================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended December 25, 1998
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 January 22, 1999 was 23,950,451 shares.
================================================================================
<PAGE>
PREMISYS COMMUNICATIONS, INC.
INDEX
PART I. Financial Information Page No.
Item 1. Financial Statements
Condensed Consolidated Balance Sheet - June
30, 1998 and December 31, 1998 3
Condensed Consolidated Statement of Operations
- Three and Six Month Periods ended December 3l,
1997 and December 31, 1998 4
Condensed Consolidated Statement of Cash Flows
- Six Month Periods ended December 31, 1997
and December 31, 1998 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 21
PART II. Other Information
Item 2.Submission of Matters to a Vote of Security
Holders 21
Item 5.Other Information 22
Item 6.Exhibits and Reports on Form 8-K 22
Signatures 23
10.
<PAGE>
FINANCIAL INFORMATION
ITEM 1. Financial Statements
Premisys Communications, Inc.
Condensed Consolidated Balance Sheet
(in thousands except per share data)
June 30, December 31,
1998 1998
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $31,006 $11,008
Short-term investments 74,975 77,782
Accounts receivable, net 12,208 15,776
Inventories 3,859 7,649
Deferred tax assets 7,355 7,355
Prepaid expenses and other assets 962 1,348
---------- ----------
Total current assets 130,365 120,918
Property and equipment, net 8,392 9,063
========== ==========
$138,757 $129,981
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 6,969 $ 6,077
Accrued liabilities 10,277 10,729
Income taxes payable 735 4,194
----------- -----------
Total current liabilities 17,981 21,000
----------- -----------
Put warrants --- 21,250
----------- -----------
Stockholders' equity:
Common Stock, $0.01 par value, 100,000 shares
authorized; 25,974 and 26,239 shares issued
and outstanding 260 262
Additional paid-in capital 85,230 65,619
Treasury Stock, 2,130 shares --- (19,993)
Retained earnings 35,286 41,843
----------- -----------
Total stockholders' equity 120,776 87,731
=========== ===========
$138,757 $129,981
=========== ===========
See notes to condensed consolidated financial statements
<PAGE>
<TABLE>
Premisys Communications, Inc.
Condensed Consolidated Statement of Operations - (unaudited)
(in thousands, except per share data)
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
<S> <C> <C> <C> <C>
1997 1998 1997 1998
Revenues $24,616 $25,394 $43,901 $50,405
Cost of revenues 8,278 10,238 15,496 18,626
------------ ---------- ---------- ---------
Gross profit 16,338 15,156 28,405 31,779
------------ ---------- ---------- ---------
Operating expenses:
Research and development 4,184 4,670 7,208 9,418
Selling, general and administrative 6,656 7,380 12,163 13,873
------------ ---------- ---------- ---------
Total operating expenses 10,840 12,050 19,371 23,291
------------ ---------- ---------- ---------
Income from operations 5,498 3,106 9,034 8,488
Interest and other income, net 870 932 1,583 1,920
------------ ---------- ---------- ---------
Income before income taxes 6,368 4,038 10,617 10,408
Provision for income taxes 2,356 1,494 3,928 3,851
------------ ---------- ---------- ---------
Net income $4,012 $ 2,544 $ 6,689 $6,557
============ ========== ========== =========
Net income (loss) per share:
Basic $ 0.16 $ 0.10 $ 0.26 $ 0.26
Diluted $ 0.15 $ 0.10 $ 0.24 $ 0.25
============ ========== ========== =========
Shares used in computing net income (loss) per share:
Basic 25,462 24,388 25,385 25,149
Diluted 27,579 25,142 27,508 26,084
============ ========== ========== =========
</TABLE>
See notes to condensed consolidated financial statements
<PAGE>
Premisys Communications, Inc.
