<PAGE>
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 2054
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 27, 1996
-----------------------------------------------
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 chapter)
Delaware 94-3153847
------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
48664 Milmont Drive, Fremont, California 94538
- ------------------------------------------------------------------------------
(Address of principal executive offices)
(Zip Code)
(510) 353-7600
- ------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No
--------- --------
The number of shares outstanding of the issuer's common stock, par value
$0.01, as of 10/31/96 was 24,550,355 shares.
1
<PAGE>
PREMISYS COMMUNICATIONS, INC.
INDEX
PART I. FINANCIAL INFORMATION PAGE NO.
Item 1. Financial Statements
Condensed Consolidated Balance Sheet - June 30,
1996 and September 30, 1996 3
Condensed Consolidated Statement of Operations -
Three Month Periods ended September 30, 1995 and
1996 4
Condensed Consolidated Statement of Cash Flows -
Three Month Periods ended September 30, 1995 and
1996 5
Notes to Condensed Consolidated Financial
Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 18
2
<PAGE>
I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
PREMISYS COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED BALANCE SHEET - (UNAUDITED)
(IN THOUSANDS EXCEPT SHARE DATA)
June 30, September 30,
1996 1996
--------- -------------
ASSETS
Current assets:
Cash and cash equivalents $22,058 $23,838
Short-term investments 38,803 48,373
Accounts receivable, net 16,267 16,397
Inventory 4,221 4,316
Deferred tax assets 2,915 2,915
Prepaid expenses and other assets 440 376
------- -------
Total current assets 84,704 96,215
Property and equipment, net 2,700 2,833
Other assets 118 127
------- -------
$87,522 $99,175
------- -------
------- -------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,250 $ 6,377
Accrued liabilities 5,897 4,465
Income taxes payable 580 4,028
Current portion of long-term debt 124 104
------- -------
Total current liabilities 9,851 14,974
------- -------
Long-term debt 91 70
------- -------
Stockholders' equity:
Preferred Stock, $0.01 par value,
2,000,000 shares authorized; no
shares issued or outstanding -- --
Common Stock, $0.01 par value,
100,000,000 shares authorized;
24,398,519 and 24,467,482 shares
issued and outstanding 244 245
Additional paid-in capital 66,656 67,483
Retained earnings 10,680 16,403
------- -------
Total stockholders' equity 77,580 84,131
------- -------
$87,522 $99,175
------- -------
------- -------
See notes to condensed consolidated financial statements
3
<PAGE>
PREMISYS COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS - (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Three Months Ended September 30,
1995 1996
------------------ --------------
<C> <C> <C>
Revenues $ 14,075 $ 24,294
Cost of revenues 5,075 8,531
--------- --------
Gross profit 9,000 15,763
--------- --------
Operating expenses:
Research and development 1,544 2,328
Selling, general and administrative 2,821 4,647
--------- --------
Total operating expenses 4,365 6,975
--------- --------
Income from operations 4,635 8,788
Interest and other income, net 374 594
--------- --------
Income before income taxes 5,009 9,382
Provision for income taxes 1,703 3,659
--------- --------
Net income $ 3,306 $ 5,723
--------- --------
--------- --------
Net income per share $ 0.13 $ 0.22
--------- --------
--------- --------
Shares used in computing net income per share 26,292 26,479
--------- --------
--------- --------
</TABLE>
See notes to condensed consolidated financial statements
4
<PAGE>
PREMISYS COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS - (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Three Months Ended September 30,
--------------------------------
1995 1996
---------- -------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 3,306 $ 5,723
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 193 255
Changes in assets and liabilities:
Accounts receivable (808) (130)
Inventory (10) (95)
Prepaid expenses and other assets (275) 55
Accounts payable 1,247 3,127
Accrued liabilities 224 (1,432)
Income taxes payable 1,480 3,448
---------- -------
Net cash provided by operating activities 5,357 10,951
---------- -------
Cash flows from investing activities:
Purchase of property and equipment (441) (388)
Purchase of short-term investments (6,718) (9,540)
---------- -------
Net cash used in investing activities (7,159) (9,928)
---------- -------
Cash flows from financing activities:
Proceeds from issuance of Common Stock, net 321 798
Principal payments on long-term debt (16) --
Proceeds of capital lease financing 92 --
Repayment of capital lease obligations (25) (41)
---------- -------
Net cash provided by financing activities 372 757
---------- -------
Net increase (decrease) in cash (1,430) 1,780
Cash and cash equivalents at beginning of
period 12,273 22,058
---------- -------
Cash and cash equivalents at end of period $ 10,843 $23,838
---------- -------
---------- -------
Supplemental disclosures:
Cash paid for income taxes 223 214
Unrealized gain on investments 91 30
</TABLE>
See notes to condensed consolidated financial statements
5
<PAGE>
PREMISYS COMMUNICATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions to
Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not
contain all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In
the opinion of management, the accompanying unaudited condensed
consolidated financial statements have been prepared on the same basis as
the audited consolidated financial statements and include all adjustments,
consisting only of normal recurring adjustments, necessary for the fair
statement of the Company's financial condition as of September 30, 1996,
the results of its operations for the three month periods ended September
30, 1995 and 1996, and its cash flows for the three month periods ended
September 30, 1995 and 1996. These financial statements should be read in
conjunction with Company's audited financial statements as of June 30, 1995
and 1996 and for each of the three years in the period ended June 30, 1996,
including notes thereto, included in the Company's Annual Report on Form
10-K. Operating results for the three month period ended September 30, 1996
are not necessarily indicative of the results that may be expected for the
year ending June 30, 1997.
The Company has a 52/53 week fiscal accounting year that ends on the
Friday closest to June 30. Accordingly, fiscal periods shown herein as
ending on June 30, 1996 and September 30, 1995 and 1996 for financial
statement presentation purposes actually reflect amounts for the fiscal
periods ended on June 28, 1996, September 29, 1995 and September 27, 1996,
respectively.
NOTE 2 - INVENTORIES (IN THOUSANDS)
June 30, September 30,
1996 1996
-------- ------------
(unaudited)
Inventory
Raw materials $ 1,587 $ 1,248
Work-in-process 1,175 2,516
Finished goods 2,236 1,841
------- --------
4,998 5,605
Less: Reserves (777) (1,289)
------- --------
$ 4,221 $ 4,316
------- --------
------- --------
NOTE 3 - SIGNIFICANT EVENTS
In July 1996, the Company signed an extension to the operating lease
for its original 43,850 square foot facility located at 48664 Milmont
Drive, Fremont, California. The extension begins on June 1, 1996 and
expires on September 30, 2004. The future minimum rental payments under all
building leases is as follows:
6
<PAGE>
Amount
----------
Nine months ending June 30, 1997 $ 685,000
Fiscal Year Ending June 30:
1998 915,000
1999 935,000
2000 1,018,000
2001 1,048,000
Thereafter 3,069,000
----------
Total future minimum rental payments $7,670,000
----------
----------
7
<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
Paradyne Corporation ("Paradyne"); new product development and
introductions by the Company and its competitors; deregulation of, and
legislation regarding the domestic and international telecommunications
industry; rapidly changing technologies and the Company's ability to
respond thereto; the growth of demand for telecommunication services such as
wireless, cellular and the Internet; competition; changes in the mix of
product or customers or in the level of operating expenses; and other
factors described throughout this Form 10-Q, including under "Revenues"
and "Other Factors That May Affect Future Operating Results", and in the
Company's Annual Report on Form 10-K for the year ended June 30, 1996.
