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 26, 1998
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 16, 1998, was approximately $251,574,000.
As of September 16, 1998, Registrant had outstanding 25,314,363 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 1998 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 26, 1998
TABLE OF CONTENTS
Form 10-K Name of Item
Item No. Page
PART I
Item 1 Business 3
Item 2 Properties 16
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 17
Item 7 Management's Discussion and Analysis of Financial Conditionnd 19
and Results of Operations
Item 7A Quantitative and Qualitative Disclosures About Market Risk 28
Item 8 Financial Statements and Supplementary Data 29
Item 9 Changes in and Disagreements with Accountants on Accounting 46
and Financial Disclosure
PART III
Item 10 Directors and Executive Officers of the Registrant 46
Item 11 Executive Compensation 46
Item 12 Security Ownership of Certain Beneficial Owners and Management 46
Item 13 Certain Relationships and Related Transactions 46
PART IV
Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K 46
Signatures 50
-----------
Premisys(R) is a registered trademark of the Company. This Form 10-K also
includes trade names and trademarks of other companies.
<PAGE>
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 its relationships with its strategic
partners and major customers, including ADC Telecommunications ("ADC"),
Motorola, Inc. ("Motorola") and 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 licensed
by the Company from Positron Fiber Systems Corporation ("Positron") and Switched
Network Technologies ("SNT"); deregulation of, and legislation regarding the
domestic and international telecommunications industry; continued success of
competitive local exchange carriers ("CLECs") in taking market share from
incumbent carriers in the U.S. business communications services market; market
acceptance of the SlimLine and StreamLine products; rapidly changing
technologies and the Company's ability to respond thereto; the growth of demand
for telecommunications services such as wireless, cellular and the Internet;
competition; changes in the mix of products or customers or in the level of
operating expenses; and other factors described throughout this Form 10-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 ("IAD")
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 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. In fiscal 1998, the Company introduced two new
integrated access products, the SlimLine and the StreamLine, which address
simpler, single T1 access applications.
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. It is
expected that the SlimLine and StreamLine products will be resold by many of
these same strategic distributors as well as directly to carriers. The Company's
strategic distribution relationships, from which the Company has derived most of
its revenues to date, include ADC, Motorola and Paradyne. To a lesser degree the
Company also sells its products directly to carriers and end user customers and
through value-added reseller relationships.
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 also has a wholly owned Canadian subsidiary.
The Company's principal executive offices are located at 48664 Milmont Drive,
Fremont, California 94538, and its telephone number is (510) 353-7600.
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 Communications
Corporation ("MCI"), U.S. Sprint Communications Company ("Sprint"), WorldCom,
Inc. ("WorldCom") and others have emerged as competitors to AT&T. In regional
and local markets, the incumbent local exchange carriers ("ILECs") are facing
stiff and intensifying competition from a variety of competitive access
providers and CLECs, such as WorldCom and Teleport Communications Group Inc.
("Teleport"). Over the last year, many new CLECs have been formed and have
raised substantial capital to build new networks. Nearly all CLECs have focused
on servicing commercial customers, and surveys have indicated that they have
been successful in taking market share from the ILECs. The international market
is also opening up as a result of deregulation, privatization and the presence
of new wireline and wireless alternative carriers. 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 the
Internet, the shift to client/server computing; the increase in local area and
wide area networking; the demand for new telecommunications services such as
video conferencing; 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 bandwidth, the flexibility to choose among services with
varying bandwidth 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
and to effectively deliver a growing portion of packet-based communications
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., Internet access, 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
transmission lines from the public carriers at fixed monthly rates and purchased
vendor-specific networking equipment. 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 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.
[Diagram of complex discrete access]
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:
o Integrates circuit, packet and cell switching technologies and supports
wireless, fiber optic cable, coaxial cable and copper wire transmission
technologies;
o Accommodates a variety of different business communications equipment
types (such as PBXs, LAN routers, automatic call distribution devices and
modems) at end-user locations;
o Operates within the carrier's existing network management system for
operations, administration, maintenance and provisioning;
o Has the flexibility and open architecture to accommodate both the
requirements of existing installed equipment and the technology developments of
the future; and
o 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 integrated access
devices 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 diagram below illustrates the
advantages of a single IAD compared to the approach shown above using numerous
dedicated discrete access devices.
