UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 24, 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 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 October 22, 1999 was 24,231,564 shares.
===========================================================================
<PAGE>
PREMISYS COMMUNICATIONS, INC.
INDEX
PART I. Financial Information Page No.
Item 1. Financial Statements
Condensed Consolidated Balance Sheet - June
30, 1999 and September 30, 1999 3
Condensed Consolidated Statement of Operations
- Three Month Periods ended September 30, 1998 4
and 1999
Condensed Consolidated Statement of Cash Flows
- Three Month Periods ended September 30, 1998
and 1999 5
Notes to Condensed Consolidated Financial
Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 21
PART II. Other Information
Item 2. Changes in Securities and Use of Proceeds 23
Item 5. Other Information 24
Item 6. Exhibits and Reports on Form 8-K 25
Signatures 26
<PAGE>
I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Premisys Communications, Inc.
Condensed Consolidated Balance Sheet
(in thousands except per share data)
<TABLE>
<S> <C> <C>
June 30, September 30,
1999 1999
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 3,982 $ 6,415
Short-term investments 80,452 73,642
Accounts receivable, net 8,459 12,151
Inventories 15,231 10,501
Deferred tax assets 7,895 7,895
Prepaid expenses and other assets 1,552 1,498
---------- ----------
Total current assets 117,571 112,102
Property and equipment, net 9,053 9,035
========== ==========
$126,624 $121,137
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 5,759 $ 3,510
Accrued liabilities 10,020 9,244
Income taxes payable 1,015 1,249
----------- -----------
Total current liabilities 16,794 14,003
----------- -----------
Put warrants 10,625 ---
----------- -----------
Stockholders' equity:
Common Stock, $0.01 par value, 100,000 shares
authorized; 26,478 and 26,560 shares issued and 265 266
outstanding
Additional paid-in capital 78,336 85,747
Treasury stock, 2,360 shares (22,303) (22,303)
Retained earnings 42,907 43,424
----------- -----------
Total stockholders' equity 99,205 107,134
=========== ===========
$126,624 $121,137
=========== ===========
</TABLE>
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 September 30,
1998 1999
---- ----
Revenues $25,011 $21,676
Cost of revenues 8,388 9,802
------------ ----------
Gross profit 16,623 11,874
------------ ----------
Operating expenses:
Research and development 4,748 5,911
Selling, general and administrative 6,493 5,922
------------ ----------
Total operating expenses 11,241 11,833
------------ ----------
Income from operations 5,382 41
Interest and other income, net 988 719
------------ ----------
Income before income taxes 6,370 760
Provision for income taxes 2,357 243
------------ ----------
Net income $ 4,013 $ 517
============ ==========
Net income per share:
Basic $ 0.15 $ 0.02
Diluted $ 0.15 $ 0.02
============ ==========
Shares used in computing net income per share:
Basic 25,910 24,165
Diluted 27,025 24,820
============ ==========
See notes to condensed consolidated financial statements
<PAGE>
Premisys Communications, Inc.
Condensed Consolidated Statement Of Cash Flows - (unaudited)
(in thousands)
Three Months Ended September 30,
1998 1999
Cash flows from operating activities:
Net income $4,013 $ 517
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation 678 1,083
Changes in assets and liabilities:
Accounts receivable (2,490) (3,692)
Inventories (2,719) 4,730
Prepaid expenses and other assets 336 54
Accounts payable 276 (2,249)
Accrued liabilities (873) (776)
Income taxes payable 2,340 234
------------ -------------
Net cash provided by (used in) operating 1,561 (99)
activities
------------ -------------
Cash flows from investing activities:
Purchase of property and equipment (750) (1,065)
Sale (purchase) of short-term investments (10,173) 6,810
------------ -------------
Net cash provided by (used in) investing (10,923) 5,745
activities
------------ -------------
Cash flows from financing activities:
Proceeds from issuance of Common Stock, 1,317 485
net
Dissolution of put warrants --- (3,698)
Repurchase of Common Stock (8,941) ---
------------ -------------
Net cash used in financing activities (7,624) (3,213)
------------ -------------
Net increase (decrease) in cash (16,986) 2,433
Cash and cash equivalents at beginning of 31,006 3,982
period
------------ -------------
Cash and cash equivalents at end of period $14,020 $ 6,415
============ =============
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 condition as of September 30, 1999, and the
results of its operations and its cash flows for the three month periods ended
September 30, 1998 and 1999. These financial statements should be read in
conjunction with the Company's audited financial statements as of June 30, 1998
and 1999 and for each of the three years in the period ended June 30, 1999,
including notes thereto, included in the Company's Annual Report on Form 10-K,
as amended, for the year ended June 30, 1999. Operating results for the three
month period ended September 30, 1999 are not necessarily indicative of the
results that may be expected for the year ending June 30, 2000.