Condensed Consolidated Statement Of Cash Flows - (unaudited)
(in thousands)
Six Months Ended December 31,
1997 1998
Cash flows from operating activities:
Net income $6,689 $6,557
Adjustments to reconcile net income to
net cash provided by (used in) operating
activities:
Depreciation 992 1,555
Changes in assets and liabilities:
Accounts receivable 2,351 (3,568)
Inventories 1,273 (3,790)
Prepaid expenses and other assets 3,034 (387)
Accounts payable 1,415 (892)
Accrued liabilities 4,747 453
Income taxes payable 627 3,459
------------ -------------
Net cash provided by operating activities 21,128 3,387
------------ -------------
Cash flows from investing activities:
Purchase of property and equipment (1,653) (2,226)
Purchase of short-term investments (20,946) (2,807)
------------ -------------
Net cash used in investing activities (22,599) (5,033)
------------ -------------
Cash flows from financing activities:
Proceeds from issuance of Common Stock, 1,504 1,641
net
Repurchase of Common Stock --- (19,993)
------------ -------------
Net cash provided by (used in) financing 1,504 (18,352)
activities
------------ -------------
Net increase (decrease) in cash 33 (19,998)
Cash and cash equivalents at beginning of 28,923 31,006
period
------------ -------------
Cash and cash equivalents at end of period $28,956 $11,008
============ =============
Supplemental disclosures:
Cash paid for income taxes $ 1 $1,173
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 December 31, 1998, the
results of its operations for the three and six month periods ended December 31,
1997 and 1998, and its cash flows for the six month periods ended December 31,
1997 and 1998. 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
six month period ended December 31, 1998 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 December 31, 1997 and 1998 for financial statement presentation
purposes actually reflect amounts for the fiscal periods ended on June 26, 1998,
December 26, 1997 and December 25, 1998.
NOTE 2 - Inventories (in thousands)
June 30, December 31,
1998 1998
(unaudited)
Inventories
Raw materials $ 582 $ 1,467
Work-in-process 676 1,472
Finished goods 2,601 4,709
--------- ------------
$ 3,859 $ 7,649
- -------------------------------------------------===========---=============
NOTE 3 - Earnings Per Share
The Company adopted Statement of Financial Accounting Standards No. 128,
"Earnings Per Share" ("SFAS 128") during the second quarter of fiscal 1998. SFAS
128 requires presentation of both Basic EPS and Diluted EPS on the face of the
statement of operations. Basic EPS is computed by dividing net income (loss)
available to common stockholders by the weighted average number of common shares
outstanding during the period. Diluted EPS gives effect to all dilutive
potential common shares outstanding during a period. In computing Diluted EPS,
the average stock price for the period is used in determining the number of
shares assumed to be purchased under the treasury stock method from exercise of
stock options.
Following is a presentation of the numerators and denominators of the Basic
and Diluted EPS computations for the periods presented below:
<PAGE>
<TABLE>
<CAPTION>
Three Month Period Ended
December 31, 1997 December 31, 1998
Net Income Shares Per Share Net Income Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------------------------------- ----------------------------------
(in thousands except per share data)
<S> <C> <C> <C> <C> <C> <C>
Basic EPS
Net income (loss)
available to common
stockholders $4,012 25,462 $0.16 $2,544 24,388 $0.10
Effect of
Dilutive Securities
Common stock
equivalents ---- 2,117 ---- 754
--------------------- ------------------
Diluted EPS
Net income (loss)
available to common
stockholders and
assumed conversions $4,012 27,579 $0.15 $2,544 25,142 $0.10
=================================== ============================
Six Month Period Ended
December 31, 1997 December 31, 1998
Net Income Shares Per Share Net Income Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------------------------------- ----------------------------------
(in thousands except per share data)
Basic EPS
Net income (loss)
available to common
stockholders $6,689 25,385 $0.26 $6,557 25,149 $0.26
Effect of
Dilutive Securities
Common stock
equivalents ---- 2,123 ---- 935
--------------------- ------------------
Diluted EPS
Net income (loss)
available to common
stockholders and
assumed conversions $6,689 27,508 $0.24 $6,557 26,084 $0.25
=================================== ============================
</TABLE>
Options to purchase 615,161, 2,005,918, 748,623 and 2,138,912 shares of
Common stock were outstanding at the three month periods ended December 31, 1997
and 1998 and the six month periods ended December 31, 1997 and 1998,
respectively, but were not included in the computation of Diluted EPS because
the options exercise price was greater than the average market price of the
common shares in each period.