[Diagram of integrated access solution]
The Company's IADs are designed to serve as a single connection point
between a broad variety of carrier services, such as ISDN, frame relay and ATM,
as well as various business communications equipment types, such as PBXs and LAN
routers. 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. Premisys has three distinct
IADs covering a wide range of needs and applications. The Company's flagship
product is the IMACS. The architecture of the 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
modular, software-based design of the IMACS product allows carriers to upgrade
easily to new communications services as they become available. The IMACS
product 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 product provides access
to network management information, such as line performance, traffic volume,
configuration and alarm data, to the carriers' existing network management
systems. The IMACS product is 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.
In fiscal 1998, Premisys, in response to a growing demand for smaller,
lower-cost IADs, introduced two new IADs with more limited feature sets, the
StreamLine and the SlimLine. The StreamLine product is a scaled down version of
the IMACS product. It is an IAD designed for deployment of multiple services at
small business locations. Using a single T1/E1 access line, the StreamLine
product has expansion slots for up to 4 IMACS compatible voice, data, ISDN or
frame relay cards. Because of its compatibility with the IMACS product, the
StreamLine minimizes spares costs, reduces training costs and provides a
migration path to the larger IMACS system.
The SlimLine product, the smallest of Premisys' IADs and designed for
low-cost applications, accommodates a single T1 access line and is offered in
two fixed configurations for rapid deployment of voice and data services. It
comes in either 12 or 24 port voice and 2 port data configurations. The
SlimLine, a plug-and-play product, has a very low profile designed to minimize
space requirements.
The design and features of the Company's IAD products provide carriers
with four major benefits:
o Lower Cost. The integration of multiple switching technologies in a
single IAD 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 IAD 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 IAD products allow
carriers to deliver multiple communications products and services, while
minimizing their risks of technology obsolescence or incompatibility.
o Ability to Offer Services Rapidly. The scaleable, upgradable design of
the Company's IAD products enables carriers to add revenue generating services
such as ISDN, frame relay and ATM, more quickly, cost-effectively and targeted
to only those areas with demand.
o Remote Manageability. The remote management features of the Company's
IAD products enhance the manageability of carriers' networks without requiring
additional network management systems.
o Reliability. The redundancy, diagnostic, testing and monitoring features
of the Company's IAD products enhance the reliability of carriers' networks.
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 IAD products were designed in anticipation of a shift from
private to public networks. The Company believes that its IAD products were the
first and are the leading standards-based integrated access devices specifically
targeted to the public carriers. The Company's IAD 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 the Company's IAD products into their networks during fiscal 1998
included:
Domestic Wireline Carriers International Carriers
AT&T AT&T Network Services International
Alltel Mobile Commnications Comcore (Russia)
Cablevision Systems Corporation DACOM (Korea)
MCI Macomnet (Russia)
MediaOne Mannesmann (Germany)
Southwestern Bell Telephone Company Metrocom (Russia)
Teleport Communications Group Philippines Telephone & Telegraph
Time Warner Communications Quanzhou PTA (China)
WorldCom Saudi Telecommunications Company
Shenyong PTA (China)
Domestic Wireless Carriers Telmex (Mexico)
AT&T Telmos (Russia)
Airtouch Communications Time Telekom (Malaysia)
Bell Atlantic Nynex Mobile
GTE Mobilnet Service Corporation
PrimeCo Personal Communications
Sprint Spectrum
Increase Market Penetration Through Strategic Relationships
The Company has focused on forming strategic relationships with leading
telecommunications equipment suppliers in order to gain market acceptance and
penetration of its IAD products. This distribution strategy has enabled the
Company:
o 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;
o To establish the IAD products as essential value-added elements of the
public carriers' business communications solutions; and
o To incorporate proprietary next-generation technology developed by or
with these strategic telecommunications equipment suppliers into one or more
elements of the IAD 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 IAD product line and encourages a
longer term relationship with the Company. Relationships with Paradyne, Lucent
Technologies ("Lucent"), Motorola and others have allowed the Company to
incorporate advanced technology into its IAD products and have broadened the
Company's markets worldwide.
Market Premisys Access Solutions Directly to CLECs
The recent, rapid growth of CLECs has stimulated demand for IADs. In
addition to supporting its strategic distribution partners efforts to service
their CLEC customers, the Company's sales force also calls directly on CLECs.
This direct coverage of CLECs ensures that these carriers are aware of the
advantages of Premisys' access solutions and provides input to Premisys for
defining new products and features. Purchases of Premisys products by CLEC's are
made through both strategic distribution partners and direct contact with the
Company.