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, 1999 and September 30, 1998 and 1999 for financial statement presentation
purposes actually reflect amounts for the fiscal periods ended on June 25, 1999,
September 25, 1998 and September 24, 1999, respectively.
NOTE 2 - Inventories (in thousands)
June 30, September
1999 30,
1999
(unaudited)
Inventories
Raw materials $ 1,376 $ 1,071
Work-in-process 1,476 617
Finished goods 12,379 8,813
----------- -------------
=========== =============
$ 15,231 $ 10,501
=========== =============
<PAGE>
NOTE 3 - Earnings Per Share
Three Month Period Ended
September 30, 1998 September 30, 1999
--------------------------- ---------------------------
Net Shares Per Net Shares Per
Income Share Income Share
Amount Amount
--------------------------- ---------------------------
(in thousands except per share data)
Basic EPS
Net income
available
to common
stockholders $4,013 25,910 $ 0.15 $ 517 24,165 $ 0.02
Effect of
Dilutive
Securities
Common stock
equivalents ---- 1,115 ---- 655
--------------- ----------------
Diluted EPS
Net income (loss)
available to
common
stockholders and
assumed
conversions $4,013 27,025 $ 0.15 $ 517 24,820 $ 0.02
=========================== ===========================
Options to purchase 2,284,309 and 3,810,242 shares of Common Stock which were
outstanding during the three month periods ended September 30, 1998 and 1999,
respectively, 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
shares of Common Stock in each period.
NOTE 4 - Changes in Stockholders' Equity
(in thousands)
Stockholders' equity at June 30, 1999 $ 99,205
Put warrants 10,625
Cost to dissolve put warrants (3,698)
Issuance of stock 485
Net income 517
================
Stockholders' equity at September 30, 1999 $ 107,134
================
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 its
Common Stock at market prices not to exceed $14.00 per share and as market and
business conditions warrant. The primary purpose of this repurchase program was
to increase stockholder value.
In connection with this program, on September 17, 1998 the Company sold
2.0 million put warrants to, and purchased 1.5 million call options from an
independent third party. The Company used the proceeds from the sale of the put
warrants to purchase call options in a transaction not requiring any cash outlay
at the time. The put warrants entitled the independent party to sell shares of
the Company's common stock to the Company at specified strike prices and
exercise dates.
On January 26, 1999, the Company paid $762,000 to dissolve the obligation
for 1.0 million put warrants and 0.75 million call options that were to expire
on January 29, 1999. On September 10, 1999, the Company paid $3.7 million to
dissolve the remaining 1.0 million put warrants and 0.75 million call options
which were to expire on September 15, 1999. The costs associated with the
dissolution of these put warrants are reflected as a component of stockholders'
equity for the quarter ended March 31, 1999 and the quarter ended September 30,
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.
NOTE 6 - Subsequent Events
On October 20, 1999, Zhone Technologies, Inc., a Delaware corporation
("Zhone"), Zhone Acquisition Corp., a Texas corporation and a wholly owned
subsidiary of Zhone ("Merger Sub"), and the Company entered into an Agreement
and Plan of Merger (the "Merger Agreement"). The Merger Agreement provides for a
cash tender offer ("Offer") by Merger Sub for all of the issued and outstanding
shares of the Company's Common Stock together with the associated rights to
purchase shares of Series A Junior Participating Preferred Stock, at a price of
$10.00 per share, net to the seller in cash without interest. The Offer is
conditioned upon, among other things, there being validly tendered and not
withdrawn, that number of shares which would constitute not less than 75% of the
outstanding shares of the Company's Common Stock, calculated on a fully diluted
basis. The Merger Agreement also provides that the Offer will be followed by a
merger ("Merger") of the Company with and into the Merger Sub, in which all
remaining outstanding shares of the Company's Common Stock would be converted
into the right to receive $10.00 per share, net to the seller in cash without
interest.
The Merger and the Offer also are conditioned on the expiration of the
applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act
and other customary closing conditions.
In connection with the execution of the Merger Agreement, Zhone entered
into a stockholders agreement ("Stockholders Agreement") pursuant to which
Raymond Lin, Nicholas Williams and Boris Auerbuch have agreed to tender their
shares in the Offer. In addition, pursuant to an option agreement ("Company
Option Agreement"), the Company has granted Zhone an option to purchase newly
issued shares of the Company's Common Stock under certain circumstances if more
than 85 percent but less than 90 percent of the outstanding shares of the
Company's Common Stock are tendered in the Offer.
