<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------
FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED JUNE 27, 1997
/ / 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 (I.R.S. Employer
of incorporation or organization) Identification No.)
48664 MILMONT DRIVE, FREMONT, CALIFORNIA 94538
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (510) 353-7600
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $0.01 PAR VALUE
(Title of Class)
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
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. /X/
The aggregate market value of the voting stock held by non-affiliates of
the registrant as of September 18, 1997, was approximately $577,122,000.
As of September 18, 1997, Registrant had outstanding 25,367,954 shares of
Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's definitive proxy statement to be filed with the
Securities and Exchange Commission relative to the Company's 1997 annual meeting
of stockholders are incorporated by reference in Part III of this Form 10-K.
<PAGE>
PREMISYS COMMUNICATIONS, INC.
ANNUAL REPORT ON
FORM 10-K
FOR THE YEAR ENDED JUNE 27, 1997
TABLE OF CONTENTS
FORM 10-K NAME OF ITEM PAGE
ITEM NO. ------------ ----
- ---------
PART I
Item 1 Business 3
Item 2 Properties 15
Item 3 Legal Proceedings 16
Item 4 Submission of Matters to a Vote of Security Holders 16
PART II
Item 5 Market for the Registrant's Common Equity
and Related Stockholder Matters 17
Item 6 Selected Financial Data 18
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations 19
Item 7a Quantitative and Qualitative Disclosures About
Market Risk 26
Item 8 Financial Statements and Supplementary Data 27
Item 9 Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 41
PART III
Item 10 Directors and Executive Officers of the Registrant 42
Item 11 Executive Compensation 42
Item 12 Security Ownership of Certain Beneficial Owners
and Management 42
Item 13 Certain Relationships and Related Transactions 42
PART IV
Item 14 Exhibits, Financial Statement Schedules and Reports
on Form 8-K 42
Signatures 45
----------------------
Premisys-Registered Trademark- is a registered trademark of the Company.
This Form 10-K also includes trade names and trademarks of other companies.
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PART I
ITEM 1. BUSINESS
This Form 10-K 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-K, including demand from and the Company's relationships with its
strategic partners and major customers, including Paradyne Corporation
("Paradyne"); limited order backlog and quarterly fluctuations; delays and
cancellations of actual and projected customer orders; new product development
and introductions by the Company and its competitors, including products based
on the technology recently licensed by the Company from Positron Fiber Systems
Corporation ("Positron"); 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; competition; changes in the mix of products or
customers or in the level of operating expenses; and other factors described
throughout this Form 10-K, including under "Revenues" and "Other Factors That
May Affect Future Operating Results" in Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operations", of this Form 10-K.
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 asterisks(*), various sentences within this Form 10-K 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 these are not the exclusive means of
identifying such statements. In addition, the section labeled "Other Factors
That May Affect Future Operating Results" in Item 7 of this Form 10-K, which
does not include asterisks for improved readability, consists primarily of
forward-looking statements and associated risks. The Company undertakes no
obligation to revise any forward-looking statements in order to reflect events
or circumstances that may arise after the date of this report. Readers are
urged to carefully review and consider the various disclosures made by the
Company in this report and in the Company's other reports filed with the
Securities and Exchange Commission that attempt to advise interested parties of
the risks and factors that may affect the Company's business.
OVERVIEW
Premisys Communications, Inc. (the "Company" or "Premisys") designs,
manufactures and markets integrated access products for telecommunications
service providers. The Company pioneered the integrated access device equipment
market with the introduction of the first of a family of integrated multiple
access communications systems ("IMACS") products in December 1991. The IMACS
products are designed to enable public carriers to provide their business
customers with flexible, cost-effective and reliable access to
telecommunications services. The IMACS products currently provide access to
numerous services, including plain old telephone service ("POTS"), Centrex,
digital data networks, integrated services digital networks ("ISDN"), frame
relay, and asynchronous transfer mode ("ATM") services. The IMACS platform
allows carriers to offer a variety of value-added services, switching
technologies and transmission technologies to their business customers through a
single access device. The IMACS products' modular design and standards-based
architecture enable carriers to offer advanced telecommunications services more
quickly and cost-effectively than single purpose access equipment and to enhance
the manageability of their networks.
The Company's products are distributed and serviced worldwide primarily
through strategic distribution relationships with significant telecommunications
equipment vendors. The Company considers its relationships with these
telecommunications equipment suppliers to be strategic in that they enable the
Company to gain access to public carriers worldwide, to establish the IMACS
products as essential value added elements of the public carriers' business
communications solutions and, in some cases, to incorporate proprietary
technology into the IMACS products. The IMACS products are typically sold as
access components of the suppliers' communications equipment solutions. The
Company's strategic distribution relationships, from which the Company has
derived most of its revenues to date, include ADC Telecommunications, Inc.
("ADC"), DSC Communications Corporation ("DSC"), Motorola, Inc. ("Motorola") and
Paradyne. The Company also sells its products through value-added reseller
relationships and, in limited circumstances, directly to carriers and end user
customers.
Premisys Communications, Inc. was incorporated in California in July 1990,
and Premisys Communications Pte. Ltd. was incorporated in August 1990 under the
laws of Singapore to be its parent. Premisys Communications Holdings, Inc. was
incorporated in California in January 1992 to serve as a holding company for
both Premisys Communications Pte. Ltd. and Premisys Communications, Inc. This
reorganization was completed in March 1992. Premisys Communications, Inc., a
Delaware corporation, was incorporated in October 1994 to be the Delaware
successor corporation to the California corporations Premisys Communications
Holdings, Inc. and Premisys Communications, Inc. The Delaware reincorporation
was effected in March 1995. As a result of the reincorporation, Premisys
Communications Holdings, Inc. and Premisys Communications, Inc., a California
corporation, merged with and into Premisys Communications, Inc., a Delaware
corporation, and Premisys Communications Pte. Ltd. and Premisys Communications
Limited, a United Kingdom corporation, became wholly-owned subsidiaries of the
Delaware corporation. The Company's principal executive offices are located at
48664 Milmont Drive, Fremont, California 94538, and its telephone number is
(510) 353-7600.
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BACKGROUND
INDUSTRY TRENDS
The market for telecommunications products and services is changing rapidly
because of deregulation and resulting competition, evolving requirements of
business communications, the drive for higher capacity and more cost-effective
technologies and services, and the shift from private to public networks. The
resulting proliferation of value-added services and technologies has created the
need for solutions that permit carriers' business customers to access the
variety of telecommunications services provided by these carriers.
DEREGULATION AND RESULTING COMPETITION. Deregulation and competition are
accelerating throughout the worldwide telecommunications industry. In 1984, the
United States government deregulated the domestic telecommunications industry
and forced AT&T Corporation ("AT&T") to divest its monopoly and create the seven
regional bell operating companies ("RBOCs"). Since that time, continuing
domestic deregulation including the Telecommunications Reform Act of 1996, has
led to fierce competition for the provision of both long distance and local
telecommunications services. In the long distance market, MCI Corporation
("MCI"), U.S. Sprint Communications Company ("Sprint"), WorldCom Network
Services, Inc. ("WorldCom") and others have emerged as competitors to AT&T. In
regional and local markets, the incumbent local exchange carriers ("ILEC"s),
such as the RBOCs, are facing stiff and intensifying competition from a variety
of competitive access providers, such as MFS Network Technologies, Inc. ("MFS")
and Teleport Communications Group, Inc. ("Teleport"), and competitive local
exchange carriers ("CLEC"s), which are common carriers that petition the local
regulatory service commission to provide public switched services. ILECs are
also facing competition from gas and electric utilities. Some utilities are
offering "bundled" services of energy and data communications, such as high
speed Internet access, as well as pure bandwidth transport over newly installed
fiber facilities. The international market is also opening up as a result of
deregulation, privatization and the presence of new wireline and wireless
alternatives to traditional carrier services. The resulting intense competition
requires carriers to differentiate themselves by offering enhanced value-added
services based on new and emerging technologies.
EVOLVING REQUIREMENTS OF BUSINESS COMMUNICATIONS. In recent years, businesses
have become increasingly dependent on the flow of voice, data and video through
various telecommunications systems. This increased dependence on
telecommunications has resulted from several business trends: the growth of
client/server computing; the increase in local area and wide area networking;
the demand for new telecommunications services such as Internet access, video
conferencing and other multimedia services; and the increase in cellular
telephone and facsimile use nationally and internationally. In addition,
businesses have expanded beyond their traditional corporate walls to include
remote sales offices, employees working at home, mobile offices and far-flung
customers and suppliers. As a result, these businesses require
telecommunications services that provide significantly higher bandwidths, the
flexibility to choose among services with varying bandwidths and the ability to
access such services from remote locations.
DRIVE FOR NEW TECHNOLOGIES AND SERVICES. The changing communications patterns
of business users and the fierce competition among carriers have fueled a drive
for technologies that allow carriers to provide additional value-added services.
Carriers are under pressure to invest aggressively in new technologies that can
deliver services quickly, reliably and cost-effectively. Having invested in new
switching and transmission technologies, many carriers have initiated aggressive
programs focused on expanding their access infrastructure to broadly deliver new
services efficiently. In addition, carriers are offering a range of services
(e.g., ISDN, LAN interconnection, video conferencing) on a bundled basis to
their business subscribers, and integrated access devices facilitate these
offerings. Bundled services give business subscribers turnkey solutions that
free them from the burden of managing their own private networks, and they often
provide higher margins to carriers than other services.
THE SHIFT FROM PRIVATE TO PUBLIC NETWORKS. During the 1980s, most large
corporations established and maintained their own private networks to transmit
voice and data because the data transmission services offered by public carriers
were limited and expensive. To build these private networks, corporations leased
telephone lines from the public carriers at fixed monthly rates and purchased
vendor-specific networking equipment. Recently, however, these corporations have
begun to favor public carrier services as traditional and emerging carriers have
improved the price, performance and range of services they offer. Corporations
have also sought to shift to the carriers the costs and burdens of maintaining
the network infrastructure and the risks of investing in new technologies in the
absence of a single technological standard.
ACCESS TO TELECOMMUNICATIONS SERVICES
In response to the industry trends described above, new and emerging public
carriers are aggressively investing in switching and transmission technologies
to construct new and to upgrade existing telecommunications networks.
Telecommunications equipment suppliers are offering more sophisticated central
office switching equipment that enables carriers to provide new, value-added
services. In addition, carriers are upgrading to fiber optic networks to provide
additional bandwidth to their customers. Traditionally, customer access to data
and voice services has been provided by multiple single purpose access devices.
This solution was adequate until recently because only a limited number of
services were offered. However, with the proliferation of new switching and
transmission technologies and services, the traditional approach for accessing
carrier services
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via separate devices results in a very complex access solution that is
expensive, consumes valuable space and is difficult to manage and maintain.
The diagram below illustrates the complexity of having numerous dedicated
discrete access devices.
[FLOWCHART]
A major need has developed for a new generation of access equipment that
enables carriers to provide their business customers with flexible,
cost-effective and reliable access to the increasing number of available public
carrier services without requiring a different access device on the customer's
premises for each technology or type of service. More specifically, public
carriers are looking for an access device that:
- Integrates circuit, packet and cell switching technologies and supports
wireless, fiber optic cable, coaxial cable and copper wire transmission
technologies;
- Accommodates a variety of different business communications equipment
types (such as PBXs, LAN routers, automatic call distribution devices and
modems) at end-user locations;
- Operates within the carrier's existing network management system for
operations, administration, maintenance and provisioning;
- Has the flexibility and open architecture to accommodate both the
requirements of existing installed equipment and the technology developments of
the future; and
- Is reliable, easy to maintain and can be configured and serviced
remotely.
Such a device would facilitate faster connections to new services as they are
offered and reduce the carriers' costs of providing these services.
THE PREMISYS SOLUTION
Since 1990, Premisys has been involved in developing a new generation of
access equipment that would enable public carriers to provide their business
customers flexible, cost-effective and reliable access to present and future
telecommunications technologies and services. The architecture of the Company's
IMACS product line is designed to permit integrated access to a wide variety of
voice and data services, independent of the carriers' switching or transmission
technologies. The Company's integrated access devices are designed to serve as a
single connection point between a broad variety of carrier services, such as
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ISDN, frame relay and ATM, as well as various business communications
equipment types, such as PBXs and LAN routers. The modular, software-based
design of the IMACS products allows carriers to upgrade easily to new
communications services as they become available. The IMACS products can be
managed remotely and have remote testing, monitoring and diagnostic features
that allow carriers to minimize expensive on-site testing and trouble
shooting. In addition, the Company's IMACS products provide access to network
management information, such as line performance, traffic volume,
configuration and alarm data, to the carriers' existing network management
systems. The Company designs its products with high levels of system
redundancy, ease-of-maintenance and hardware safety to conform to established
reliability and maintenance standards, practices and processes. The IMACS
products are based on open industry standards for multi-vendor
interoperability and enable carriers to deliver a comprehensive set of
services without building proprietary overlay networks or management systems.
The diagram below illustrates the advantages of a single integrated access
device compared to the approach shown above using numerous dedicated discrete
access devices.
[FLOWCHART]
The design and features of the Company's IMACS products provide carriers
with four major benefits:
- LOWER COST. The integration of multiple switching technologies in a
single IMACS platform reduces carriers' costs of providing access to these
technologies. These reductions are realized in part by eliminating the need for
numerous dedicated discrete access devices, thereby decreasing equipment costs.
In addition, the Company's IMACS products are able to concentrate multiple
sources of low and high-speed traffic into fewer high-speed channels, thereby
increasing utilization of carrier network capacity. The Company's IMACS products
allow carriers to deliver multiple communications products and services, while
minimizing their risks of technology obsolescence or incompatibility.
- ABILITY TO OFFER SERVICES RAPIDLY. The scaleable, upgradable design of
the Company's IMACS products enables carriers to add revenue generating services
such as ISDN, frame relay and ATM, more quickly and cost-effectively.
- REMOTE MANAGEABILITY. The remote management features of the Company's
IMACS products enhance the manageability of carriers' networks without requiring
additional network management systems.
- RELIABILITY. The redundancy, diagnostic, testing and monitoring features
of the Company's IMACS products enhance the reliability of carriers' networks.
6
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COMPANY STRATEGY
The Company's strategic objective is to establish itself as the leading
worldwide provider of access equipment to public carriers for business services.
The key elements of the Company's strategy are described below.
FOCUS ON PUBLIC CARRIER ACCESS MARKET
The Company's IMACS products were designed in anticipation of a shift from
private to public networks. The Company believes that its IMACS products were
the first and are the leading standards-based integrated access devices
specifically targeted to the public carriers. The Company's IMACS products are
designed to deliver voice, data and video applications regardless of whether the
carrier uses circuit, packet or cell switching technologies and whether the
carrier network uses copper wire, fiber optic cable, coaxial cable or wireless
transmission. In recent years, carriers have focused on upgrading existing or
building new networks by investing in switching and transmission technologies.
The remaining links needed by the carriers in order to offer these new services
are access devices, and the Company believes that a single integrated access
device offers carriers the most cost-effective access solution. Carriers that
deployed IMACS into their networks during fiscal 1997 included:
DOMESTIC WIRELINE CARRIERS INTERNATIONAL CARRIERS
-------------------------- ----------------------
AT&T AT&T Network Services International
Brooks Fiber Communications CNH Communications (Venezuela)
Cablevision Systems Corporation Comcore (Russia)
Media One Macomnet (Russia)
MFS Mannesmann (Germany)
Southwestern Bell Telephone Company Metrocom (Russia)
Teleport Philippines Telephone & Telegraph
Time Warner Communications (Philippines)
WorldCom Network Services TelecomAsia Corporation Public
Company Limited (Thailand)
Telmex (Mexico)
Time Telekom (Malaysia)
DOMESTIC WIRELESS CARRIERS
--------------------------
AT&T
Airtouch Communications
Bell Atlantic Nynex Mobile
GTE Mobilnet Service Corporation
Geotek Communications
Primeco Personal Communications
Sprint Spectrum
INCREASE MARKET PENETRATION THROUGH STRATEGIC RELATIONSHIPS
The Company focuses on forming strategic relationships with leading
telecommunications equipment suppliers in order to gain market acceptance and
penetration of its IMACS products. This distribution strategy has enabled the
Company:
- To take advantage of distribution capabilities and established
relationships between leading telecommunications equipment suppliers and their
public carrier customers and thereby gain access to public carriers worldwide,
which do not generally purchase important infrastructure equipment from smaller
companies such as Premisys;
- To establish the IMACS products as essential value-added elements of the
public carriers' business communications solutions; and
- To incorporate proprietary next-generation technology developed by or
with these strategic telecommunications equipment suppliers into one or more
elements of the IMACS products, which are then distributed by the
telecommunications equipment suppliers.
The Company believes that the joint development of technology with certain
of these strategic telecommunications equipment suppliers demonstrates the
commitment of these suppliers to the Company's IMACS product line and encourages
a longer term relationship with the Company. Relationships with Paradyne,
Motorola and others have allowed the Company to incorporate advanced technology
into its IMACS products and have broadened the Company's markets worldwide.
BUILD ON SOFTWARE-BASED MULTI-SERVICE PLATFORM
The Company's products are based on a multi-service platform that is
designed to include a series of components sharing a common software
architecture. This software-based product platform enables the Company to make
it easier and more cost-effective for carriers to upgrade and expand their
networks as telecommunications technologies and services evolve and to customize
its products to address the special interface requirements of individual
carriers. The IMACS product software
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also integrates the IMACS management system with the transmission and switching
network management infrastructures of public carriers. *The Company's strategy
is to continue to enhance its software-based products through internal research
and development and through joint development projects.
PROVIDE ACCESS SYSTEM SOLUTIONS
The Company is focused on continuing to expand its product line to
address the needs of the evolving market for access equipment. *In June
1997, Premisys announced three new access products that, when completed, will
expand its ability to solve a wide range of carrier access needs, from
providing access to only POTS to multiple, broadband services. *Premisys
also intends to expand its element management software to simplify the
carrier's ability to remotely manage the access portion of its networks. See
"-The IMACS Product Family - New Product Announcements" below for
descriptions of these announcements.
INCREASED FOCUS ON INTERNATIONAL MARKETS
Since a major portion of the telecommunications equipment market is outside
of the United States, the Company is increasing its focus on international
markets. Although most of the Company's current revenues represent shipments to
domestic telecommunications equipment suppliers, all of these companies market
and distribute the Company's products worldwide. *Premisys intends to increase
and diversify its sales in international markets by ensuring that its IMACS
products meet international standards, pursuing international strategic
relationships and distributors, and adding to its own sales presence in key
regions. Premisys currently has international offices in Singapore, Hong Kong
and Birmingham, United Kingdom.
CUSTOMERS AND APPLICATIONS
CUSTOMERS
A substantial majority of the Company's sales are to suppliers of
telecommunications equipment with whom the Company has strategic relationships.
These telecommunications equipment suppliers generally resell the Company's
products to public carriers and end users. The Company also sells products to
value-added resellers ("VARs"), distributors and systems integrators, and, to a
much lesser degree, directly to carriers and end users. Certain of the
Company's customers in fiscal 1997 are listed by channel in the table below.
STRATEGIC RELATIONSHIPS
-----------------------
ADC Motorola
Alcatel Network Systems Northern Telecom
CaliforniaMicrowave Paradyne
DSC Rockwell International Corporation
ECI Telecom Ltd. UTStarcom
Harris Corporation/Farinon Division XEL Communications
VALUE-ADDED RESELLERS, DISTRIBUTORS AND SYSTEM INTEGRATORS
----------------------------------------------------------
Aydin Corporation Schmidt Telecom
Comtech Systems SRT Associates
DatacraftAsia Ericsson Telecom S.A. de C.V.
InComA Ltd. TechForce Corporation
Integrated Telecommunication TechLink Telecom Ltd.
Technology Sdn. Bhd. Telos Engineering Limited
Interlink Communication Systems Telsource Corporation
LG Electronics Trends and Technologies
Metro-Link Services Co. Ltd. Walker and Associates
MSN Communications Williams Telecommunications Systems
N.E.T. Federal
PSI Business Computers
DIRECT
------
Intercel Teleport
MediaOne Telesat Corporation Co., Ltd.
Motorola Paging U.S. Sprint Communications Company
Organization Ardilla Lulle WorldCom Network Services
Southwestern Bell Telephone Company
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Paradyne was the Company's first strategic partner and has been its largest
customer. Paradyne markets the Company's products, under its label AccuLink
Access Controller (AAC), primarily to Lucent Technologies ("Lucent") and AT&T.
In fiscal 1995, 1996 and 1997, Paradyne accounted for 45%, 33% and 30% of the
Company's revenues, respectively. The Company's agreement with Paradyne gives
Paradyne exclusive distribution rights to AT&T entities. See "-Results of
Operations - Sources of Revenues" and "Other Factors That May Affect Future
Operating Results - Relationship with Paradyne" within "Management's Discussion
and Analysis of Financial Condition and Results of Operations" in Item 7 of this
Form 10-K.
The Company has three other customers that in fiscal 1997 represented 10%
or more of its total revenue. Motorola accounted for 8%, 15% and 15%, ADC
accounted for 17%, 16% and 12%, and DSC accounted for 12%, 9% and 10% of the
Company's revenues during fiscal 1995, 1996 and 1997, respectively. *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
Item 7, "Management's Discussion and Analysis of Financial Condition and Results
of Operations - Other Factors That May Affect Future Operating Results -
Indirect Channels of Distribution."
IMACS APPLICATIONS
Carriers utilize the Company's IMACS products in many applications. The
following are brief descriptions of some of the uses of the IMACS products in a
competitive access provider network, a cellular service provider network, an
ISDN service provider network and a frame relay service provider network.
COMPETITIVE ACCESS PROVIDER NETWORK. In a competitive access provider network,
the IMACS product is typically located inside a subscriber's business facility.
The IMACS product concentrates voice and data traffic from multiple sources,
such as PBXs and LANs, for transmission through the competitive access
provider's fiber optics network. The specific advantages of the IMACS product
over the multiple discrete access devices that would otherwise be required in
this application are the ability of the IMACS product to support multiple
services and to be managed remotely, without consuming bandwidth that could be
used by the competitive access provider's customer.
CELLULAR SERVICE PROVIDER NETWORK. In a cellular service provider network, the
IMACS product is usually located at the cell site, where it performs a variety
of tasks, including multiplexing, concentration and protection of critical cell
site traffic. Space is at a premium at many cell sites, and the IMACS product
saves space by functioning as, and eliminating the need for, a separate
analog-to-digital converter, a channel service unit, a voice compression device,
a signal converter, a digital cross-connect and a line protection switch. In
addition, the low power demands of the IMACS product reduce battery requirements
and eliminate the need for fans. The ability to diagnose problems remotely with
the IMACS product is also important because it minimizes the need to dispatch
technicians to remote cell sites.
ISDN SERVICE PROVIDER NETWORK. In areas where the public carrier is offering
ISDN switched services, the Company's IMACS products are located both at the
carrier's central office and at a customer's location. In this application, the
IMACS products enable the carrier to provide ISDN services to support a variety
of applications. These applications include dial up video, automatic call
distribution, remote LAN connectivity and imaging and data connectivity. The
IMACS products allow the service provider to support both Primary Rate Interface
("PRI") and Basic Rate Interface ("BRI") connections in a single platform and
groom, concentrate and cross-connect voice and data at the customer's premises.
FRAME RELAY SERVICE PROVIDER NETWORK. In a frame relay network, the Company's
frame relay concentrator fills the pricing and functionality gap between
high-end backbone switches and end user frame relay assembler/dissembler
equipment, which encapsulate various data types in frame relay packets. The
Company's IMACS frame relay concentrator product is located at a concentration
site within the frame relay network. The IMACS frame relay concentrator product
is designed to allow the service provider to concentrate numerous low speed
access lines connecting various end user devices (such as routers and terminal
controllers) to the frame relay network. The primary benefits of the IMACS
product to the network provider in this application are the frame relay switch
port savings and reduced transmission costs.
THE IMACS PRODUCT FAMILY
PRODUCTS
The IMACS product family currently contains three products:
IMACS/600, IMACS/800 and IMACS/900. All three products are designed
for mission-critical applications and support full redundancy
features such as redundant CPU, wide area network ("WAN") interface,
power supplies and ringing generators. The IMACS/600 and IMACS/900
are front-access devices, whereas the IMACS/800 can be accessed from
the front and back. The following table outlines the characteristics
of the IMACS in terms of number of slots, types of carrier services,
resource modules, bandwidth and U.S. list price ranges, which vary
depending on the number and types of resource and user modules
installed and the degree of redundancy. Each product can support up
to eight WAN ports.