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 IAD products meet international standards, pursuing international
strategic relationships and distributors, and adding to its own sales presence
in key regions. In fiscal 1998 the Company hired a Vice President, International
Operations to plan and direct these efforts. Premisys currently has
international sales offices in Singapore, Hong Kong, China and the 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 1998 are listed by channel in the table below.
Strategic Relationships
ADC Paradyne
Alcatel U.S.A., Inc. (1) Pulsecom
ECI Telecom Ltd. Rockwell International Corporation
Ericsson Telecom S.A. de C.V. Tadiran Microwave Networks
Lucent UTStarcom
Motorola XEL Communications
Northern Telecom
(1) - Alcatel U.S.A., Inc. ("Alcatel") is the combination of Alcatel Network
Systems, Inc. and DSC Communications Corp, ("DSC"), previously listed as having
a strategic relationship with the Company. Alcatel completed the acquisition of
DSC in September, 1998.
<PAGE>
Value-Added Resellers, Distributors and System Integrators
Datacraft Asia PSI Technologies Corporation
Harris Corporation/Farinon Division Schmidt Telecom
InComA Ltd. SRT Associates
Integrated Telecommunication TechLink Telecom Ltd.
Technology Sdn. Bhd.
Interlink Communication Systems Telos Engineering Limited
Metro-Link Services Co. Ltd. Telsource Corporation
MSN Communications Trends and Technologies
N.E.T. Federal
Direct
Cox Communications Teleport
Powertel, Inc. Telesat Corporation Co., Ltd.
MediaOne Transaction Network Services
Motorola Paging Sprint
Southwestern Bell Telephone Company WorldCom
Paradyne was the Company's first strategic partner and was its largest
customer until fiscal 1998. Paradyne markets the Company's products, under its
label, AccuLink Access Controller (AAC), primarily to Lucent and AT&T. In fiscal
1996, 1997 and 1998, Paradyne accounted for 33%, 30% and 15% 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.
ADC was the Company's largest customer in fiscal 1998; it accounted for
16%, 12% and 29% of the Company's revenues during fiscal 1996, 1997 and 1998,
respectively. The majority of products shipped to ADC during fiscal 1998 were
resold to MCI. Motorola accounted for 15%, 15% and 11% of the Company's revenues
during fiscal 1996, 1997 and 1998, 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."
The Premisys Product Lines
Premisys Communications offers a full family of integrated access devices:
the IMACS, StreamLine and SlimLine products. The IMACS is the Company's flagship
product having the greatest capacity and broadest range of services among the
Company's IAD product family. The Company began shipping the IMACS in 1992, and
it has represented nearly all of the Company's revenues. The StreamLine has a
similar modular architecture as the IMACS and supports all IMACS user cards in a
smaller chassis with a single T1/E1 design. Shipments of the StreamLine began in
March 1998. The SlimLine is a single T1 voice and data IAD, offering a very
small footprint, low price, and easy to provision unit ideal for the small or
remote office environment. Shipments of the SlimLine began in June 1998. The
table below compares the capabilities and prices of these three product lines.
<PAGE>
NARROW BAND PRODUCTS
[SLIMLINE PICTURE] [STREAMLINE PICTURE] [IMACS PICTURE]
SlimLine StreamLine IMACS
Network 1-8 T1/E1s TDM,
Connections Single T1 Single T1/E1 Frame Relay, DS3
ATM
- --------------------------------------------------------------------------------
User 12 or 24 User cards: Server cards:
Connections voice ports ISDN, FXS, FXO, Frame Relay, PRI,
2 data ports FRAD, Data, IP ATM, ADPCM
User Cards:
ISDN, FXS, FXO,
Frame Relay, IP
- --------------------------------------------------------------------------------
Management Plug & play, Remotely via EMS Remotely via EMS
front panel & Telnet & Telnet
configuration Full range of
SNMP MIBs
- --------------------------------------------------------------------------------
Other TR - 08 TR-08 Server Cards for
Functions Drop & insert Advanced functions
Voice compression 0/1 cross-connect
Modular design Redundancy
TR-08
Modular design
- --------------------------------------------------------------------------------
List Price Range $3,500 - $5,000 $7,000 - $12,000 $10,000 - $40,000
In June 1998 the Company announced the Q-155 product, which manages narrowband
access devices, delivers broadband services, and acts as a gateway to both TDM
and cell-based carrier networks.