The actual results that the Company achieves may differ materially from any
forward-looking statements due to such risks and uncertainties. The
Company has identified using an asterisk ("*") various sentences within
this Form 10-Q which contain such forward-looking statements, and
words such as "believes", "anticipates", "expects", "intends" and
similar expressions are intended to identify forward-looking statements,
but are not the exclusive means of identifying such statements. In
addition, the section labeled "Other Factors That May Affect Future
Operating Results", which does not include asterisks for improved
readability, consists primarily of forward-looking statements. The
Company undertakes no obligation to revise any forward-looking statements
in order to reflect events or circumstances that may arise after the date
of this report. Readers are urged to carefully review and consider the
various disclosures made by the Company in this report and in the Company's
other reports filed with the Securities and Exchange Commission, including
its Form 10-K, that attempt to advise interested parties of the risks and
factors that may affect the Company's business.
REVENUES
Three Months Ended September 30,
-------------------------------------
1995 % Change 1996
---------- -------- -----------
Revenues $14,075,000 73% $24,294,000
Revenues consist primarily of gross sales of products, less discounts
and sales returns and allowances. A majority of the revenue increase
from the quarter ended September 30, 1995 to the comparable period in
fiscal 1997 was attributable to growth in unit volumes of platforms and
modules sold and, to a lesser extent, from the introduction and subsequent
growth of new products. The Company's list prices for its products and
average selling prices for individual products did not change significantly
between the quarter ended September 30, 1995 and the comparable period in
fiscal 1997. *The Company expects that the rate of growth in revenues will
decrease from the rate experienced between the quarters ended September 30,
1995 and September 30, 1996.
8
<PAGE>
The following table sets forth, for the periods indicated, the
revenues generated from the Company's largest customers, 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
<TABLE>
<CAPTION>
Three months ended September 30,
-------------------------------------------------
1995 % 1996 %
---------------------- ----------------------
<S> <C> <C> <C> <C>
Paradyne $ 4,635,000 33% $ 7,174,000 30%
Motorola, Inc. 2,402,000 17% 3,215,000 13%
ADC Telecommunications, Inc. 2,306,000 16% 2,559,000 11%
DSC Communications, Corp. 1,411,000 10% 3,986,000 16%
Other Domestic Customers 1,798,000 13% 6,392,000 26%
International Customers 1,523,000 11% 968,000 4%
---------------------- ----------------------
Total Revenues $14,075,000 100% $24,294,000 100%
---------------------- ----------------------
---------------------- ----------------------
</TABLE>
As shown in the table above, the Company sells a substantial majority
of its products to a limited number of customers, which generally
resell the Company's products to public carriers and end users. *The loss
of any one or more of the Company's major customers would have a material
adverse effect on the Company's business and operating results. *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. *These telecommunications equipment
suppliers could develop products that could be sold for selected
applications for which the Company's products are currently provided,
which could reduce the level of demand from these telecommunications
equipment suppliers for the Company's products.
The Company typically operates with limited order backlog, and a majority
of its revenues in each quarter result from orders booked in that quarter.
Also, the Company has from time-to-time, including the quarters ended June
30, 1996 and September 30, 1996, recognized a substantial portion of its
revenues from sales booked and shipped in the last month of a quarter. *The
Company expects a similar shipment pattern for the next several
quarters. The Company's agreements with its customers typically allow
customers to cancel orders without penalty until a relatively short period
of time before shipment. *The Company has experienced cancellations of
orders from time-to-time in the past and expects to continue to
receive order cancellations from time to time in the future.
The sales cycle for the Company's products is relatively long and is
often dependent on factors such as the size and timing of a carrier's
equipment deployment project. *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) could have a
material adverse effect on the Company's business and operating results.
*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
9
<PAGE>
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.
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 products by Paradyne to AT&T,
public carriers and operators of private networks. Shipments to
Paradyne have generated a substantial portion of the Company's revenues to
date. *Paradyne is not subject to any minimum purchase requirements, and
there can be no assurance that Paradyne will continue to place orders
with the Company. The Company is discussing with Paradyne the recent
changes associated with the purchase of Paradyne by the Texas Pacific
Group, and their effect on the Company's strategic relationship with
Paradyne. *Reductions in shipments to Paradyne would have a material
adverse effect on the Company's business and operating results.
During the quarter ended September 30, 1996, direct international
revenues accounted for 4% of the Company's revenues, compared to 11% for the
same period in fiscal 1996. Certain of the Company's domestic customers
also sell Premisys products into international markets. *The Company
intends to expand its operations outside the United States and
anticipates that international sales will increase in the future both in
absolute dollars and as a percentage of revenues. In order to sell its
products internationally, the Company must meet standards established by
international telecommunications committees and authorities in various
countries. *Conducting business outside of the United States is subject
to certain risks, including longer payment cycles, unexpected changes in
regulatory requirements and tariffs, currency conversion risks,
difficulties in staffing and managing foreign operations, greater difficulty
in accounts receivable collection and potentially adverse tax consequences.
GROSS PROFIT
Three Months Ended September 30,
------------------------------------
1995 % Change 1996
---------- -------- -----------
Gross Profit $9,000,000 75% $15,763,000
As a percentage of revenues 64% 65%
Cost of revenues consists of component costs, compensation costs
and overhead related to the Company's manufacturing operations and
warranty expenses. Gross profit increased from the three months ended
September 30, 1995 to the comparable period in fiscal 1997 primarily as a
result of increased unit volumes. The percentage gross margin increased
slightly from the quarter ended September 30, 1995 to the quarter ended
September 30, 1996 due primarily to lower product costs, resulting
primarily from volume increases and achieved manufacturing efficiencies,
which were offset in part by higher discounts and a shift in product mix
toward modules with less favorable product margins. * The Company expects
its gross margins for the remainder of fiscal 1997 to decline slightly from
the 65% realized in the quarter ended September 30, 1996. * However,
achievement of the Company's expectations is subject to a number of
risks, including customer mix, in particular the level of revenues
generated by Paradyne, the mix of products sold and the Company's ability to
realize expected revenue levels.