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CHARACTERISTICS OF THE IMACS PRODUCT FAMILY
<TABLE>
<CAPTION>
Number Services Resource WAN
Product of Slots Supported Modules Bandwidth U.S. List Price
- ------- -------- --------- ------- --------- ---------------
<S> <C> <C> <C> <C> <C>
IMACS/600 11 POTS ISDN 16Mbps $7,000 - $25,000
Centrex Voice Compression
DDN Inverse Multiplexing
CDPD Frame Relay
INS ATM
ISDN
VPN
IMACS/800 18 POTS ISDN 16Mbps $11,000 - $45,000
Centrex Voice Compression
DDN Inverse Multiplexing
CDPD Frame Relay
INS ATM
ISDN
VPN
IMACS/900 18 POTS ISDN 16Mbps $12,000 - $46,000
Centrex Voice Compression
DDN Inverse Multiplexing
CDPD Frame Relay
INS ATM
ISDN
VPN
</TABLE>
The Company also offers pre-configured versions of the IMACS to
address specific applications. These pre-configured products include:
the BRX, which offers carriers a cost-effective solution for provisioning
ISDN BRI services to remote customers; the IMACS/300, which targets
entry-level integrated access device applications; and the CellDAX, which
is configured to reduce the amount of equipment at the wireless cell
site, decreasing bandwidth requirements and reducing operating costs.
SYSTEM ARCHITECTURE
The IMACS products are open multi-service access platforms that
combine software with modular hardware to provide configuration
flexibility. The four components of the IMACS system architecture are the
WAN modules, user modules, resource modules and common equipment modules.
The WAN modules provide the connections to the carrier network. The user
modules connect user voice, data and video systems to the IMACS products.
The resource modules process information flowing between user and WAN
modules by performing tasks such as voice compression or inverse
multiplexing. The common equipment modules contain the central processor
and provide power and interface functions.
The unique user and resource architecture of the IMACS products
allows resource modules to be accessed by any user or WAN module in the
system and allows modules to be added or replaced as applications and
communications service environments change. The use of software in the
Company's products provides the flexibility to implement new technologies
and services in a timely and economical manner.
All of the embedded microprocessors included in the Company's
products incorporate the same type of Motorola microprocessor, which
maximizes integration, testability, reliability and performance. Using
only one type of microprocessor enables a high degree of hardware
modularity and software portability and substantially reduces hardware
design cycles. All modules can be swapped without powering down the
system.
SOFTWARE ARCHITECTURE
The IMACS software architecture is based on a fully distributed
computing system with real-time operating system and common software
interface. The IMACS product architecture allows the system software to
be tightly coupled with hardware for cost/performance optimization, which
contributes to more effective use of resources and provides greater
flexibility in system configuration and design. The system software has
been designed to be fault-tolerant and to operate closely with the
redundancy features of the hardware platform. The multi-service features
of the IMACS products capitalize on the ability of the resource modules
to communicate with the system software and other modules within the
platform.
10
<PAGE>
NETWORK MANAGEMENT
The IMACS products offer a number of network management options that
are based on open industry standards in order to provide easy integration
with generic network management systems and interfaces, such as the
Simplified Network Management Protocol. The IMACS products can be managed
locally through an attached terminal or remotely through an integral
modem. Network management messaging is supported locally through TCP/IP
protocol standards, including support for SLIP, and remotely through the
virtual terminal TELNET protocol. Network management messaging can be
sent across the network via a carrier's standards-based network
infrastructure. The Company has developed application software for the
IMACS product family called the Element Management System ("EMS"). EMS'
features include fault management and statistics, remote testing and
diagnostics surveillance management, performance monitoring,
software-download, inventory reporting and configuration management.
These features reduce the carrier's cost of providing multiple services
to its business customers.
DIAGNOSTICS
The IMACS products include built-in diagnostics that enhance the
network operator's ability to test, isolate and resolve network problems.
Built-in testing capabilities include bit error rate testing on data
modules, tone generation on analog voice modules, extensive loop-back
generation and detection capability on system elements and the ability to
manipulate analog leads and digital signaling bits of voice circuits. The
ability to generate and receive test signals coupled with the ability to
initiate such tests at various points in a circuit reduces fault
isolation time. The built-in diagnostic capabilities also eliminate the
need for external stand-alone test equipment. In addition, the IMACS
products offer 24-hour performance monitoring for various network and
user interfaces with alarm generation options for preventive maintenance.
NEW PRODUCT ANNOUNCEMENTS
The Company introduced several new IMACS product features in fiscal
1997. These new product features included ATM support, HDSL
(High-bit-rate Digital Subscriber Line) support, ISDN BRI-PRI conversion,
low-bit-rate voice compression, voice over frame relay and system
management enhancements.
In June 1997, at Supercomm, a major industry tradeshow, the Company
also announced three new products under development. These products are
the SlimLine, StreamLine and Q-155 XTRA. The SlimLine and StreamLine
products are designed for bundled service applications where service
providers bundle local voice, long-distance voice and data services as a
single service offering. *The Company expects these applications to
become more prevalent as service providers implement competitive services
enabled by the Telecommunications Reform Act of 1996. The SlimLine
products target low-end voice and data provisioning applications via a
single T1 line. The StreamLine products offer greater flexibility than
the SlimLine as they are based upon the IMACS modular architecture.
Compared to the IMACS, the StreamLine products provide less capacity but
have lower prices. *The Company plans that shipments of both products
will begin in the quarter ending December 31, 1997.
The Q-155 XTRA product is designed to provision higher bandwidth
services directly from a SONET or SDH fiber optic ring. *The Q-155 XTRA
will enable carriers to deliver a variety of broadband services to their
business customers with higher utilization of their transmission networks
and at lower capital and operating costs than today's alternatives. The
Q-155 XTRA is being developed utilizing technologies licensed from
Positron Fiber Systems Corporation ("Positron") in January, 1996. *First
shipments of the Q-155 XTRA are projected in the quarter ending September
30, 1998.
All of these new products are designed to complement the IMACS
products. *These new products are expected to provide a full access
product line offering multiple price points from a single T1 to SONET/SDH
speeds and are expected to enable Premisys to offer a more complete
solution to network access. For a discussion of certain risks related to
these new products, see "Other Factors that May Affect Future Operating
Results - Rapidly Evolving Technology" within item 7, "Management's
Discussion and Analysis of Financial Condition and Results of
Operations."
MARKETING, SALES AND DISTRIBUTION
The primary market for the Company's products is public
telecommunications carriers, including major domestic carriers providing
long distance and local service, competitive access providers,
competitive local exchange carriers, wireless service providers, enhanced
service providers and international carriers. The secondary market for
the Company's products is large corporations with private networks. The
focus of the Company's sales strategy is to form and to support strategic
relationships with telecommunications equipment suppliers. The Company
also has relationships with distributors and sells its products directly
to end users on a limited basis. The Company currently has sales staff in
several locations across the United States and also maintains
international offices in Singapore, Hong Kong and Birmingham, United
Kingdom. The offices in Singapore and Hong Kong serve the Asia/Pacific
region, and the office in Birmingham serves Europe, the Middle East and
Africa. The Company's sales staff supports the sales organizations of the
telecommunications equipment suppliers that distribute and market its
products. In addition, the Company's sales staff provides local system
training, develops new strategic relationships and, where appropriate,
sells directly to end users.
11
<PAGE>
STRATEGIC RELATIONSHIPS
The Company believes that the combination of technologies, services
and support mechanisms needed to reach the world-wide market for the
Company's products can best be provided through strategic relationships
with leading telecommunications equipment suppliers. These
telecommunications equipment suppliers have established relationships
with the public carriers and provide a broad range of services to these
carriers through existing front-line service and support networks.
Premisys seeks strategic relationships that offer (i) an established
presence in the Company's primary markets, (ii) a product line that the
IMACS product can complement to provide value-added networking solutions
and (iii) a core technology that enables the telecommunications equipment
suppliers to develop enhanced products with market differentiation that
can be integrated with the IMACS platform.
The Company believes that the joint development of technology
demonstrates the commitment of these telecommunications equipment
suppliers to the IMACS product line and encourages a longer term
relationship with the Company. *The Company is involved in certain joint
development projects with Northern Telecom, as well as Lucent and
Paradyne, where, upon completion of these developments, the IMACS
products will be sold as a component of specific Northern Telecom and
Lucent products.
The Company's agreements with telecommunications equipment suppliers
generally grant non-exclusive licenses to distribute the Company's
products, are not subject to minimum purchase requirements and provide
for certain discounts on the purchase prices of the Company's products.
*Any of the telecommunications equipment suppliers that market and sell
the Company's products could elect to cease marketing and selling the
Company's products, and there can be no assurance that these
telecommunications equipment suppliers will continue to place orders with
the Company or that the Company will be able to obtain orders from new
telecommunications equipment suppliers or end users. *The loss of any
one or more of the Company's strategic telecommunications equipment
suppliers would have a material adverse effect on the Company's business
and operating results. The Company derived approximately 83%, 77% and 77%
of its revenues from its strategic telecommunications equipment suppliers
in fiscal 1995, 1996 and 1997, respectively. Shipments to Paradyne have
generated a substantial portion of the Company's revenues to date. See
Item 7, "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Results of Operations - Revenues" and "- Other
Factors That May Affect Future Operating Results - Relationship with
Paradyne."
DISTRIBUTORS
The Company also uses a select number of VARs, system integrators
and distributors to market and sell its products. These customers
generally sell the Company's products to smaller carriers and
corporations accessing public networks as well as to serve international
markets where the VAR or distributor is located. The Company derived
approximately 12%, 11% and 19% of its revenues from value added resellers
and non-strategic distributors in fiscal 1995, 1996 and 1997,
respectively.
DIRECT SALES
Direct sales by the Company to carriers and end users represent a
minor part of the Company's business. Generally, the Company sells
directly only to end users that have their own established support and
service infrastructures and to end users within market segments where the
Company's strategic telecommunications equipment suppliers, distributors
and VARs cannot cost-effectively market and sell the Company's products.
The Company derived approximately 5%, 12% and 4% of its revenues from
direct sales in fiscal 1995, 1996 and 1997, respectively.
CUSTOMER SUPPORT
The first level of customer support for the Company's products is
provided by the telecommunications equipment suppliers that sell the
Company's products directly to the end user. The Company's personnel
provide backup support and training. When a telecommunications equipment
supplier is not able to provide solutions to product problems, the
supplier's service personnel contact the Company's customer support
group, which has hardware and software products configured to simulate
networking problems. In some cases, the Company's customer support
representatives dial into the end user network to assist directly in
troubleshooting and problem isolation. Customer support representatives
are available by telephone 24 hours a day, 7 days a week. The Company
also provides on-site service when requested.
The Company's products have been designed to ensure that problems
can be easily diagnosed. All voice and data modules contain integral
testing suites that allow isolation of networking problems. The Company
currently warrants its systems products for five years and its network
management software products for 90 days. During the warranty period,
Premisys repairs or replaces any failed system component at no charge.
The Company also provides technical training either at the sites of
its strategic telecommunications equipment suppliers or at Company
facilities. Training courses include the theory of operation, equipment
diagnostics and the testing and troubleshooting of both the equipment and
the network. Train-the-trainer courses are also offered to help the
telecommunications equipment suppliers educate their support personnel.
12
<PAGE>
COMPETITION
The market for telecommunications products is highly competitive and
subject to rapid technological change, regulatory developments and
emerging industry standards. The Company believes that the principal
competitive factors in the carrier access market are: support for
multiple types of carrier services; conformance to public carrier
standards for signaling, transmission, network management, reliability
and safety; the development and rapid introduction of new product
features; price/performance; quality of customer support; and installed
base. The Company believes it has competed favorably to date with
respect to these factors. *However, there can be no assurance that the
Company will compete successfully in the future with respect to these or
other factors.
The Company's principal competition to date has been from major
telecommunications equipment suppliers, such as Newbridge Networks
Corporation and Tellabs, Inc., which offer broad lines 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.
*When Premisys begins shipping its new products, announced in June 1997, it
expects to face additional competition from both start-ups and existing
telecommunications equipment manufacturers. *The SlimLine and StreamLine
products are likely to compete with those sold by channel bank and CSU/DSU
vendors. Paradyne, Premisys' largest customer, introduced products in March
1997 that are extensions of its CSU/DSU product line, and higher capacity
models of the 916x series may offer features that are similar to those of
the Company's IMACS and Streamline products. See Item 7. "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Other Factors That May Affect Future Operating Results - Relationship With
Paradyne." *The Q-155 product will likely compete with broadband access
products offered or announced by a number of vendors. *Certain of the
telecommunications equipment suppliers that market and distribute the
Company's products may in the future develop other products that could be
sold for selected applications for which the Company's products are currently
provided. *Successful, timely development and market acceptance of such
products could reduce the level of demand from these telecommunications
equipment suppliers for the Company's products. *To the extent that current
or potential competitors can expand their current offerings to include access
to circuit, packet and cell switching in an integrated product, the Company's
business and operating results could be materially adversely affected. Most
of the Company's competitors have technical, financial, manufacturing and
marketing resources significantly greater than those of the Company. In
addition, many of such competitors have long-established relationships with
public carriers. *There can be no assurance that the Company will have the
financial resources, technical expertise, manufacturing, marketing,
distribution and support capabilities to compete successfully in the future.
MANUFACTURING AND SUPPLIERS
The Company's manufacturing operations consist primarily of
materials planning and procurement, module testing and quality control.
The Company relies on contract manufacturers, both in Asia and in the
United States. The Company's reliance on third-party subcontractors
reduces the Company's flexibility and responsiveness to changes. For
example, contract manufacturers are not as quick as internal
manufacturing organizations to react to new products or changes in
product designs or product quantities. Use of contract manufacturers can
expose Premisys to supply interruptions due to production, quality or
financial problems of its contractors. *This loss of flexibility or
supply interruption can result in shipment delays, which could have a
material adverse effect on the Company's business and operating results.
The Company believes, however, that by using a limited number of
third-party subcontractors, it is in a better position to reduce product
costs, acquire additional capacity and reduce its capital investment. All
testing of the Company's products is performed by the Company at its
Fremont, California facility. Products are rigorously tested using
automated test equipment prior to shipment to customers. All printed
circuit board assemblies are tested individually.
Generally, the Company uses industry standard components for its
products. It uses field programmable gate arrays with erasable programmable
memory rather than custom integrated circuits in order to maximize its
ability to customize products quickly for individual carriers and add product
features. Certain components used in the Company's products, including
microprocessors and communications chips that are manufactured by Motorola,
Siemens AG, Xilinx and National Semiconductor, are currently available from
only one supplier. In the past, the Company has experienced shortages of
certain of these and other components because of vendor production or quality
problems and the inability of suppliers to increase delivery rates to meet
the Company's requirements. In the past certain components have been in short
supply within the Company's industry, and in such cases, Premisys must
compete for these components with larger companies that often have longer
established relationships with these vendors. Component shortages and delays
have on occasion resulted in delays in the shipment of the Company's
products, and the component shortages have also on occasion resulted in
higher component costs. Certain components used in the Company's products
require an order lead time of up to one year. *Other components that
currently are readily available may become difficult to obtain in the future.
*Failure of the Company to order sufficient quantities of these components in
advance could prevent the Company from increasing production of products in
response to customer orders in excess of amounts projected by the Company,
which could have a material adverse effect on the Company's business and
operating results. *Alternatively, ordering too much of a component in
advance could lead to excess inventory, which could have a material adverse
effect on the Company's business and operating results.
*An extended delay in deliveries of components or of finished
printed circuit board assemblies would have a material adverse effect on
the Company's business and operating results and possibly on its
relationships with its customers. *Although Premisys typically maintains
some reserve inventory of components, this inventory would not cover a
significant delay in the delivery of such components.
13
<PAGE>
RESEARCH AND DEVELOPMENT
During fiscal 1995, 1996 and 1997, total research and development
expenditures were $4.5 million, $7.5 million and $10.5 million,
respectively. All research and development expenditures are expensed as
incurred. In addition, in fiscal 1997 the Company incurred a charge of
$4.0 million for a license to certain SONET and SDH technologies. See
"Results of Operations - Other Operating Expenses" within "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
in Item 7 of this Form 10-K.
The telecommunications equipment market is characterized by rapidly
changing technologies and frequent new product introductions, which
include frame relay, ATM and new digital subscriber line technologies
("xDSL"). Standards for new services such as ATM and xDSL are still
evolving. *As these technologies and related standards evolve, the
Company may be required to modify its products or develop and support new
versions of its products. *The rapid development of new technologies
increases the risk that current or new competitors could develop products
that would reduce the competitiveness of the Company's products. *The
Company's success will depend to a substantial degree upon its ability to
respond to changes in technology, industry standards and customer
requirements. *This will require the timely selection, development and
marketing of new products and enhancements on a cost-effective basis.
*There can be no assurance that the Company will be successful in
developing, introducing or managing the transition to new or enhanced
products or that any such products will be responsive to technological
changes or will gain market acceptance. See Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations
- - Other Factors That May Affect Future Operating Results - Rapidly
Evolving Technology."
In fiscal 1997 the Company's development activities focused on
adding features to the IMACS, developing extensions to the IMACS as a
part of joint development projects with certain of its strategic
distribution partners and developing the new products announced in June
1997. New functions included ATM support, low-bit-rate voice compression,
voice over frame relay and ISDN BRI-PRI conversion. Joint development
projects with strategic distribution partners during the year were with
Northern Telecom and Lucent. The Company entered into a development
agreement with Northern Telecom in Canada, which was announced in May
1997, to integrate the IMACS into the Northern Telecom AccessNode
Express. *The Company expects Northern Telecom to begin shipping the
AccessNode Express integrated with the IMACS in the first half of
calendar 1998. The joint development project with Paradyne and Lucent is
to integrate the IMACS product into Lucent's DACS II ISX. The product
will be labeled by Lucent as the DACS II ISX Low Speed Interface Unit.
*The Company's management continues to seek joint development agreements
with new partners as it believes that such programs can enhance the
strengths of its relationships.
*Products as complex as those offered by the Company may contain
undetected errors or failures when first introduced or as new versions
are released. *Such errors have occurred in the past year, and there can
be no assurance that, despite testing by the Company and by current and
potential customers, errors will not be found in new products after
commencement of commercial shipments. *The occurrence of such errors
have in the past resulted (including during fiscal 1997), and could in
the future, result in the loss or delay in market acceptance of the
Company's products, which could have a material adverse effect on the
Company's quarterly operating results and its market opportunities. *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.
As of June 30, 1997, 61 employees were engaged in research and
development programs, including hardware and software development, test
and engineering support personnel. The Company believes that recruiting
and retaining engineering personnel is essential to its success. *To the
extent that the Company is not successful in attracting and retaining its
technical staff, its business and operating results would be adversely
affected. See Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Other Factors That May Affect
Future Operating Results - Dependence on Key Personnel."
GOVERNMENT REGULATION
*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.
*Regulations and FCC rulings arising from the Telecommunications Reform
Act of 1996 will impact service offerings and competitiveness in the
communications marketplace, and thus could have an affect on the timing
and size of the industry's investment in access equipment. *Tariff
rates, whether determined autonomously by carriers or in response to
regulatory directives, may affect the cost effectiveness of deploying
public network services. *Tariff policies are under continuous review
and are subject to change. *User uncertainty regarding future policies
may also affect demand for telecommunications products, including the
Company's products.
Governmental communications regulatory authorities have promulgated
regulations that, among other things, set installation and equipment
standards for private telecommunications systems and require that all
newly installed hardware be registered and meet certain governmental
standards. *The failure of the Company's products to comply with these
standards, or any delays in compliance, could delay introduction of the
Company's products, which could have a material adverse effect on the
Company's business and operating results. See Item 7, "Management's
Discussion and Analysis of Financial Condition
14
<PAGE>
and Results of Operations - Other Factors That May Affect Future
Operating Results - Industry Standards and Regulatory Matters."
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. The Company currently
holds one U.S. patent. This patent relates to the manner in which the
various modules that are included within an IMACS communicate with one
another and expires December 2012. The Company has also entered into
confidentiality and invention assignment agreements with its employees,
and enters into non-disclosure agreements with its suppliers,
distributors and appropriate customers so as to limit access to and
disclosure of its proprietary information. *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 laws of certain
foreign countries in which the Company's products are or may be
developed, manufactured or sold may not protect the Company's products or
intellectual property rights to the same extent as do the laws of the
United States and thus make the possibility of piracy of the Company's
technology and products more likely.
The telecommunications industry is characterized by the existence of
a large number of patents and frequent litigation based on allegations of
patent infringement. *From time to time, third parties may assert
exclusive patent, copyright, trademark and other intellectual property
rights to technologies that are important to the Company. There are no
currently pending material claims that the Company's products, trademarks
or other proprietary rights infringe the proprietary rights of third
parties. *However, there can be no assurance that the Company will not
receive communications from third parties in the future asserting that
the Company's products infringe or may infringe the proprietary rights of
third parties. In its distribution agreements, the Company agrees to
indemnify its customers for any expenses or liabilities resulting from
claimed infringements of patents, trademarks or copyrights of third
parties. *In the event of litigation to determine the validity of any
third-party claims, 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. *There
can be no assurance that licenses from third parties would be available
on reasonable commercial terms, if at all. *In the event of a successful
claim against the Company and the failure of the Company to develop or
license a substitute technology, the Company's business and operating
results would be materially adversely affected.
EMPLOYEES
At June 30, 1997, Premisys employed 238 individuals on a full-time
equivalent basis. Of these, 61 were involved in research and development,
84 in sales, marketing and customer support, 69 in manufacturing, and the
remaining 24 in administration and finance. The Company also uses
contractors and temporary workers. The Company considers its relations
with its employees to be good and has not experienced any interruption of
operations as a result of labor disagreements. *The Company's future
success will depend on its ability to attract, motivate and retain highly
skilled employees, the competition for whom is intense. See Item 7,
"Management's Discussion and Analysis of Financial Condition and Results
of Operations - Other Factors That May Affect Future Operating Results -
Dependence on Key Personnel."
ITEM 2. PROPERTIES
The Company's principal offices are located in two facilities
totaling 96,000 square feet leased by the Company in Fremont, California.
The leases on these facilities are scheduled to expire on October 31,
2004. Approximately 85% of the space in these facilities is used or
reserved for manufacturing, product development and testing; the balance
of the space is used or reserved for sales, marketing and other general
administrative activities. See Note 5 of Notes to Consolidated Financial
Statements. The Company also rents sales offices in Singapore, Hong Kong
and Birmingham, United Kingdom. The Company believes that its present
facilities are well maintained and are in good operating condition.
15
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
16
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
PRICE RANGE OF COMMON STOCK
The Company's Common Stock is quoted on the Nasdaq National Market
under the symbol "PRMS." The Company's Common Stock commenced trading on
the Nasdaq National Market on April 6, 1995. The following table lists
the high and low closing prices during fiscal 1996 and fiscal 1997 (as
adjusted to give retroactive effect to the 100% stock dividend in
December 1995).
HIGH LOW
----- ---
Fiscal 1996:
First Quarter $ 47 1/2 $ 32 1/4
Second Quarter $ 57 1/4 $ 29 3/4
Third Quarter $ 56 $ 27 3/4
Fourth Quarter $ 65 $ 28 3/4
Fiscal 1997:
First Quarter $ 62 3/4 $ 29 1/8
Second Quarter $ 54 1/2 $ 35 3/8
Third Quarter $ 37 1/4 $ 7 1/8
Fourth Quarter $ 16 1/4 $ 7 3/4
There were approximately 221 holders of record of the Company's
Common Stock as of September 18, 1997.
DIVIDEND POLICY
The Company has not paid any cash dividends on its capital stock to
date. *The Company currently anticipates that it will retain all future
earnings for use in its business and does not anticipate paying any cash
dividends in the foreseeable future.
17
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,(1)
----------------------------------------------------------
1993 1994 1995 1996 1997
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Revenues $ 3,518 $ 17,164 $ 30,888 $ 73,912 $ 78,358
Income (loss) from operations (3,749) 961 4,784 24,577 15,213
Net income (loss) $ (3,746) $ 886 $ 3,967 $ 16,788 $ 10,891
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Net income per share (2) $ 0.04 $ 0.18 $ 0.64 $ 0.41
-------- -------- -------- --------
-------- -------- -------- --------
Shares used in computing net income per share (2) 20,254 22,246 26,424 26,592
-------- -------- -------- --------
-------- -------- -------- --------
<CAPTION>
AS OF JUNE 30, (IN THOUSANDS)(1)
----------------------------------------------------------
1993 1994 1995 1996 1997
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments $ 1,104 $ 6,533 $ 42,963 $ 60,861 $ 73,224
Working capital (deficiency) (1,163) 8,537 45,520 74,853 90,263
Total assets 3,417 12,643 52,621 87,522 107,101
Long-term debt 228 194 109 91 9
Mandatorily redeemable convertible preferred stock 7,662 18,217 --- --- ---
Total stockholder's equity (deficit) (8,477) (8,638) 47,007 77,580 96,817
</TABLE>
QUARTERLY FINANCIAL DATA
The following table sets forth certain unaudited quarterly financial
data for each quarter of fiscal 1996 and 1997. In the opinion of the
Company's management, this unaudited information has been prepared on the
same basis as the audited consolidated financial statements contained
herein and includes all adjustments (consisting only of normal recurring
adjustments) necessary to present fairly the information set forth
therein. *The operating results for any quarter are not necessarily
indicative of results for any future period. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations
- - Quarterly Fluctuations."