PRODUCT UNDER DEVELOPMENT
[Q-155 PICTURE]
Q-155
Network 72 T1/E1s TDM
Connections DS3/E3, OC3/STM 1
SONET/SDH
- --------------------------------------------
User HDSL
Connections T1/E1 & DS3/E3
OC3C/STM 1
- --------------------------------------------
Management Remotely via
OnLine
TL1
- --------------------------------------------
Key 3/1/0 Cross
Functions Connect
ATM Switch
GR303/V5.2
- --------------------------------------------
List Price Range $50,000 - $100,000
- --------------------------------------------
Expected Availability December 1998
<PAGE>
IMACS Products
The IMACS product is a modular, software-based platform that can be configured
for delivering a wide variety of communications services. The product is
designed for mission-critical applications and supports full redundancy for CPU,
wide area network ("WAN") interfaces, power supplies and ringing generators. The
components of the IMACS system architecture are the WAN modules, user modules,
server 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. The server modules process information flowing
between user and WAN modules, performing tasks such as voice compression, ATM
adaptation and inverse multiplexing. The common equipment modules contain the
central processor and provide power and interface functions. Two versions of the
IMACS with three unique chassis designs are available: the 3.x Host series which
does not have server modules and supports an intelligent channel bank
application and the 5.x Host series which offers the full functionality of an
IAD. The chassis designs are the IMACS/600 and IMACS/900 which are front-access
devices, and the IMACS/800 which can be accessed from the front and back. This
allows the IMACS to work in any carrier environment. Environmentally hardened
units are also available, including units designed for desert installation.
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, and the CellDAX, which is configured to reduce the amount of
equipment at the wireless cell site, decreasing bandwidth requirements and
reducing operating costs.
StreamLine
The StreamLine product, like the IMACS, has a modular design and is
software-based. It supports all of the user cards supported by the IMACS,
offering carriers an inventory control and cost benefit. It is also manageable
via the same EMS system that supports the IMACS. However, it only has half the
footprint of the IMACS, making it ideal for space constrained collocation space
and telco closets.
As with all Premisys products, StreamLine is standards based including
TR-08. The single T1/E1 design positions it for the small and medium business
market that Carriers are targeting, without losing the scaleability offered by
the IMACS.
SlimLine
The SlimLine product is designed for small or remote business offices
seeking plug & play provisioning of integrated T1 service. It is offered in two
fixed configurations - one with 12 voice channels and two V.35 data ports, and
the other with 24 voice channels and two V.35 data ports. Either or both data
ports can support a low cost router for Internet and Intranet service. The
chassis is a pizza-box design with configuration done with front panel dip
switches. Installation is very simple.
TR-08 support comes standard with either the 12 or 24 port voice
configurations, supports FXS, loop and ground start, caller ID, and an integral
CSU.
Network Management
The IMACS and StreamLine 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 (SNMP). They 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 also developed application software for the IMACS and
StreamLine products called the Element Management System ("EMS") and the new
OnLine 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 by allowing remote management and control.
<PAGE>
Q-155 Product Line
In June 1998, at Supercomm, a major industry tradeshow, the Company
demonstrated a new product, the Q-155, which is designed to bring the benefits
of IADs to broadband networks. *The Q-155 is being designed to increase the
utilization of higher bandwidth services such as SONET or SDH fiber optic rings.
*Furthermore, the Q-155 is being designed to accept legacy TDM or advanced
packet traffic and route it to the appropriate central office or data switch,
again in any protocol required (SONET, SDH, ATM, TDM).
*The Q-155 will enable carriers to deliver a variety of broadband and
narrowband services to their business customers with higher utilization of their
transmission networks and reduced requirements for ports on their central office
cross-connects and switches. *The Q-155 is being developed utilizing
technologies licensed from Positron in January 1997, and from technologies
licensed from SNT in March 1998. First shipments of the Q-155 are projected for
the quarter ending December 31, 1998.
*The Q-155 is designed to complement the IMACS, StreamLine and SlimLine
products as the Q-155 can integrate these devices into a total network solution.
*With the addition of the Q-155 product line, Premisys 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 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 focus of the Company's sales strategy is to form and to support
strategic relationships with telecommunications equipment suppliers, systems
integrators and international distributors (collectively, "Partners"). 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
sales offices in Singapore, Hong Kong, Beijing, Mexico and the United Kingdom.
The offices in Singapore, Beijing and Hong Kong serve the Asia/Pacific region,
the office in the United Kingdom serves Europe, the Middle East and Africa and
the office in Mexico serves the Latin America region. 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 field system training, develops new strategic relationships and, where
appropriate, sells directly to carriers.