NOTE 4 - Significant Events
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 January 29, 1999, the Company
had repurchased for cash 2.3 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 $10.75 million. The remaining 1.0
million put warrants and 0.75 million call options expire on September 15, 1999.
<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"), Motorola, Inc.
("Motorola"), 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 and StreamLine products;
rapidly changing technologies and the Company's ability to respond thereto; the
growth of demand for telecommunications services such as wireless, cellular and
the Internet; competition; changes in the mix of products or customers or in the
level of operating expenses; and other factors described throughout this Form
10-Q, including under "Revenues" and "Other Factors That May Affect Future
Operating Results," and in the Company's Annual Report on Form 10-K for the year
ended June 30, 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 December 31,
-------------------------------------
1997 % Change 1998
Revenues $24,616,000 3% $25,394,000
Six Months Ended December 31,
-------------------------------------
1997 % Change 1998
Revenues $43,901,000 15% $50,405,000
The increase in revenues from the quarter ended December 31, 1997 to the quarter
ended December 31, 1998 is the result of first-time sales of the Company's
StreamLine product in fiscal 1999 offset by lower revenues from the Company's
integrated multiple access communications systems ("IMACS"). While IMACS unit
volumes for platforms and modules increased in the quarter ended December 31,
1998, compared with the December 1997 quarter, the average sales prices of both
platforms and modules decreased during the same comparison periods. 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. As a result, the
carriers are demanding price reductions from access equipment suppliers. The
increase in revenues from the six month period ended December 31, 1997 to the
six month period ended December 31, 1998 is the result of increased revenues
from the Company's IMACS product line and first-time sales of the Company's
StreamLine product. IMACS unit volumes for platforms and modules increased in
the six month period ended December 31, 1998 from the comparable period in
fiscal 1998, while the average sales prices for IMACS platforms and modules
decreased during the same comparison periods due to the market forces discussed
above. See "Other Factors That May Effect Future Operating Results - Indirect
Channels of Distribution." Revenues were flat from $25,011,000 in the quarter
ended September 30, 1998 to $25,395,000 in the quarter ended December 31, 1998.
*The Company expects that revenues in the March 1999 quarter will be comparable
to those reported for the quarter ended December 31, 1998. *However, these
expectations are subject to a number of uncertainties, which include but are not
limited to the following: the level of business which the Company expects to
ship through its strategic distribution partners, the growth in business shipped
direct to international customers; and the market acceptance and availability of
the Company's new products, the SlimLine and StreamLine. In the prior three
quarters, shipments of the SlimLine and StreamLine products have been delayed or
curtailed significantly pending the resolution of design issues identified in
customer and production testing. *There is a risk that additional issues which
will restrict the availability and market acceptance of these products will be
identified as the unit volumes produced and shipped to customers grow in the
March 1999 quarter.
The following table sets forth, for the periods indicated, the revenues
generated from the Company's customers which exceeded 10% of total revenues
during the three and six month periods ended December 31, 1997 and December 31,
1998, other domestic customers as a group and international customers as a
group, in absolute dollars and as a percentage of total revenues.
Source of Revenues
Three Months Ended December 31,
-----------------------------------------------
1997 % 1998 %
---------------------- ----------------------
Paradyne $2,772,000 11% $ 6,408,000 25%
ADC 8,447,000 34% 17%
4,397,000
Motorola 2,521,000 10% 3,111,000 12%
Teleport (a) --- 3,048,000 12%
XEL (a) --- 2,792,000 11%
Other Domestic Customers 8,528,000 35% 4,685,000 19%
International Customers 2,348,000 10% 953,000 4%
====================== ======================
Total Revenues $24,616,000 100% $25,394,000 100%
====================== ======================
Six Months Ended December 31,
-----------------------------------------------
1997 % 1998 %
---------------------- ----------------------
Paradyne $5,440,000 12% $ 15,445,000 31%
ADC 15,455,000 35% 6,625,000 13%
Motorola 4,035,000 9% 6,093,000 12%
Other Domestic Customers 15,226,000 35% 20,326,000 40%
International Customers 3,745,000 9% 1,916,000 4%
====================== ======================
Total Revenues $43,901,000 100% $50,405,000 100%
====================== ======================
(a)Amounts not separately provided (but are instead included in "Other Domestic
Customers") as revenues for the period represented less than 10% of the
period 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 December 31, 1997 and 1998, customers
individually representing 10% or more of the Company's revenue generated 55% and
77% of the Company's total revenues, respectively. For the six month periods
ended December 31, 1997 and 1998, customers individually representing 10% or
more of the Company's revenue generated 56% of the Company's total revenues.