In connection with the execution of the Merger Agreement, the Company's
Board of Directors also approved an amendment to its Rights Agreement dated
September 18, 1998 with ChaseMellon Shareholder Services, L.L.C. making the
Rights Agreement inapplicable to the Offer, the Merger, the Merger Agreement,
the Stockholders Agreement and the Company Option Agreement.
For further information, refer to the Company's report on Form 8-K filed
on October 26, 1999 as well as the Schedule 14D-1 filed with the Securities and
Exchange Commission by Zhone and the Schedule 14D-9 filed by the Company.
<PAGE>
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
This Form 10-Q contains forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A
of the Securities Act of 1933, as amended. These forward-looking statements
involve a number of risks and uncertainties which are described throughout this
Form 10-Q, including: demand from and its relationships with its strategic
partners and major customers, including ADC Telecommunications ("ADC"), AT&T
Local Services ("ALS") formerly Teleport Communications Group ("Teleport"),
Motorola, Inc. ("Motorola"), Paradyne Corporation ("Paradyne") and XEL
Communications, Inc. ("XEL"); competition; 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"); market acceptance of the SlimLine, StreamLine and Q-155 products;
rapidly changing technologies and the Company's ability to respond to them;
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; the growth of demand for
telecommunications services such as wireless, cellular and the Internet; 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, as amended for the year ended June 30,
1999. 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 by asterisks (*) (or italics in the non-EDGAR version of this
Form 10-Q) 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 also intended to
identify forward looking statements, but these are not the exclusive means of
identifying such statements. In addition, the section labeled "Other Factors
That May Affect Future Operating Results," which does not include asterisks for
improved readability, consists primarily of forward-looking statements and
associated risks. The Company undertakes no obligation to revise any
forward-looking statements in order to reflect events or circumstances that may
arise after the date of this report. Readers are urged to carefully review and
consider the various disclosures made by the Company in this report and in the
Company's other reports filed with the Securities and Exchange Commission,
including its Form 10-K, as amended, for the year ended June 30, 1999, that
attempt to advise interested parties of the risks and factors that may affect
the Company's business.
Revenues
Three Months Ended September 30,
--------------------------------------
1998 % Change 1999
Revenues $25,011,000 (13%) $21,676,000
Revenues consist primarily of gross sales of products, less discounts and
sales returns and allowances. The decrease in revenues from the quarter ended
September 30, 1998 to the quarter ended September 30, 1999 is primarily the
result of lower unit volumes for both IMACS platforms and modules. The lower
unit volumes were partially offset by an increase in average sales prices for
both platforms and modules in the quarter ended September 30, 1999, compared
with the quarter ended September 30, 1998. The increase in average sales prices
was primarily due to a more favorable mix of customers and products in the
quarter ended September 30, 1999 versus the quarter ended September 30, 1998.
*The Company expects that revenues in the December 1999 quarter will increase
somewhat compared with those reported for the quarter ended September 30, 1999.
*However, the Company's expectations regarding future revenue levels are subject
to numerous risks and uncertainties, including competition, limited order
backlog, its relationships with its strategic partners, the introduction and
acceptance of new products and the level of capital expenditures by CLECs and
other carriers. See "Other Factors That May Affect Future Operating Results
- -Competition," "-Limited Order Backlog," "-Indirect Channels of Distribution,"
"-Rapidly Evolving Technology," "-Mergers of the Company's Customers" and
"-Risks Associated with Announcement of Acquisition by Zhone."
The following table sets forth, for the periods indicated, the revenues
generated by customers which accounted for 10% or more of the Company's revenues
in the quarters ended September 30, 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.
Source of Revenues
Three Months Ended September 30,
-----------------------------------------------
1998 % 1999 %
---- -- ---- --
Motorola $3,157,000 13% $4,978,000 23%
Paradyne 9,037,000 36% 4,293,000 20%
ALS (a) --- 4,058,000 19%
Other Domestic Customers 11,856,000 47% 7,408,000 34%
Direct International
Customers 961,000 4% 939,000 4%
====================== ======================
Total Revenues $25,011,000 100% $21,676,000 100%
====================== ======================
(a) - Amounts not separately provided (but are instead included in "Other
Domestic Customers") 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. For the quarters ended September 30, 1998 and 1999,
customers individually representing 10% or more of the Company's revenue
generated 49% and 62% of the Company's total revenues, respectively. The
increase in the percentages is primarily the result of growth in sales to ALS
from the September, 1998 quarter to the September, 1999 quarter. *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" "-Limited Order
Backlog," "-Quarterly Fluctuations," "- Indirect Channels of Distribution," and
"-Relationship with Paradyne."
In the quarter ended September 30, 1998 and the quarter ended September 30,
1999, direct international revenues accounted for 4% of the Company's revenues.