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
Partners. Many of these Partners 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 Partners to the IMACS product line and encourages a
longer-term relationship with the Company. *The Company has completed joint
development projects with Paradyne, Lucent, Northern Telecom, Alcatel and
Motorola, which has led to IMACS products being sold as components of these
companies' specific products.
The Company's agreements with Partners generally grant non-exclusive
licenses to distribute and, based on volume, provide for certain discounts on
the purchase prices of the Company's products. *Any Partner that markets and
sells the Company's products could elect to cease marketing and selling the
Company's products, and there can be no assurance that these Partners will
continue to place orders with the Company or that the Company will be able to
obtain orders from new customers or end users. *The loss of any one or more of
the Company's strategic Partners would have a material adverse effect on the
Company's business and operating results. The Company derived approximately 77%,
77% and 81% of its revenues from its Partners in fiscal 1996, 1997 and 1998,
respectively. 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 service international markets where the VAR or
distributor is located. The Company derived approximately 11%, 19% and 10% of
its revenues from value added resellers and non-strategic distributors in fiscal
1996, 1997 and 1998, respectively.
Direct Sales
Direct sales by the Company to carriers and end users to date has
represented a minor part of the Company's business. Generally, the Company sells
directly only to carriers 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 12%, 4% and 9% of its revenues from direct sales in fiscal 1996,
1997 and 1998, respectively. Direct sales by the Company to CLECs and
Alternative Carriers is a rapidly growing and dynamic opportunity. The Company
believes that these new and generally small carriers are not aggressively
targeted by large telecommunications equipment providers much as the small and
medium business customers are not aggressively targeted by the ILECs or PTTs.
Moreover, the Company believes that its products are ideally suited to these new
carriers offering bundled services, a range of technologies, protection of
legacy investment, and low cost implementation. The Company intends to augment
its technical support, training, collateral development and marketing to
actively develop its direct sales capabilities.
Customer Support
The first level of customer support for the Company's products is provided
by the Partners that sell the Company's products directly to the end user. The
Company's personnel provide backup support and training. When a Partner is not
able to provide solutions to product problems, 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 against workmanship or defects 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 Partners 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.
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., both of these companies 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. Since Premisys began selling SlimLine and StreamLine products, it has
faced additional competition from both start-ups and existing telecommunications
equipment manufacturers selling channel bank and CSU/DSU products. *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. Many 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, primarily 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. To date, the Company has experienced no
adverse affects on flexibility or responsiveness to changes due to the Company's
use of third-party subcontractors.
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,
Lucent 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.
Research and Development
During fiscal 1996, 1997 and 1998, total research and development
expenditures were $7.5 million, $10.5 million and $16.2 million, respectively.
All research and development expenditures are expensed as incurred. In addition,
in fiscal 1997 and 1998 the Company incurred a charges of $4.0 million and $4.4
million for licenses to certain SONET and SDH based technologies and cell and
packet technologies, respectively. See "Results of Operations - Acquired
In-Process Technology" 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 and 1998, the Company's research and development activities
focused on the development and release of the SlimLine, StreamLine and Q-155.
The SlimLine and StreamLine were released in the March and June 1998 quarters,
respectively. The prototype version of the Q-155 was demonstrated at the trade
show Supercomm in June 1998 and is expected to be available in the quarter
ending December 31, 1998. Premisys licensed SONET/SDH technology from Positron
in the March, 1997 quarter and licensed cell and packet switching technologies
from SNT in the March 1998 quarter; the Company plans to integrate these
technologies into future versions of Q-155.
*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 1998), 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, 1998, 106 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 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, 1998, Premisys employed 331 individuals on a full-time
equivalent basis. Of these, 121 were involved in sales, marketing and customer
support, 106 in research and development, 74 in manufacturing, and the remaining
30 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 three facilities, totaling
150,281 square feet, leased by the Company in Fremont, California. The leases on
these facilities, which are classified as non-cancelable operating leases,
expire on various dates through December 31, 2005. In addition, the Company
leases facilities in Florida, Canada, Singapore, Hong Kong, the United Kingdom
and the Peoples Republic of China. The leases on these facilities, which are
classified as non-cancelable operating leases, expire on various dates through
September 30, 2003. Approximately 60% of the space in the Fremont, California
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 9 of Notes to Consolidated
Financial Statements. The Company believes that its present facilities are well
maintained and are in good operating condition.
Item 3. Legal Proceedings
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
<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 1997 and fiscal 1998.