<TABLE>
<CAPTION>
QUARTER ENDED (IN THOUSANDS, EXCEPT PER SHARE DATA)
--------------------------------------------------------------------------------------
FISCAL 1996 (1) FISCAL 1997 (1)
----------------------------------------- -------------------------------------------
SEPT 30, DEC 31, MAR 31, JUNE 30, SEPT 30, DEC 31, MAR 31, JUNE 30,
1995 1995 1996 1996 1996 1996 1997 1997
------- -------- ------- ------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues $14,075 $17,684 $19,674 $22,479 $24,294 $26,356 $12,237 $15,471
Gross Profit 9,000 10,877 12,811 14,806 15,763 17,588 7,913 9,832
Income (loss) from
operations 4,635 5,722 6,747 7,473 8,788 9,335 (4,152)(3) 1,242
Net income (loss) $ 3,306 $ 3,871 $ 4,648 $ 4,963 $ 5,723 $ 6,098 ($2,109)(3) $ 1,180
------- ------- ------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- ------- ------- -------
Net income per share (2) $ 0.13 $ 0.15 $ 0.18 $ 0.19 $ 0.22 $ 0.23 ($ 0.08) $ 0.04
------- ------- ------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- ------- ------- -------
Shares used in computing net
income per share (2) 26,292 26,393 26,351 26,659 26,479 26,721 26,292 26,875
------- ------- ------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- ------- ------- -------
</TABLE>
- ---------------------------------
(1) At the beginning of fiscal 1995, the Company changed its fiscal
year to end on the Friday closest to June 30. For ease of
presentation, however, annual and quarterly periods during
fiscal 1995, 1996 and 1997 are shown in this Form 10-K as
ending on the last day of the last calendar month in such year
and quarter, respectively.
(2) Net income per share and shares used in computing net income
per share have been adjusted to reflect the 100% stock dividend
effected in December 1995. See Note 1 of Notes to Consolidated
Financial Statements for an explanation of the determination of
the number of shares used in computing net income per share.
(3) Includes a $4,000,000 charge for a technology license. See
Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Other Operating Expenses"
of this Form 10-K and Note 8 of Notes to Consolidated Financial
Statements.
18
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
As indicated in the first paragraph of Item 1, above, this Form 10-K
contains certain 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. The Company has identified by
asterisks (*) various sentences within this Form 10-K which contain such
forward-looking statements, and words such as "believes," "anticipates,"
"expects," "intends," and similar expressions are also intended to identify
forward looking statements, but these are not the exclusive means of
identifying such statements. The forward looking statements included in
this Form 10-K involve numerous risks and uncertainties which are described
throughout this Form 10-K, such as those referenced in the first paragraph
of Item 1, above, and other factors described throughout this Form 10-K,
including under "Revenues" and "Other Factors That May Affect Future
Operating Results" within this Item 7. The actual results that the Company
achieves may differ materially from any forward looking statements due to
such risks and uncertainties.
OVERVIEW
Premisys was founded in July 1990 to offer integrated access device
solutions to public telecommunications carriers. During its early years,
the Company's efforts were directed toward designing and developing its
initial IMACS product and establishing relationships with potential
customers. In the telecommunications equipment industry, earning market
acceptance of new products is a costly and lengthy process involving
extensive product testing and evaluation by each customer. The Company's
first product was shipped in fiscal 1992. Since that time the Company has
continued to improve and broaden its product line while expanding
relationships with its customers.
The Company's IMACS products consist of a hardware platform,
integrated hardware/software modules and optional network management
software delivered on disks. A small number of standard modules are
utilized in all systems; modules are available with optional or more
advanced functionality allowing customers to configure systems to meet
their specific needs. Newly developed modules are sold in connection with
new platform sales and for use with installed platforms. These new modules
have typically had more advanced functionality and therefore higher average
prices and gross margins than older modules.
The Company sells its products worldwide, primarily through large
telecommunications equipment suppliers and distributors. In addition, the
Company derived 5%, 11% and 7%, respectively, of its revenues from direct
sales to international customers in fiscal 1995, 1996 and 1997.
(International sales through domestic suppliers and distributors are
reflected in the Company's domestic revenues). *The Company intends to
continue to expand its operations outside the United States and anticipates
that direct sales to international customers will increase in the future,
both in absolute dollars and as a percentage of the Company's revenues. In
order to sell its products internationally, the Company must meet standards
established by international telecommunications committees and
telecommunications 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. See " - Other Factors That May
Affect Future Operating Results."
RESULTS OF OPERATIONS
REVENUES
Revenues consist primarily of gross sales of products, less discounts and
sales returns and allowances. Revenues in fiscal 1995, 1996 and 1997 were
$30,888,000, $73,912,000 and $78,358,000, respectively. The majority of the
revenue increases from fiscal 1995 to fiscal 1996 and from fiscal 1996 to
fiscal 1997 were attributable to growth in unit volumes of platforms and
modules sold. The impact of average selling price fluctuations on revenues
during these comparison periods was not significant. The rate of revenue
growth in fiscal 1997 over fiscal 1996 was significantly lower than the rates
of growth of revenues in recent years. Although Premisys maintained a
significant level of revenue growth during the first two quarters of fiscal
1997 as compared to the first two quarters of fiscal 1996, the Company
experienced a large decrease in revenues in the quarter ended March 31, 1997
and June 30, 1997 as compared to the quarter ended March 31, 1996 and June
30, 1996. The decrease from revenues of $26,356,000 in the quarter ended
December 31, 1996 to $12,237,000 in the quarter ended March 31, 1997 was due
primarily to several major deployments of the Company's IMACS products being
deferred or lost by domestic and international distribution partners.
*Revenues increased sequentially to $15,471,000 in the quarter ended June 30,
1997, and the Company expects that it will take several quarters to return to
the revenue levels of the quarter ended December 31, 1996. *However, the
Company's expectations regarding future revenue levels are subject to
numerous risks and uncertainties, including limited order backlog, its
relationships with its strategic partners and the introduction of new
products. See "--Other Factors That May Affect Future Operating
Results--Indirect Channels of Distribution" and "--Rapidly Evolving
Technology."
The following table sets forth, for the periods indicated, the
revenues generated by the Company's largest customers in fiscal 1997, other
domestic customers as a group and international customers as a group, in
absolute dollars and as a percentage of total revenues.
19
<PAGE>
<TABLE>
<CAPTION>
Source of Revenues
- ------------------
Fiscal 1995 % Change Fiscal 1996 % Change Fiscal 1997
----------- -------- ------------ --------- -----------
<S> <C> <C> <C> <C> <C>
Paradyne $14,024,000 74% $24,446,000 (5%) $23,355,000
Motorola 2,613,000 315% 10,838,000 11% 11,996,000
ADC 5,202,000 120% 11,464,000 (16%) 9,576,000
DSC 3,837,000 79% 6,858,000 16% 7,950,000
Other Domestic Customers 3,650,000 222% 11,736,000 69% 19,802,000
International Customers 1,562,000 449% 8,570,000 (34%) 5,679,000
----------- ------ ----------- ------ ------------
Total Revenues $30,888,000 139% $73,912,000 6% $78,358,000
----------- ------ ----------- ------ ------------
----------- ------ ----------- ------ ------------
<CAPTION>
Percentage of Total Revenues
- ----------------------------
Fiscal 1995 Fiscal 1996 Fiscal 1997
----------- ----------- -----------
<S> <C> <C> <C>
Paradyne 45% 33% 30%
Motorola 8% 15% 15%
ADC 17% 16% 12%
DSC 12% 9% 10%
Other Domestic Customers 12% 16% 26%
International Customers 5% 11% 7%
----------- ----------- -----------
Total Revenues 100% 100% 100%
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
As illustrated 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. See "-Other Factors That May Affect
Future Operating Results - Indirect Channels of Distribution."
The Company has a strategic relationship with Paradyne, formerly a
wholly-owned subsidiary of AT&T, that involves the joint development and
marketing and sale of the Company's products by Paradyne to Lucent and
AT&T. The Company's agreement with Paradyne gives Paradyne exclusive
distribution rights to AT&T entities. Shipments to Paradyne have generated
a substantial portion of the Company's revenues to date. *The Company
expects that sales to Paradyne will decline again in fiscal 1998 as
Paradyne is focusing its resources on its own products. *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. *Significant
reductions in shipments to Paradyne would have a material adverse impact on
the Company's business and operating results. See "-Other Factors That May
Affect Future Operating Results - Relationship with Paradyne."
GROSS PROFIT
Fiscal 1995 % Change Fiscal 1996 % Change Fiscal 1997
----------- -------- ----------- -------- -----------
Gross Profit $17,834,000 166% $47,494,000 8% $51,096,000
As a percentage
of revenues 58% 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 improved from fiscal 1995 to fiscal 1996 and from
fiscal 1996 to fiscal 1997 primarily as a result of increased unit volumes.
The increase in gross margin from fiscal 1995 to fiscal 1996 was primarily
the result of a shift in product mix toward more advanced modules with
higher gross margins, the growth of manufacturing expenses at a rate slower
than the rate of revenue growth and a shift in customer mix toward
customers who purchase the Company's products at higher prices. The slight
increase in gross margin from fiscal 1996 to fiscal 1997 was the result of
lower product costs and a further shift in customer mix toward customers
who purchase the Company's products at higher prices, which were partially
offset by an increase in discounts and the sale of fewer modules per
platform. *The Company expects its gross margins for fiscal 1998 to
decline somewhat from the 65% realized in fiscal 1997 due primarily to
changes in product mix. *However, achievement of the Company's
expectations is subject to a number of uncertainties, including customer
mix, the mix and volume of products sold and the Company's ability to
realize expected revenue levels.
20
<PAGE>
RESEARCH AND DEVELOPMENT EXPENSES
Fiscal 1995 % Change Fiscal 1996 % Change Fiscal 1997
----------- -------- ----------- -------- -----------
Research and
development
expenses $4,537,000 65% $7,468,000 41% $10,519,000
As a percentage of
revenues 15% 10% 13%
Research and development expenses consist of personnel costs, contract
development fees, 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 $2,931,000, or 65%, from
fiscal 1995 to fiscal 1996 and $3,051,000, or 41%, from fiscal 1996 to fiscal
1997. The increase from fiscal 1995 to fiscal 1996 was primarily due to
additional personnel for the purpose of expanding the Company's product line
and, to a lesser extent, increased occupancy, testing and supply expenses. The
increase from fiscal 1996 to fiscal 1997 was primarily due to additional
personnel for the purpose of expanding the Company's product line and, to a
lesser extent, increased consulting and supply expenses. In fiscal 1997 the
Company's development activities focused on adding features to the IMACS,
developing extensions to the IMACS as a part of joint development projects with
its strategic distribution partners and developing the new products announced in
June 1997. See "-Other Factors That May Affect Future Operating Results -
Rapidly Evolving Technology." Research and development expenses decreased as a
percentage of the Company's revenues from 15% in fiscal 1995 to 10% in fiscal
1996 and increased as a percentage of the Company's revenues to 13% in fiscal
1997. The decrease from fiscal 1995 to fiscal 1996 was the result of the rapid
growth in the Company's revenues between these same fiscal years, whereas the
increase from fiscal 1996 to fiscal 1997 was the result of the slower rate of
growth in the Company's revenues between fiscal 1996 and fiscal 1997. *The
Company anticipates that these expenses, as a percentage of revenues, will
increase in fiscal 1998 as compared to 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.
OTHER OPERATING EXPENSES
In the quarter ended March 31, 1997, the Company executed a technology
license agreement with Positron. The Company licensed certain SONET and SDH
based technologies for use in its future products, including the Q-155 XTRA,
which was announced in June 1997. *First shipments of the Q-155 XTRA are
projected in the quarter ending September 30, 1998.
The licensed technology includes the right to modify and manufacture
products which are based on Positron's OSIRIS-155Mb/s SONET/SDH products. The
licensed technology also includes the right to use and manufacture Positron
proprietary application-specific integrated circuits (ASICs), and training and
integration assistance on all design materials. *The delivery of the technology
began in January 1997 and will continue in phased releases through October 1997.
The Company will pay Positron $4 million of license fees over three years.
Positron will also be paid a royalty on the Company's products utilizing the
licensed technology up to a maximum of $4 million. Thus, total payments to
Positron will be between $4 million and $8 million. The Company expensed the $4
million of license fees in the quarter ended March 31, 1997. Payments of
license fees to Positron in fiscal 1997 totaled $2.0 million. If the Company is
unsuccessful in developing the product, this technology has no alternative use.
See "-Other Factors That May Affect Future Operating Results - Rapidly Evolving
Technology."
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Fiscal 1995 % Change Fiscal 1996 % Change Fiscal 1997
----------- -------- ----------- -------- -----------
Selling, general and
administrative
expenses $8,513,000 81% $15,449,000 38% $21,364,000
As a percentage of
revenues 28% 21% 27%
Selling expenses consist principally of compensation costs for sales and
marketing personnel (including sales commissions and bonuses), travel expenses,
customer support expenses, trade show expenses and advertising expenses.
General and administrative expenses consist primarily of compensation expenses
for administration, finance and general management personnel, as well as legal
and accounting fees. Selling, general and administrative expenses increased
$6,936,000, or 81%, from fiscal 1995 to fiscal 1996 and $5,915,000, or 38%, from
fiscal 1996 to fiscal 1997. The increases during the comparison periods were
primarily the result of increased staffing, primarily for sales, and associated
expenses, such as payroll taxes and sales commissions and to a lesser extent
increased occupancy and travel expenses. Selling, general and administrative
expenses decreased as a percentage of the Company's revenues from 28% in fiscal
1995 to 21% in fiscal 1996 but increased to 27% in fiscal 1997. The decline as
a percentage of the Company's revenues from fiscal 1995 to fiscal 1996 was due
primarily to the rapid growth in revenues as well as the fact that the Company
sells only a small percentage of its products directly and, therefore, selling
expenses did not increase commensurately with revenues.
21
<PAGE>
The increase as a percentage of the Company's revenues from fiscal 1996 to
fiscal 1997 was due to a decline in the rate of the Company's revenue growth.
*The Company anticipates that these expenses as a percentage of revenues in
fiscal 1998 will increase slightly as compared to 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
Fiscal 1995 % Change Fiscal 1996 % Change Fiscal 1997
----------- -------- ----------- -------- -----------
Interest and other
income, net 505,000 249% $1,899,000 39% $2,641,000
As a percentage of
revenues 2% 3% 3%
Interest and other income, net consists of interest income, interest
expense and, to a much lesser extent, foreign currency gains and losses. The
increase in interest and other income, net from fiscal 1995 to fiscal 1996 was
due to increased interest income from higher cash balances resulting from the
prior year's initial public offering and the positive cash flow from operating
activities. The increase in interest and other income, net from fiscal 1996 to
fiscal 1997 was due to increased interest income from higher cash balances
resulting from the positive cash flow from operating activities.
PROVISION FOR INCOME TAXES
Fiscal 1995 % Change Fiscal 1996 % Change Fiscal 1997
----------- -------- ----------- -------- -----------
Provision for income
taxes $1,322,000 633% $9,688,000 (28%) $6,963,000
As a percentage of
income
before income taxes 25% 37% 39%
The Company's provision for income taxes represents estimated federal and
state income taxes. The effective income tax rate of 25% for fiscal 1995 was
less than the combined federal and state statutory rate primarily as a result of
a partial release of the valuation allowance on deferred tax assets. The
Company's effective rate for fiscal 1996 was 37% which was also less than the
combined federal and state statutory rate due to the release of the remaining
valuation allowance on deferred tax assets. The Company's effective income tax
rate for fiscal 1997 was 39% which was also less than the combined federal and
state statutory rate as a result of tax-exempt interest income from the
Company's municipal securities portfolio and anticipated utilization of research
and development tax credits available in fiscal 1997. *The Company anticipates
that its effective income tax rate will decrease to 37% in fiscal 1998 due to
the extension of the federal research and development tax credit.
NET INCOME PER SHARE
Fiscal 1995 % Change Fiscal 1996 % Change Fiscal 1997
----------- -------- ----------- -------- -----------
Net income per share $0.18 256% $0.64 (36%) $0.41
Shares used in
computing net
income per share 22,246,000 19% 26,424,000 1% 26,592,000
In December 1995, the Company effected a 100% stock dividend. Net income
per share and shares used in computing net income per share have been presented
giving effect to this stock dividend for all periods presented. The increase in
net income per share from fiscal 1995 to fiscal 1996 was due to the increase in
net income, which resulted principally from the rapid growth in revenues, higher
gross margins and operating expenses increasing at a slower rate than revenues,
as discussed above. This increase in net income per share was slightly offset
by a greater number of weighted average common shares and common share
equivalents used to calculate net income per share. The decrease in net income
per share in fiscal 1997 was due to the decrease in net income, which resulted
principally from the slower rate of growth in revenues, operating expenses
increasing at a higher rate than revenues and the impact of the Positron
licensing agreement, as discussed above. The Company expensed the $4 million of
license fees for the Positron agreement in fiscal 1997, which reduced net income
per share in fiscal 1997 by $.09.
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement No. 128, "Earnings Per Share," ("SFAS 128") which is required to be
adopted by the Company in its fiscal quarter ending December 31, 1997. Under
SFAS 128, primary earnings per share is replaced by basic earnings per share,
for which the dilutive effect of stock options will be excluded, and fully
diluted earnings per share is replaced by diluted earnings per share. See Note
1 of Notes to Financial Statements for the impact of SFAS 128 on earnings per
share in fiscal 1996 and 1997.
In June 1997, the FASB issued Statement No. 130, "Reporting Comprehensive
Income" ("SFAS 130"). SFAS 130 establishes standards for reporting
comprehensive income and its components in a full set of general purpose
financial statements. SFAS 130 requires that items to be recorded in
comprehensive income, which include unrealized gains/losses on marketable
securities classified as available-for-sale and cumulative translation
adjustments, be displayed with the same prominence as other financial
statements. SFAS 130 is required to be adopted in the Company's financial
statements for the year ending June 30, 1999.
22
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Fiscal 1995 % Change Fiscal 1996 % Change Fiscal 1997
----------- -------- ----------- -------- -----------
Net cash provided by
operating activities $4,001,000 53% $6,115,000 51% $ 9,233,000
Year end cash, cash
equivalents and
short-term
investments $42,963,000 42% $60,861,000 20% $73,224,000
Year end working
capital $45,520,000 64% $74,853,000 21% $90,263,000
In fiscal 1997, net cash of $9.2 million was provided by operating
activities primarily due to net income, a decrease in accounts receivable and
an increase in accounts payable, which were partially offset by increases in
inventories, deferred tax assets and prepaid expenses and other assets. The
decrease in accounts receivable was due to both improved days-sales-outstanding
at fiscal 1997 year end and lower revenues in the fourth quarter of fiscal 1997
as compared to the fourth quarter of fiscal 1996.
The Company purchased $5.1 million of property and equipment in fiscal
1997 primarily for furniture and leasehold improvements for the additional
facility leased in November, 1996. See Note 2 of Notes to Consolidated
Financial Statements. Financing activities provided $8.2 million of cash in
fiscal 1997. The primary sources of financing in fiscal 1997 were the tax
benefits of disqualifying dispositions of exercised stock options and the
issuance of Common Stock.
At June 30, 1997, the Company's principal sources of liquidity included
$73.2 million of cash, cash equivalents and short-term investments, and the
Company had working capital of approximately $90.3 million. Except for the
commitment to Positron discussed above under "-Other Operating Expenses", the
Company has no significant capital spending or purchase commitments other
than normal purchase commitments and commitments under facilities and capital
leases. See Note 5 of Notes to Consolidated Financial Statements. *The
Company believes that available funds and anticipated cash flows from
operations will satisfy the Company's projected working capital and capital
expenditure requirements through at least the next 18 months.
OTHER FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS
As referenced in the first paragraph of Item 1, this section consists
primarily of forward-looking statements but does not include asterisks for
improved readability.
INDIRECT CHANNELS OF DISTRIBUTION. Substantially all of the sales of
the Company's products are through indirect channels of distribution. Thus,
the Company's ability to affect and judge the timing and size of individual
user orders is more limited than for manufacturers selling directly to the
end users of their products. Any of the telecommunications equipment
suppliers that market and sell the Company's products could elect to cease
marketing and selling the Company's products, and there can be no assurance
that these telecommunications equipment suppliers will continue to place
orders with the Company or that the Company will be able to obtain orders
from new telecommunications equipment suppliers or end users. See
"-Relationship with Paradyne". These telecommunications equipment suppliers
could develop products that could be sold for selected applications for which
the Company's products are currently provided, which could reduce the level
of demand from these telecommunications equipment suppliers for the Company's
products. "See -Competition". In addition, the Company's revenues for a
given quarter may depend to a significant degree upon planned product
shipments for a single carrier's equipment deployment project. 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. Such
delays occurred in the quarter ended March 31, 1997, and may occur in the
future. Such delays materially adversely affected the Company's business and
operating results for the quarter ended March 31, 1997 and would have a
similar impact if they occurred in the future. Delays can be caused by late
deliveries by other vendors, changes in implementation priorities, slower
than anticipated growth in demand for the services that the equipment
supports and delays in obtaining regulatory approvals for new tariffs.
Revenues can also be affected by delays in initial shipments of new products
and new software releases. In fiscal 1997, a delay of the development and
release of a new feature resulted in a loss of a large, forecasted shipment.
In developing countries, delays and reductions in the planned deployment of
the Company's products can also be caused by sudden declines in the local
economy or capital availability and by new import controls. Suppliers of the
Company's products have in the past and may in the future build significant
inventory in order to facilitate more rapid deployment of anticipated major
projects or for other reasons. Decisions by such suppliers to sell from
their inventory could lead to reductions in purchases from the Company.
These reductions, in turn, could cause fluctuations in the Company's
operating results and have an adverse effect on the Company's business and
operating results in the periods in which the inventory is utilized. In
addition, the Company has in the past experienced delays as a result of the
need to modify its products to comply with unique customer specifications.
While such delays have not to date had a material adverse effect on the
Company's business or operating results, there can be no assurance that any
future delays would not have such an adverse effect.
LIMITED ORDER BACKLOG. The Company typically operates with limited order
backlog, and a majority of its revenues in each quarter result from orders
booked in that quarter. Also, the Company has from time-to-time, including
the four quarters of fiscal 1997, recognized a substantial portion of its
revenues from sales booked and shipped in the last month of a quarter. Due
to the delivery requirements of its customers, the Company expects to
continue to experience limited order
23
<PAGE>
backlog. 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 cancellation of orders
from time to time, and expects to receive order cancellations from time to
time in the future, which could adversely affect the Company's revenue for a
quarter or series of quarters.
QUARTERLY FLUCTUATIONS. The Company's operating results may fluctuate
on a quarterly and annual basis due to factors such as the timing of new
product announcements and introductions by the Company, its major customers
and its competitors, delays in equipment deployment, market acceptance of new
or enhanced versions of the Company's products, changes in the product or
customer mix of revenues, changes in the level of operating expenses,
competitive pricing pressures, the gain or loss of significant customers,
increased research and development expense associated with new product
introductions, component shortages and general economic conditions. The
Company's planned product shipments for a single carrier's equipment
deployment project can be a significant portion of a quarter's revenues, and
delays in the timing of such a project (which have occurred in the past
including the quarter ended March 31, 1997) could and have had a material
adverse effect on the Company's business and operating results. All of the
above factors are difficult for the Company to forecast, and these or other
factors can materially adversely affect the Company's business and operating
results for one quarter or a series of quarters. The Company's expense
levels are based in part on its expectations regarding future revenues and in
the short term are fixed to a large extent. Therefore, the Company may be
unable to adjust spending in a timely manner to compensate for any unexpected
future revenue shortfall. In the quarter ended March 31, 1997, the Company
experienced such an unforecasted revenue shortfall and was not able to
compensate for it through expense reduction, which resulted in a net loss.