During both comparison periods, revenues from Paradyne increased while revenues
from ADC decreased. The increase in revenues from Paradyne during both
comparison periods was due to increased international equipment deployments. The
decrease in revenues from ADC during both comparison periods was due to lower
shipments by ADC to one of its CLEC customers. *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,"
"-Slowdown in Telecommunications Carriers' Capital Expenditures," "-Limited
Order Backlog" and "-Relationship with Paradyne."
During the quarter ended December 31, 1998, direct international revenues
accounted for 4% of the Company's revenues, compared to 9% for the same period
in fiscal 1998. The Company believes this reduction in direct international
revenues is partly attributable to the current economic difficulty in Asia and
Russia and partly due to the lack, in Premisys' products, of product features
and protocols that are unique to or required in countries outside of the U.S.A.
Certain of the Company's domestic customers also sell Premisys products into
international markets. The Company is currently refocusing its marketing and
engineering resources to provide more emphasis on developing product features
which are demanded in international markets. *The Company intends to expand its
operations outside the United States and anticipates that international sales
will increase in the future. However, in order to sell its products
internationally, the Company must meet international telecommunications
standards. *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 December 31,
-------------------------------------
1997 % Change 1998
Gross Profit $16,338,000 (7%) $15,156,000
As a percentage of revenues 66% 60%
Six Months Ended December 31,
-------------------------------------
1997 % Change 1998
Gross Profit $28,405,000 12% $31,779,000
As a percentage of revenues 65% 63%
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 December 31, 1997 to the
quarter ended December 31, 1998 primarily as a result of lower product gross
margins. Gross profit increased from the six month period ended December 31,
1997 to the six month period ended December 31, 1998 primarily as a result of
higher unit shipment volumes partially offset by lower product gross margins.
The product gross margin decrease from the quarter and six month periods ended
December 31, 1997 to the quarter and six month periods ended December 31, 1998,
is primarily attributable to two factors: (1) the sale, during the quarter ended
December 31, 1998, of StreamLine product to fulfill SlimLine product orders at
the lower SlimLine prices to certain customers; (2) lower prices on the IMACS
product sold, during the quarter ended December 31, 1998, to certain of the
Company's large OEM and CLEC customers. *The Company expects its gross margins
for the remainder of fiscal 1999 to decline significantly, due primarily to
continuing competitive pressures and to increases in the mix of lower-margin
SlimLine and StreamLine products.
Research and Development Expenses
Three Months Ended December 31,
-------------------------------------
1997 % Change 1998
Research and development expenses $4,184,000 12% $4,670,000
As a percentage of revenues 17% 18%
Six Months Ended December 31,
-------------------------------------
1997 % Change 1998
Research and development expenses $7,208,000 31% $9,418,000
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 $486,000, or 12%, from the three months ended
December 31, 1997 to the comparable period in fiscal 1999 and by $2,210,000, or
31%, from the six month period ended December 31, 1997 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 six month
periods ended December 31, 1998 versus the comparable periods ended December 31,
1997 1998 due primarily to the lower rate of revenues change in each of these
comparison periods. *During the remaining quarters of fiscal 1999, the Company
expects that these expenses will increase in absolute dollars as compared to the
quarter ended December 31, 1998. *However, the Company expects that as a
percentage of revenues research and development expenses will remain the same or
increase slightly during the remaining quarters of fiscal 1999. *These
expectations are subject to a number of uncertainties, including the Company's
level of revenues, availability and market acceptance of the SlimLine and
StreamLine products and the level of personnel dedicated to and the success of
research and development activities.