10
<PAGE>
RESEARCH AND DEVELOPMENT EXPENSES
Three Months Ended September 30,
------------------------------------
1995 % Change 1996
------------ -------- ----------
Research and development expenses $ 1,544,000 51% $2,328,000
As a percentage of revenues 11% 10%
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 $784,000, or 51%,
from the three months ended September 30, 1995 to the comparable period in
fiscal 1997. This increase was primarily due to increased personnel for the
purposes of expanding the Company's product line and to a lesser extent to
increased expenses for materials used in product development. The expansion
of the Company's product line during the comparison periods included the
development of new modules and the integration and testing of expanded
system software. The decrease in research and development expenses as
a percentage of the Company's revenues was the result of the growth in the
Company's revenues. *The Company expects that these expenses will increase
in absolute dollars and as a percentage of revenues during the remainder
of fiscal 1997. *However, the expected increase in research and
development expenses as a percentage of revenues is subject to, among
other things, the Company's level of revenues.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Three Months Ended September 30,
------------------------------------
1995 % Change 1996
------------ -------- ----------
Selling, general and administrative
expenses $2,821,000 65% $4,647,000
As a percentage of revenues 20% 19%
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 $1,826,000, or 65%, from the
three months ended September 30, 1995 to the comparable period in
fiscal 1997. This increase was primarily a result of increased staffing
and associated expenses for sales and marketing, and, to a lesser extent,
travel and customer support expenses. The decrease in selling, general and
administrative expenses as a percentage of the Company's revenues was the
result of the growth in the Company's revenues. *The Company expects that
these expenses will increase in absolute dollars and as a percentage of
revenues during the remainder of fiscal 1997. *However, the expected increase
in selling, general and administrative expenses as a percentage of
revenues is subject to, among other things, the Company's level of revenues.
INTEREST AND OTHER INCOME, NET
Three Months Ended September 30,
------------------------------------
1995 % Change 1996
------------ -------- ----------
Interest and other income, net $ 374,000 59% $ 594,000
As a percentage of revenues 3% 2%
11
<PAGE>
Interest and other income, net consists of interest income, net of
interest expense, and, to a much lesser extent, foreign currency gains and
losses. The increase in interest and other income, net, for the three months
ended September 30, 1996 as compared to the same period in fiscal 1996
was due to increased interest income from higher cash balances resulting
from the positive cash flow from operating activities.
PROVISION FOR INCOME TAXES
Three Months Ended September 30,
------------------------------------
1995 % Change 1996
------------ -------- ----------
Provision for income taxes $ 1,703,000 115% $3,659,000
As a percentage of income before
income taxes 34% 39%
The Company's provision for income taxes represents estimated
federal, state and foreign income taxes. The effective tax rate for the
quarter ended September 30, 1995 was less than the combined federal and
state statutory rate primarily as a result of the utilization of net
operating loss carryforwards. The effective tax rate for the quarter ended
September 30, 1996 was less than the combined federal and state statutory
rate primarily as a result of tax-exempt interest income from its
municipal securities portfolio and anticipated utilization of R&D tax
credits for fiscal year 1997. The provision for income taxes increased
from the three months ended September 30, 1995 to the three months ended
September 30, 1996 due both to higher pretax income and a higher effective
tax rate.
NET INCOME PER SHARE
Three Months Ended September 30,
------------------------------------
1995 % Change 1996
------------ -------- ----------
Net income per share $0.13 69% $0.22
Shares used in calculating net income 26,292,000 1% 26,479,000
per share
Net income per share increased 69% from $0.13 in the quarter
ended September 30, 1995 to $0.22 in the quarter ended September 30,
1996. This increase was due to an increase of 73% in net income between
the three month periods ended September 30, 1995 and 1996.
LIQUIDITY AND CAPITAL RESOURCES
September 30, September 30,
1995 % Change 1996
------------ -------- -------------
Net cash provided by operating
activities in the period $ 5,357,000 104% $10,951,000
Period end cash, cash equivalents and
short-term investments $48,342,000 49% $72,211,000
Period end working capital $49,037,000 66% $81,241,000
At September 30, 1996, the Company had approximately $72.2 million of
cash, cash equivalents and short-term investments.
Net cash totaling $11.0 million was provided by operating activities
during the three months ended September 30, 1996 primarily due to net
income of $5.7 million and increases in income taxes payable and accounts
payable aggregating $6.6 million, which were partially offset by a
12
<PAGE>
decrease in accrued liabilities of $1.4 million. Neither the Company's
accounts receivable nor its inventories changed significantly during the
three months ended September 30, 1996.
Cash used in investing activities during the three months ended
September 30, 1996 consisted principally of purchases of short-term
securities totaling $9.5 million and, to a lesser extent, investment of
$388,000 in property and equipment for product development and testing.
Cash flows from financing activities during the three months ended
September 30, 1996 consisted principally of the issuance of stock under the
Company's 1995 employee stock purchase plan and the exercise of employee
stock options.
As of September 30, 1996, the Company's working capital was
approximately $81.2 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 12 months.
OTHER FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS
As referenced in the first paragraph of Part 1, Item 2, this
section consists primarily of forward-looking statements but does not
include asterisks for improved readability.
The Company's revenues are subject to quarterly and annual fluctuations
due to a number of factors. 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 of individual user orders
is more limited than for manufacturers selling directly to the end users of
their products. In addition, the Company's revenues for a given quarter may
depend to a significant degree upon planned product shipments for a
single carrier's equipment deployment project. Revenues derived from such
projects are often difficult to forecast due to a relatively long sales
cycle and delays in the timing of such projects. Delays can be caused
by late deliveries by other vendors, changes in implementation
priorities, slower than anticipated growth in demand for the services
that the equipment supports and delays in obtaining regulatory
approvals for new tariffs. Revenues can also be effected by delays in
initial shipments of new products and new software releases. In developing
countries, delays and reductions in the planned deployment of the
Company's products can also be caused by sudden declines in the local
economy or capital availability and by new import controls. Such delays have
occurred in the past and may occur in the future. These delays could
materially adversely affect the Company's business and operating results.
In addition, the Company has in the past experienced delays as a result
of the need to modify its products to comply with unique customer
specifications. While such delays have not to date had a material
adverse effect on the Company's business or operating results, there can be
no assurance that any future delays would not have such an adverse
effect.
The Company's operating results may fluctuate due to factors such as
the timing of new product announcements and introductions by the Company,
its major customers and its competitors, market acceptance of new or
enhanced versions of the Company's products, changes in the product or
customer mix of revenues, changes in the level of operating expenses,
competitive pricing pressures, the gain or loss of significant
customers, increased research and development expense associated with
new product introductions, component shortages and general economic
13
<PAGE>
conditions. 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 revenue shortfall.
Accordingly, 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.
The telecommunications equipment market is also effected by rapidly
changing technologies and frequent new product introductions, which include
ATM and high speed digital subscriber lines (HDSL). The Company's success
will depend to a substantial degree upon its ability to respond to
changes in technology and customer requirements. This will require the
timely selection, development and marketing of new products and
enhancements on a cost-effective basis. 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. Products as complex as
those offered by the Company may contain, and have in the past contained,
undetected errors, incompatibilities with installed products or failures
when first introduced or as new versions are released, which could result in
the loss or delay in market acceptance of the Company's products. As the
functionality and complexity of the Company's products continue to grow,
the Company may experience an increased incidence of such errors or
failures as well as delays in introducing its products.