Any significant decline in demand relative to the Company's expectations or
any material delay of customer orders would have a material adverse effect on
the Company's business and operating results. The Company's operating
results may also be affected by seasonal trends. Such trends may include
lower revenues in the summer months during the Company's first fiscal quarter
when many businesses experience lower sales, and in the Company's third
fiscal quarter, as compared to its second fiscal quarter, as a result of
strong calendar year end purchasing patterns from certain of the Company's
strategic customers.
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 most of the Company's products by
Paradyne to Lucent and AT&T (including its business units, divisions and
majority-owned subsidiaries). The Company's agreement with Paradyne provides
Paradyne exclusive distribution rights with respect to the products covered
by the agreement to AT&T entities.
At the time that the Company entered into its OEM agreement with
Paradyne, Paradyne was a 100%-owned subsidiary of AT&T. In September 1995,
AT&T announced its plan to separate into three publicly-held stand-alone
businesses, one of which - Lucent - would focus on the communications
equipment market. In June 1996 Lucent announced that it had concluded a
stock purchase agreement for the sale of Paradyne to the Texas Pacific Group.
In January 1997, Paradyne implemented an organizational change that moved all
sales and support activities for products purchased from Premisys (the
Paradyne AAC product line) from its sales and support organization to a group
dedicated to marketing and servicing these products to Lucent and AT&T. In
the quarter ended March 31, 1997, Paradyne announced new products which are
extensions of its existing line of CSU/DSU products. Premisys expects that
the higher capacity models of the 916x series may offer features that are
similar to those of the Company's IMACS and Streamline products. See
"-Competition" and "-Rapidly Evolving Technology").
Although sales to Paradyne declined 5% from fiscal 1996 to fiscal 1997,
shipments to Paradyne continued to represent a substantial portion of the
Company's revenues in fiscal 1997. Paradyne is not subject to any minimum
purchase requirements, and there can be no assurance that Paradyne will
continue to place orders with the Company. Premisys expects that sales to
Paradyne will decline again in fiscal 1998. Significant reductions in
shipments to Paradyne would have a material adverse effect on the Company's
business and operating results.
COMPETITION. The market for telecommunications products is highly
competitive and subject to rapid technological change. The Company's
principal competition to date has been from major telecommunications
equipment suppliers, such as Newbridge Networks Corporation and Tellabs,
which offer a broad line of products including access devices for business
applications. The Company expects substantial additional competition from
existing competitors as they develop products to compete with the
functionality and flexibility of the Company's products. When Premisys begins
shipping its new products announced in June 1997, it expects to face
additional competition from both start-ups and existing telecommunications
equipment manufacturers. The SlimLine and StreamLine products are likely to
compete with those sold by channel bank and CSU/DSU vendors. See
"-Relationship With Paradyne." The Q-155 product will likely compete with
broadband access products offered or announced by a number of vendors.
Certain of the telecommunications equipment suppliers that market and
distribute the Company's products may in the future develop products that
could be sold for selected applications for which the Company's products are
currently provided. Successful, timely development of such products could
reduce the level of demand from these telecommunications equipment suppliers
for the Company's products.
24
<PAGE>
RAPIDLY EVOLVING TECHNOLOGY. The telecommunications equipment market is
characterized by rapidly changing technologies and frequent new product
introductions, which include ATM and new digital subscriber line technologies
("xDSL"). The Company's success will depend to a substantial degree upon its
ability to respond to changes in technology and customer requirements. This
will require the timely selection, development and marketing of new products
and enhancements on a cost-effective basis. For example, the Company has
recently licensed certain technology from Positron for inclusion in Q-155
XTRA products, which the Company announced in June 1997 and expects to begin
shipping in the quarter ending September 30, 1998. However, there can be no
assurance that the Company will be able to successfully integrate such
technology into a new product within such time frame, or at all. In
addition, in June 1997 the Company announced two new access products,
StreamLine and SlimLine, to address applications that require less capacity
and fewer features than the IMACS product line. These products are scheduled
to begin shipping in the second quarter of fiscal 1998. However, as
development is continuing with respect to these products, there can be no
assurance that the Company will not experience delays in their introduction.
Failure of the Company's newly announced products to be timely introduced and
accepted by the market 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. Recently, 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.
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
affect 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 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.
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. Certain of the Company's senior officers, including its
President and Chief Operating Officer and its Senior Vice President,
Engineering, have only recently joined the Company. The loss of the services
of any one of the Company's senior officers or key employees could have a
material adverse effect on the Company's business and operating results.
The Company's success also depends to a significant extent on its ability to
attract and retain additional highly-skilled technical, managerial, sales and
marketing personnel, the competition for whom is intense.
LIMITED PROTECTION OF INTELLECTUAL PROPERTY. The Company relies upon a
combination of patent, trade secret, copyright and trademark laws and
contractual restrictions to establish and protect proprietary rights in its
products. There can be no assurance that these statutory and contractual
arrangements will prove sufficient to deter misappropriation of the Company's
technologies or independent third-party development of similar technologies.
The telecommunications industry is characterized by the existence of a large
number of patents and frequent litigation based on allegations of patent
infringement. In the event of litigation to determine the validity of any
third-party claims asserting that the Company's products infringe or may
infringe the proprietary rights of such third parties, such litigation,
whether or not determined in favor of the Company, could result in
significant expense to the Company and divert the efforts of the Company's
technical and management personnel from productive tasks. In the event of an
adverse ruling in such litigation, the Company might be required to
discontinue the use and sale of infringing products, expend significant
resources to develop non-infringing technology or obtain licenses from third
parties.
DEPENDENCE ON CERTAIN SUPPLIERS. Certain components used in the
Company's products are currently available from only one supplier. In
addition, the Company relies on contract manufacturers to produce its printed
circuit board assemblies. Use of contract manufacturers can expose Premisys
to supply interruptions due to production, quality or financial problems of
its contractors. Shortages or delays in the delivery of the components used
in the Company's products (which have occurred in the past) or extended
delays in deliveries of printed circuit board assemblies could result in
delays in the shipment of the Company's products and/or increase component
costs. Failure of the Company to order sufficient quantities of any required
component in advance could prevent the Company from increasing production of
products in response to customer orders in excess of amounts projected by the
Company. Although the Company typically maintains some reserve inventory of
components and printed circuit board assemblies, this inventory would not
cover a significant delay in the delivery of such items.
25
<PAGE>
STOCK PRICE FLUCTUATIONS. All of the above factors are difficult for
the Company to forecast, and these or other factors, such as changes in
earnings estimates by securities analysts, can materially affect the
Company's stock price for one quarter or a series of quarters. Further, the
stock market has experienced extreme price and volume fluctuations that have
particularly affected the market prices of securities of many high technology
companies. These fluctuations, as well as general economic, political and
market conditions, may materially adversely affect the market price of the
Company's Common Stock. There can be no assurance that the trading price of
the Company's Common Stock will remain at or near its current level.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable
26
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Quarterly supplementary data is included as part of Item 6, "Selected
Financial Data." The Company's consolidated financial statements required by
this item are set forth below.
PREMISYS COMMUNICATIONS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
Report of Independent Accountants 28
Consolidated Balance Sheet as of June 30, 1996 and 1997 29
Consolidated Statement of Operations for the years ended
June 30, 1995, 1996 and 1997 30
Consolidated Statement of Stockholders' Equity (Deficit)
for the years ended June 30, 1995, 1996 and 1997 31
Consolidated Statement of Cash Flows for the years
ended June 30, 1995, 1996 and 1997 32
Notes to Consolidated Financial Statements 33
27
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of Premisys Communications, Inc.
In our opinion, the accompanying consolidated balance sheet and the
related consolidated statements of operations, stockholders' equity (deficit)
and cash flows present fairly, in all material respects, the financial
position of Premisys Communications, Inc. and its subsidiaries at June 30,
1996 and 1997, and the results of their operations and their cash flows for
each of the three years in the period ended June 30, 1997, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express
an opinion on these financial statements based on our audits. We conducted
our audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion expressed above.
/s/ Price Waterhouse
PRICE WATERHOUSE LLP
San Jose, California
July 24, 1997
28
<PAGE>
PREMISYS COMMUNICATIONS, INC.
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT PER SHARE DATA)
ASSETS
JUNE 30,
-------------------
1996 1997
-------------------
Current assets:
Cash and cash equivalents $22,058 $28,923
Short-term investments 38,803 44,301
Accounts receivable, net 16,267 7,658
Inventories 4,221 8,775
Deferred tax assets 2,915 7,207
Prepaid expenses and other assets 440 3,674
-------- --------
Total current assets 84,704 100,538
Property and equipment, net 2,700 6,444
Other assets 118 119
-------- --------
$87,522 $107,101
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $3,250 $4,756
Accrued liabilities 5,897 5,438
Income taxes payable 580 ---
Current portion of long-term debt 124 81
-------- --------
Total current liabilities 9,851 10,275
-------- --------
Long-term debt 91 9
-------- --------
Commitments (Note 5)
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
25,190,751 shares issued and outstanding 244 252
Additional paid-in capital 66,656 74,994
Retained earnings 10,680 21,571
-------- --------
Total stockholders' equity 77,580 96,817
-------- --------
$87,522 $107,101
-------- --------
-------- --------
The accompanying notes are an integral part
of these financial statements.
29
<PAGE>
PREMISYS COMMUNICATIONS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED JUNE 30,
--------------------------------
1995 1996 1997
-------- ------- -------
Revenues $30,888 $73,912 $78,358
Cost of revenues 13,054 26,418 27,262
-------- ------- -------
Gross profit 17,834 47,494 51,096
-------- ------- -------
Operating expenses:
Research and development 4,537 7,468 10,519
Selling, general and administrative 8,513 15,449 21,364
Other operating expenses --- --- 4,000
-------- ------- -------
Total operating expenses 13,050 22,917 35,883
-------- ------- -------
Income from operations 4,784 24,577 15,213
Interest and other income 553 1,930 2,653
Interest expense (48) (31) (12)
-------- ------- -------
Income before income taxes 5,289 26,476 17,854
Provision for income taxes 1,322 9,688 6,963
-------- ------- -------
Net income $ 3,967 $16,788 $10,891
-------- ------- -------
-------- ------- -------
Net income per share $ 0.18 $ 0.64 $ 0.41
-------- ------- -------
-------- ------- -------
Shares used in computing net
income per share 22,246 26,424 26,592
-------- ------- -------
-------- ------- -------
The accompanying notes are an integral part
of these financial statements.
30
<PAGE>
PREMISYS COMMUNICATIONS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
Notes
Common Stock Additional Receivable Retained
----------------------- Paid-In From Earnings
Shares Amount Capital Stockholders (Deficit)
---------- ------- ---------- ------------ ----------
<S> <C> <C> <C> <C> <C>
Balance, June 30, 1994 962,810 $ 10 $ 191 $ (159) $ (8,680)
Issuance of Common Stock 2,300,000 23 33,134
Accrual of dividends on Preferred
Stock (1,276)
Repayment of notes receivable from
stockholders 21
Exercise of options 258,517 2 90
Exercise of warrants 110,190 1 190
Conversion of Mandatorily
Redeemable Convertible Preferred
Stock into Common Stock 8,084,008 81 19,412
Net income for fiscal 1995 3,967
- ----------------------------------- ----------- ------ ------- ------- --------
Balance, June 30, 1995 11,715,525 117 53,017 (138) (5,989)
Stock dividend 11,715,525 119 (119)
Shares issued under Employee
Stock Purchase Plan 51,126 --- 677
Exercise of options 916,343 8 1,578
Repayment of notes receivable from
stockholders 138
Tax benefit of exercised stock
options 11,384
Net income for fiscal 1996 16,788
- ----------------------------------- ----------- ------ ------- ------- --------
Balance, June 30, 1996 24,398,519 244 66,656 10,680
Shares issued under Employee Stock
Purchase Plan 46,143 --- 1,109
Exercise of options 746,089 8 2,776
Tax benefit of exercised stock
options 4,453
Net income for fiscal 1997 10,891
- ----------------------------------- ----------- ------ ------- ------- --------
Balance, June 30, 1997 25,190,751 $ 252 $74,994 $ --- $ 21,571
----------- ------ ------- ------- --------
----------- ------ ------- ------- --------
</TABLE>
The accompanying notes are an integral part
of these financial statements.
31
<PAGE>
PREMISYS COMMUNICATIONS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED JUNE 30,
--------------------------------
1995 1996 1997
-------- ------- -------
Cash flows from operating activities:
Net income $ 3,967 $ 16,788 $ 10,891
Adjustments to reconcile net income
to net cash provided by
(used in) operating activities:
Depreciation 471 838 1,347
Deferred tax assets (1,084) (1,831) (4,292)
Changes in assets and liabilities:
Accounts receivable (1,049) (12,725) 8,609
Inventories (880) (1,107) (4,554)
Prepaid expenses and other assets (217) (171) (3,235)
Accounts payable (135) 1,946 1,506
Accrued liabilities 1,557 3,242 (459)
Income taxes payable 1,371 (865) (580)
--------- -------- --------
Net cash provided by operating
activities 4,001 6,115 9,233
--------- -------- --------
Cash flows from investing activities:
Purchase of property and equipment (789) (2,007) (5,091)
Purchase of short-term investments (30,690) (8,113) (5,498)
--------- -------- --------
Net cash used in investing activities (31,479) (10,120) (10,589)
--------- -------- --------
Cash flows from financing activities:
Proceeds from issuance of Common
Stock, net 33,440 2,264 3,893
Tax benefit of exercised stock
options --- 11,384 4,453
Repayment of notes receivable from
stockholders 21 138 ---
Principal payments on long-term
debt (182) (16) ---
Proceeds from capital lease
financing 17 109 ---
Repayment of capital lease
obligations (78) (89) (125)
--------- -------- --------
Net cash provided by financing
activities 33,218 13,790 8,221
--------- -------- --------
Net increase in cash 5,740 9,785 6,865
Cash and cash equivalents at beginning
of year 6,533 12,273 22,058
--------- -------- --------
Cash and cash equivalents at end
of year $ 12,273 $ 22,058 $ 28,923
--------- -------- --------
--------- -------- --------
Supplemental disclosures:
Cash paid for interest $ 50 $ 31 $ 12
Cash paid for income taxes 1,035 975 10,644
Accretion of dividends on
Mandatorily Redeemable Convertible
Preferred Stock 1,276 --- ---
Conversion of Mandatorily
Redeemable Convertible Preferred
Stock into Common Stock 19,493 --- ---
Capitalization of retained earnings
in connection with stock dividend --- 119 ---
The accompanying notes are an integral part
of these financial statements.
32
<PAGE>
PREMISYS COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY
Premisys Communications, Inc. and its subsidiaries, Premisys Communications
Pte Ltd ("Premisys Asia") and Premisys Communications Limited ("Premisys
Europe") (together, the "Company"), design, manufacture and market integrated
digital access products for telecommunications service providers. The Company's
products assist domestic and international public carriers in building,
expanding and managing their worldwide telecommunications networks for their
business customers.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Premisys
Communications, Inc. and its wholly-owned subsidiaries (Premisys Asia and
Premisys Europe). All significant intercompany accounts and transactions have
been eliminated.
CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
Cash and cash equivalents include cash, money market funds and certain
municipal securities with a maturity of three months or less when purchased.
The Company determines the appropriate classification of debt and equity
securities at the time of purchase and reassesses the classification at each
reporting date. All of the Company's short-term investments, consisting
principally of fixed maturity securities, have been classified as available for
sale. Under this classification the investments are reported at fair value,
with unrealized gains and losses excluded from earnings and reported as a
separate component of stockholders' equity. At June 30, 1996 and 1997, such
unrealized gains and losses were not significant.
INVENTORIES
Inventories are stated at the lower of cost or market, cost being determined
using the first-in, first-out (FIFO) method.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, and depreciation is computed using
the straight-line method over their estimated useful lives, which range from
three years for computer equipment and purchased software to five years for
machinery and equipment and furniture and fixtures. Leasehold improvements are
amortized using the straight-line method based upon the shorter of the estimated
useful lives (all of which are currently five years) or the remaining lease
term.
REVENUE RECOGNITION
The Company typically recognizes revenue upon shipment of product to
customers provided no significant obligations remain and collectibility is
probable. Certain distributors have sales agreements allowing limited rights to
return product without penalties. In such cases the Company recognizes revenue
upon sales of product by the distributor to its customers.
SOFTWARE DEVELOPMENT COSTS
Software development costs incurred prior to the establishment of
technological feasibility are expensed as incurred. Software development costs
incurred subsequent to the establishment of technological feasibility will be
capitalized, if material. To date, all software development costs incurred
subsequent to the establishment of technological feasibility have been
immaterial, and therefore no software development costs have been capitalized.
WARRANTY EXPENSE
Upon product shipment, the Company provides for the estimated cost that may
be incurred under its various product warranties.
33
<PAGE>
NET INCOME PER SHARE
Net income per share is computed using the weighted average number of
outstanding shares of common stock and common stock equivalents outstanding
during the periods presented, assuming the conversion of Mandatorily Redeemable
Convertible Preferred Stock into common shares, which occurred upon completion
of the Company's initial public offering, and the exercise of stock options and
warrants (using the treasury stock method). Common stock equivalent shares are
excluded from the computation if their effect is anti-dilutive; however,
pursuant to the requirements of the Securities and Exchange Commission,
Convertible Preferred Stock (using the if-converted method) and common
equivalent shares relating to the stock options and warrants (using the treasury
stock method and the initial public offering price) issued from February 17,
1994 through the closing of the Company's initial public offering are included
for all periods prior to the Company's initial public offering.
FOREIGN CURRENCY TRANSACTIONS
The U.S. dollar is the functional currency of Premisys Asia and Premisys
Europe. Exchange gains and losses resulting from transactions denominated in
currencies other than U.S. dollars are included in net income. To date, the
resulting gains and losses have not been material.
FISCAL YEAR
At the beginning of fiscal 1995, the Company adopted a 52/53 week accounting
year that ends on the Friday closest to June 30. For purposes of financial
statement presentation, each fiscal year is considered to have ended on June 30.
MANAGEMENT ESTIMATES AND ASSUMPTIONS
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements, and
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement No. 128, "Earnings Per Share," ("SFAS 128") which is required to be
adopted by the Company in its fiscal quarter ending December 31, 1997. Under
SFAS 128, primary earnings per share is replaced by basic earnings per share,
for which the dilutive effect of stock options will be excluded, and fully
diluted earnings per share is replaced by diluted earnings per share.
If the Company had adopted SFAS 128 for the year ended June 30, 1997, the
Company's earnings per share for the years ended June 30, 1995, 1996 and 1997
would have been as follows:
Year Ended June 30,
-----------------------------
1995 1996 1997
---- ---- ----
Basic $0.19 $0.70 $0.44
Diluted $0.18 $0.64 $0.41
In June 1997, the FASB issued Statement No. 130, "Reporting Comprehensive
Income" ("SFAS 130"). SFAS 130 establishes standards for reporting
comprehensive income and its components in a full set of general purpose
financial statements. SFAS 130 requires that items to be recorded in
comprehensive income, which include unrealized gains/losses on marketable
securities classified as available-for-sale and cumulative translation
adjustments, be displayed with the same prominence as other financial statement
items. SFAS 130 is required to be adopted in the Company's financial statements
for the year ending June 30, 1999.
In June 1997, the FASB issued Statement No. 131, "Disclosures about Segments
of an Enterprise and Related Information," ("SFAS 131"). SFAS 131 establishes
standards for the way public business enterprises report information about
operating segments in annual financial statements and requires those enterprises
to report selected information about operating segments in interim financial
reports issued to shareholders. SFAS 131 also establishes standards for related
disclosures about products and services, geographic areas, and major customers.
SFAS 131 is required to be adopted in the Company's financial statements for the
year ending June 30, 1999.
34
<PAGE>
CERTAIN EQUITY TRANSACTIONS
In December 1995, the Company effected a stock split in the form of a 100%
stock dividend, providing shareholders of record one additional share of
stock for each share held. All share and per share amounts included in the
consolidated balance sheet, consolidated statement of operations and these
notes have been adjusted to retroactively reflect this stock dividend.
NOTE 2 - BALANCE SHEET COMPONENTS (IN THOUSANDS)
JUNE 30,
--------------------
1996 1997
------- --------
Cash and Cash Equivalents:
Cash $ 123 $ 174
Money market funds 11,188 10,106
Municipal securities 10,747 18,643
------- -------
$22,058 $28,923
------- -------
------- -------
Short-term investments, municipal
securities $38,803 $44,301
------- -------
------- -------
As of June 30, 1996 and 1997, the estimated
fair value of short-term investments
approximated their cost.
Accounts Receivable:
Trade accounts receivable $16,319 $ 7,659
Less: allowance for doubtful accounts (52) (1)
------- -------
$16,267 $ 7,658
------- -------
------- -------
Inventories:
Raw materials $ 1,769 $ 2,010
Work-in-process 1,311 1,390
Finished goods 2,486 7,893
------- -------
5,566 11,293
Less: Reserves (1,345) (2,518)
------- -------
$ 4,221 $ 8,775
------- -------
------- -------
Property and Equipment:
Machinery and equipment $ 2,198 $ 3,099
Computers and purchased software 1,709 2,707
Furniture and fixtures 525 1,638
Leasehold improvements 97 2,176
------- -------
4,529 9,620
Less: Accumulated Depreciation (1,829) (3,176)
------- -------
$ 2,700 $ 6,444
------- -------
------- -------
Accrued Liabilities:
Employee compensation $ 3,025 $ 1,868
Warranty 1,703 2,424
Other 1,169 1,146
------- -------
$ 5,897 $ 5,438
------- -------
------- -------
35
<PAGE>
NOTE 3 - INCOME TAXES
The provision for income taxes consists of the following:
YEAR ENDED JUNE 30,
--------------------------------
1995 1996 1997
-------- -------- --------
Current: (IN THOUSANDS)
Federal $ 1,895 $ 8,889 $ 9,058
State 511 2,494 2,138
Foreign --- 136 59
-------- -------- --------
2,406 11,519 11,255
-------- -------- --------
Deferred:
Federal (1,084) (1,024) (3,467)
State --- (807) (825)
(1,084) (1,831) (4,292)
-------- -------- --------
Total $ 1,322 $ 9,688 $ 6,963
-------- -------- --------
-------- -------- --------
Deferred income taxes reflect the tax effects of temporary differences
between carrying amounts of assets and liabilities for financial reporting
and income tax purposes. Significant components of the Company's deferred tax
assets are as follows:
JUNE 30,
---------------------
1996 1997
--------- ---------
(IN THOUSANDS)
Net operating loss carry forwards $ 14 $ 13
Capitalized purchased technology 53 1,067
Capitalized research and development
expenses 112 54
Reserves and other 2,736 6,073
--------- ---------
$ 2,915 $ 7,207
--------- ---------
--------- ---------
36
<PAGE>
A reconciliation of the income tax provisions computed at the United States
federal statutory rate to the effective tax rate is as follows:
YEAR ENDED JUNE 30,
-------------------------------
1995 1996 1997
------ ----- -----
Federal statutory rate 35.0% 35.0% 35.0%
State taxes, net of federal benefit 6.1 6.1 6.1
Increase (decrease) in valuation
allowance (20.5) (2.7) ---
Tax exempt interest income --- (2.4) (4.8)
Other 4.4 0.6 2.7
------ ----- -----
Effective tax rate 25.0% 36.6% 39.0%
------ ----- -----
------ ----- -----
NOTE 4 - BENEFIT PLANS
STOCK OPTION PLANS
In March 1992, the Company adopted a Stock Option Plan (the "1992 Option
Plan"). The 1992 Option Plan provides for the granting of incentive stock
options and nonqualified stock options to employees at prices not less than
the fair market value and not less than 85% of the fair market value of the
Company's Common Stock, respectively, on the date of grant. While
previously issued options remain outstanding under the 1992 Option Plan, the
Company can no longer issue new options out of the 1992 Option Plan.
On November 16, 1994, the Company's Board of Directors approved the 1994
Stock Option Plan (the "1994 Option Plan"). Under the terms of the 1994
Option Plan, 4,000,000 shares of the Company's Common Stock are reserved for
issuance at exercise prices not less than the fair value of the stock at the
date of grant. The incentive and nonqualified stock options have ten-year
terms, and vest over a period determined by the Board of Directors, but not
to exceed five years. Options granted to date vest over four years. The 1994
Option Plan will terminate ten years after its adoption unless earlier
terminated by the Board of Directors.