Selling, General and Administrative Expenses
Three Months Ended December 31,
-------------------------------------
1997 % Change 1998
Selling, general and administrative $6,656,000 11% $7,380,000
expenses
As a percentage of revenues 27% 29%
Six Months Ended December 31,
-------------------------------------
1997 % Change 1998
Selling, general and administrative $12,163,000 14% $13,873,000
expenses
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 increased $724,000, or
11%, from the quarter ended December 31, 1997 to the quarter ended December 31,
1998 and increased $1,710,000, or 14% from the six months ended December 31,
1997 to the six months ended December 31, I998. This increase was primarily a
result of increased staffing, primarily in sales and marketing, and associated
expenses, and, to a lesser extent, occupancy, travel and customer support
expenses. Selling, general and administrative expenses increased as a percentage
of the Company's revenues in the quarter ended December 31, 1998 versus the
quarter ended December 31, 1997 and remained flat between the six months ended
December 31, 1997 and 1998 due primarily to the underlying rate of revenues
change in each of these comparison periods. *The Company expects that these
expenses will increase slightly in absolute dollars versus the quarter ended
December 31, 1998 during the remaining quarters of fiscal 1999. *These
expectations are subject to a number of uncertainties, including, among other
things, the Company's level of revenues and the level of personnel dedicated to
sales, marketing and administrative activities.
Interest and Other Income, net
Three Months Ended December 31,
-------------------------------------
1997 % Change 1998
Interest and other income, net $ 870,000 7% $ 932,000
As a percentage of revenues 4% 4%
Six Months Ended December 31,
-------------------------------------
1997 % Change 1998
Interest and other income, net $ 1,583,000 21% $1,920,000
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 increase in interest and other income, net, for the three and six
month periods ended December 31, 1998 as compared to the same periods ended
December 31, 1997 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 for Income Taxes
Three Months Ended December 31,
-------------------------------------
1997 % Change 1998
Provision for income taxes $2,356,000 (37%) $1,494,000
As a percentage of income before 37% 37%
taxes
<PAGE>
Six Months Ended December 31,
-------------------------------------
1997 % Change 1998
Provision for income taxes $3,928,000 (2%) $3,851,000
As a percentage of income before 37% 37%
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 six
month period ended December 31, 1998 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 December 31,
-------------------------------------
1997 % Change 1998
Net income $4,012,000 (37%) $2,544,000
Net income per share (diluted) $0.15 (33%) $0.10
Shares used in computing diluted net 27,579,000 (9%) 25,142,000
income per share
Six Months Ended December 31,
-------------------------------------
1997 % Change 1998
Net income $6,689,000 (2%) $6,557,000
Net income per share (diluted) $0.24 3% $0.25
Shares used in computing diluted net 27,508,000 (5%) 26,084,000
income per share
Net income per share decreased from $0.15 in the quarter ended December
31, 1997 to $0.10 in the quarter ended December 31, 1998, due primarily to a
decrease of 37% in net income between the three-month periods ended December 31,
1997 and 1998. Net income per share increased slightly from $0.24 in the six
month period ended December 31, 1997 to $0.25 in the six month period ended
December 31, 1998, due primarily to a decrease in shares used in computing net
income per share resulting from stock repurchases made by the Company during the
six month period ended December 3 l, 1998.
Liquidity and Capital Resources
Six Months Ended December 31,
1997 % Change 1998
Net cash provided by operating0
activities $21,128,000 171% $ 3,387,000
Period end cash, cash equivalents
and short-term investments $94,203,000 40% $88,790,000
Period end working capital $97,905,000 14% $99,918,000
At December 31, 1998, the Company had approximately $88.8 million of cash,
cash equivalents and short-term investments. Net cash totaling $3.4 million was
provided by operating activities during the six months ended December 31, 1998,
most significantly due to net income of $6.6 million and an increase in income
taxes payable of $3.5 million, offset partially by increases in inventories and
accounts receivable, aggregating $7.4 million.