The market for the Company's products is also characterized by the need
to meet a significant number of voice and data communications
regulations and standards, including those defined by the Federal
Communications Commission, Underwriters Laboratories, Bell Communications
Research ("Bellcore") and, internationally, various countries and
international standards committees. Some of these new standards are evolving
as new technologies, such as ATM and frame relay, are deployed. As existing
and new standards evolve, the Company will be required to modify its
products or develop and support new versions of its products. It is also
important that the Company's products are easily integrated with carriers'
network management systems. The failure of the Company's products to comply,
or delays in compliance, with the various existing and evolving industry
standards could delay introduction of the Company's products, which could
have a material adverse effect on the Company's business and operating
results. In addition, government regulatory policies are likely to continue
to have a major impact on the pricing of existing as well as new public
network services and therefore are expected to affect demand for such
services and the telecommunications products that support such services.
The market for telecommunications products is highly competitive.
The Company's principal competition to date has been from major
telecommunications equipment suppliers, such as Newbridge Networks
Corporation, Tellabs, Inc. Nokia, Inc. and NEC Corporation, which offer a
broad line of products including access devices for business applications.
The Company expects substantial additional competition from existing
competitors as they develop products to compete with the functionality and
flexibility of the Company's products. In addition, Premisys expects to
compete with other new entrants, including both start-ups and existing data
communications companies, to the telecommunications access equipment
marketplace, including those targeting
14
<PAGE>
bandwidth-on-demand services and broadband integrated access products. The
Company also anticipates that certain of the telecommunications equipment
suppliers that market and distribute the Company's products may develop
products that could be sold for selected applications for which the
Company's products are currently provided. Successful, timely development of
such products could reduce the level of demand from these telecommunications
equipment suppliers for the Company's products.
The Company's success to date has been significantly dependent on
the contributions of its senior officers: Raymond C. Lin, President
and Chief Executive Officer; Boris J. Auerbuch, Senior Vice President and
Chief Technical Officer; William J. Smith, Senior Vice President, Sales and
Marketing; and Riley R. Willcox, Senior Vice President and Chief Financial
Officer. The loss of the services of any one of these officers could have
a material adverse effect on the Company's business and operating
results. The Company's success also depends to a significant extent on
a number of other key employees as well as its ability to attract and
retain additional highly-skilled technical, managerial, sales and
marketing personnel, the competition for whom is intense.
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.
Certain components used in the Company's products are currently
available from only one supplier. In addition, the Company relies
on contract manufacturers, primarily Eltech Electronics, Inc., to
produce its printed circuit board assemblies. Shortages or delays in the
delivery of the components used in the Company's products (which have
occurred in the past) or extended delays in deliveries of printed circuit
board assemblies could result in delays in the shipment of the Company's
products and/or increase component costs. Certain components are currently
in short supply within the Company's industry, and the Company must
therefore compete for these components with larger companies that
often have long-established relationships with these suppliers. 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.
All of the above factors are difficult for the Company to forecast,
and these or other factors, such as changes in earnings estimates by
securities analysts, can materially affect the Company's operating results
and stock price for one quarter or a series of quarters. Further, in
recent years, the stock market has experienced extreme price and
volume fluctuations that have particularly affected the market prices of
securities of many high technology companies, for reasons frequently
15
<PAGE>
unrelated to the performance of the specific 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. The trading prices of many high technology
companies stocks, including the Common Stock of the Company, are at
or near their historical highs and reflect price/earnings ratios
substantially above historical norms. There can be no assurance that
the trading price of the Company's Common Stock will remain at or near its
current level.
16
<PAGE>
II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8 K
A. Exhibits
Exhibit No. Description of Exhibit
----------- ----------------------
10.33 Second Amendment to Lease Agreement by and between Premisys
Communications, Inc. and Aetna Life Insurance Company, dated
August 9, 1996.
10.34 First Amendment to Lease Agreement by and between Premisys
Communications, Inc. and Berg & Berg Enterprises, Inc., dated
September 17, 1996, for the premises located at 48800 Milmont
Drive, Fremont, California (formerly 48700 Milmont Drive,
Fremont, California).
11.01 Computation of Net Income per Share.
27.01 Financial Data Schedule
B. Reports on Form 8-K
None
17
<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 7, 1996 /S/ Robert W. Dilfer
- --------------------------------------- -------------------------------------
Date Robert W. Dilfer
Vice President and Controller
(Duly Authorized Officer and Chief
Accounting Officer)
18
<PAGE>
INDEX TO EXHIBITS
Exhibit No. Description of Exhibit
----------- ----------------------
10.33 Second Amendment to Lease Agreement by and between
Premisys Communications, Inc. and Aetna Life
Insurance Company, dated August 9, 1996 for the
premises located at 48664 Milmont Drive, Fremont,
California..
10.34 First Amendment to Lease Agreement by and between
Premisys Communications, Inc. and Berg & Berg
Enterprises, Inc., dated September 17, 1996, for the
premises located at 48800 Milmont Drive, Fremont,
California (formerly 48700 Milmont Drive, Fremont,
California).
11.01 Computation of Net Income per Share
27.01 Financial Data Schedule
19
<PAGE>
Exhibit 10.33
SECOND AMENDMENT TO LEASE AGREEMENT
This Second Amendment to Lease Agreement (the "Second Amendment") is made
and entered into as of August 9, 1996, by and between AETNA LIFE INSURANCE
COMPANY, A CONNECTICUT CORPORATION ("LANDLORD"), AND PREMISYS
COMMUNICATIONS, INC., A DELAWARE CORPORATION ("TENANT"), with reference to
the following facts:
RECITALS
WHEREAS, Landlord and Premisys Communications Holdings, Inc., a
California corporation ("Premisys Communications Holdings") have entered
into that certain Lease Agreement dated October 4, 1993 (the "Lease"), for
the leasing of certain premises located at 48664 Milmont Drive, Fremont,
California (the "Premises") as such Premises are more fully described in the
Lease;
WHEREAS, Premisys Communications Holdings has assigned its interest in the
Lease to Premisys Communications, Inc., a Delaware corporation
("Premisys Communications"); and
WHEREAS, Landlord and Tenant have agreed to extend the Lease Term subject to
the term and conditions set forth in this Second Amendment.
NOW, THEREFORE, in consideration of the mutual promises and covenants
contained herein, and other good and valuable consideration, the receipt
and sufficiency of which are hereby acknowledged, the parties agree as
follows:
1. TERM: The Term of the Lease commenced on April 1, 1994 and is
scheduled to expire on May 31, 1999. Upon execution of this Second Amendment,
the Term of the Lease shall be extended for an additional sixty-five (65)
months, therefore, the lease expiration date shall be amended from May 31, 1999
to October 31, 2004.
2. BASE RENT: The monthly Base Rent payable by Tenant shall be set
forth below commencing and effective June 1, 1999:
Monthly Periods Monthly Rate Monthly Base Rent
--------------- ------------ -----------------
6/l/1999 - 5/31/2000 $0.81 $35,519.31
6/l/2000 - 5/31/2001 $0.84 $36,834.84
6/l/2001 - 5/31/2002 $0.875 $38,369.63
6/l/2002 - 5/31/2003 $0.91 $39,904.41
6/l/2003 - 10/31/2004 $0.945 $41,439.20
3. TENANT IMPROVEMENTS BY TENANT: Tenant shall construct and install
the improvements ("Tenant Improvements") in the Premises as described
and in accordance with the terms, conditions, criteria and provisions set
forth in the Final Plans and Specifications as prepared by Tenant's
architect, Banuazizi Associates Architects, and dated August 2, 1996.