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. However, 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. See "Other Factors That May
Affect Future Operating Results - Industry Standards and Regulatory Matters."
Gross Profit
Three Months Ended September 30,
--------------------------------------
1998 % Change 1999
Gross Profit $16,623,000 (29%) $11,874,000
As a percentage of revenues 66% 55%
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 months ended September 30, 1998
to the quarter ended September 30, 1999 primarily due to the combination of
lower unit shipment volumes and higher manufacturing expenses which resulted
primarily from a $2 million inventory reserve taken to reflect concerns
regarding market willingness to purchase the Company's present SlimLine product
currently held in inventory. The gross margin decreased from the quarter ended
September 30, 1998 to the quarter ended September 30, 1999, due primarily to
higher manufacturing expenses. Product margins were unchanged from the quarter
ended September 30, 1998 to the quarter ended September 30, 1999. *The Company
expects its gross margins for the remainder of fiscal 2000 to decline from the
55% reported in the quarter ended September 30, 1999, due primarily to
anticipated changes in the mix of IMACS, StreamLine, SlimLine and Q-155 products
sold. *However, achievement of the Company's expectations is subject to a number
of uncertainties, including customer mix, the mix of products sold and the
Company's ability to realize expected revenue levels.
Research and Development Expenses
Three Months Ended September 30,
-------------------------------------
1998 % Change 1999
Research and development expenses $4,748,000 25% $5,911,000
As a percentage of revenues 19% 27%
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 $1,163,000, or 25%, from the quarter ended
September 30, 1998 to the quarter ended September 30, 1999. This increase was
primarily due to increased personnel expenses, increased expenses for outside
services and materials and increased equipment expenses associated with the
development of the Company's Q-155 product. The increase in research and
development expenses as a percentage of the Company's revenues from the quarter
ended September 30, 1998 to the quarter ended September 30, 1999 was primarily
the result of lower revenues in the quarter ended September 30, 1999. *The
Company expects that during the remaining quarters of fiscal 2000 these expenses
will increase in absolute dollars but decrease as a percentage of revenues as
compared to the quarter ended September 30, 1999. *These expectations are
subject to a number of risks, including the Company's ability to realize
expected revenue levels and meet spending expectations.
Selling, General and Administrative Expenses
Three Months Ended September 30,
-------------------------------------
1998 % Change 1999
Selling, general and administrative $6,493,000 (9%) $5,922,000
expenses
As a percentage of revenues 26% 27%
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 $571,000, or
9%, from the quarter ended September 30, 1998 to the quarter ended September 30,
1999. This decrease was primarily a result of decreased legal, staffing, travel
and advertising expenses. The increase in selling, general and administrative
expenses as a percentage of the Company's revenues in the quarter ended
September 30, 1999 versus the quarter ended September 30, 1998 was primarily the
result of lower revenues in the quarter ended September 30, 1999. *The Company
expects that during the remaining quarters of fiscal 2000 these expenses will
increase in absolute dollars but decrease as a percentage of revenues as
compared to the quarter ended September 30, 1999. *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 September 30,
-------------------------------------
1998 % Change 1999
Interest and other income, net $988,000 (27%) $719,000
As a percentage of revenues 4% 3%
Interest and other income, net consists of interest income less interest
expense, and, to a much lesser extent, foreign currency gains and losses. The
decrease in interest and other income, net, for the quarter ended September 30,
1999 as compared to the quarter ended September 30, 1998 was due to lower
average cash balances for the quarter ended September 30, 1999 versus the
quarter ended September 30, 1998. The lower average cash balance for the quarter
ended September 30, 1999 was the direct consequence of the use of cash during
fiscal 1999 for the repurchase of Common Stock.
Provision for Income Taxes
Three Months Ended September 30,
-------------------------------------
1998 % Change 1999
Provision for income taxes $2,357,000 (90%) $243,000
As a percentage of income before 37% 32%
income taxes
The Company's provision for income taxes represents estimated federal and
state income taxes. The Company's effective tax rate for the quarter ended
September 30, 1998 was 37%. The Company's effective income tax rate for the
quarter ended September 30, 1999 was reduced to 32% as a larger portion of the
Company's pre-tax income came from tax exempt income from the Company's
municipal securities portfolio.
Net Income per Share
Three Months Ended September 30,
-------------------------------------
1998 % Change 1999
Net income $4,013,000 (87%) $517,000
Net income per share (diluted) $.15 (87%) $.02
Shares used in calculating diluted
net income per share 27,025,000 (8%) 24,820,000
Net income decreased from the quarter ended September 30, 1998 to the
quarter ended September 30, 1999 primarily due to the reduction in revenues, as
discussed under "Revenues," and the increase in manufacturing expenses, as
discussed under "Gross Profit," in the quarter ended September 30, 1999 as
compared to the quarter ended September 30, 1998.