High Low
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 $ 73/4
Fiscal 1998:
First Quarter $ 25 1/4 $ 15
Second Quarter $ 33 1/4 $ 20 3/8
Third Quarter $ 29 3/4 $ 18 13/16
Fourth Quarter $ 32 1/4 $ 22 1/2
There were approximately 169 holders of record of the Company's Common
Stock as of September 11, 1998.
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.
Item 6. Selected Financial Data
<TABLE>
<CAPTION>
Year Ended June 30, (1)
-------------------------------------------------
1994 1995 1996 1997 1998
-------- -------- --------- --------- --------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Consolidated Statements of Operations Data:
Revenues $ 17,164 $ 30,888 $ 73,912 $ 78,358 $102,298
Income from operations 961 4,784 24,577 15,213 18,371
Net income $ 886 $ 3,967 $ 16,788 $ 10,891 $ 13,715
======== ======== ========= ========= ========
Net income per share - Basic $ 1.03 $ 0.60 $ 0.70 $ 0.44 $ 0.54
======== ======== ========= ========= ========
Net income per share - Diluted $ 0.05 $ 0.18 $ 0.64 $ 0.41 $ 0.50
======== ======== ========= ========= ========
Shares used in computing net income per share
Basic 856 6,622 23,876 24,722 25.569
======== ======== ========= ========= ========
Diluted 17,107 22,246 26,389 26,498 27,495
======== ======== ========= ========= ========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
As of June 30, (1)
--------------------------------------------------
1994 1995 1996 1997 1998
-------- -------- -------- -------- --------
(in thousands)
<S> <C> <C> <C> <C> <C>
Consolidated Balance Sheet Data:
Cash, cash equivalents and
short-term investments $ 6,533 $ 42,963 $ 60,861 $ 73,224 $105,981
Working capital 8,537 45,520 74,853 90,263 112,079
Total assets 12,643 52,621 87,522 107,101 138,757
Long-term debt 194 109 91 9 ---
Mandatorily redeemable convertible 18,217 --- --- --- ---
preferred stock
Total stockholder's equity (deficit) $(8,638) $ 47,007 $ 77,580 $ 96,817 $120,776
</TABLE>
Quarterly Financial Data
The following table sets forth certain unaudited quarterly financial data
for each quarter of fiscal 1997 and 1998. 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
--------------------------------------------------------------------
Fiscal 1997 (1) Fiscal 1998 (1)
-------------------------------- ---------------------------------
Sept 30, Dec 31, Mar 31, June 30, Sept 30, Dec 31, Mar 31, June 30,
1997 1997 1997 1997 1997 1997 1998 1998
-------- -------- -------- -------- -------- -------- -------- --------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues $ 24,294 $ 26,356 $ 12,237 $ 15,471 $ 19,285 $ 24,616 $ 27,154 $ 31,243
Gross Profit 15,763 17,588 7,913 9,832 12,067 16,338 18,045 20,262
Income (loss)
from operations 8,788 9,335 (4,152)(2) 1,242 3,536 5,498 2,000(3) 7,337
Net income (loss) $ 5,723 $ 6,098 ($2,109)(2)$ 1,180 $ 2,677 $ 4,012 $1,841(3)$ 5,185
======== ======== ======== ======== ======== ======== ======== ========
Net income per
share-Basic $ 0.23 $ 0.25 ($ 0.09) $ 0.05 $ 0.11 $ 0.16 $ 0.07 $ 0.20
======== ======== ======== ======== ======== ======== ======== ========
Net income per
share-Diluted $ 0.22 $ 0.23 ($ 0.09) $ 0.04 $ 0.10 $ 0.15 $ 0.07 $ 0.19
======== ======== ======== ======== ======== ======== ======== ========
Shares used in computing net income per share
Basic 24,432 24,550 24,764 25,142 25,308 25,462 25,630 25,874
Diluted 26,479 26,721 24,764 26,501 27,287 27,578 27,507 27,608
======== ======== ======== ======== ======== ======== ======== =======
</TABLE>
- ---------------------------------
(1)The Company uses a fiscal year ending on the Friday closest to June 30.
For ease of presentation, however, annual and quarterly periods during
fiscal 1996, 1997 and 1998 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)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 - Acquired In-Process Technology" of this Form 10-K and Item
7, "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Other Operating Expenses" of the Form 10-K for the
year ended June 30, 1997.
(3)Includes a $4,431,000 charge for a technology license. See Item 7,
"Management's Discussion and Analysis of Financial Condition and Results
of Operations - Acquired In-Process Technology" of this Form 10-K and Note
3 of Notes to Consolidated Financial Statements.