4. OPTION TO EXTEND THE LEASE: The parties hereby acknowledge and
agree that Tenant did not exercise the Option To Extend The Lease in
accordance with the terms and conditions set forth in Addendum I of the
Lease dated October 4, 1993 (the "First Option To Extend"). The parties
further agree that this option is of no further force and effect, and the
following option shall replace the First Option To Extend: Landlord shall
grant Tenant one (1) five (5) year option to extend the Lease (the "Option
to Extend") as set forth in Addendum 1, attached and incorporated herein
by this reference.
5. HVAC REPAIRS: Tenant has acknowledged to Landlord that they
are experiencing pressure differentials along with warm and cold
variations throughout the Premises. Effective upon execution of this
Second Amendment, Landlord agrees to hire an HVAC engineering company to
investigate the existing HVAC zoning of the Premises. This investigation
and any necessary corrective work as a result of said investigation
shall be at Landlord's sole cost, provided the cost does not exceed the
amount of five thousand and 00/100 dollars ($5,000.00). Any cost in excess of
five thousand and 00/100 dollars ($5,000.00), and any corrective work as a
result of modifications made to the Premises by Tenant shall be at Tenant's
sole cost.
<PAGE>
6. EFFECT OF AMENDMENT: Except as modified herein, the terms
and conditions of the Lease shall remain unmodified and continue in full
force and effect. In the event of any conflict between the terms and
conditions of the Lease and this Second Amendment, the terms and
conditions of this Second Amendment shall prevail.
7. DEFINITIONS: Unless otherwise defined in this Second Amendment, all
terms not defined in this Second Amendment shall have the meaning set forth in
the Lease.
8. AUTHORITY: Subject to the provisions of the Lease, this
Second Amendment shall be binding upon and inure to the benefit of the
parties hereto, their respective heirs, legal representatives, successors
and assigns. Each party hereto and the persons signing below warrant that
the person signing below on such party's behalf is authorized to do so and
to bind such party to the terms of this Second Amendment.
9. The terms and provisions of the Lease are hereby incorporated in this
Second Amendment.
IN WITNESS WHEREOF, the parties have executed this Second Amendment as of the
date and year first above written.
TENANT:
Premisys Communications, Inc.,
a Delaware corporation
By: /S/ Riley Willcox
--------------------------------------
Printed Name: Riley R. Willcox
----------------------------
Title: Chief Financial Officer
----------------------------------
Date: 8/21/96
----------------------------------
LANDLORD:
AETNA LIFE INSURANCE COMPANY,
a Connecticut corporation
By: Lincoln Property Company Management Services, Inc.,
As Manager and Agent for Owner
By: /S/ Barry DiRaimondo
----------------------------------
Vice President
Date: 9/17/96
---------------------------------
2
<PAGE>
EXHIBIT A
TENANT IMPROVEMENTS
PAGE 1 OF 3
This exhibit, entitled "Tenant Improvements", is and shall
constitute Exhibit A to the Lease Agreement, dated as of the Lease Date,
by and between Landlord and Tenant for the Premises. The terms and
conditions of this Exhibit A are hereby incorporated into and are made a
part of the Lease. Capitalized terms used, but not otherwise defined, in
this Exhibit A have the meanings ascribed to such terms in the Lease.
1. TENANT TO CONSTRUCT TENANT IMPROVEMENTS. Tenant shall be
solely responsible for the planning, construction and completion of the
interior tenant improvements ("Tenant Improvements") to the Premises in
accordance with the terms and conditions of this Exhibit A.
2. DEFINITION. "Tenant Improvements" as used in the Lease and
this Exhibit A shall include only those improvements within the interior
portions of the Premises which are depicted on the Final Plans and
Specifications (hereafter defined in Paragraph 3 (b)) or described
hereinbelow. "Tenant Improvements" shall specifically not include Tenant's
personal property of trade fixtures.
The Tenant Improvements may include:
a. Partitioning, doors, floor coverings, finishes, ceilings, wall
coverings and painting, millwork and similar items.
b. Electrical wiring, lighting fixtures, outlets and switches, and
other electrical work.
c. Duct work, terminal boxes, defusers and accessories required for
the completion of the heating, ventilation and air conditioning systems
serving the Premises, including the cost of meter and key control for
after-hour air conditioning.
d. All fire and life safety control systems such as fire walls,
sprinklers, halon, fire alarms, including piping, wiring and accessories
installed within the Building and serving the Premises.
e. All plumbing, fixtures, pipes, and accessories to be installed
within the Building and serving the Premises.
3. TENANT IMPROVEMENTS PLANS.
a. PRELIMINARY PLANS AND SPECIFICATIONS. Tenant shall retain
an architect ("Architect") and/or engineer ("Engineer") to prepare
preliminary working architectural and engineering plans and specifications
("Preliminary Plans and Specifications") for the Tenant Improvements. The
Preliminary Plans and Specifications shall be in sufficient detail to show
locations, types and requirements for all heat loads, people loads, floor
loads, power and plumbing, regular and special HVAC needs, telephone
communications, telephone and electrical outlets, lighting, lighting
fixtures and related power, and electrical and telephone switches.
Landlord shall approve or disapprove the Preliminary Plans and
Specifications within five (5) business days after Landlord receives
the Preliminary Plans and Specifications, and if disapproved, Landlord
shall return the Preliminary Plans and Specifications to Tenant, who shall
make all necessary revisions. This procedure shall be repeated until
Landlord approves the Preliminary Plans and Specifications. Landlord shall
not unreasonably withhold its approval of the Preliminary Plans and
Specifications. The approved Preliminary Plans and Specifications, as
modified, shall be deemed the "Final Preliminary Plans and Specifications".
b. FINAL PRELIMINARY PLANS AND SPECIFICATIONS. After
the Preliminary Plans and Specifications are approved by Landlord and are
deemed to be the Final Preliminary Plans and Specifications, Tenant
shall cause the Architect and/or the Engineer to prepare the final
working architectural and engineering plans and specifications ("Final Plans
and Specifications") for the Tenant Improvements. Upon preparation of the
Final Plans and Specifications Tenant shall deliver the Final Plans and
Specifications to Landlord. Landlord shall approve or disapprove the Final
Plans and Specifications within five (5) business days after Landlord
receives the Final Plans and Specifications and, if disapproved, Landlord
shall return the Final Plans and Specifications to Tenant who shall make all
necessary revisions. This procedure shall be repeated until Landlord
approves the Final Plans and Specifications. Landlord shall not
unreasonably withhold its approval of the Final Plans and Specifications.