Liquidity and Capital Resources
Three Months Ended September 30,
1998 % Change 1999
Net cash provided by (used in)
operating activitie s $ 1,561,000 (106%) $ (99,000)
Period-end cash, cash equivalents
and short-term investments $ 99,168,000 (19%) $80,057,000
Period-end working capital $108,421,000 (10%) $98,099,000
At September 30, 1999, the Company had approximately $80.1 million of
cash, cash equivalents and short-term investments. Net cash totaling $0.1
million was used in operating activities during the three months ended September
30, 1999, most significantly due to decreases in accounts receivable ($3.7
million), accounts payable ($2.2 million) and accrued liabilities ($0.8
million), offset partially by a decrease in inventory ($4.7 million) and
depreciation plus net income ($1.6 million).
Cash provided by investing activities during the three months ended
September 30, 1999 consisted principally of sales of short-term securities
totaling $6.8 million. Financing activities during the three months ended
September 30, 1999 resulted in a net use of cash of $3.2 million. The net use of
cash is the result of $3.7 million of cash used to dissolve the Company's put
warrant obligations, offset in part by proceeds from the issuance of Common
Stock. See Note 4 - Changes in Stockholders' Equity.
As of September 30, 1999, the Company's working capital was approximately
$98.1 million. 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.
<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 and associated risks but, for improved
readability, does not include asterisks (or italics in the non-EDGAR version of
this Form 10-Q).
COMPETITION. The market for telecommunications products is highly
competitive and subject to rapid technological change. The Company's principal
competition for the market segment served by the Company's IMACS products comes
from major telecommunications equipment suppliers, such as Newbridge Networks
Corporation ("Newbridge"), Tellabs, Inc. ("Tellabs") and World Access, Inc.
("World Access"), which offer a broad line of products including access devices
for business applications. The Company's principal competition for the market
segment served by the Company's SlimLine and StreamLine products includes
Carrier Access Corporation ("CAC"), Adtran, Inc. ("Adtran"), Vina Technologies
("Vina") and telecommunications equipment manufacturers selling channel bank and
CSU/DSU products. In addition, the Company faces competition from companies who
provide substitute, as opposed to direct replacement, solutions for the
Company's IMACS, SlimLine and StreamLine products. The primary competitors for
such substitute products include Advanced Fibre Communications ("AFC"), Alcatel
U.S.A., Inc. ("Alcatel"), Lucent Technologies ("Lucent"), Nortel Networks
Corporation ("Nortel") and Reltec Corporation ("Reltec"). The Company has
experienced and expects substantial additional competition from existing
competitors as they continue to 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 from new
startups focusing on the access equipment market. The Q-155 product competes
with broadband access products offered or announced by a number of vendors
including Fibex Systems ("Fibex"), which was recently acquired by Cisco Systems
("Cisco"), Accelerated Networks, Inc., Atmosphere Networks, Inc., other
telecommunications equipment manufacturers selling multiplexer products and
digital loop carriers with the Bellcore Standard GR-303 protocol and other
competitors, such as Pairgain Technologies, Inc. ("Pairgain") and Paradyne, that
provide bundled voice and data services and solutions for better utilization of
bandwidth. 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. 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 in four out of the last five quarters. 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 effect 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.
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 the 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 15% 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. In addition, the Company's
financial results for the quarter ended June 30, 1999 were also adversely
affected primarily as a result of the Company's failure to obtain large orders
it had expected during the quarter from three of its major OEM partners -
Paradyne, Nortel and XEL. 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.
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 product and 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 quarters ended March 31,
1997 and June 30, 1999) 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, 1998, December 31, 1998 and June 30, 1999, 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 was 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. However, volume shipments of this
product have not yet commenced. As a result, there is no assurance that the
market will accept this product. 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 the first quarter of calendar
2000. However, there can be no assurance that the Company will be able to
successfully develop this product, other new products or enhancements to its
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. For
example, in addition to the delays in getting SlimLine product to market, the
lack of a remote management feature in the present SlimLine product has deterred
market willingness to purchase the product. 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.
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 recently lost the services of its
Senior Vice President of Operations, Antonio Flores, and Senior Vice President
of Sales, Robert A. Fyffe, both of whom had been with the Company for more than
seven years. Both positions have been filled and the Company expects little, if
any, disruption in its manufacturing or sales operations as a result of these
departures. 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.
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, 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 future product 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 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. The
increased buying power wielded by these merged carriers and by merged equipment
suppliers, such as Alcatel and DSC Communications Corp. ("DSC"), is also likely
to place added competitive price pressure on equipment manufacturers such as
Premisys.