In February 1995, the Company's Board of Directors adopted, and the
Company's stockholders approved, the 1995 Directors Stock Option Plan
("Directors Plan"), which provides for the automatic grant of options to
purchase shares of Common Stock to non-employee directors of the Company
("Eligible Directors"). The Directors Plan is administered by the Board of
Directors. The maximum number of shares of Common Stock that may be issued
pursuant to options granted under the Directors Plan is 240,000. Pursuant to
the terms of the Directors Plan, each Eligible Director who becomes a member
of the Board and who has not otherwise received options in connection with
his Board service will automatically be granted an option to purchase 24,000
shares of Common Stock on the date the Eligible Director first joins the
board (the "Initial Grant"). In addition, Eligible Directors serving on the
Board in April 1995 who had never received options for their services as a
director received an Initial Grant. Each Eligible Director will automatically
be granted an additional option for 6,000 shares of Common Stock (a
"Succeeding Grant") on the anniversary date of the Initial Grant, or if such
director was not eligible for an Initial Grant under the Directors Plan, on
the anniversary date of his election to the Board of Directors. Each Initial
Grant and each Succeeding Grant will vest as to 25% of the shares per year
thereafter, so long as the non-employee director remains a member of the
Board. Options granted under the Directors Plan expire ten years from the
date of grant. The exercise price of options under the Directors Plan must
be equal to the fair market value of the Common Stock on the date of grant.
The Directors Plan will terminate in February 2005, unless sooner terminated
by the Board.
On March 19, 1997 the Compensation Committee of the Board of Directors
approved offering employees the right to amend outstanding stock options
granted under the Company's 1994 Stock Option Plan. The amended stock
options would have an exercise price equal to the closing price of the
Company's common stock on April 23, 1997 and a new vesting schedule beginning
on the same date with a duration equal to that of the original option.
Corporate officers were excluded from this option repricing offer. Employees
elected to amend options for approximately 1,051,000 shares; the new exercise
price was $8.1875 per share. In the summary table below, these options are
included in shares granted and shares canceled in fiscal 1997.
As of June 30, 1997, of the 4,107,911 shares subject to outstanding
options, 850,847 shares of Common Stock were exercisable; and 853,219 shares
were available for future grant under all of the Company's option plans.
A summary of transactions relating to all of the Company's option plans is as
follows (all amounts have been adjusted for the Company's stock dividend):
37
<PAGE>
Options Outstanding
---------------------------
Outstanding Weighted Average
Shares Exercise Price
----------- ----------------
Balance at June 30, 1994 2,051,568 $0.38
Options granted 1,692,550 $4.31
Options canceled (50,622) $1.36
Options exercised (517,034) $0.18
---------- ------
Balance at June 30, 1995 3,176,462 $2.49
Options granted 774,300 $32.31
Options canceled (124,961) $4.18
Options exercised (916,343) $1.70
---------- ------
Balance at June 30, 1996 2,909,458 $10.61
Options granted 3,401,647 $16.35
Options canceled (1,457,105) $27.33
Options exercised (746,089) $3.80
---------- ------
Balance at June 30, 1997 4,107,911 $10.67
---------- ------
---------- ------
The following table summarizes information concerning outstanding and
exercisable options as of June 30, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------------------- --------------------------
Weighted Average Weighted
Remaining Average Weighted
Range of Number Contractual Life Exercise Number Average
Exercise Prices Outstanding (in years) Price Exerciseable Exercise Price
---------------- ----------- --------------- -------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
$ 0.10 - $ 0.16 72,620 5.5 $0.12 70,548 $0.12
$ 0.40 - $ 1.00 268,129 6.7 $0.68 137,056 $0.70
$ 1.50 - $ 3.50 391,187 7.1 $2.18 205,863 $2.11
$ 4.00 - $ 8.88 2,651,913 9.0 $7.58 324,697 $6.02
$ 10.25 - $ 13.75 107,500 9.9 $11.84 719 $11.63
$ 28.25 - $ 51.00 616,562 9.2 $34.74 111,964 $32.07
---------- -------
$ 0.10 - $ 51.00 4,107,911 8.7 $10.67 850,847 $7.16
---------- -------
---------- -------
</TABLE>
STOCK PURCHASE PLAN
In February 1995, the Company's Board of Directors approved the 1995
Employee Stock Purchase Plan (the "Stock Purchase Plan"). Under the terms of
the Stock Purchase Plan, all employees of the Company may contribute, through
payroll deductions, up to 10% of their annual compensation toward the
purchase of the Company's Common Stock. The Company has reserved 400,000
shares for issuance under the 1995 Stock Purchase Plan. The purchase price
per share is 85% of the lesser of (a) the fair market value of the Common
Stock on the first day of the offering period, as defined, or (b) the fair
market value of the Common Stock on the last day of the offering period, as
defined. The 1995 Stock Purchase Plan will terminate ten years after its
adoption unless earlier terminated by the Board of Directors.
PRO FORMA NET INCOME AND EARNINGS PER SHARE
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees," ("APB 25") in accounting for
its employee stock options because, as discussed below, the alternative fair
value accounting provided for under Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-based Compensation," ("SFAS 123")
requires the use of option valuation models that were not developed for use
in valuing employee stock options. Under APB 25, because the exercise price
of the Company's employee stock options equals the market price of the
underlying stock on the date of grant, no compensation expense is recognized
in the Company's financial statements for employee stock options.
Pro forma information regarding net income and earnings per share is
required by SFAS No. 123. This information is required to be determined as
if the Company had accounted for its employee stock options, including shares
issued under the Stock Purchase Plan, (collectively the "options") granted
subsequent to June 30, 1995 under the fair value method of that statement.
The fair value of options granted in fiscal 1996 and 1997 reported below have
been estimated at the date of grant using a Black-Scholes option pricing
model. The Black-Scholes option valuation model was developed for use in
estimating
38
<PAGE>
the fair value of publicly traded options that have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions, including the expected stock price
volatility. Because the Company's options have characteristics significantly
different from those of publicly traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimates,
in the opinion of management, the existing models do not necessarily provide
a reliable single measure of the fair value of its options.
Had stock-based compensation cost for the options been determined based on
the fair value at the grant dates using the Black-Scholes model as prescribed
by SFAS No. 123, the Company's results for the year ended June 30, 1996 and
1997 would have been as follows:
Year Ended June 30,
-----------------------------------
1996 1997
---- ----
(in thousands except per share data)
Net income as reported $16,788 $10,891
Pro forma net income $14,642 $2,371
Earnings per share as reported $0.64 $0.41
Pro forma earnings per share $0.56 $0.09
The pro forma effect on net income and earnings per share for fiscal 1996 and
fiscal 1997 is not representative of the pro forma effect on net income in
future years because it does not take into consideration pro forma compensation
expense related to grants made prior to fiscal 1996.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes model with the following weighted average assumptions:
Year Ended June 30,
-----------------------------------
1996 1997
---- ----
Stock option plans:
Expected dividend yield 0.0% 0.0%
Expected stock price volatility 65.0% 65.0%
Risk free interest rate 6.2% 6.4%
Expected life of options (years) 3.11 3.09
Stock purchase plan:
Expected dividend yield 0.0% 0.0%
Expected stock price volatility 65.0% 65.0%
Risk free interest rate 5.8% 5.4%
Expected life of options (years) 0.39 0.50
The weighted average estimated grant date fair value, as defined by SFAS 123,
for options granted under stock option plans during fiscal 1996 and 1997 was
$15.37 and $7.51 per share, respectively. The weighted average estimated
grant date fair value, as defined by SFAS 123, for purchase rights granted
under the Stock Purchase Plan during fiscal 1996 and 1997 was $5.45 and $7.46
per share, respectively.
401(k) PLAN
During fiscal 1994, the Company adopted a 401(k) plan for its employees
whereby eligible employees may contribute up to 20% of their earnings, on a
pre-tax basis, subject to the maximum amount permitted by the Internal
Revenue Code. Under the 401(k) plan, the Company may make contributions at
the discretion of the Board of Directors. During fiscal 1995, the Company did
not contribute to the 401(k) plan. In fiscal 1996, the Company amended its
plan to match employee contributions up to $800 per contributor per plan year
and to reduce the maximum contribution to 15% of earnings. The Company
continued the $800 per contributor per plan year match and the 15% maximum
contribution in fiscal 1997.
39
<PAGE>
NOTE 5 - COMMITMENTS
The Company's principal offices are located in two facilities, totaling
96,000 square feet, leased by the Company in Fremont, California. The leases on
these facilities, which are classified as a non-cancelable operating lease, are
scheduled to expire on October 31, 2004.
In addition, the Company leases certain equipment under long-term lease
agreements that are classified as capital leases. These capital leases expire at
various dates through 2001. Property and equipment at June 30, 1996 and 1997
include assets acquired under capitalized leases of $564,000 and $437,000, with
related accumulated amortization of $309,000 and $342,000, respectively.
Future minimum payments under capitalized leases are not material.
Future minimum lease payments under all noncancelable operating leases are
as follows:
YEAR ENDING JUNE 30,
- --------------------
(In thousands)
1998 $ 948
1999 952
2000 1,027
2001 1,058
Thereafter 3,707
-------------
Total minimum payments $ 7,692
-------------
-------------
Rent expense under facility leases totaled $307,000, $372,000 and $941,000
during fiscal 1995, 1996 and 1997, respectively.
NOTE 6 - INTERNATIONAL OPERATIONS
The following is a summary of the Company's operations:
YEAR ENDED JUNE 30, (IN THOUSANDS)
-----------------------------------
1995 1996 1997
--------- --------- ---------
Revenues from third party customers:
United States $ 29,326 $ 65,342 $ 72,679
Asia 1,264 6,961 3,452
Europe 298 1,609 355
Latin America --- --- 1,872
--------- --------- ---------
$ 30,888 $ 73,912 $ 78,358
--------- --------- ---------
--------- --------- ---------
Income (loss) from operations:
United States $ 5,528 $ 21,043 15,114
Asia (136) 3,917 (1,025)
Europe (608) (383) (1,706)
Latin America --- --- 780
--------- --------- ---------
$ 4,784 $ 24,577 $ 15,213
--------- --------- ---------
--------- --------- ---------
JUNE 30, (IN THOUSANDS)
-----------------------
1996 1997
--------- ---------
Identifiable assets:
United States $ 25,989 $ 32,992
Asia 575 874
Europe 97 100
Latin America --- ---
--------- ---------
$ 26,661 $ 33,877
--------- ---------
--------- ---------
Identifiable assets are those assets that are associated with the
operations in each geographic area. Identifiable assets do not include cash and
short-term investments.
The Company derived 5%, 11% and 7%, respectively, of its revenues from
direct sales to international customers in fiscal 1995, 1996 and 1997.
40
<PAGE>
NOTE 7 - CONCENTRATION OF SALES AND CREDIT RISK
The following table summarizes the percentage of revenues accounted for by
the Company's significant customers:
YEAR ENDED JUNE 30,
----------------------------
1995 1996 1997
---- ---- ----
Paradyne 45% 33% 30%
Motorola 8% 15% 15%
ADC Telecommunications 17% 16% 12%
DSC 12% 9% 10%
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash and cash equivalents,
short-term investments and trade accounts receivable. The Company's investment
policy limits the amount of credit exposure to any one financial institution or
commercial issuer. The Company has not experienced any material losses on its
investments.
The Company generally extends 30-day credit terms to its customers, which
is consistent with industry business practices. The Company performs ongoing
credit evaluations of its customers' financial condition and, generally,
requires no collateral from its customers. The Company maintains an allowance
for doubtful accounts receivable based upon the expected collectibility of all
accounts receivable. The Company has not experienced any material write-offs of
uncollectible accounts receivable.
NOTE 8 - SIGNIFICANT EVENTS
On January 7, 1997, the Company announced the execution of a technology
license agreement with Positron. The Company will license certain SONET and SDH
based technology from Positron for use within its future products.
The licensed technology includes the right to modify and manufacture
products which are based on Positron's OSIRIS-155Mb/s SONET/SDH products. The
technology information is in the form of circuit pack schematics, Field
Programmable Gate Array (FPGA) designs and documentation, shelf backplane and
bus designs, and system software source code. The licensed technology also
includes the right to use and manufacture Positron proprietary application-
specific integrated circuits (ASICs), and training and integration assistance on
all design materials. The delivery of the technology began in January, 1997 and
will continue in phased released through October, 1997.
The Company will pay Positron $4 million of license fees over the next
three years. Positron will also be paid a royalty on the Company's products
utilizing the licensed technology up to a maximum of $4 million. Thus, total
payments to Positron will be between $4 million and $8 million. The Company
expensed the $4 million of license fees in the quarter ended March 31, 1997,
which reduced its earnings per share for such quarter by $0.09. Payments of
license fees to Positron in fiscal 1997 totaled $2.0 million.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
41
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information required by this Item is incorporated by reference from the
section titled "Directors/Nominees" under "Proposal No. 1 - Election of
Directors," "Executive Officers" and "Section 16(a) Beneficial Ownership
Reporting and Compliance" from the definitive proxy statement to be filed with
the Securities and Exchange Commission relative to the Company's annual meeting
of stockholders to be held in December 1997 (the "Definitive Proxy Statement").
ITEM 11. EXECUTIVE COMPENSATION.
Information required by this Item is incorporated by reference from the
sections titled "Director Compensation" under "Proposal No. 1 - Election of
Directors" and "Executive Compensation" and "Employment Agreements" from the
Definitive Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Information required by this Item is incorporated by reference from
"Security Ownership of Certain Beneficial Owners and Management" from the
Definitive Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information required by this Item is incorporated by reference from
"Certain Relationships and Related Transactions" from the Definitive Proxy
Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) The following financial statements and schedules are filed as part of this
report:
(1) Financial Statements
See index included in Part II, Item 8.
(2) Financial Statement Schedules
All schedules are omitted because they are not applicable, or the required
information is included in the financial statements or notes thereto.
(a)(3) and (c). The following exhibits are filed herewith or incorporated by
reference:
EXHIBIT
NUMBER EXHIBIT TITLE
2.01 Premisys California Acquisition Agreement between Premisys Communications
Holdings, Inc. and Premisys Communications Pte Ltd, dated as of March 12,
1992, and exhibits thereto.(1)
2.02 Exchange Agreement by and among Premisys Communications Holdings, Inc.
and the shareholders, warrant holders and noteholders of Premisys
Communications Pte Ltd, dated as of March 12, 1992, and material exhibits
thereto.***(1)
2.03 Form of Agreement and Plan of Merger by and among the Registrant,
Premisys Communications Holdings, Inc. and Premisys Communications,
Inc.(1)
3.01 Registrant's Amended and Restated Certificate of Incorporation as filed
with the Delaware Secretary of State on April 12, 1995.(2)
3.04 Registrant's Bylaws, as amended.(1)
3.05 Certificate of Amendment of Amended and Restated Certificate of
Incorporation of Premisys Communications, Inc.(4)
4.01 Form of Specimen Certificate for Registrant's Common Stock.(1)
4.02 Investors' Rights Agreement, dated as of March 12, 1992, as amended June
15, 1992, October 22, 1993, December 14, 1993, February 18, 1994 and May
9, 1994 among Registrant and various investors.(1)
4.03 Waiver Relating to and Amendment of Investors' Rights Agreement dated as
of July 24, 1995 among Registrant and various investors.(3)
42
<PAGE>
+10.01 Registrant's 1992 Stock Option Plan and related documents.(1)
+10.02 Registrant's 1994 Stock Option Plan and related documents.(10)
+10.03 Registrant's 1995 Directors Stock Option Plan and related documents.(1)
+10.04 Registrant's 1995 Employee Stock Purchase Plan and related documents.(1)
+10.06 Founders Agreement by and among Registrant, Raymond Lin, Boris Auerbuch
and Marcus Auerbuch, dated as of March 12, 1992.**(1)
10.08 Form of Indemnity Agreement entered into by Registrant with each of its
directors and executive officers.(1)
10.09 Warranty and Indemnification Agreement by and among Raymond Lin, Boris
Auerbuch and Registrant dated as of August 2, 1990.(1)
10.10 Agreement for Purchase and Sale of Assets by and between Premisys
Communications, Inc., a California corporation, and Premisys
Communications Pte Ltd, dated as of January 1, 1992, including Bill of
Sale.(1)
10.11 Technology Cost and Risk Sharing Agreement by and between Premisys
Communications, Inc., a California corporation, and Premisys
Communications Pte Ltd, dated as of January 1, 1992.(1)
10.12 Agreement Regarding Payment by and between Premisys Communications, Inc.,
a California corporation, and Premisys Communications Pte Ltd, dated as
of September 30, 1992.(1)
10.13 Technology Cost and Risk Sharing Agreement Amendment by and between
Premisys Communications, Inc., a California corporation, and Premisys
Communications Pte Ltd, dated as of July 1, 1995.(6)
10.15 Option Agreement by and between Registrant and AT&T Paradyne Corporation,
dated as of December 4, 1992.(1)
10.16 Series C Preferred Stock Purchase Agreement by and between Registrant and
AT&T Paradyne Corporation, dated as of December 14, 1993 and material
exhibits thereto.***(1)
10.18 Lease Agreement by and between Registrant and Aetna Life Insurance
Company, dated October 4, 1993, as amended to date.(1)
10.19 OEM Agreement by and among Premisys Communications Holdings, Inc.,
Premisys Communications, Inc., a California corporation, and AT&T
Paradyne Corporation, dated as of December 4, 1992, as amended July 8,
1993, March 17, 1994 and May 24, 1994.**(1)
10.20 Extension Agreements by and among Premisys Communications Holdings, Inc.,
Premisys Communications, Inc., a California corporation, and AT&T
Paradyne Corporation, dated as of June 30, 1993 and July 12, 1993 and
September 30, 1993.**(1)
10.21 Co-Development Agreement between Registrant and AT&T Paradyne
Corporation, dated as of September 30, 1993, as amended November 9, 1993
and May 25, 1994.**(1)
10.22 Private Label Purchase/Resale Agreement by and between Registrant and DSC
Technologies Corporation, effective as of March 31, 1994.**(1)
10.23 Purchase/Resale Agreement by and between Registrant and ADC
Telecommunications, Inc., effective as of January 1, 1994.**(1)
10.24 Manufacturing Agreement by and between Registrant and Eltech Electronics
Technology (M) SDN BHD (Malaysia) as of July 22, 1996.**(6)
10.26 Original Equipment Manufacturer (OEM) Volume Purchase Agreement between
Registrant and Motorola, Inc. dated December 21, 1994.**(1)
+10.27 Employment Agreement by and between Premisys Communications Holdings,
Inc. and Riley R. Willcox dated as of February 10, 1994.(1)
10.28 Amendment No. 4 to OEM Agreement by and among Premisys Communications
Holdings, Inc., Premisys Communications, Inc., a California corporation,
and AT&T Paradyne Corporation dated as of March 6, 1995.**(1)
+10.29 Registrant's Management Salary and Incentive Plan for the Fiscal Year
Ended June 30, 1996.(3)
10.30 Lease Agreement by and between Premisys and Berg & Berg Enterprises,
Inc., dated October 24, 1995, for the premises located at 48700 Milmont
Drive, Fremont, California.(4)***
10.31 Amendments Number 5 and 6 to OEM Agreement by and between Premisys
Communications, Inc., a Delaware Corporation and AT&T Paradyne
Corporation, dated as of April 1, 1995. (5)**
+10.32 Registrant's Management Incentive Plan for the fiscal year ended June 30,
1997.(6)
10.33 Amendment Number 7 and 8 to OEM Agreement by and between Premisys
Communications, Inc., a Delaware Corporation, and Paradyne Corporation,
dated as of December 2, 1996.**(9)
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). (8)
10.35 Second Amendment to Lease Agreement by and between Premisys
Communications, Inc. and Aetna Life Insurance Company, dated August 9,
1996. (7)
43
<PAGE>
10.36 Manufacturing Agreement by and between Premisys Communications, Inc. and
CMC Mississippi, Inc. as of January 9, 1997.*
10.37 Amendment Number 9 OEM Agreement by and between Premisys Communications,
Inc., a Delaware Corporation and AT&T Paradyne Corporation, dated as of
May 13, 1997. *
+10.38 Employment Agreement by and between Premisys Communications Inc. and
Nicholas Williams dated as of March 31, 1997
+10.39 Registrant's Management Incentive Plan for the fiscal year ended June
30, 1998.
10.40 License Agreement dated December 27, 1996 between Premisys
Communications Inc. and Positron Fiber Systems Corporation. **(11)
11.01 Statement regarding computation of net income per share.
21.01 List of Registrant's subsidiaries.(1)
23.01 Consent of Price Waterhouse LLP, Independent Accountants.
24.01 Power of Attorney (See page 45 of this Form 10-K).
2 7.01 Financial Data Schedule.
___________
(1) Incorporated by reference to the exhibit bearing the same number in
Registrant's Form S-1 Registration Statement declared effective
April 15, 1995 (File No. 33-89598).
(2) Incorporated by reference to Exhibit 3.01 to the Registrant's Form 10-Q
(File No. 0-25684) for the quarter ended March 31, 1995 filed May
22, 1995.
(3) Incorporated by reference to the exhibit bearing the same number in
Registrant's Form S-1 Registration Statement filed August 1, 1995
(File No. 33-95266).
(4) Incorporated by reference to the exhibit bearing the same number in
Registrant's Form 10-Q (File No. 0-25684) for the quarter ended
December 29, 1995 filed February 12, 1996.
(5) Incorporated by reference to the exhibit bearing the same number in
Registrant's Form 10-Q (File No. 0-25684) for the quarter ended
March 29, 1996 filed May 3, 1996.
(6) Incorporated by reference to the exhibit bearing the same number in
Registrant's Form 10-K (File No. 0-25684) for the fiscal year
ended June 28, 1996 initially filed September 26, 1996.
(7) Incorporated by reference to the exhibit bearing the number 10.33 in
Registrant's Form 10-Q (File No. 0-25684) for the quarter ended
September 27, 1996 filed November 10, 1996.
(8) Incorporated by reference to the exhibit bearing the same number in
Registrant's Form 10-Q (File No. 0-25684) for the quarter ended
September 27, 1996 filed November 10, 1996.
(9) Incorporated by reference to the exhibit bearing the same number in
Registrant's Form 10-Q (File No. 0-25684) for the quarter ended
December 27, 1996 filed February 9, 1997.
(10) Incorporated by reference to Exhibit 4.04 in Registrant's Form S-8
Registration Statement filed April 25, 1996 (File No. 333-4060).
(11) Incorporated by reference to the exhibit bearing the number 10.2 in the
Registration Statement on Form F-1 (File No. 333-07144) of
Positron Fiber Systems Corporation.
+ Management contract or compensatory plan or arrangement.
* Confidential treatment has been requested with respect to certain
portions of this agreement. Such portions have been omitted from this
filing and have been filed separately with the Securities and Exchange
Commission.
** Confidential treatment was received with respect to certain portions of
this agreement. Such portions have been omitted from this filing and have
been filed separately with the Securities and Exchange Commission.
*** Certain exhibits to the exhibit will be furnished supplementally to the
Securities and Exchange Commission upon its request.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter ended June 30, 1997.
44
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, as amended, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Fremont, State of California, on the 25th day of September, 1997.
PREMISYS COMMUNICATIONS, INC.
By: /s/Raymond C. Lin
--------------------------------
Raymond C. Lin
CHIEF EXECUTIVE OFFICER
Each person whose signature appears below constitutes and appoints Raymond
C. Lin and Riley R. Willcox, jointly and severally, his true and lawful
attorneys-in-fact, each with the power of substitution, for him in any and all
capacities, to sign amendments to this Report on Form 10-K, and to file the
same, with all exhibits thereto and other documents in connection therewith,
with the Securities and Exchange Commission, hereby ratifying and conforming all
that said attorneys-in-fact, or his substitute or substitutes, may do or cause
to be done by virtue thereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed by the following persons in the capacities
and on the dates indicated.
NAME TITLE DATE
---- ----- ----
PRINCIPAL EXECUTIVE OFFICER:
/s/Raymond C. Lin Chief Executive Officer September 25, 1997
- ---------------------------- and a Director
Raymond C. Lin
PRINCIPAL FINANCIAL OFFICER:
/s/Riley R. Willcox Senior Vice President, Chief September 25, 1997
- ---------------------------- Financial Officer and
Riley R. Willcox Secretary
PRINCIPAL ACCOUNTING OFFICER:
/s/Robert W. Dilfer Vice President and September 25, 1997
- ---------------------------- Controller
Robert W. Dilfer
ADDITIONAL DIRECTORS:
/s/Boris J. Auerbuch Director September 25, 1997
- ----------------------------
Boris J. Auerbuch
/s/Lip-Bu Tan Director September 25, 1997
- ----------------------------
Lip-Bu Tan
45
<PAGE>
/s/Gary J. Morgenthaler Director September 25, 1997
- ----------------------------
Gary J. Morgenthaler
/s/Marino R. Polestra Director September 25, 1997
- ----------------------------
Marino R. Polestra
/s/Edward A. Keible Director September 25, 1997
- ----------------------------
Edward A. Keible
/s/Robert C. Hawk Director September 25, 1997
- ----------------------------
Robert C. Hawk
46
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------
EXHIBITS
TO
FORM 10-K
UNDER
THE SECURITIES ACT OF 1933
-----------
PREMISYS COMMUNICATIONS, INC.