The approved Final Plans and Specifications, as modified, shall be
deemed the "Construction Documents".
c. MISCELLANEOUS. All deliveries of the Preliminary Plans
and Specifications, the Final Preliminary Plans and Specifications, the
Final Plans and Specifications, and the Construction Documents shall
be delivered by messenger service, by personal hand delivery or by
overnight parcel service. While Landlord has the right to approve
the Preliminary Plans and Specifications, the Final Preliminary Plans and
Specifications, the Final Plans and Specifications, and the Construction
Documents, Landlord's interest in doing so is to protect the Premises, the
Building and Landlord's interest therein. Accordingly,
<PAGE>
EXHIBIT A
TENANT IMPROVEMENTS
PAGE 2 OF 3
Tenant shall not rely upon Landlord's approvals and Landlord shall not be
the guarantor of, nor responsible for, the correctness or accuracy
of the Preliminary Plans and Specifications, the Final Preliminary
Plans and Specifications, the Final Plans and Specifications, and the
Construction Documents, or the compliance thereof with applicable laws,
and Landlord shall incur no liability of any kind by reason of granting such
approvals.
4. PERMITS. Tenant at its sole cost and expense shall obtain
all governmental approvals of the Construction Documents to the full
extent necessary for the issuance of a building permit for the Tenant
Improvements based upon such Construction Documents. Tenant at its sole
cost and expense shall also cause to be obtained all other necessary
approvals and permits from all governmental agencies having jurisdiction or
authority for the construction and installation of the Tenant Improvements
in accordance with the approved Construction Documents. Landlord shall
cooperate with Tenant at no cost or expense to Landlord in the obtaining
of such approvals and permits. Tenant at its sole cost and expense shall
undertake all steps necessary to ensure that the construction of the Tenant
Improvements is accomplished in strict compliance with all statutes, laws,
ordinances, rules, and regulations applicable to the construction of the
Tenant Improvements and the requirements and standards of any insurance
underwriting board, inspection bureau or insurance carrier insuring the
Premises and/or the Building.
5. CONSTRUCTION.
a. Tenant shall be solely responsible for the
construction, installation and completion of the Tenant Improvements in
accordance with the Construction Documents approved by Landlord and is
solely responsible for the payments of all amounts when payable in
connection therewith without any cost or expense to Landlord, except for
Landlord's obligation to contribute the Carpet and Paint Tenant
Improvement Allowance (as hereinafter defined). Once undertaken,
Tenant shall diligently proceed with the construction, installation and
completion of the Tenant Improvements in accordance with the Construction
Documents. No material changes shall be made to the Construction
Documents approved by Landlord without Landlord's prior written consent,
which consent shall not be unreasonably withheld or delayed.
b. Tenant at its sole cost and expense shall employ a
reputable general contractor ("Contractor") to construct the Tenant
Improvements in accordance with the Construction Documents. The Contractor
selected by Tenant shall be subject to the written approval of Landlord,
which approval shall not be unreasonably withheld or delayed. The
construction contract between Tenant and the Contractor shall be subject to
Landlord's prior written approval. Proof that the Contractor is licensed
in California and has insurance coverage typically carried by a
reputable general contractor in the State of California shall be provided
to Landlord at the time that Tenant requests approval of the Contractor from
Landlord. Tenant shall ensure that all subcontractors hired by the
Contractor are licensed in California and have insurance typically carried
by reputable subcontractors in the State of California.
c. Prior to the commencement of the construction and installation
of the Tenant Improvements, Tenant shall provide the following to the
Landlord, all of which shall be to the Landlord's reasonable satisfaction:
i. An estimated completion schedule for the Tenant
Improvements.
ii. Copies of all required approvals and permits from
governmental agencies having jurisdiction or authority over the construction and
installation of the Tenant Improvements.
d. Landlord shall at all times have the right to inspect the
Tenant Improvements and Tenant shall immediately cease work upon written
notice from the Landlord if the Tenant Improvements are not substantially in
compliance with the Construction Documents approved by the Landlord. If
Landlord gives notice of faulty construction or any other deviation from the
Construction Documents, Tenant shall cause Contractor to make corrections
promptly. However, neither the privilege herein granted to Landlord to make
such inspection, nor the making of such inspections by Landlord, shall
operate as a waiver of any rights of Landlord to require good and
workmanlike construction and improvements constructed in accordance with
the Construction Documents.
e. Tenant shall discharge promptly and fully, by payment
or appropriate bond satisfactory to Landlord in form and substance, all
claims for labor done and materials and services furnished in connection
with the Tenant Improvements. Tenant Improvements shall not be commenced
until five (5) days after Landlord has received notice from Tenant stating
the date the construction of the Tenant Improvements is to commence so that
Landlord can post and record any appropriate notice of non-responsibility.
<PAGE>
EXHIBIT A
TENANT IMPROVEMENTS
PAGE 3 OF 3
f. Tenant shall maintain during the construction of the
Tenant Improvements, at its sole cost and expense, builders' risk
insurance for the amount of the completed value of the Tenant
Improvements on an all-risk non-reporting form covering all improvements
under construction, including building materials, and other insurance in
amounts and against such risks as the Landlord shall reasonably require in
connection with the Tenant Improvements.
g. No materials, equipment of fixtures shall be delivered to
or installed upon the Premises pursuant to any agreement by which another
party has a security interest or right to remove or repossess such items,
without the prior written consent of Landlord.
h. Upon completion of the Tenant Improvements, Tenant shall
deliver to Landlord the following, all of which shall be to the Landlord's
reasonable satisfaction:
i. Any certificates required for occupancy, including a
permanent and complete Certificate of Occupancy issued by the City of
Fremont or a final signed-off building permit or its equivalent.
ii. A Certificate of Completion signed by the Architect who
prepared the Construction Documents approved by the Landlord.
6. CARPET AND PAINT TENANT IMPROVEMENT ALLOWANCE.
a. Landlord shall provide an allowance to recarpet the
existing carpeted areas of the Premises, and repaint the interior office
portion of the Premises in the amount of sixty-five thousand seven
hundred seventy-six and 50/100 dollars ($65,776.50) ($1.50 per square foot),
or the amount equal to the lowest of three (3) bids received by Tenant,
whichever is lower (the "Carpet and Paint Tenant Improvement Allowance").
The Carpet and Paint Tenant Improvement Allowance shall be the maximum
contribution by Landlord for the Carpet and Paint Tenant Improvements and
shall be used to install the Carpet and Paint Tenant Improvements and for
no other purpose. Landlord shall have no obligation to disburse the
Carpet and Paint Tenant Improvement Allowance or any portion thereof
unless and until the Carpet and Paint Tenant Improvements have been
completed in a lien-free and good and workmanlike manner and in accordance
with all statues, laws, ordinances, rules and regulations applicable
thereto, Tenant has made the deliveries required under Paragraph 5(h.)
above, and the Lien Period (as hereinafter defined) has expired and
Landlord has been reasonably able to confirm that no mechanics' or
materialsmens' liens have been filed against the Property during such
Lien Period. As used herein, "Lien Period" means the period during
which the Contractor and any subcontractors, labor suppliers and
materialsmen providing services or materials for the Tenant
Improvements may file a lien against the Property of otherwise enforce
lien rights.
b. Notwithstanding the foregoing to the contrary, Landlord shall
not be obligated to disburse any portion of the Carpet and Paint Tenant
Improvement Allowance while Tenant is in Default of this Lease.
c. Should the total cost of the Carpet and Paint Tenant
Improvements be less than the Carpet and Paint Tenant Improvement
Allowance, the Carpet and Paint Tenant Improvement Allowance shall be
automatically reduced to the amount equal to said actual cost.