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.
Shipments to Paradyne have represented a significant portion of the Company's
revenues, including in fiscal 1999, and continue to represent a significant
portion of the Company's revenues in fiscal 2000. 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.
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.
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.
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 and enclosures. 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 or enclosures 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 has performed a
Company-wide risk assessment, conducted testing, communicated with
employees, suppliers, customers and other third party business partners to raise
awareness of the Year 2000 problem and is conducting remediation. 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 by
the end of November, 1999. In addition to applications and information
technology hardware, the Company is testing 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 all of
its preferred suppliers. All of the Company's key suppliers have confirmed that
they are Year 2000 compliant. Approximately forty percent (40%) of the Company's
non-critical suppliers have confirmed that they are Year 2000 compliant and the
remainder assert that they will be Year 2000 compliant by December 31, 1999.
Based on interactions with and assurances from suppliers, the Company believes
that supplier issues that potentially affect the Company's products have been
resolved.
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, both past and present, are Year 2000 compliant.
Customer readiness: The Company sells a substantial portion of its
products 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 products 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, in spite of their assurances, 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
determined the extent of contingency planning that may be required, but it
cannot be sure that additional actions will not be necessary. Based on the
status of the assessments made and remediation plans in process to date, the
Company believes that the total cost of remediation of all Year 2000 issues will
not exceed $500,000. However, the Company has developed remediation for all
problems and has either completely implemented or is implementing 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 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.
RISKS ASSOCIATED WITH ANNOUNCEMENT OF ACQUISITION BY ZHONE. On October 20,
1999, the Company announced the execution of a merger agreement with Zhone
Technologies, Inc., pursuant to which a wholly-owned subsidiary of Zhone will
make a cash tender offer for all of the issued and outstanding shares of the
Company's Common Stock, followed by a merger of the Company with and into such
subsidiary. See Note 6 of Notes to Condensed Consolidated Financial Statements
in Item 1 of this form 10-Q. This intended acquisition by Zhone may result in
the diversion of management's attention from other business concerns, the
disruption of the Company's business, the loss of key employees, the loss of
orders for the Company's products from its customers and the loss of key
distributor, supplier or other business partner relationships. There can be no
assurance that the Company will succeed in overcoming these or any other
significant risks encountered in connection with the proposed acquisition.
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 following discussion about the Company's market risk disclosures
contains forward-looking statements. Forward-looking statements are subject to
risks and uncertainties. Actual results could differ materially from those
discussed in the forward-looking statements.
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, 1999
for a more detailed discussion.
There has been no significant change in the Company's exposure to foreign
currency fluctuations during the quarter ended September 30, 1999 versus the
year ended June 30, 1999.
The fair market value of the Company's fixed income securities portfolio
at September 30, 1999 was $73.6 million, as compared to $81.4 million at June
30, 1999. In both comparison periods the corresponding unrealized gain was
immaterial. The average duration of the portfolio remained unchanged from 1.20
years at June 30, 1999 and September 30, 1999.
The following table presents the hypothetical change in the aggregate fair
market value of the Company's fixed income securities portfolio at September 30,
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 Rate
(BPS) (150 BPS)(100BPS)(50 BPS) 50 BPS 100 BPS 150 BPS
- --------------------------------------------------------------------------------
Change in Securities $1,337 $883 $428 ($441) ($876)($1,304)
Valuation ($000's)
<PAGE>
II. OTHER INFORMATION
ITEM 2. Changes in Securities and Use of Proceeds.
Amendment of Rights Agreement
The Company's Rights Agreement (the "Rights Agreement") dated as of
September 18, 1998 between the Company and ChaseMellon Shareholder Services
L.L.C., as Rights Agent (the "Rights Agent"), was amended by the First Amendment
to Rights Agreement, dated as of October 20, 1999 (the "Amendment"). The
Amendment provides an exception to the definition of "Acquiring Person" for each
of Zhone Technologies, Inc. ("Zhone") and Zhone Acquisition Corp. ("Merger Sub")
and their respective subsidiaries, Affiliates and Associates (as such latter two
terms are defined in the Rights Agreement) solely by virtue of their
acquisition, or their right to acquire, Common Stock of the Company pursuant to
an Agreement and Plan of Merger dated October 20, 1999 by and among Zhone,
Merger Sub and the Company (the "Merger Agreement"), the Company Option
Agreement dated October 20, 1999 by and among Zhone, Merger Sub and the Company
(the "Option Agreement"), the Stockholders Agreement dated October 20, 1999 by
and among Zhone, Merger Sub and Raymond C. Lin, Boris J. Auerbuch and Nicholas
J. Williams (the "Stockholders Agreement") or the consummation of the
transactions contemplated by the Merger Agreement, the Option Agreement or the
Stockholders Agreement. The Amendment also provides that a "Distribution Date"
or a "Shares Acquisition Date" shall not occur solely by reason of execution of
the Merger Agreement, the Option Agreement or the Stockholders Agreement, the
consummation of the Offer or the Merger (as each term is defined in the Merger
Agreement) or the consummation of any other transaction contemplated by the
Merger Agreement, the Option Agreement or the Stockholders Agreement. Finally,
the Amendment changes the definition of the event(s) at the time of and after
which a holder of Rights under the Rights Agreement cannot exercise his, her or
its Rights to the earlier of (i) immediately prior to the Effective Time (as
defined in the Merger Agreement) of the Merger or (ii) the close of business on
September 18, 2008. The Amendment is filed as Exhibit 4.05 to the Company's Form
8-A/A which was filed on October 27, 1999 and the foregoing description of the
Amendment is qualified in its entirety by reference to Exhibit 4.05.