Cash used in investing activities during the six months ended December 31,
1998 consisted of purchases of short-term securities totaling $2.8 million and
purchases of property and equipment totaling $2.2 million. Financing activities
during the six months ended December 31, 1998 resulted in a net use of cash of
$18.4 million. The net use of cash is the result of $20.0 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 December 31, 1998, the Company's working capital was approximately
$99.9 million. Except for the potential obligation related to put warrants, as
discussed below and in the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 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
the market and business conditions warrant. As of January 29, 1999, the Company
had repurchased for cash 2.3 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 which were to expire
on January 29, 1999. As a result, the Company currently has a maximum potential
obligation related to the put warrants of $10.75 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 but does not include asterisks for
improved readability.
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
recent startup 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. 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 may be
adapted to compete with the Company's products in the future. 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.
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 December 31, 1998. 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. In December, 1998, Nicholas Williams, the
Company's President and CEO suffered exposure to sub-freezing weather. Mr.
Williams is currently being treated for frostbite and is expected to return to
work on a full-time basis at or near the end of the March 1999 quarter. In the
meantime, Mr. Williams has been working from his home in coordination with
Premisys' senior management team to manage strategic opportunities and issues
and day-to-day operations. 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.
INDIRECT CHANNELS OF DISTRIBUTION. Substantially all of the sales of the
Company's products are through indirect channels of distribution. Thus, the
Company's ability to affect and judge the timing and size of individual user
orders is more limited than for manufacturers selling directly to the end users
of their products. Any of 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. Such delays that
have occurred in the past, and have had a material adverse effect on the
Company, may occur in the future and would have a similar impact if they did
occur. Delays can be caused by late deliveries by other vendors, changes in
implementation priorities, slower than anticipated growth in demand for the
services that the equipment supports or in the capital expenditures of the end
user customer, consolidation among carriers and delays in obtaining regulatory
approvals for new tariffs. See "-Slowdown In Telecommunications Carriers'
Capital Expenditures" and "-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 thc planned deployment of the
Company's products can also be caused by sudden declines in thc 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. Such delays had a material adverse effect on the
Company's business and operating results in the quarter ended December 31, 1998,
and there can be no assurance that any future delays would not have such an
adverse effect.
TELECOMMUNICATIONS CARRIERS' CAPITAL EXPENDITURES. Currently, the primary
targeted end user customers for the Company's products are CLECs and
interexchange carriers ("IXCs"). These carriers have been expanding their local
networks at a rapid pace in the past two years to provide services to small and
medium-sized businesses that have historically been served inadequately by
incumbent local exchange carriers ("ILECs'). Based on industry information, it
now appears likely that the pace of capital expenditure growth by the CLECs and
IXCs will slow significantly for basic network infrastructure but increase for
access equipment. The Company believes that the reason for this shift is because
it is expected that end user demand for new services will grow. . However, the
Company believes that there will be an increase in the intensity of price
competition for these markets. 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
introduced its 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
of the anticipated slowdown in telecommunications carriers' capital expenditures
and related increase in price competition, the Company may find it more
difficult to achieve expected levels of revenues and profitability.
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 Company's products
serve a vital function, to grow significantly. 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. For example, the
Company's shipment of new SlimLine product has been delayed for several quarters
due to hardware and software revisions necessary to make the product more
acceptable in the marketplace. In addition, 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 expects to begin shipping this product
by the end of the quarter ending 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. 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 continued to represent a significant portion of the
Company's revenues in fiscal 1998 and are expected to continue to represent a
significant portion of the Company's revenues in fiscal 1999. Neither Paradyne
nor Lucent are 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 thereon for becoming
ready for the Year 2000.
Internal infrastructure readiness: An assessment of internal and 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 May 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
compliancy 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 affects 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
millenium 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 and 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 assessment
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. The Company is still assessing the impact that
the introduction and use of the Euro will have on the Company's internal
systems. The Company does not presently expect that introduction and use of the
Euro will materially affect the Company's business but has not yet completed its
assessment. If the Company encounters unexpected 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 December 31, 1998 versus the
quarters ended June 30 and September 30, 1998.