7. CONDITION PRECEDENT. Landlord shall have no obligation to approve or
review any plans or take any other actions required by Landlord pursuant to this
Exhibit A if at the time Tenant requests such approval, review or action or at
any time thereafter Tenant is in Default of this Lease.
8. LANDLORD'S CONSENTS. If Landlord does not respond to any request for
consent under this Exhibit A within the period set forth for such consent
herein, then such consent shall be deemed given.
<PAGE>
ADDENDUM 1 - OPTION TO RENEW
PAGE 1 OF 2
This Addendum No. 1 is incorporated as a part of that certain Second
Amendment to Lease Agreement dated August 9, 1996 (the "Amendment"), by and
between AETNA LIFE INSURANCE COMPANY, A CONNECTICUT CORPORATION
("LANDLORD"), AND PREMISYS COMMUNICATIONS INC., A DELAWARE CORPORATION
("TENANT"), of the premises located at 48664 Milmont Drive, Fremont,
California (the "Premises"). Any capitalized terms used herein and not
otherwise defined herein shall have the meaning ascribed to such terms as
set forth in the Lease.
If Tenant has not at any time been, or is currently not, in default in
the performance of any of its obligations under this Lease and
contingent upon review and approval of Tenant's then current financial
condition by Landlord, Tenant shall have the right at its option to extend
the term of the Lease for five (5) years (the "Extended Term"). The
Lease of the Premises during the Extended Term shall be upon the same
terms, covenants and conditions as are set forth in this Lease, other than
the monthly Base Rent and the term of the Lease. If Landlord does not receive
from Tenant written notice of Tenant's exercise of this option on a date
which is not more than three hundred sixty (360) days nor less than two
hundred forty (240) days prior to the end of the initial term of the
Lease (the "Option Notice"), all rights under this option shall
automatically lapse and terminate and shall be of no further force and
effect. Time is of the essence herein.
The monthly Base Rent for the Extended Term shall be equal to the higher of
(i) the current fair market rent for space comparable to the Premises
taking into account any increases in the fair market rent over the Extended
Term (the "Fair Rental Value") determined as set forth below, or (ii) the
Base Rent payable hereunder immediately prior to the commencement of the
Extended Term.
1. The parties shall have ten (10) days after Landlord receives
the Option Notice within which to agree on the monthly Base Rent for the
Extended Term. If the parties agree on the monthly Base Rent for the
Extended Term within ten (10) days after Landlord receives the Option
Notice, they shall immediately execute an amendment to this Lease stating
the monthly Base Rent for the Extended Term. If the parties have not agreed
on the monthly Base Rent for the Extended Term within the aforesaid ten
(10) days, Tenant may rescind its exercise of the option by giving written
notice to Landlord within five (5) days after expiration of the aforesaid
ten (10) day period. If Tenant does not exercise its right to rescind
as and when required, it shall conclusively be presumed that Tenant has
elected not to rescind its exercise of the option.
2. If the parties are unable to agree on the Fair Rental Value for
the Extended Term within ten (10) days after Landlord receives the Option
Notice, and in the event Tenant does not exercise its right to rescind as
provided in Paragraph 1 above, the Fair Rental Value of the Premises shall
be determined in accordance with Paragraph 4 below.
3. The "Fair Rental Value" of the Premises shall be defined to mean
the fair market rental value of the Premises as of the commencement of the
Extended Term, taking into consideration all relevant factors, including
length of term, the uses permitted under the Lease, the quality, size,
design and location of the Premises, including the condition and value of
existing tenant improvements, and the monthly Base Rent paid by tenants
for premises comparable to the Premises, and located in Fremont,
California.
4. Within five (5) days after the expiration of the ten (10) day
period set forth in Paragraph 2 above, each party, at its sole cost and
by giving notice to the other party, shall appoint a real estate appraiser
with at least five (5) years' full-time commercial appraisal experience in
the area in which the Premises are located to appraise and set the Fair
Rental Value of the Premises for the Extended Term. If a party does not
appoint an appraiser within this five (5) day time period, the single
appraiser appointed shall be the sole appraiser and shall set the then Fair
Rental Value of the Premises. If the two appraisers are appointed by the
parties as stated in this Paragraph 4, they shall meet promptly and
attempt to set the Fair Rental Value of the Premises. If they are unable
to agree within fifteen (15) days after the second appraiser has been
appointed, they shall attempt to elect a third appraiser meeting the
qualifications stated in this Paragraph 4 within five (5) days after the
last day the two appraisers are given to set the Fair Rental Value of the
Premises. If they are unable to agree on the third appraiser, either of
the parties to this Lease, by giving five (5) days notice to the other
party, can apply to the then president of the real estate board for the
city in which the Premises are located, or the then presiding judge of the
Alameda County Superior Court, for the selection of a third appraiser who
meets the qualifications stated in this Paragraph 4. Each of the parties
shall bear one-half (1/2) of the cost of the appointed third appraiser and
of paying the third appraiser's fee. The third appraiser, however
selected, shall be a person who has not previously acted in any capacity
for either party.
Within twenty (20) days after the election of the third appraiser, a majority
of the appraisers shall set the Fair Rental Value of the Premises. If a
majority of the appraisers are unable to set the Fair Rental Value
<PAGE>
ADDENDUM 1 - OPTION TO RENEW
PAGE 2 OF 2
of the Premises within the stipulated period of time, the three appraisals
shall be added together and their total divided by three (3); subject to
the next sentence, the resulting quotient shall be the Fair Rental Value of
the Premises. If, however, the low appraisal and/or high appraisal is more
than ten percent (10%) lower and/or higher than the middle appraisal, the
low appraisal and/or high appraisal shall be disregarded. If only one
appraisal is disregarded, the remaining two appraisals shall be added
together and their total divided by two (2); the resulting quotient shall be
the then Fair Rental Value of the Premises. If both the low appraisal and
the high appraisal are disregarded as stated in this Paragraph 4, the
middle appraisal shall be the Fair Rental Value of the Premises. After
the Fair Rental Value of the Premises has been set, the appraisers
shall immediately notify the parties of such value, and the monthly Base
Rent for the Extended Term shall be the amount which is the Fair Rental
Value of the Premises so set.
In no event shall the monthly Base Rent for any period of the Extended Term
be less than the highest monthly Base Rent charged during the Term of the
Lease. Upon determination of the monthly Base Rent for the Extended Term,
pursuant to the terms outlined above, the parties shall immediately execute
the new standard lease document stating the minimum monthly Base Rent for
the Extended Term and confirming the dates of the Extended Term. Tenant
shall have no other right to extend the term of the Lease under this
Addendum 1 unless Landlord and Tenant otherwise agree in writing. If Tenant
duly exercises this option, in accordance with the terms contained herein:
(1) Tenant shall accept the Premises in its then "As-Is" condition and,
accordingly, Landlord shall not be required to perform any additional
improvements to the Premises; and (2) Tenant hereby agrees that it will
solely be responsible for any and all brokerage commissions and finder's
fees payable to any broker in connection with the option described herein,
and Tenant hereby further agrees that Landlord shall in no event or
circumstance be responsible for the payment of any such commissions and fees.