Issuance of Company Option
In connection with the Merger Agreement, the Company entered into a
Company Option Agreement with Zhone and Merger Sub under which the Company has
granted Zhone an option (the "Company Option") to purchase newly issued shares
of the Company's Common Stock under certain circumstances if more than 85
percent but less than 90 percent of the outstanding shares of the Company's
Common Stock are tendered in the Offer. The Company Option allows Merger Sub to
purchase that number of shares (the "Company Option Shares") equal to the lowest
number of shares that, when added to the number of shares owned by Merger Sub at
the time of such exercise, shall constitute one share more than 90% of the
shares then outstanding (assuming issuance of the Company Option Shares) at a
price equal to $10.00 per share. Zhone may not exercise the Company Option
unless and until it has accepted for payment pursuant to the Offer, shares
constituting more than 85% but less than 90% of the shares then outstanding. In
addition, Zhone may not exercise the Company Option unless immediately after
such exercise Merger Sub would own more than 90% of the shares then outstanding.
Moreover, Zhone may not exercise the Company Option after the earliest to occur
of (i) the Effective Time, (ii) the date which is ten business days after the
occurrence of the Company Option Exercise Event (as defined in the Company
Option Agreement) (or such later date on which the closing of a purchase of
shares pursuant to the Company Option Agreement may be consummated), or (iii)
the termination of the Merger Agreement. The Company has relied on Section 4(2)
of the Securities Act in connection with the execution of the Company Option
Agreement. The execution of the Company Option Agreement was privately
negotiated, and Zhone was a sophisticated investor with access to all relevant
information necessary to evaluate the investment. No public offering or public
solicitation was used by the Company in connection with this agreement.
ITEM 5. Other Information
On October 20, 1999, Zhone Technologies, Inc., a Delaware
corporation ("Zhone"), Zhone Acquisition Corp., a Texas corporation and a wholly
owned subsidiary of Zhone ("Merger Sub"), and the Company entered into an
Agreement and Plan of Merger (the "Merger Agreement"). The Merger Agreement
provides for a cash tender offer ("Offer") by Merger Sub for all of the issued
and outstanding shares of the Company's Common Stock together with the
associated rights to purchase shares of Series A Junior Participating Preferred
Stock, at a price of $10.00 per share, net to the seller in cash without
interest. The Offer is conditioned upon, among other things, there being validly
tendered and not withdrawn, that number of shares which would constitute not
less than 75% of the outstanding shares of the Company's Common Stock,
calculated on a fully diluted basis. The Merger Agreement also provides that the
Offer will be followed by a merger ("Merger") of the Company with and into the
Merger Sub, in which all remaining outstanding shares of the Company's Common
Stock would be converted into the right to receive $10.00 per share, net to the
seller in cash without interest.
The Merger and the Offer also are conditioned on the expiration of the
applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act
and other customary closing conditions.
In connection with the execution of the Merger Agreement, Zhone entered
into a stockholders agreement ("Stockholders Agreement") pursuant to which
Raymond Lin, Nicholas Williams and Boris Auerbuch have agreed to tender their
shares in the Offer. In addition, pursuant to an option agreement ("Company
Option Agreement"), the Company has granted Zhone an option to purchase newly
issued shares of the Company's Common Stock under certain circumstances if more
than 85 percent but less than 90 percent of the outstanding shares of the
Company's Common Stock are tendered in the Offer.
In connection with the execution of the Merger Agreement, the Company's
Board of Directors also approved an amendment to its Rights Agreement dated
September 18, 1998 with ChaseMellon Shareholder Services, L.L.C. making the
Rights Agreement inapplicable to the Offer, the Merger, the Merger Agreement,
the Stockholders Agreement and the Company Option Agreement.