47
<PAGE>
EXHIBIT INDEX
EXHIBIT
NUMBER EXHIBIT TITLE
2.01 Premisys California Acquisition Agreement between Premisys Communications
Holdings, Inc. and Premisys Communications Pte Ltd, dated as of March 12,
1992, and exhibits thereto.(1)
2.02 Exchange Agreement by and among Premisys Communications Holdings, Inc.
and the shareholders, warrant holders and noteholders of Premisys
Communications Pte Ltd, dated as of March 12, 1992, and material exhibits
thereto.***(1)
2.03 Form of Agreement and Plan of Merger by and among the Registrant,
Premisys Communications Holdings, Inc. and Premisys Communications,
Inc.(1)
3.01 Registrant's Amended and Restated Certificate of Incorporation as filed
with the Delaware Secretary of State on April 12, 1995.(2)
3.04 Registrant's Bylaws, as amended.(1)
3.05 Certificate of Amendment of Amended and Restated Certificate of
Incorporation of Premisys Communications, Inc.(4)
4.01 Form of Specimen Certificate for Registrant's Common Stock.(1)
4.02 Investors' Rights Agreement, dated as of March 12, 1992, as amended June
15, 1992, October 22, 1993, December 14, 1993, February 18, 1994 and May
9, 1994 among Registrant and various investors.(1)
4.03 Waiver Relating to and Amendment of Investors' Rights Agreement dated as
of July 24, 1995 among Registrant and various investors.(3)
+10.01 Registrant's 1992 Stock Option Plan and related documents.(1)
+10.02 Registrant's 1994 Stock Option Plan and related documents.(10)
+10.03 Registrant's 1995 Directors Stock Option Plan and related documents.(1)
+10.04 Registrant's 1995 Employee Stock Purchase Plan and related documents.(1)
+10.06 Founders Agreement by and among Registrant, Raymond Lin, Boris Auerbuch
and Marcus Auerbuch, dated as of March 12, 1992.**(1)
10.08 Form of Indemnity Agreement entered into by Registrant with each of its
directors and executive officers.(1)
10.09 Warranty and Indemnification Agreement by and among Raymond Lin, Boris
Auerbuch and Registrant dated as of August 2, 1990.(1)
10.10 Agreement for Purchase and Sale of Assets by and between Premisys
Communications, Inc., a California corporation, and Premisys
Communications Pte Ltd, dated as of January 1, 1992, including Bill of
Sale.(1)
10.11 Technology Cost and Risk Sharing Agreement by and between Premisys
Communications, Inc., a California corporation, and Premisys
Communications Pte Ltd, dated as of January 1, 1992.(1)
10.12 Agreement Regarding Payment by and between Premisys Communications, Inc.,
a California corporation, and Premisys Communications Pte Ltd, dated as
of September 30, 1992.(1)
10.13 Technology Cost and Risk Sharing Agreement Amendment by and between
Premisys Communications, Inc., a California corporation, and Premisys
Communications Pte Ltd, dated as of July 1, 1995.(6)
10.15 Option Agreement by and between Registrant and AT&T Paradyne Corporation,
dated as of December 4, 1992.(1)
10.16 Series C Preferred Stock Purchase Agreement by and between Registrant and
AT&T Paradyne Corporation, dated as of December 14, 1993 and material
exhibits thereto.***(1)
10.18 Lease Agreement by and between Registrant and Aetna Life Insurance
Company, dated October 4, 1993, as amended to date.(1)
10.19 OEM Agreement by and among Premisys Communications Holdings, Inc.,
Premisys Communications, Inc., a California corporation, and AT&T
Paradyne Corporation, dated as of December 4, 1992, as amended July 8,
1993, March 17, 1994 and May 24, 1994.**(1)
10.20 Extension Agreements by and among Premisys Communications Holdings, Inc.,
Premisys Communications, Inc., a California corporation, and AT&T
Paradyne Corporation, dated as of June 30, 1993 and July 12, 1993 and
September 30, 1993.**(1)
10.21 Co-Development Agreement between Registrant and AT&T Paradyne
Corporation, dated as of September 30, 1993, as amended November 9, 1993
and May 25, 1994.**(1)
10.22 Private Label Purchase/Resale Agreement by and between Registrant and DSC
Technologies Corporation, effective as of March 31, 1994.**(1)
10.23 Purchase/Resale Agreement by and between Registrant and ADC
Telecommunications, Inc., effective as of January 1, 1994.**(1)
10.24 Manufacturing Agreement by and between Registrant and Eltech Electronics
Technology (M) SDN BHD (Malaysia) as of July 22, 1996.**(6)
48
<PAGE>
10.26 Original Equipment Manufacturer (OEM) Volume Purchase Agreement between
Registrant and Motorola, Inc. dated December 21, 1994.**(1)
+10.27 Employment Agreement by and between Premisys Communications Holdings,
Inc. and Riley R. Willcox dated as of February 10, 1994.(1)
10.28 Amendment No. 4 to OEM Agreement by and among Premisys Communications
Holdings, Inc., Premisys Communications, Inc., a California corporation,
and AT&T Paradyne Corporation dated as of March 6, 1995.**(1)
+10.29 Registrant's Management Salary and Incentive Plan for the Fiscal Year
Ended June 30, 1996.(3)
10.30 Lease Agreement by and between Premisys and Berg & Berg Enterprises,
Inc., dated October 24, 1995, for the premises located at 48700 Milmont
Drive, Fremont, California. Exhibits A, C, D to this exhibit consist of
blueprint drawings which have not been included herewith but will be
furnished supplementally to the Securities and Exchange Commission upon
request.(4)
10.31 Amendments Number 5 and 6 to OEM Agreement by and between Premisys
Communications, Inc., a Delaware Corporation and AT&T Paradyne
Corporation, dated as of April 1, 1995. (5)**
+10.32 Registrant's Management Incentive Plan for the fiscal year ended June 30,
1997. (6)
10.33 Amendment Number 7 and 8 to OEM Agreement by and between Premisys
Communications, Inc., a Delaware Corporation, and Paradyne Corporation,
dated as of December 2, 1996. ** (9)
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). (8)
10.35 Second Amendment to Lease Agreement by and between Premisys
Communications, Inc. and Aetna Life Insurance Company, dated August 9,
1996. (7)
10.36 Manufacturing Agreement by and between Premisys Communications, Inc. and
CMC Mississippi, Inc. as of January 9, 1997.*
10.37 Amendment Number 9 OEM Agreement by and between Premisys Communications,
Inc., a Delaware Corporation and AT&T Paradyne Corporation, dated as of
May 13, 1997. *
+10.38 Employment Agreement by and between Premisys Communications Inc. and
Nicholas J. Williams dated as of March 31, 1997
+10.39 Registrant's Management Incentive Plan for the fiscal year ended June 30,
1998.
10.40 License Agreement dated December 27, 1996 between Premisys Communications
Inc. and Positron Fiber Systems Corporation. ** (11)
11.01 Statement regarding computation of net income per share.
21.01 List of Registrant's subsidiaries.(1)
23.01 Consent of Price Waterhouse LLP, Independent Accountants.
24.01 Power of Attorney (See page 45 of this form 10-K)
27.01 Financial Data Schedule.
(1) Incorporated by reference to the exhibit bearing the same number in
Registrant's Form S-1 Registration Statement declared effective
April 15, 1995 (File No. 33-89598).
(2) Incorporated by reference to Exhibit 3.01 to the Registrant's Form 10-Q
(File No. 0-25684) for the quarter ended March 31, 1995 filed May
22, 1995.
(3) Incorporated by reference to the exhibit bearing the same number in
Registrant's Form S-1 Registration Statement filed August 1, 1995
(File No. 33-95266).
(4) Incorporated by reference to the exhibit bearing the same number in
Registrant's Form 10-Q (File No. 0-25684) for the quarter ended
December 29, 1995 filed February 12, 1996.
(5) Incorporated by reference to the exhibit bearing the same number in
Registrant's Form 10-Q (File No. 0-25684) for the quarter ended
March 29, 1996 filed May 3, 1996.
(6) Incorporated by reference to the exhibit bearing the same number in
Registrant's Form 10-K (File No. 0-25684) for the fiscal year
ended June 28, 1996 initially filed September 26, 1996.
(7) Incorporated by reference to the exhibit bearing the number 10.33 in
Registrant's Form 10-Q (File No. 0-25684) for the quarter ended
September 27, 1996 filed November 10, 1996.
(8) Incorporated by reference to the exhibit bearing the same number in
Registrant's Form 10-Q (File No. 0-25684) for the quarter ended
September 27, 1996 filed November 10, 1996.
(9) Incorporated by reference to the exhibit bearing the same number in
Registrant's Form 10-Q (File No. 0-25684) for the quarter ended
December 27, 1996 filed February 9, 1997.
49
<PAGE>
(10) Incorporated by reference to Exhibit 4.04 in Registrant's Form S-8
Registration Statement filed April 25, 1996 (File No. 333-4060).
(11) Incorporated by reference to the exhibit bearing the number 10.2 in the
Registration Statement on Form F-1 (File No. 333-07144) of
Positron Fiber Systems Corporation.
+ Management contract or compensatory plan or arrangement.
* Confidential treatment has been requested with respect to certain
portions of this agreement. Such portions have been omitted from this
filing and have been filed separately with the Securities and Exchange
Commission.
** Confidential treatment was received with respect to certain portions of
this agreement. Such portions have been omitted from this filing and have
been filed separately with the Securities and Exchange Commission.
*** Certain exhibits to the exhibit will be furnished supplementally to the
Securities and Exchange Commission upon its request.
<PAGE>
** Confidential treatment has been requested with respect to the information
contained within the "[**]" markings. Such marked portions have been omitted
from this filing and have been filed separately with the Securities and
Exchange Commission
EXHIBIT 10.36
MANUFACTURING AGREEMENT
by and between
PREMISYS COMMUNICATIONS, INC.
and
CMC MISSISSIPPI INC.
This Agreement is entered into this 9th day of Jan., 1997, by and between
PREMISYS COMMUNICATIONS, INC., a California corporation having a place of
business at 48664 Milmont Drive, Fremont, California, 94538, ("Buyer") and CMC
MISSISSIPPI INC., a Mississippi corporation, having a place of business at 1801
Fulton Drive, Corinth, Mississippi, 38834 ("Seller").
1. DEFINITIONS
AML Approved Manufacturer List
ATP Availability To Promise
BABT British Approvals Board for Telecommunications
DMR Discrepant Material Report
ECO Engineering Change Orders
EDI Electronic Data Interchange
ESD Electric Static Discharge
FGI Finished Goods Inventory
FIFO First In First Out
FOB Free On Board
ICT In Circuit Test
MOQ Minimum Order Quantity
MRP Material Requirements Planning
NCNR Non-Cancelable Non-Reschedule
NDA Non-Disclosure Agreement
NRE Non-Recurring Engineering
P/I ECO Disposition: Phase In
PCB Printed Circuit Board
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POTS Plain Old Telephone Service
PPM Parts Per Million
PPV Purchase Price Variance
RMA Return Material Authorization
RWK ECO Disposition: Rework
SMT Surface Mount Technology
SOF Sales Order Forecast
UAI ECO Disposition: Use As Is
VPA Volume Purchase Agreement
WIP Work In Process
Delivery Date The scheduled date for material receipt at Buyer's
premises as indicated on Buyer's Purchase Orders.
Purchase Order A periodic contract specifying Product part
number, Product description, quantity, price,
revision, scheduled delivery date and ship-to
address.
Written Communication Throughout this contract, communication between
the Buyer and Seller is referred or alluded to.
This means any type of mutually agreed to form of
documented communication; U.S. mail, express
courier, facsimile, E-mail, EDI, etc. The
communication will be deemed received on the date
it is transmitted (and verified) electronically,
taking into account time zone differences, or on
the date it is actual delivered by U.S. mail or
other express courier.
2. TERM OF AGREEMENT
2.1. The term of this Agreement ("Term") shall commence on January 12,
1997 and expire on January 12, 1998 (twelve months after the
commencement). In the event that neither party to this Agreement
gives written notice to the other within three (3) months prior to an
expiration date, this Agreement shall automatically be renewed for
successive twelve-month periods, unless terminated in accordance with
Section 14 or Section 18 hereof. All existing terms and conditions
shall remain the same, unless specifically modified by the parties in
a written amendment to this Agreement.
3. STATEMENT OF WORK
3.1. Buyer agrees that Seller shall be a manufacturer of Products, as
defined in Purchase
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Order and amended from time to time upon the mutual agreement of the
parties, for the Term, as long as schedule, delivery and pricing
requirements of this Agreement are met.
3.2. Seller agrees to assemble, test, inspect, package for delivery and
sell the Products only to Buyer as described in this Agreement, and
Buyer agrees to purchase the Products in accordance with the terms
and subject to the conditions of this Agreement.
3.3. Buyer shall consign to Seller all applicable Product documentation,
including bills of materials, for use in the manufacture of each
Product. Seller shall make available to Buyer all necessary
manufacturing, testing, inspection and other information required in
the qualification of the manufacturing process, as mutually agreed by
the parties, as well as a costed bill of materials for each Product,
excluding certain components which, by contractual obligation with
suppliers, Seller cannot divulge. A written NDA shall be signed by
both Buyer and Seller prior to transfer of Product documentation from
Buyer to Seller.
3.4. Seller shall purchase parts and material for Products only from
Buyer's AML; as amended from time to time and submitted in writing by
Buyer via the Buyer's Source Control Process.
3.5. Nothing in this Agreement shall obligate Buyer to purchase any
quantity of Products from Seller for which Buyer does not deliver to
Seller a purchase order nor shall anything in this Agreement prevent
Buyer from purchasing from any source other than Seller.
4. ORDERS
4.1. Upon execution of this Agreement, and on a quarterly basis
thereafter, Buyer shall supply Seller with an eight (8) month rolling
SOF for anticipated requirements for each Product. This forecast
shall be used to drive Seller's MRP thereby providing Seller with ATP
against future Purchase Orders submitted.
4.2. Pursuant to this Section 4, Buyer shall issue written Purchase Orders
signed by an authorized representative of Buyer. Such Purchase
Orders shall, at a minimum, indicate the; quantity, Buyer's part
number, description, revision level(s), price, ship-to address, and
Delivery Date(s) for each Product ordered. Buyer shall ensure that
the delivery schedule contained in each Purchase Order will allow for
a standard Product lead time of not less than four (4) months.
4.3. Upon execution of this Agreement, Buyer shall issue a Purchase Order
for Products to be delivered during the first 180-day period of the
Term. Subject to the provisions hereof, including, without
limitation, Section 5 and 6 hereof, Buyer may issue a
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Purchase Order or change order each thirty (30) days or as business
conditions dictate, specifying Products to be delivered during the
succeeding six (6) month period.
4.4. All Purchase Orders for Products are subject to Seller's review for
correct specification level and pricing. Seller's acceptance and
confirmation shall be within five (5) business days of the date of
Buyer's issuance and Seller's receipt. Each Purchase Order shall
become effective upon written acceptance of the Seller provided that,
however, in the event that no written confirmation is received within
six (6) business days of the date of Buyer's issuance and Seller's
receipt, the Purchase Orders shall be deemed accepted and confirmed
by both parties.
4.5. The parties hereby agree that where any term or provision in any
Purchase Order conflicts with, or could be construed to alter, a term
or provision of this Agreement, the term or provision herein shall
govern.
5. RESCHEDULES AND CANCELLATIONS
5.1. Seller shall use reasonable efforts to accommodate any reschedule
request, subject in each case to material availability, available
capacity and other factors impacting the manufacturing process, and
subject to the following guidelines:
5.1.1. Orders and quantities scheduled for a Delivery Date within
thirty (30) days of the current date cannot be rescheduled
out to a later date;
5.1.2. Orders and quantities scheduled for a Delivery Date between
thirty-one (31) and sixty (60) days of the current date may
be rescheduled out to a maximum of ninety (90) days.
5.1.3. Orders and quantities scheduled for a Delivery Date outside
sixty (60) days of the current date are cancelable at no
fee; subject to obligations for written acceptance of NCNR
and/or component MOQ by Buyer.
5.2. Reschedules must be in the form of written changes to existing
Purchase Orders. Seller's acceptance and confirmation of reschedule
requests shall be within five (5) business days of the date of
Buyer's issuance and Seller's receipt provided that, however, in the
event that no written confirmation is received within six (6)
business days of the date of Buyer's issuance and Seller's receipt,
the reschedule shall be deemed accepted and confirmed by both
parties.
5.3. Buyer may at any time expedite delivery of a Product by requesting an
earlier delivery date with no additional fee. Seller shall use best
efforts to accommodate such requests. In cases where best efforts
are insufficient due to PPV issues, Seller shall identify all gating
items and corresponding PPV proposals within five (5)
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business days of Buyer's request date and Buyer shall respond to said
gating items within three (3) business days of Seller's response.
Buyer acknowledges the responsibility to provide a timely response to
Seller's queries and reasonable assistance to secure material when
expediting efforts are in process. Such assistance is not to be
construed to include material purchases by Buyer for resale to Seller
in support of such efforts. Acceptance of Products delivered in
accordance with Buyer's reschedule request (Purchase Order change
order) constitute Buyer's agreement to the payment terms contained
herein.
5.4. Seller shall make best efforts to return "obsolete/excess" materials
and/or components to the source of purchase or to use said materials
and/or components for other Customers when held by the Seller due to
cancellations or ECO's which are within ninety (90) days of Buyer's
scheduled Delivery Date. Seller shall identify and return such
materials and/or components at the time of cancellation or Product
change. Buyer shall be responsible for reimbursement to Seller of
demonstrated cancellation or restocking charges upon verification of
best effort communications with the source of purchase and
presentation of supplier invoices evidencing such charges. In the
event that the excess material has become non-returnable or non-
useable elsewhere, then Seller shall provide Buyer the origin of the
excess material, the Product and quantities that were canceled by
Buyer which used said material, and the purchase price of said
material. Upon review and agreement by the Buyer, Buyer shall issue
a Purchase Order for the excess material plus a 9.5% handling charge
and determine a disposition of the material. Excess Material shall
also include all other components and materials purchased by Seller
for the manufacture of Products pursuant to a Purchase Order accepted
by the Seller for Products that have not been completed at the time
of termination of this Agreement for cause.
5.5. Buyer may, at any time, provide written notification of cancellation
of Purchase Order Line Item balances in the event of:
5.5.1. Buyer accepted short shipments pursuant to Section 7.7.
5.5.2. Certification revocation pursuant to Section 9.9.
5.6. Buyer demands, and Seller acknowledges, that on-time shipments of
Products purchased from Seller is a primary factor of Buyer's
successful business operations. To compensate for potential
cancellations and expediting costs on behalf of Buyer's customers due
to late shipments on the part of Seller, Buyer is entitled to cost
reductions and an additional reschedule allowance (superseding
Section 5.1) commensurate with the degree of late shipments on the
part of Seller against accepted Purchase Orders with specified
Delivery Dates as expressed in the following table:
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------------------------------------------------------------
Days Late Discount Reschedule Allowance
------------------------------------------------------------
[**] [**] [**]
------------------------------------------------------------
[**] [**] [**]
------------------------------------------------------------
[**] [**] [**]
------------------------------------------------------------
[**] [**] [**]
------------------------------------------------------------
6. PRICING
6.1. Pricing shall be reviewed by Buyer and Seller quarterly, and price
changes will be incorporated upon completion of review, effective for
all orders placed and released. Price changes will not be applicable
to any existing inventories or NCNR purchase orders that Buyer has in
place with vendors. Seller shall allow Buyer to verify component
prices via on line system data using a telephone number and password,
if applicable, supplied to Buyer by Seller. Should further audits be
deemed necessary by Buyer, Buyer may request an audit of invoices
from Seller's vendors upon reasonable notification to Seller by
Buyer. The component, material, and labor pricing agreed upon as a
result of these quarterly reviews shall be based on actual costs,
firm for all orders placed during the next three months, except as
referenced for cost reductions under Section 6.3.
6.2. Gross material mark-up will be determined on a step scale based on
the average total annual volume, expressed in U.S. Dollars, averaged
on a quarterly calendar basis. The following table shall be
referenced:
------------------------------------------------------
Average Annual Volume [**] [**] [**]
------------------------------------------------------
Gross Material Mark-Up % [**] [**] [**]
------------------------------------------------------
6.3. Buyer and Seller will make every reasonable effort to reduce costs in
their respective areas.
6.3.1. Seller driven Cost Reductions
Buyer and Seller agree that Seller driven cost reductions
will be [**] for the following six months. After the six
month time period, the Product's component/material price
will be reduced to actual cost plus the agreed upon mark-
up.
(Seller driven cost reduction example: Seller recommends a
new manufacturer's part which is acceptable to the Buyer
and which is added to the Buyer's AML per the Buyer's
Source Control process. This part change reduces the
Product cost by [**]. The Product cost during the next six
months will only be reduced by [**], thus earning the
Seller an extra [**] profit per Product required and
shipped to Buyer during this time period.)
** Confidential treatment has been requested with respect to the information
contained within the "[**]" markings. Such marked portions have been omitted
from this filing and have been filed separately with the Securities and
Exchange Commission.
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6.3.2. Buyer Driven Cost Reductions
Seller agrees to use best efforts to implement Buyer
arranged cost reductions, whether due to manufacturer or
supplier substitution, subject to invoice offsets if
delayed beyond the following maximum time limits (excluding
custom materials and components under MOQ controls when
inventory accumulation was the result of Buyer reschedules
and subject to Buyer verification):
6.3.2.1. When existing materials are on order and subject
to cancellation charges, Buyer cost reductions
must occur within 75 days of notification (i.e.,
fifteen (15) days for reaction time plus thirty
(30) days for existing orders and thirty (30) days
for kitting and manufacturing lead time except for
excess material due to any Buyer initiated
reschedule or material on order under NCNR terms.
6.3.2.2. When Buyer's arrangements (e.g., VPA, etc.) permit
price effectivity on existing orders, Buyer cost
reductions must occur within 45 days of
notification (i.e., fifteen (15) days for reaction
time plus thirty (30) days for kitting and
manufacturing lead time) except for excess
material due to any Buyer initiated reschedule or
material on order under NCNR terms.
6.4. Engineering changes shall be set forth in written ECOs furnished by
Buyer to Seller. Seller shall evaluate the ECO for cost and/or
schedule impact within ten (10) business days of the date of ECO
receipt, based on Buyer's indicated ECO implementation requirements.
Buyer shall be advised of all potential price and/or schedule impacts
incurred by Seller in connection with such changes. Seller shall not
commence implementation of engineering changes which have a price
and/or schedule impact until written approval has been received from
Buyer authorizing all price and/or schedule impacts. ECO
implementations shall occur as appropriate to the ECO dispositions
indicated in the following sections:
6.4.1. UAI dispositions shall be implemented upon exhaustion of
affected inventory immediately following the effectivity
date of the ECO and shall not have applicable rework or
excess inventory charges.
6.4.2. P/I dispositions shall be implemented upon the next
scheduled production run immediately following the
effectivity date of the ECO.
6.4.3. RWK dispositions shall be implemented immediately following
the effectivity date of the ECO and are applicable to all
affected inventory (i.e., WIP, FGI and Safety Stock)
regardless of processing state.
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6.5. Buyer shall be responsible for all freight, duties, insurance, and
other external shipping costs incurred by Seller, in addition to the
unit prices payable pursuant to Section 6.1, in connection with the
Products shipped to Buyer. However, in the event that Product is not
available by the specified Delivery Date indicated on accepted
Purchase Orders, Seller may, at the sole discretion of Buyer, be
liable for freight expediting charges required to achieve the
specified Delivery Date. Such expediting charges would be charged as
offsets to existing invoices.
7. DELIVERY
7.1. The risk of loss and title to Products shall pass to Buyer at FOB
shipping point.
7.2. Seller shall package each Product according to written specifications
supplied by the Buyer. Seller shall take reasonable steps needed to
insure maximum protection from damage due to handling, ESD and other
hazards which might occur during handling and transit.
7.3. A packing list will accompany each shipment and include, at a
minimum, the; purchase order number, Buyer's part number, revision,
serial numbers, quantity, quantity back-ordered, date of shipment,
country of origin, manufacturer's affidavits of all American made
components, and foreign assemblers declaration.
7.4. Buyer shall designate the carrier and method of all shipments. Buyer
may withhold authorization to carrier for shipment acceptance in the
event of partial availability of Products (Section 7.7) or written
consolidation requirements expressed at time of Purchase Order
acceptance (Section 4.4).