The fair market value of the Company's fixed income securities portfolio
at December 31, 1998 was $84 million, as compared to $89 million at June 30,
1998. In both comparison periods the corresponding unrealized gain was included
as a component of shareholders' equity. The average weighted duration of the
portfolio increased from .99 years at June 30, 1998 to 1.28 years at December
31, 1998.
The following table presents the hypothetical change in the aggregate fair
market value of the Company's fixed income securities portfolio at December 31,
1998 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 (150 (100 (50 BPS) 50 BPS 100 BPS 150 BPS
(BPS) BPS) BPS)
- --------------------------------------------------------------------------------
Change in Securities $1,635 $1,079 $523 ($540) ($1,071)($1,595)
Valuation ($000's)
II. OTHER INFORMATION
ITEM 4. Submission of Matters to a Vote of Security Holders
At the Company's Annual Meeting of Stockholders held on December 9, 1998 (the
"Annual Meeting"), the following individuals were elected to the Company's Board
of Directors by the votes indicated:
FOR WITHHELD
Boris J. Auerbuch 23,050,552 611,761
Edward A. Keible, Jr. 23,080,360 581,953
Raymond C. Lin 23,050,921 611,392
Marino R. Polestra 23,080,463 581,850
Lip-Bu Tan 23,081,538 580,775
Nicholas J. Williams 23,050,921 611,392
In addition, the Company's 1994 Stock Option Plan was amended to increase the
number of shares of Common Stock reserved for issuance thereunder from 5,200,000
to 6,460,000. The following votes were cast in connection with such amendment:
BROKER
FOR AGAINST ABSTAIN NON-VOTES
15,873,458 7,769,768 19,087 0
Finally, the appointment of PricewaterhouseCoopers LLP as auditors for the
fiscal year ended June 30, 1999 was ratified by the following vote:
BROKER
FOR AGAINST ABSTAIN NON-VOTES
23,605,057 48,589 8,667 0
ITEM 5. Other Information
In December, 1998, Boris Auerbuch, Senior Vice President and Chief Technical
Officer of the Company, assumed the responsibilities of Andrew Aczel, the Senior
Vice President, Engineering who resigned October, 1998.
In December, 1998, Nicholas Williams, the Company's President and CEO suffered
exposure to sub-freezing weather. Mr. Williams is currently being treated for
frostbite and is expected to return to work at or near the end of the March 1999
quarter.
ITEM 6. Exhibits and Reports on Form 8-K
A. Exhibits
Exhibit No. Description of Exhibit
10.02 Registrant's 1994 Stock Option Plan and related
documents. (1)
27.01 Financial Data Schedule
(1) - Incorporated by reference to Exhibit 4.04 in Registrant's Form
S-8 Registration Statement filed January 15, 1999 (File No. 333-70739)
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.
February 8, 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
10.02 Registrant's 1994 Stock Option Plan and related documents. (1)
27.01 Financial Data Schedule
(1) - Incorporated by reference to Exhibit 4.04 in Registrant's Form S-8
Registration Statement filed January 15, 1999 (File No. 333-70739)
<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 December 25, 1998, and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-25-1999
<PERIOD-START> JUN-27-1998
<PERIOD-END> DEC-25-1998
<CASH> 11,008
<SECURITIES> 77,782
<RECEIVABLES> 15,776
<ALLOWANCES> 0
<INVENTORY> 7,649
<CURRENT-ASSETS> 120,918
<PP&E> 15,992
<DEPRECIATION> 6,929
<TOTAL-ASSETS> 129,981
<CURRENT-LIABILITIES> 21,000
<BONDS> 0
0
0
<COMMON> 262
<OTHER-SE> 108,719
<TOTAL-LIABILITY-AND-EQUITY> 129,981
<SALES> 50,405
<TOTAL-REVENUES> 50,405
<CGS> 18,626
<TOTAL-COSTS> 41,917
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 10,408
<INCOME-TAX> 3,851
<INCOME-CONTINUING> 6,557
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,557
<EPS-PRIMARY> 0.26
<EPS-DILUTED> 0.25
</TABLE>