<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,"
"will" 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 and became a publicly owned corporation
in April 1995. The Company develops, manufactures, and markets access products
for use by telecommunications carriers for delivering a wide variety of voice
and data services to its business customers.
The Company's products enable carriers to deliver multiple services with a
single device. The Company's IMACS product supports the widest range of services
and up to eight T1 or E1 connections; its StreamLine product, which was derived
from the IMACS, supports the same voice services and most of the data services
offered by the IMACS, but has a single T1 connection; its SlimLine product
supports a limited number of voice and data services and has one T1 connection;
its Q-155 product, not yet released, is a broadband integrated access device
combining TDM, ATM and Sonet/SDH on a single platform which accommodates a wide
range of voice and data services. Although the IMACS accounted for nearly all of
the Company's revenues in fiscal 1996, 1997 and 1998, the Company's new products
provide additional options in order to offer carriers more complete solutions to
provide delivery of services to their business customers.
Most of the Company's products are deployed in new networks, typically
built by new carriers, such as CLECs in the United States and new wireless
service providers.
The Company sells its products worldwide, primarily through large
telecommunications equipment suppliers, systems integrators and distributors.
The Company derived 11%, 7% and 5%, respectively, of its revenues from direct
sales to international customers in fiscal 1996, 1997 and 1998. (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 - Indirect Channels of Distribution."
Results of Operations
Revenues
Revenues consist primarily of gross sales of products, less discounts and
sales returns and allowances. Revenues in fiscal 1996, 1997 and 1998 were
$73,912,000, $78,358,000 and $102,298,000, respectively. The majority of the
revenue increases from fiscal 1996 to fiscal 1997 and from fiscal 1997 to fiscal
1998 were attributable to unit growth. The rate of revenue growth in fiscal 1997
over fiscal 1996 was significantly lower than the rates of growth of revenues in
earlier years. Although the Company 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 quarters ended March 31, 1997 and June 30,1997 as compared to the quarters
ended March 31, 1996 and June 30, 1996, respectively. 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 product being deferred or lost by domestic and international
distribution partners. An important contributor to the Company's unit growth in
fiscal 1998 has been its success with domestic CLECs, most notably MCI through
the Company's strategic relationship with ADC. Sales to CLECs have been realized
both through distribution partners and direct sales. The Company's list prices
for its products did not change significantly from fiscal 1996 through fiscal
1998. The impact of average selling price fluctuations on revenues during these
comparison periods was not significant. The average revenue to the Company per
entire system decreased from fiscal 1996 to fiscal 1997 and was relatively
unchanged from fiscal 1997 to fiscal 1998. * The Company expects that its rate
of revenue growth from fiscal 1998 to fiscal 1999 will be the same or greater
than the 31% growth rate experienced in fiscal 1998. *However, the Company's
expectations regarding future revenue levels are subject to numerous risks and
uncertainties, including limited order backlog, the level of capital
expenditures by CLEC's and other carriers and 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,"
"-Slowdown in Telecommunications Carriers Capital Expenditures," "-Mergers of
the Company's Customers" and "-Rapidly Evolving Technology."
The following table sets forth, for the periods indicated, the revenues
generated by customers which accounted for 10% or more of the Company's revenues
in fiscal 1996, 1997 or 1998, other domestic customers as a group and
international customers as a group, in absolute dollars and as a percentage of
total revenues.
<TABLE>
<CAPTION>
Source of Revenues
- ------------------
Fiscal % Change Fiscal % Change Fiscal
1996 1997 1998
------------ -------- ------------ -------- ------------
<S> <C> <C> <C> <C> <C>
ADC $ 11,464,000 (16%) $ 9,576,000 214% $ 30,024,000
Paradyne 24,446,000 (5%) 23,355,000 (34%) 15,345,000
Motorola 10,838,000 11% 11,996,000 (9%) 10,946,000
DSC (a) --- 7,950,000 --- (a)
Other Domestic 18,594,000 6% 19,802,000 107% 41,043,000
Customers
International Customers 8,570,000 (34%) 5,679,000 (13%) 4,940,000
------------ -------- ------------ -------- ------------
Total Revenues $ 73,912,000 6% $ 78,358,000 31% $102,298,000
- ------------------------============ ======== ============ ======== ============
</TABLE>
<TABLE>
<CAPTION>
Percentage of Total Revenues
Fiscal Fiscal Fiscal
1996 1997 1998
------ ------ ------
<S> <C> <C> <C>
ADC 16% 12% 29%
Paradyne 33% 30% 15%
Motorola 15% 15% 11%
DSC (a) 10% (a)
Other Domestic Customers 25% 26% 40%
International Customers 11% 7% 5%
------ ------ ------
Total Revenues 100% 100% 100%
</TABLE>
(a) - Amounts not provided as revenues for the period were less than 10% of the
total.