7.5. Seller shall notify Buyer of Products ready for shipment at least two
(2) days prior to actual shipment. All shipments are to receive
written authorization prior to release to the designated carrier; a
copy of which will be sent to the designated carrier by Buyer.
7.6. Seller shall deliver Products in accordance with the scheduled
Delivery Dates set forth in any Purchase Order issued and accepted in
conformity with this Agreement. Seller shall ship to the locations
designated by Buyer. Seller shall schedule delivery and initiate
shipment so Products reach the Buyer's facility in a window from
three (3) days prior to the scheduled Delivery Date to zero (0) days
past the scheduled Delivery Date. Buyer shall be notified of
shipment by facsimile transmission to Buyer of a copy of the Packing
List or other agreed upon document within twenty-four (24) hours of
actual shipment of Products. Any delay in notification to Buyer
shall defer invoice payment by a corresponding period. Shipping
notification will include, at a minimum, the Purchase Order number,
Buyer's part number, revision, quantity shipped, quantity back-
ordered, date of shipment and components that are of US domestic
origin and their value. Seller will not ship any of the Buyer's
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Products short any components without Buyer's written authorization.
7.7. Seller will not ship less than 100% of the total quantity of Products
ordered per Purchase Order line item nor ship more than the total
quantity of Products ordered per Purchase Order line item without the
written approval of Buyer.
8. PAYMENT TERMS
8.1. Payments shall be made in U.S. dollars Net thirty (30) days from the
date of invoice, subject to offsets due to late shipment notification
(Section 7.6), and sent to the following address:
CMC Mississippi Inc.
1801 Fulton Drive
Corinth, MS 38834
8.2. If Buyer disputes the amount due pursuant to any invoice, the Buyer
may only withhold payment of the amount in dispute, if the Seller is
notified in writing of the dispute in question within twenty-five
(25) days of receipt of the subject invoice. Otherwise, payment
shall be made in full as required by this Section.
8.3. Each party shall refund any disputed amount already paid to the other
party after receipt of satisfactory supporting evidence. In no case
shall any adjustment, refund, or credit be issued for any items after
six (6) months following the original date of the subject invoice,
unless such items are called to the attention of the Seller in
writing within six (6) months following the original date of the
subject invoice or are as a result of defects covered under Warranty
in Section 11.
8.4. All invoices will be in writing and contain, at a minimum, the
following information; Buyer's invoice and ship-to address, Buyer's
purchase order number, Product or service description, quantity of
goods shipped, unit and extended price, and method of shipment.
9. PRODUCT QUALITY STANDARDS; BUYER'S REMEDY FOR NON-CONFORMANCE
9.1. Buyer and Seller hereby agree to mutually establish the standards of
Product quality as set forth in this section ("Quality Standards").
Seller shall adopt the processes and procedures for quality control
as set forth herein ("Quality Control Tests") and Buyer shall adopt
the processes and procedures for incoming inspection of Products as
set forth herein ("Incoming Inspection"). At a minimum, Buyer
expects Products to be built to the latest issue of the following
acceptable industry and workmanship standards;
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9.1.1. IPC-A-610 Class 2 (Acceptability of Electronic Assemblies),
9.1.2. IPC-S-815 Class 2 (SMT - Acceptability of Electronic
Assemblies),
9.1.3. IPC-R-700 (Guidelines for modification and repair of PCB's
and Assemblies),
9.1.4. IPC-A-600 (Acceptability of Printed Boards),
9.1.5. BABT 340 approved production Quality Assurance schemes on
all manufacturing processes used for Products in Buyer's
multiplexer applications. Buyer to provide written
notification to Seller in the event that Products are not
intended for multiplexer applications such that Seller can
obtain appropriate BABT certification for said
applications.
9.2. Prior to each shipment of Products to the Buyer, Seller shall perform
Quality Control Tests as specified herein. Buyer, or Buyer's
authorized representative, may inspect Seller's manufacturing and
quality control facilities at any reasonable time upon advance
notice. Upon request, Seller will provide Buyer with access and
copies of Seller's quality control documentation applicable to
Products in process and previously shipped to Buyer. Buyer's
personnel shall comply with Seller's security and safety regulations
while on Seller's premises.
9.3. All Products ordered by Buyer pursuant to this Agreement shall be
subject to an Incoming Inspection by Buyer at the Products'
destination or at the Seller's facilities; as determined by Buyer.
The Buyer shall accept all Products which pass such Incoming
Inspection. Upon discovery of non-conforming Products, Buyer shall
supply Seller with written notice of such rejection consisting of, at
a minimum, a DMR indicating the specific discrepancies. All Products
not explicitly rejected within ninety (90) days pursuant to this
Section 9.3 shall be deemed to be accepted. Such Incoming Inspection
will include, at a minimum, the following conformance expectations
for acceptance:
9.3.1. Workmanship failures, as agreed by both parties, in excess
of 1000 PPM shall be rejected. PPM will be based on number
of opportunities for error per assembly.
9.3.2. Component failures in excess of 3.4 PPM on ICT tested
Products shall be rejected if attributable to the assembly
process.
9.4. Upon receipt of notice of rejection, Seller shall, within two (2)
days of such notice of rejection, verify indicated failure(s) and/or
cause(s) for rejection and either:
9.4.1. provide Buyer with a RMA number authorizing the Buyer to
return such
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rejected Products to Seller for credit at Seller's expense
and pursuant to which Seller may designate a carrier and
method of shipment, or
9.4.2. replace such rejected Products and request Buyer to dispose
of such rejected Products at Sellers cost.
9.5. In the event that Seller elects to provide Buyer with a RMA number,
Buyer may, request replacement or repair of the rejected Products and
shall arrange for shipment of the rejected Products to the Seller,
freight collect, within seven (7) days of receipt of the RMA number.
Seller shall, within seven (7) days of receipt of the Product, repair
or replace such Product, at Seller's option, and return it to the
Buyer, freight prepaid.
9.6. In the event that Seller receives the rejected Products from Buyer
and determines, by means of performance of additional Quality Control
Tests on the rejected Products and/or other evidence, that the
alleged defects in the Products are not the result of failure to meet
the applicable Quality Standards on the part of the Seller, Seller
shall repair or replace such Products in a timely manner and invoice
the Buyer for the full expenses associated with such repair or
replacement, including all costs associated with shipping such
Products to the Seller and return the Products to Buyer freight
collect.
9.7. If Seller cannot meet the required turn around time specified by
Buyer in regards to reworking or replacing the rejected material, or
if it is more beneficial to either the Buyer or the Seller, the
Seller may authorize Buyer, and Buyer may accept the responsibility,
to "rework" rejected Product at Buyer's facility, or at another local
subcontractor. Buyer will consequently be authorized to charge back
to Seller the cost of all such rework.
9.8. Buyer's remedies as set forth in this Section 9 shall be Buyer's sole
remedies with respect to the non-conformance of Products with any
requirements, terms or conditions of or pursuant to this Agreement.
9.9. Seller shall maintain ISO9002 and BABT certification at all times
throughout the term of this agreement. If at any time either of
these certifications are challenged, temporarily suspended or
revoked, Buyer shall immediately be notified. Revocation of these
certifications are sufficient reason for Purchase Order cancellation
for cause.
10. SAFETY STOCK
10.1. Seller, on a rolling FIFO basis, will carry in stock one additional
two weeks quantity of assembled Product available for shipment within
twenty-four (24) hours of notification by Buyer. Seller shall bring
the Product safety stock quantities back up to their required level,
within twelve (12) weeks of usage/shipment of Product to
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Buyer. However, Safety Stock restoration has priority over Purchase
Order shipments and therefore, based on the sole discretion of the
Buyer, Seller may be so instructed to defer scheduled shipments such
that Safety Stock is returned to its required level.
10.2. The two week safety stock quantity will be based on the Product's
average one month requirement as derived from the eight (8) month SOF
and expressed on Buyer's Safety Stock Purchase Order as modified
periodically by Buyer. Quantities are to be reviewed monthly by
Buyer and Seller. Product Safety Stock Inventory amounts shall not
be greater than two (2) week's average production release plus an
additional 10% or be less than two (2) week's average production
release minus 10% except during the eight (8) week period immediately
following an adjustment to the Safety Stock Purchase Order when
modified by Buyer. Product Safety Stock Inventories are quantities
above and beyond the production requirement schedule.
11. WARRANTY
11.1. Warranty by Seller.
11.1.1. The following warranty for Products is in lieu of all
conditions or warranties, express or implied, including,
but not limited to, any implied conditions or warranties of
merchantability or fitness for a particular purpose on the
part of the Seller.
11.1.2. Seller warrants that, upon delivery and for a period of one
(1) year following receipt of a Product by Buyer's
customer, such Product will be free from defects in
workmanship for work which was performed by Seller.
11.2. Warranty by Buyer
Buyer warrants that, at the time of delivery of consigned materials
and tools (as defined in Section 12 hereof) to Seller, Buyer has free
and clear title to the consigned materials and tools. Buyer warrants
the consigned materials and tools against faulty workmanship and
materials, that they meet applicable specifications and that the
tools perform the functions on which the Seller will rely to
manufacture the Products. Buyer warrants and represents that it is
the owner of any and all proprietary rights in the information
provided to Seller in order to manufacture the Products, and that the
Buyer has the unqualified right to make available to the Seller the
consigned materials, tools, and other information, including
drawings, designs and specifications, for use by the Seller
thereunder, and to grant licenses, if required, under the terms of
this Agreement. Buyer shall indemnify Seller, its employees, agents,
shareholders, licensees, sub-licensees, successors and assigns from
any and all damages, costs and liabilities incurred by any of them
arising out of the breach of the foregoing warranty by Buyer.
Page 12
<PAGE>
11.3. Seller agrees that any rights it may have against any supplier of
components or other materials used in Products manufactured
hereunder, which rights arise out of a breach of any warranty of
supplier with respect to such materials or components be subjugated
to Buyer.
11.4. Seller warrants to Buyer that the manufacturing services will conform
to Buyer's applicable specifications at the time of delivery of the
Products. Seller will transfer to Buyer any and all transferable
warranties and indemnities Seller receives from the manufacturer of
the electronic or other components/materials.
12. LIMITATION OF LIABILITY
12.1. In no event shall Seller be liable in connection with the performance
or nonperformance of this agreement for indirect, incidental or
consequential damages, loss of profits, loss of use or data or
interruption of business, whether such alleged damages are labeled in
tort, contract, warranty or indemnity, even if Seller has been
advised of the possibility of such damages; and in no event shall
Seller's liability arising out of the performance or nonperformance
of this agreement, whether arising out of contract, tort (including
negligence and strict liability) under any warranty, indemnity or any
other legal or equitable form of action, exceed the aggregate
purchase price paid by the Buyer for such Products under the
agreement.
12.2. Seller is performing work pursuant to specifications provided by
Buyer; therefore, Seller shall not be liable for the technical
adequacy or design of the Products, nor shall Seller be liable for
the safety or regulatory compliance of the Products, including, but
not limited to, ensuring the Product meets applicable government or
responsible agency regulations. Buyer agrees to indemnify and save
Seller harmless from and against all losses, expenses or damages
arising out of any claim resulting from Seller's compliance with
Buyer's specifications.
13. TOOLING AND TEST EQUIPMENT
The tooling, test equipment and other items identified in Exhibit I
("Tools") are property of Buyer. The parties agree to the following
provisions with respect to the Tools listed under Exhibit I:
13.1. Seller expressly agrees that all Tools are the property and assets of
Buyer. Seller shall not assign, lease, license, pledge, loan,
mortgage or otherwise part with possession or the right to possess
the tools. Seller shall allow no claims, encumbrances or liens with
respect to the Tools and shall not state or imply to any third party
that Seller is the owner of the Tools.
13.2. Seller agrees that all Tools will be used only to manufacture Buyer's
Products, unless otherwise approved by the Buyer.
Page 13
<PAGE>
13.3. The Seller agrees that it will follow normal industrial practice in
the identification and maintenance of the property control records on
all such tooling, and will make such records available for inspection
by the Buyer at all reasonable times. This includes annual
calibration requirements imposed by Buyer. All such reasonable labor
costs associated with maintenance shall be absorbed by Seller. All
material costs associated with maintenance will be the responsibility
of Buyer. After the termination or completion of such order(s) and
upon the request of the Buyer, the Seller shall furnish a list of
such tooling in the form requested and shall make such tooling
available for disposition by the Buyer.
13.4. Seller shall make available to Buyer the following equipment for the
purpose of enhanced ICT and functional testing of Products as desired
by Buyer: 1) Hewlett Packard 3070 with POTS option, 2) Rod-L High
Potential Tester.
14. DEFAULT - DUE ON DEMAND
14.1. If either party becomes insolvent, ceases to do business, or becomes
a party to any bankruptcy or receivership proceedings, the other
party may, with or without previous written notification to the first
party, declare this Agreement terminated upon written notification to
the first party.
14.2. If either party shall be in default with respect to any of its
obligations herein, the other party may notify the defaulting party
in writing specifying the nature of the default; and if such default
is not cured within thirty (30) days after the receipt of such
notice, the notifying party may terminate this Agreement as of the
effective date of notice of termination provided to the defaulting
party.
14.3. In the event this Agreement is terminated pursuant to this Section
14, Buyer shall forthwith pay to Seller
14.3.1. all outstanding invoices,
14.3.2. the per unit price for all completed but un-shipped
Products as of the termination, plus freight and other
charges hereunder,
14.3.3. a negotiated price mutually agreed by both Buyer and Seller
for all work in process, and
14.3.4. the cost of all Excess Materials ordered plus 9.5% for
released purchase orders.
14.4. Seller is to return all "tools", drawings, and other consigned or
proprietary material or information to Buyer. Terminating Party's
rights pursuant to this Section 14 are in addition to all other
remedies provided by law or equity.
Page 14
<PAGE>
15. LIAISON
Each party designates the person below as its primary representative that
the other party may contact for exchanging information concerning this
Agreement. Either party may change its representative by written notice to
the other.
Buyer: Premisys Communications, Inc. Seller: CMC Mississippi Inc.
48664 Milmont Drive 1801 Fulton Drive
Fremont, CA 94538 Corinth, MS 38834
Phone: (510) 353-7660 Phone: (800) 359-2928
Attn: John Scheff Attn: Al Laffoon
Title: Director of Materials Title: Sr. V.P. Program
Management
16. NOTICE
16.1. Except as otherwise provided in this Agreement, all notices,
requests, consents and other communications hereunder shall be in
writing, shall be addressed to the receiving party's address set
forth below or to such other address as a party may designate by
notice hereunder, and shall be either
16.1.1. delivered by hand,
16.1.2. made by telex, telecopy or facsimile transmission,
16.1.3. sent by overnight courier, or
16.1.4. sent by registered mail, return receipt requested, postage
prepaid.
If to Seller:
CMC Mississippi Inc. Attn: Al Laffoon
1801 Fulton Drive Phone: (800) 359-2928
Corinth, MS 38834 Fax: (601) 287-3469
If to Buyer: Premisys Communications, Inc. Attn: John Scheff
48664 Milmont Drive Phone: (510) 353-7660
Fremont, CA 94538 Fax: (510) 353-7601
16.2. All notices, requests, consents and other communications hereunder
shall be deemed to have been given either
Page 15
<PAGE>
16.2.1. if by hand, at the time of the delivery thereof to the
receiving party at the address of such party set forth
above,
16.2.2. if made by telex, telecopy or facsimile transmission, at
the time that receipt thereof has been acknowledged by
electronic confirmation or otherwise,
16.2.3. if sent by overnight courier, on the next business day
following the day such notice is delivered to the courier
service, or
16.2.4. if sent by registered mail, on the 5th business day
following the day such mailing is made.
17. EXHIBITS
The following document(s) are attached to and made a part of this Agreement:
Exhibit I Tools
18. TERMINATION
This Agreement may be terminated by either party upon one hundred-twenty
(120) days prior written notice. In the event of such termination, Seller
shall continue shipment of all orders accepted prior to the date of such
notice, and Buyer shall remain obligated to accept and pay for such
deliveries at the agreed-upon price, and to be liable for payment for all
Excess Material pursuant to Section 5.4 hereof.
18.1. This agreement may be terminated immediately for cause by either
party in the event the other party:
18.1.1. Shall become insolvent;
18.1.2. Ceases to function as a going concern;
18.1.3. Fails to perform any of its obligations hereunder so as to
be in default and fails to cure said default within thirty
(30) days after written notice hereof.
18.2. Notwithstanding termination of this agreement, Buyer shall be liable
for payment for all Products pursuant to orders accepted by Seller
and for all Products delivered to and accepted by Buyer prior to the
effective date of termination of this agreement.
19. GENERAL PROVISIONS
19.1. Entire Agreement; Amendment
Page 16
<PAGE>
This document and its Exhibits contain the entire Agreement between
the parties relating to the subject matter hereof. All prior or
contemporaneous agreements, written or oral, between the parties
regarding the Products and services are superseded by this Agreement.
This Agreement may not be modified except by written document signed
by an authorized representative of each party.
19.2. Force Majeure
Neither party shall be liable for delay or defaults due to fire,
weather, riot, strikes, acts of God, acts of the public enemy, or
other similar unforeseeable events or causes beyond the reasonable
control and without the fault or negligence of the party incurring
such delay.
19.3. Waiver
No term of this Agreement shall be considered waived and no breach
excused by either party unless made in writing by the other party.
No consent, waiver, or excuse by either party, express or implied,
shall constitute a subsequent consent, waiver or excuse.
19.4. Nonassignment
Neither party shall assign this Agreement without the consent of the
other party provided, however, that either party may assign this
Agreement and its rights hereunder, without the consent of the other,
to its parent corporation or any subsidiary or corporate affiliate of
it.
19.5. Governing Law and Language.
This Agreement shall be governed by California law, without reference
to conflict of laws principles (and specifically excluding the United
Nations Convention on Contracts for the International Sale of Goods),
and is in the English language only, which language shall be
controlling in all respects. All communications and notices to be
made or given pursuant to this Agreement shall be in the English
language.
19.6. Arbitration.
Any dispute arising out of or relating to this Agreement, or the
interpretation, making, performance, breach or termination thereof,
shall be finally settled by binding arbitration in San Francisco,
California under the Rules for International Arbitration of the
American Arbitration Association, by three arbitrators reasonably
familiar with the technology and business pertaining to the products
covered by this Agreement, appointed in accordance with said Rules.
The arbitrators shall apply
Page 17
<PAGE>
California law to the merits of any dispute or claim, without
reference to rules of conflicts of law. The arbitration and all
pleadings and written evidence shall be in the English language.
Judgment on the award entered by the arbitrator may be entered in any
court having jurisdiction thereof. Notwithstanding the foregoing,
the parties may apply to any court having jurisdiction for a
temporary restraining order, preliminary injunction, or other interim
or conservatory relief, without breach of this arbitration agreement
and without any abridgment of the power of the arbitrator.
19.7. Severability
If any provision of this Agreement is held invalid, illegal or
unenforceable, the validity, legality and enforceability of the
remaining provisions shall not in any way be affected or impaired.
19.8. Headings
All headings and captions included in this Agreement are for
convenience of reference only and are not intended to affect the
interpretation of any provision hereof.
IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement,
in one or more counterparts, on the dates set forth below:
CMC PREMISYS
MISSISSIPPI INC. COMMUNICATIONS, INC.
(Seller) (Buyer)
By: /s/Jack L. O'Rear /s/Tony Flores
-------------------------------- --------------------------------
(Authorized Representative) (Authorized Representative)
Jack L. O'Rear Tony Flores
-------------------------------- --------------------------------
(Printed Name) (Printed Name)
President VP of Operations
-------------------------------- --------------------------------
(Title) (Title)
9 Jan 97 1/9/97
-------------------------------- --------------------------------
(Date) (Date)
Page 18
<PAGE>
EXHIBIT I
Tools
Seller shall build and maintain burn-in fixtures, high-potential fixtures and
ICT fixtures for Buyer at Buyer's request upon submission of Purchase Orders.
Such tools shall remain the sole property of Buyer and shall reside at Seller's
location until Buyer otherwise requests.
Page 19
<PAGE>
[LETTERHEAD]
AGREEMENT NUMBER GSC103DS
AMENDMENT NUMBER 9
PAGE 1 OF 1
DATE 05/13/97
PREMISYS COMMUNICATIONS, INC.
48664 MILMONT DRIVE
FREMONT, CALIFORNIA 94538
Agreement number LGSC103DS dated and signed December 4, 1992, by and between
Premisys Communications Inc. and Paradyne Corporation will be amended as
follows:
1.0 Exhibit A, IMACS PRICING LIST, dated 11/14/96, is hereby deleted in its
entirety and replaced by a new IMACS PRICING List, Exhibit A, dated 1/l/97
(printed 3/28/97), which shall be attached hereto and made a part hereof.
2.0 This IMACS PRICING LIST, with stated Paradyne Corporation Pricing, will be
the basis for which all dollar volume discounts, as referenced and detailed
in Amendment #4, will be applied against to calculate new Paradyne pricing
as said discounts go into effect.
3.0 The Price of all packages are the sum of the parts unless noted otherwise
in the attached Pricing List.
4.0 All other terms and conditions of the above stated Agreement remain
unchanged.
This amendment for new pricing shall be effective as of January 1, 1997 for all
orders current as of that date.
PARADYNE CORPORATION PREMISYS COMMUNICATIONS INC.
By: /s/Andrew S. May By: /s/Robert W. Dilfer
-------------------------------- ---------------------------
Title: Pres and CEO Title: VP Controller
----------------------------- ------------------------
Date: 6/27/97 Date: 6/3/97
----------------------------- ------------------------
** Confidential treatment has been requested with respect to the information
contained within the "[**]" markings. Such marked portions have been omitted
from this filing and have been filed separately with the Securities and Exchange
Commission.
Paradyne Corporation - PROPRIETARY
Use Pursuant to Company Instructions
Amendment Number 9 - LGSC103DS
1 - 5/13/97
<PAGE>
PREMISYS COMMUNICATIONS, INC.
IMACS PRICING
FOR PARADYNE
** Confidential treatment has been requested with respect to the information
contained within the "[**]" markings. Such marked portions have been omitted
from this filing and have been filed separately with the Securities and Exchange
Commission.
1997
PRODUCT NUMBER DESCRIPTION PRICE
- --------------------------------------------------------------------------------
8901 AC power supply [**]
8902 (48V DC power supply) [**]
890220 (48V DC power supply - support OOS @ 39V) [**]
890250 SSTE '-48V DC power supply - support OOS @ 39V [**]
8903 (48V DC converter (115 VAC input)) [**]
8905 (48V DC Converter (115 - 240 VAC input)) [**]
8904 (48V Ringing generator) [**]
8906 (48V Ringing generator) [**]
8907 24V DC power supply [**]
8916 IMACS/600 universal enclosure [**]
891620 IMACS/600 universal enclosure [**]
8918 IMACS/800 universal enclosure [**]
891820 IMACS/800 universal enclosure w/ install kit, dual
feed pwr supply [**]
891822 IMACS/800 universal enclosure w/ install kit, dual
feed pwr supply, NEBS [**]
891850 SSTE IMACS/800 universal enclosure w/ install kit,
dual feed pwr supply [**]
8919 IMACS/900 universal enclosure **(2) [**]
8920 8 T1/E1 interface card with 2,400 baud modem - 32
Kb NVRAM [**]
892020 8 T1/E1 interface card with 2,400 baud modem - 32
Kb NVRAM metal [**]
8923### 8 T1/E1 interface card with 2,400 baud modem - 128
Kb NVRAM (4) [**]
892320### 8 T1/E1 interface card with 2,400 baud modem - 128
Kb NVRAM (4) [**]
8921 8 T1/E1 interface card w/out modem - 32 Kb NVRAM [**]
892120 8 T1/E1 interface card without modem - 32 Kb NVRAM [**]
892220 8 T1/E1 interface card without modem - 128Kb NVRAM
with ext sync module for framed T1/E1 (2) [**]
892250 SSTE 8 T1/E1 interface card without modem - 128Kb
NVRAM with ext sync module for framed T1/E1 (2) [**]
892221 8 T1/E1 interface card without modem - 128Kb NVRAM
with ext sync module for unframed T1/E1**(2) [**]
8925 2 T1 interface card without modem [**]
8926 2 T1 interface card with modem (1) [**]
8927 2 E1 interface card without modem(1) [**]
1183 E1 Distribution Panel (8 E1s) [**]
1184 Distribution Panel [**]
8800 CPU control card with 2 T1/E1 bus-connect (non-
redundant) - 256K [**]
880020 CPU control card with 2 T1/E1 bus-connect (non-
redundant) - 256K [**]
8801 CPU control card with 8 T1/E1 cross-connect
(redundant-capable) - 256 K [**]
880120 CPU control card with 8 T1/E1 cross-connect
(redundant-capable) - 256 K [**]
8802# CPU control card with 8 T1/E1 cross-connect
(redundant-capable) - 512 K (4) [**]
880220# CPU control card with 8 T1/E1 cross-connect
(redundant-capable) - 512 K (4) [**]
880221 CPU control card with 8 T1/E1 cross-connect
(redundant-capable) - 512 K (4) [**]
880250 SSTE CPU control card with 8 T1/E1 cross-connect
(redundant-capable) - 512 K (4) [**]
8804 CPU control card with 4 T1/E1 bus-connect
(redundant-capable) - 256 K [**]
880420 CPU control card with 4 T1/E1 bus-connect
(redundant-capable) - 256 K [**]
60342 Version 3.4.2 host firmware [**]
60343 Version 3.4.3 host firmware [**]
60344 Version 3.44 host firmware [**]
60400 Version 4.0.0 host firmware (5) [**]
60410 Version 4.1.0 host firmware (5) [**]
Page 1
<PAGE>
PREMISYS COMMUNICATIONS, INC.