For further information, refer to the Company's report on Form 8-K filed
on October 26, 1999 as well as the Schedule 14D-1 filed with the Securities and
Exchange Commission by Zhone and the Schedule 14D-9 filed by the Company.
<PAGE>
ITEM 6. Exhibits and Reports on Form 8-K
A. Exhibits
Exhibit No. Description of Exhibit
2.1 Agreement and Plan of Merger dated as of October 20, 1999
by and among Zhone Technologies, Inc., Zhone Acquisition
Corp. and Premisys Communications, Inc. (incorporated by
reference to the Form 8-K of the Company filed October 26,
1999).
2.2 Company Option Agreement dated as of October 20, 1999 by
and among Zhone Technologies, Inc., Zhone Acquisition
Corp. and Premisys Communications, Inc. (incorporated by
reference to the Form 8-K of the Company filed October 26,
1999).
2.3 Stockholders Agreement dated as of October 20, 1999 by and
among Zhone Technologies, Inc., Zhone Acquisition Corp. and
Raymond C. Lin, Boris J. Auerbuch and Nicholas J. Williams
(incorporated by reference to the Form 8-K of the Company
filed October 26, 1999).
4.05 First Amendment to Rights Agreement, dated as of October 20,
1999, by and between Premisys Communications, Inc. and
ChaseMellon Shareholder Services, L.L.C. (incorporated by
reference to Exhibit 4.05 to the Company's Report on Form
8-A/A (File No. 0-25684) filed on October 27, 1999).
10.53 Employment Agreement, dated March 25, 1999, and related
Secured Promissory Note, dated April 29, 1999, between
Premisys Communications, Inc. and Claude DuPuis (incorporated
by reference to Exhibit 10 to the Company's Schedule 14D-9
filed on October 27, 1999).
27.01 Financial Data Schedule
B. Reports on Form 8-K
The Company filed a report on Form 8-K on October 26, 1999. The report
covered the Company's execution of the Merger Agreement with Zhone
Technologies, Inc. and Zhone Acquisition Corp. as described in Item 5
above.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PREMISYS COMMUNICATIONS, INC.
November 5, 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
2.1 Agreement and Plan of Merger dated as of October 20, 1999
by and among Zhone Technologies, Inc., Zhone Acquisition
Corp. and Premisys Communications, Inc. (incorporated by
reference to the Form 8-K of the Company filed October 26,
1999).
2.2 Company Option Agreement dated as of October 20, 1999 by
and among Zhone Technologies, Inc., Zhone Acquisition
Corp. and Premisys Communications, Inc. (incorporated by
reference to the Form 8-K of the Company filed October 26,
1999).
2.3 Stockholders Agreement dated as of October 20, 1999 by and
among Zhone Technologies, Inc., Zhone Acquisition Corp. and
Raymond C. Lin, Boris J. Auerbuch and Nicholas J. Williams
(incorporated by reference to the Form 8-K of the Company
filed October 26, 1999).
4.05 First Amendment to Rights Agreement, dated as of October 20,
1999, by and between Premisys Communications, Inc. and
ChaseMellon Shareholder Services, L.L.C. (incorporated by
reference to Exhibit 4.05 to the Company's Report on Form
8-A/A (File No. 0-25684) filed on October 27, 1999).
10.53 Employment Agreement, dated March 25, 1999, and related
Secured Promissory Note, dated April 29, 1999, between
Premisys Communications, Inc. and Claude DuPuis (incorporated
by reference to Exhibit 10 to the Company's Schedule 14D-9
filed on October 27, 1999).
27.01 Financial Data Schedule
<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 September 24, 1999, and is qualified in its entirety
by reference to such financial statements.
</LEGEND>
<MULTIPLIER>
1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> JUN-26-1999
<PERIOD-END> SEP-24-1999
<CASH> 6,415
<SECURITIES> 73,642
<RECEIVABLES> 12,151
<ALLOWANCES> 0
<INVENTORY> 10,501
<CURRENT-ASSETS> 112,102
<PP&E> 19,055
<DEPRECIATION> 10,020
<TOTAL-ASSETS> 121,137
<CURRENT-LIABILITIES> 14,003
<BONDS> 0
0
0
<COMMON> 266
<OTHER-SE> 106,868
<TOTAL-LIABILITY-AND-EQUITY> 121,137
<SALES> 21,676
<TOTAL-REVENUES> 21,676
<CGS> 9,802
<TOTAL-COSTS> 21,635
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 760
<INCOME-TAX> 243
<INCOME-CONTINUING> 517
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 517
<EPS-BASIC> 0.02
<EPS-DILUTED> 0.02
</TABLE>