This option is personal to Tenant and may not be assigned, voluntarily
or involuntarily, separate from or as part of the Lease. At Landlord's
option, all rights of Tenant under this option shall terminate and be of no
force and effect if any of the following individual events occur or any
combination thereof occur: (1) Tenant has been in default at any time
during the Term of the Lease, or is currently in default of any provision of
the Lease; and/or (2) Tenant has assigned its rights and obligations under
all or part of the Lease or Tenant has subleased all or part of the
Premises; and/or (3) Tenant's financial condition is unacceptable to
Landlord at the time the Option Notice is delivered to Landlord; and/or
(4) Tenant has failed to exercise this option in a timely manner in
accordance with the provisions of this Addendum 1; and/or (5) Tenant no
longer has possession of all or any part of the Premises under the Lease, or
if Lease has been terminated earlier, pursuant to the terms of the Lease.
<PAGE>
Exhibit 10.34
FIRST AMENDMENT TO LEASE
This First Amendment to Lease ("Amendment"), is made and entered into this
17th day of September, 1996 by and between Berg & Berg Enterprises,
Inc., a California corporation ("Berg" or "Lessor") and Premisys
Communications, Inc., a Delaware corporation ("Premisys" or "Lessee"). All
capitalized terms used in this Amendment shall have the definitions set
forth in the Lease.
RECITALS
A. By that certain lease dated October 24, 1996 (the "Lease"), Berg agreed to
construct approximately 52,000 square feet of space, including all
improvements thereto, at 48700 Milmont Drive, Fremont, California (the
"Premises") and to lease the constructed space to Premisys.
B. The parties to the Lease hereby agree to amend the Lease according to the
terms and conditions of this Amendment.
NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency
of which are acknowledged, the parties hereto agree to amend the Lease as
follows:
1. ADDRESS: The address for the Premises is 48800 Milmont Drive, Fremont,
California.
2. PREMISES: The square footage of the Premises has increased to 53,000
square feet.
3. COMMENCEMENT DATE: Lessor and Lessee agree that construction of the
Premises has been delayed due to acts of God (rain and wet soil
conditions) for in excess of sixty (60) days and therefore rent
abatement as provided in Section 2 of the Lease, if any, shall
commence November 30, 1996 rather than September 30, 1996. It is
the intention of Lessor and Lessee that the Commencement Date as
provided in Section 1 of the Lease shall be October 1, 1996 rather
than August 1, 1996.
4. TI ALLOWANCE: The TI Allowance shall be increased to $1,325,000 rather
than $1,300,000 as provided in Section 2 of the Lease.
5. BASE RENT: Base rent shall be increased to and payable at the following
monthly rates:
Months 1 through 12 $46,640
Months 13 through 24 47,806
Months 25 through 36 49,001
Months 37 through 48 50,226
Months 49 through 60 51,482
Months 61 through 72 52,769
Months 73 through 84 54,088
Months 85 through 96 55,440
6. LESSEE INTERIOR IMPROVEMENTS: Lessee is aware and acknowledges that
the cost of the Lessee Interior Improvements are expected to be
approximately two million three hundred twenty-eight thousand one
hundred fifty-six dollars ($2,328,156) due to the special HVAC,
electrical, data, and grounding requirements of Premisys, excluding
security costs. Based on the current estimated total of the Lessee
Interior Improvements, Lessee will be required to make cash payments
to Lessor of approximately one million three thousand dollars
($1,003,156) for Lessee Interior Improvements plus the costs of
security.
<PAGE>
7. RATIFICATION OF LEASE: Except as modified herein, the Lease is hereby
ratified, approved and confirmed upon all the terms, covenants, and
conditions.
8. AUTHORITY: Each party executing this Amendment represents and warrants
that he or she is duly authorized to execute and deliver this
Amendment. If executed on behalf of a corporation, that this Amendment
is executed in accordance with the by-laws of said corporation (or a
partnership that this Amendment is executed in accordance with the
partnership agreement of such partnership), that no other party's
approval or consent to such execution and delivery is required, and
that this Amendment is binding upon said individual, corporation
(or partnership) as the case may be in accordance with its terms.
BERG & BERG ENTERPRISES, INC., PREMISYS COMMUNICATIONS, INC.,
a California general partnership a Delaware corporation
By: /s/ Carl E. Berg By: /s/ Riley R. Willcox
------------------------- -------------------------
Carl E. Berg Riley R. Willcox
Title: President Title: Chief Financial Officer
---------------------- -------------------------
Date: September 17, 1996 Date: September 17, 1996
---------------------- -------------------------
In reference to section 4, TI Allowance of First Amendment to Lease:
Lessor prescribed herein represents the lessors best estimate of cost at
this time. Formal definition of final cost as it relates to monies owed by
lessee will be defined at conclusion of construction. Lessor shall provide
lessee with actual cost and provide supporting documentation as requested by
lessee.
Acknowledged and accepted:
By: /s/ Carl E. Berg By: /s/ Riley R. Willcox
------------------------- -------------------------
Carl E. Berg Riley R. Willcox
Title: President Title: Chief Financial Officer
---------------------- --------------------------
Date: September 17, 1996 Date: September 17, 1996
---------------------- --------------------------
<PAGE>
Exhibit 11.01
PREMISYS COMMUNICATIONS, INC.
COMPUTATION OF NET INCOME PER SHARE - (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Three Months Ended September 30,
---------------------------------
1995 1996
---- ----
<S> <C> <C>
Weighted average shares outstanding:
Common Stock 23,462 24,432
Common stock equivalents related to options
using the treasury stock method 2,830 2,047
--------- --------
Weighted-average common shares and equivalents 26,292 26,479
--------- --------
--------- --------
Net income $ 3,306 $ 5,723
--------- --------
--------- --------
Net income per share $ 0.13 $ 0.22
--------- --------
--------- --------
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheet, consolidated statement of operations and
consolidated statement of cash flows included in the Company's Form 10-Q for the
period ended September 27, 1996, 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-27-1997
<PERIOD-START> JUN-29-1996
<PERIOD-END> SEP-27-1996
<CASH> 23,838
<SECURITIES> 48,373
<RECEIVABLES> 16,397
<ALLOWANCES> 0
<INVENTORY> 4,316
<CURRENT-ASSETS> 96,215
<PP&E> 4,888
<DEPRECIATION> 2,055
<TOTAL-ASSETS> 99,175
<CURRENT-LIABILITIES> 14,974
<BONDS> 70
0
0
<COMMON> 245
<OTHER-SE> 83,886
<TOTAL-LIABILITY-AND-EQUITY> 99,175
<SALES> 24,294
<TOTAL-REVENUES> 24,294
<CGS> 8,531
<TOTAL-COSTS> 15,506
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 9,382
<INCOME-TAX> 3,659
<INCOME-CONTINUING> 5,723
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,723
<EPS-PRIMARY> 0.22
<EPS-DILUTED> 0.22
</TABLE>
