description of Exhibit
27.01 Financial Data Schedule (Nine month period ended
March 26, 1999)
B. Reports on Form 8-K
None
<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 10, 1999 /S/ Robert W. Dilfer
- --------------------------------- --------------------------------
Date Robert W. Dilfer
Vice President and Controller
(Duly Authorized Officer and
Chief Accounting Officer)
<PAGE>
Index to Exhibits
Exhibit No. Description of Exhibit
27.01 Financial Data Schedule (Nine month period ended
March 26, 1999)
<PAGE>
Exhibit 27.01
<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 March 26, 1999, 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-25-1999
<PERIOD-START> JUN-27-1998
<PERIOD-END> MAR-26-1999
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0
0
<COMMON> 264
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</TABLE>