IMACS PRICING
FOR PARADYNE
** Confidential treatment has been requested with respect to the information
contained within the "[**]" markings. Such marked portions have been omitted
from this filing and have been filed separately with the Securities and Exchange
Commission.
1997
PRODUCT NUMBER DESCRIPTION PRICE
- --------------------------------------------------------------------------------
60420 Version 4.2.0 host firmware (5) [**]
60430 Version 4.3.0 host firmware (5) [**]
60440 Version 4.4.0 host firmware (5) [**]
60450 Version 4.5.0 host firmware (5) [**]
60101 TCP/IP/SNMP host code option [**]
60102 TR08 host code option [**]
63100 MCC Firmware [**]
8000 Single T1/E1 WAN [**]
800020 Single T1/E1 WAN [**]
8010 Dual T1/E1 WAN [**]
801020 Dual T1/E1 WAN [**]
801050 SSTE Dual T1/E1 WAN [**]
801120 Universal Dual T1/E1 WAN** [**]
8014 Dual T1/E1WAN with 1 x 3 relays [**]
801420 Dual T1/E1WAN with 1 x 3 relays [**]
811 DSX/CEPT plug-in module [**]
81120 DSX/CEPT plug-in module [**]
81150 SSTE DSX/CEPT plug-in module [**]
812 CSU plug-in module [**]
81220 CSU plug-in module [**]
82020 1168 kbps HDSL plug-in mod for Univ WAN 8011 [**]
8108 8-port, 2-wire E&M [**]
8119 8-port, 4-wire E&M - Extended Range [**]
811920 8-port, 4-wire E&M - Extended Range metal [**]
8128 8-port, 2-wire FXS - 900 Ohm [**]
8129 8-port, 2-wire FXS - 600 Ohm [**]
8138 8-port, 2-wire FXO - 900 Ohm [**]
8139 8-port, 2-wire FXO - 600 Ohm [**]
8149 6 Port 16 KHz FXS Coin Card - 600 Ohm (2) [**]
8159 6 Port 16 KHz FXO Coin Card - 600 Ohm (2) [**]
8202 2-port HSU w/ RS-530/V.35 i/f [**]
8212 2-port HSU w/ V.35 i/f [**]
8213 2-port HSU w/ RS-530/RS-366/V.25bis i/f [**]
8215 4-port HSU w/ RS-530/V.35 i/f [**]
821520 4-port HSU w/ RS-530/V.35 i/f [**]
821550 SSTE 4-port HSU w/ RS-530/V.35 i/f [**]
8220 10-port SRU w/ RS-232C/V.24 i/f [**]
8228 8-port sub-rate B7R IP concentrator card (1) [**]
8230 8-port subrate FRAD card [**]
8231 8-port subrate FRAD card (HDLC only) [**]
8247 5-port OCU-DP (expandable) (6) [**]
845 5-port OCU-DP child card (6) [**]
8249 2-port OCU-DP with error correction [**]
8254 4-port DSO-DP/G.703 co/contra directional [**]
8260 8-port BRI U i/f card (1) [**]
826020 8-port BRI U i/f card (1) [**]
8261 8-port BRI U i/f card, with sealing current (1) [**]
826120 8-port BRI U i/f card, with sealing current (1) [**]
8811 ACS-68 server (3) [**]
881120 ACS-68 server (3) [**]
8813 ACS-68 server with Exp-64 module (3) [**]
881320 ACS-68 server with Exp-64 module (3) [**]
8871 ADPCM Server [**]
887120 ADPCM Server [**]
8880 4 channel inverse mux server with BONDING modes
0 and 1 software(1) [**]
8840A ISDN PRI server card - 1 D channel [**]
8840B ISDN PRI server card - 2 D channels [**]
8840C ISDN PRI server card - 8 D channels [**]
62100 Frame relay server software for ACS card (3) [**]
8401 External alarm card [**]
840120 External alarm card [**]
8402 External alarm card - 3 ports and power fail alarm [**]
Page 2
<PAGE>
PREMISYS COMMUNICATIONS, INC.
IMACS PRICING
FOR PARADYNE
** Confidential treatment has been requested with respect to the information
contained within the "[**]" markings. Such marked portions have been omitted
from this filing and have been filed separately with the Securities and Exchange
Commission.
1997
PRODUCT NUMBER DESCRIPTION PRICE
- --------------------------------------------------------------------------------
840220 External alarm card - 3 ports and power fail alarm [**]
840250 SSTE External alarm card - 3 ports and power fail
alarm [**]
1500 External Sync Panel [**]
150050 SSTE External Sync Panel [**]
2001 Blank Card Filler Panel [**]
Notes
** Consult factory for delivery lead times [**]
# formerly 8801b [**]
## formerly 8805 [**]
### formerly 8920b [**]
(1) Requires version 3.2 or higher [**]
(2) Requires version 4.0 or higher [**]
(3) Requires version 4.1 or higher [**]
(4) Required for Host 4.0 or higher [**]
(5) Requires 8923 or 8922 and 8802 [**]
(6) Requires Host 3.4.1 or higher [**]
(7) 8811 or higher ACS [**]
Front panel types [**]
Std = standard molded face plate [**]
M/E = metal face plate with ejec [**]
1106 RJ48 to 2 BNC Adapter (for E1) [**]
1114F 5-ft RJ48M to DB25F Straight-Thru Cable (for SRU) [**]
1114M 5-ft RJ48M to DB25M Straight-Thru Cable (for SRU) [**]
1114X 5-ft RJ48M to DB25M Cross-Over Cable (for SRU) [**]
1114CX 5-ft RJ48M to DB25M External Clock Cable (for SRU) [**]
1118 25-ft RJ48M to RJ48M Silver-Satin Cable (for OCU-DP) [**]
1121 50-Pin to 2 RJ48 Adapter with Test Jacks (for T1) [**]
1181 50-Pin to 8 RJ48 Adapter (for T1) [**]
1201F 15-ft DB9M to DB25F Straight Thru (for Interface) [**]
1201M 15-ft DB9M to DB25M Straight Thru (for Interface) [**]
1202F 15-ft DB9F to DB25F Straight Thru (for Interface) [**]
1202M 15-ft DB9F to DB25M Straight Thru (for Interface) [**]
1203F 5-ft DB25M to V.35F Straight-Thru Cable (for V.35
HSU) [**]
1203M 5-ft DB25M to V.35M Straight-Thru Cable (for V.35
HSU) [**]
1203X 5-ft DB25M to V.35M Cross-Over Cable (for V.35 HSU) [**]
1204F 5-ft DB25M to RS530F Straight-Thru Cable (for RS530
HSU) [**]
1204M 5-ft DB25M to RS530M Straight-Thru Cable (for RS530
HSU) [**]
1204X 5-ft DB25M to RS530M Cross-Over Cable (for RS530 HSU) [**]
1206F 5-ft DB15M to DB25F Straight-Thru Cable (for RS366
HSU Ports) [**]
1207 6-ft 3-to-4 50-Pin E&M Cable (All Male Connectors) [**]
1208 6-ft 3-to-1 50-Pin FXS Cable (All Male Connectors) [**]
1209 6-ft 3-to-1 50-Pin TO Cable (All Male Connectors) [**]
1210 5-ft 50-Pin Male to Male Amphenol Cable (for Multiple
Uses) [**]
1212F 5-ft DB25M to RS449F Straight-Thru Cable (for RS449
HSU) [**]
1212M 5-ft DB25M to RS449M Straight-Thru Cable (for RS449
HSU) [**]
1212X 5-ft DB25M to RS449M Cross-Over Cable (for RS449 HSU) [**]
1213 5-ft 50-pin Male Amphenol Cable to 2 RJ-48F Cable
(for 8 T1 interface) [**]
1215M 5-ft RJ48M to DB15M Straight-Thru Cable (for CSU) [**]
1215X 5-ft RJ48M to DB15F Cross-Over Cable (for PBX) [**]
1216F 15-ft RJ48M to DB25F Straight-Thru Cable (for VT100) [**]
1216M 15-ft RJ48M to DB25M Straight-Thru Cable (for VT100) [**]
1217 25-ft RJ11M to RJ11M Cable (for Modem) [**]
1220 25-ft 50-Pin Male to Female Amp/Champ Extension
Cable [**]
1221 25-ft DB25M to DB25F Extension Cable (for RS232
operation) [**]
1222 25-ft DB25M to DB25F Extension Cable (for RS530
operation) [**]
1224 25-ft DB25M to DB25F Extension Cable (for V.35
operation) [**]
1230 1-ft RJ48M to RJ48M Shielded Cable (for T1) [**]
Page 3
<PAGE>
PREMISYS COMMUNICATIONS, INC.
IMACS PRICING
FOR PARADYNE
** Confidential treatment has been requested with respect to the information
contained within the "[**]" markings. Such marked portions have been omitted
from this filing and have been filed separately with the Securities and Exchange
Commission.
1997
PRODUCT NUMBER DESCRIPTION PRICE
- --------------------------------------------------------------------------------
1231 25-ft RJ48M to RJ48M Shielded Cable (for T1) [**]
1232 50-ft RJ48M to RJ48M Shielded Cable (for T1) [**]
1233 100-ft RJ48M to RJ48M Shielded Cable (for T1) [**]
1239 Y Adapter for WAN Card Redundancy (Bus Connect
Systems) [**]
1240 5-inch DB26M to DB25F RS530 Adapter Cables [**]
1251 RS-530 to V.35 Personality Module [**]
1252 RS-530 to RS-232 Personality Module [**]
1255 RS232/RS530 DB25 Female-to-Female Gender Changer [**]
1257 V.35 M34 Female-to-Female Gender Changer [**]
1258 RS449 DB37 Female-to-Female Gender Changer [**]
1261F 5-ft DB25(M) to M34(F) Straight-Thru Cable V.35
cable [**]
1261M 5-ft DB25(M) to M34(M) Straight-Thru Cable V.35
cable [**]
1263F 5-ft DB26M to V.35F (M34) Straight-Thru Cable (for
DB26 HSUs) [**]
1263M 5-ft DB26M to V.35M (M34) Straight-Thru Cable (for
DB26 HSUs) [**]
1263X 5-ft DB26M to V.35M (M34) Cross-Over Cable (for
DB26 HSUs) [**]
1264F 5-ft DB26M to RS530F (DB25) Straight-Thru Cable
(for DB26 HSUs) [**]
1264M 5-ft DB26M to RS530M (DB25) Straight-Thru Cable
(for DB26 HSUs) [**]
1264X 5-ft DB26M to RS530M (DB25) Cross-Over Cable (for
DB26 HSUs) [**]
1265F 5-ft DB26M to RS449M (DB37) Straight-Thru Cable
(for DB26 HSUs) [**]
1265M 5-ft DB26M to RS449M (DB37) Straight-Thru Cable
(for DB26 HSUs) [**]
1265X 5-ft DB26M to RS449M (DB37) Cross-Over Cable (for
DB26 HSUs) [**]
1268 25-ft DB26M to DB26F Extension Cable (for V.35
operation) [**]
1269 25-ft DB26M to DB26F Extension Cable (for RS530/
RS449 operation) [**]
1504 M66 Block with 2 Female 50-Pin Amp/Champ Connectors [**]
1901 IMACS Reference Guide [**]
1902 EMS Reference Guide [**]
1903 Cable and Equipment Guide [**]
1904 TCP/IP Manual [**]
3001AR Model 8800 CPU to Model 8804 CPU [**]
3002AR Model 8800 CPU to Model 8801 CPU [**]
3003AR Model 8804 CPU to Model 8801 CPU [**]
3100AR Add TCP/IP/SNMP firmware to any CPU card [**]
3010AR Firmware enhancement to any card [**]
3020AR Any other enhancement to any module [**]
Terms and conditions on advanced replacements:
User must order an advanced replacement upgrade
from Premisys.
Advanced replacement board will be sent with return
label for old board.
Old board must be returned freight pre-paid to
Premisys within 21 days of receipt of replacement
board.
If old board is not received within 21 days, the user
will be billed for the list price of the board
Replaced board retains the warranty period of the
origional board.
3001FG Model 8800 CPU to Model 8804 CPU [**]
3002FG Model 8800 CPU to Model 8801 CPU [**]
3003FG Model 8804 CPU to Model 8801 CPU [**]
3100FG Add TCP/IP/SNMP firmware to any CPU card [**]
3010FG Firmware enhancement to any card [**]
3020FG Any other enhancement to any module [**]
Terms and conditions on return-to factory
enhancements and upgrades.
User must obtain an RA number from Premisys before
returning board for upgrade.
Board must be sent freight pre-paid to Premisys.
Premisys will return the upgraded board via 2nd day air
freight within 21 days of receipt.
Upgraded boards retain the warranty period of the
origional board.
Advanced replacement is not included in upgrade price.
3010EP Firmware upgrade to any CPU card [**]
3020EP Firmware upgrade to any other card [**]
Page 4
<PAGE>
PREMISYS COMMUNICATIONS, INC.
IMACS PRICING
FOR PARADYNE
** Confidential treatment has been requested with respect to the information
contained within the "[**]" markings. Such marked portions have been omitted
from this filing and have been filed separately with the Securities and Exchange
Commission.
1997
PRODUCT NUMBER DESCRIPTION PRICE
- --------------------------------------------------------------------------------
Terms and conditions on EPROM upgrades.
User is responsible for proper handling of EPROM's
and circuit boards.
Improper handling by user may result in voiding of
warranty.
1920 Corporate Brochure [**]
1921 Corporate Cover Folder [**]
1922 IMACS Data Sheet [**]
1923 ATM Data Sheet [**]
1924 Frame Relay Data Sheet [**]
1925 ISDN BRX Data Sheet [**]
1926 Assembly of collateral into folder [**]
1927 Complete set of collateral (1920, 1921, 1922,
1923, 1924, 1925, 1926) [**]
PACKAGE PRICING
The packages listed below are not a sum of the parts and are being included in
this agreement.
All other packages are a sum of the parts and will not be listed individually on
this agreement.
The pricing on these packages is good thru
December 31, 1997
2525-TWA AC POWER PACKAGE FOR TIME WARNER [**]
8901 AC POWER SUPPLY (110/220) [**]
8903 INTERNAL AC-DC CONVERTER [**]
8904 48V RINGING GENERATOR [**]
2525-TWD DC POWER PACKAGE FOR TIME WARNER [**]
8902 DC POWER SUPPLY (-48) [**]
8904 48V RINGING GENERATOR [**]
2525-41U RELEASE 4.1 UPGRADE PACKAGE [**]
880220/60410 CPU Xcon 512K RAM w/4.1 FW-Metal [**]
892320 128K NV RAM Interface w/Modem-Metal [**]
60101 TCP/IP SNMP SW OPTION [**]
2525-FRU FRAME RELAY UPGRADE PACKAGE [**]
880220/60410 CPU Xcon 512K RAM w/4.1 FW-Metal [**]
892320 128K NV RAM Interface w/Modem-Metal [**]
881120/62100 Frame Relay Server/ACS-68 Server [**]
60101 TCP/IP SNMP SW OPTION [**]
<PAGE>
[LETTERHEAD]
EXHIBIT 10.38
March 31, 1997
Mr. Nicholas Williams
505 N. Lakeshore, #3010
Chicago, IL 60611
Dear Nick:
I am pleased to offer you the position of President and Chief Operating Officer
of Premisys Communications, Inc., reporting directly to me.
CASH COMPENSATION
* Annual Base Salary of $225,000, paid bi-weekly.
* Target Bonus equal to 40% base salary based upon achieving 100% of the
Company's Fiscal 1998 goals; you will participate in setting our goals for
the coming year.
You will also be compensated for giving up certain unvested stock options.
Premisys will pay you a total of $1,300,000 on a quarterly basis ($81,250
per payment) over your first four years of employment; the first payment
will be within 10 days of your first day of employment. These payments
will cease if you resign or are terminated with cause.
* You will earn vacation at the rate of four weeks per year of employment.
STOCK OPTIONS
* We will also recommend to the Compensation Committee of the Board of
Directors that you be granted options for 300,000 shares of Premisys stock
in accordance with our standard option agreement, a copy of which is
attached.
RELOCATION EXPENSES
Premisys will offer the following reimbursement of relocation expenses
associated with your move to California:
* Premisys will gross up taxable relocation expense reimbursements to
compensate for related income taxes;
* Sales commissions on the sale of your current home;
* All moving expenses for household goods and vehicles, up to $50,000;
* Miscellaneous relocation expenses of $7,000;
<PAGE>
Mr. Nicholas Williams
March 31, 1997
Page 2
* Premisys will pay your rent for an apartment (and for storage of household
goods) in California for you and your family until you have moved into your
new California home, for up to six months;
* Travel expenses for your wife to visit California to find a new home; and
* Travel expenses to return to Chicago for visits until your family
relocates, every three weeks for up to six months.
MORTGAGE ASSISTANCE
As an employee, Premisys will provide mortgage assistance as follows:
* Year 1: $50,000
* Year 2: $50,000
* Year 3: $37,500
* Year 4: $25,000
* Thereafter: None
These payments will be made monthly and will commence upon purchase of your home
in California.
OTHER
As a full time employee, you will be eligible to participate in the benefits
program offered by Premisys in accordance with our policies, which may change
from time to time, and after meeting the applicable eligibility requirements, if
any. The benefits program includes medical, dental, life, long term disability
coverage, profit sharing, employee stock purchase plan and a 401K plan.
Additionally, you will be entitled to paid holidays and vacation in accordance
with our policy.
Since this letter represents an employment agreement, please note the following:
1. Your employment is at-will and either you or Premisys may terminate the
employment relationship at any time with or without cause.
2. It is understood that as part of the Company's effort to protect its
proprietary information, you will assist in safeguarding the Company's
trade secrets and related sensitive information. Consequently, you will
enter into an Invention Assignment and Proprietary Information Agreement
with the Company on your first day of work
3. You and Premisys agree that the foregoing represents and expresses their
complete agreement regarding the terms and conditions of employment, and
further agree that this written contract may not be modified or changed
except in a writing signed by you and a officer of the Company.
<PAGE>
Mr. Nicholas Williams
March 31, 1997
Page 3
Nick, I am pleased to offer you this challenging opportunity to contribute to
the success of Premisys; I would like you to start on April 21, 1997. Also, if
you are in agreement with this offer, please sign this letter where indicated
below, and return it to me in the self-addressed stamped envelope provided.
Should you have any questions or concerns regarding this offer, please contact
me directly at (510) 353-7613.
Sincerely,
/s/ Raymond C. Lin
Raymond Lin
President and CEO
I accept the above offer of employment, pursuant to the items and conditions set
forth in this letter.
Signature: /s/Nicholas J. Williams Date: 2 April, 1997
------------------------------ --------------------
Attachment: Copy of Offer Letter
Copy of Standard Option Agreement
<PAGE>
MANAGEMENT INCENTIVE PLAN FOR FY1998
PREMISYS COMMUNICATIONS, INC.
COMPENSATION COMMITTEE OF BOARD OF DIRECTORS
JULY 11, 1997
I. Participation
A. Participants ("Participants") are executives and senior managers that
have an impact of the overall success of the Company
B. Participants must be full-time, regular employees as of the last day
of each bonus period to earn a bonus.
C. Participants of the Management Incentive Plan can not participate in
profit sharing plan.
II. Bonus Formula
A. The target individual bonuses are set as a percentage of annual
salaries and reflect bonuses paid to individuals in comparable
positions at other companies and their responsibilities at Premisys.
B. Operating Profit in all calculations is the consolidated operating
profit before accruals for Management Bonus and the Profit Sharing
Plans ("Prebonus Operating Profit").
C. The basis of earning bonuses varies with the responsibilities of the
manager:
1. Ray Lin, Nick Williams and Riley Willcox - company performance;
measured as actual Prebonus Operating Profit versus plan
2. Bill Smith and Al Fyffe - product revenue (through his sales
commission plan), goal accomplishments and actual Prebonus
Operating Profit versus plan
3. All other participants - combination of actual Prebonus Operating
Profit versus plan and achievement of individual goals, with
specific portions of their bonuses tied to the accomplishment of
each goal.
<PAGE>
D. The Company performance bonuses that are tied to actual Prebonus
Operating Profit versus plan will be calculated as follows:
1. The earned bonus is the product of individual bonus percentage of
planned Prebonus Operating Profit times the actual Prebonus
Operating Profit.
2. If actual Prebonus Operating Profit versus plan is 120% or more
of Plan, the earned bonus is the product of individual bonus
percentage of planned Prebonus Operating Profit times the ratio
of the actual/planned Prebonus Operating Profit times the actual
Prebonus Operating Profit.
3. Individual Bonuses are capped at two times target dollar bonuses.
E. Bonuses based upon the accomplishment of individual goals will be
determined by the CEO in conjunction with the individual's direct
manager. The target levels represent bonuses to be paid upon
achievement of goals on a timely basis; to the degree goals are
accomplished later or earlier than expected, and to the degree the
goal completion represented lesser or greater effort than expected,
actual bonuses can be from zero to 150% of the target levels.
F. No bonus payments are made if actual operating profit is less than 75%
of Plan.
G. Management bonuses will be calculated for the first half and the
second half of each fiscal year and be paid within 30 days after the
end of each six-month period.
III. Authorization
A. The Plan and participation must be approved at the beginning of each
fiscal year by the Compensation Committee of the Board of Directors.
B. The Compensation Committee of the Board of Directors has the authority
to adjust amounts paid out based upon corporate performance based upon
its assessment of the overall accomplishments of the management team.
IV. Compensation Committee Resolution
A. Approve Management Incentive Plan for fiscal year 1998
<PAGE>
EXHIBIT 11.01
PREMISYS COMMUNICATIONS, INC.
COMPUTATION OF NET INCOME PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED JUNE 30
-------------------------
1995 1996 1997
----- ------- -------
Weighted average common shares outstanding:
Common Stock 6,622 24,264 24,722
Mandatorily Redeemable Convertible
Preferred Stock 12,668 --- ---
Common stock equivalents related to
options using the treasury stock method 2,760 2,160 1,870
Common stock equivalents related to
warrants using the treasury stock method 196 --- ---
------- ------- -------
Shares used in computing net income per share 22,246 26,424 26,592
------- ------- -------
Net income $ 3,967 $ 6,788 $10,891
------- ------- -------
Net income per share $ 0.18 $ 0.64 $ 0.41
------- ------- -------
51
<PAGE>
EXHIBIT 23.01
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (File Nos. 33-90938 and 333-4060) of Premisys
Communications, Inc. of our report dated July 24, 1997, appearing on page 28 of
this Annual Report on Form 10-K.
/s/ Price Waterhouse
PRICE WATERHOUSE LLP
San Jose, California
September 25, 1997
52
<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-K for the
period ended June 27, 1997, and is qualified in its entirety by reference to
such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-27-1997
<PERIOD-START> JUN-29-1996
<PERIOD-END> JUN-27-1997
<CASH> 28,923
<SECURITIES> 44,301
<RECEIVABLES> 7,658
<ALLOWANCES> 0
<INVENTORY> 8,775
<CURRENT-ASSETS> 100,538
<PP&E> 9,620
<DEPRECIATION> 3,176
<TOTAL-ASSETS> 107,101
<CURRENT-LIABILITIES> 10,275
<BONDS> 9
0
0
<COMMON> 252
<OTHER-SE> 96,565
<TOTAL-LIABILITY-AND-EQUITY> 107,101
<SALES> 78,385
<TOTAL-REVENUES> 78,358
<CGS> 27,262
<TOTAL-COSTS> 63,145
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 17,854
<INCOME-TAX> 6,963
<INCOME-CONTINUING> 10,891
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,891
<EPS-PRIMARY> 0.41
<EPS-DILUTED> 0.41
</TABLE>