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 marketing and sale of the
Company's products by Paradyne to Lucent. See "-Other Factors That May Affect
Future Operating Results - Relationship with Paradyne." The Company also has a
strategic relationship with ADC that has recently involved the marketing and
sale of a significant amount of the Company's products to MCI. Shipments to
Paradyne and ADC have generated a substantial portion of the Company's revenues
to date. *The Company expects that sales to Paradyne will increase somewhat in
fiscal 1999 and that a decrease in sales to ADC in fiscal 1999 will be offset by
increases to other customers such as WorldCom and Teleport. *Paradyne and ADC
are not subject to any minimum purchase requirements, and there can be no
assurance that Paradyne or ADC will continue to place orders with the Company.
*Significant reductions in shipments to Paradyne or ADC (or their customers)
could have a material adverse impact on the Company's business and operating
results.
<PAGE>
Gross Profit
Fiscal 1996 % Change Fiscal 1997 % Change Fiscal 1998
----------- -------- ----------- -------- -----------
Gross Profit $47,494,000 8% $51,096,000 31% $66,712,000
As a percentage
of revenues 64% 65% 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 1996 to fiscal 1997 and from fiscal
1997 to fiscal 1998 primarily as a result of increased unit volumes. 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. Gross margin
was relatively unchanged from fiscal 1997 to fiscal 1998. *The Company expects
its gross margins for fiscal 1999 to decline somewhat from the 65% realized in
fiscal 1998 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.
Research and Development Expenses
Fiscal 1996 % Change Fiscal 1997 % Change Fiscal 1998
----------- -------- ----------- -------- -----------
Research and
development expenses $7,468,000 41% $10,519,000 54% $16,205,000
As a percentage of
revenues 10% 13% 16%
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 $3,051,000, or 41%, from
fiscal 1996 to fiscal 1997 and $5,686,000, or 54%, from fiscal 1997 to fiscal
1998. The increase from fiscal 1996 to fiscal 1997 and from fiscal 1997 to
fiscal 1998 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 1998 the Company's development
activities focused on the development of the SlimLine, StreamLine and Q-155
products. See "-Other Factors That May Affect Future Operating Results - Rapidly
Evolving Technology." Research and development expenses increased as a
percentage of the Company's revenues from 10% in fiscal 1996 to 13% in fiscal
1997 and to 16% in fiscal 1998. The increase in expenses as a percentage of
revenues from fiscal 1996 to fiscal 1997 was primarily due to the fact that
while research and development expenses grew as planned, the Company's revenues
did not. The increase from fiscal 1997 to fiscal 1998 was the result of the
increased research and development activities discussed above. *The Company
anticipates that the amount of these expenses will increase in fiscal 1999, but
as a percentage of revenues, will decrease slightly in fiscal 1999 as compared
to fiscal 1998. *However, the expected decrease in research and development
expenses as a percentage of revenues is subject to, among other things, the
Company's level of revenues.
Acquired In-Process Technology
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, which
was announced in June 1997. *First shipments of the Q-155 are projected in the
quarter ending December 31, 1998. *However, achievement of this is subject to a
number of uncertainties, including undetected errors and incompatibilities with
installed 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
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 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, resulting in a
$0.09 per share earnings reduction. Payments of license fees to Positron in
fiscal 1997 and 1998 totaled $2.0 million and $1.0 million, respectively. *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."
In the quarter ended March 31, 1998, the Company announced the execution
of a technology license agreement with SNT. SNT's technologies will provide the
Company with a non-blocking switching core expandable to 11.6 Gbs, ATM
interfaces to OC-3 and OC-12, 10/100MB Ethernet/Fast Ethernet interfaces, and
related software. *The Company will use these technologies to develop broadband
ATM and IP multiservice platforms. *However, there can be no assurance that the
Company will be able to integrate successfully this technology into its
products. *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."
The Company paid a total of $4.4 million for licensing SNT technologies
and related software. The Company expensed these fees as a purchase of
in-process research and development in the quarter ended March 31, 1998
resulting in a $0.10 per share earnings reduction. The Company also received
options to license future releases of SNT software for additional fees.
Selling, General and Administrative Expenses
Fiscal 1996 % Change Fiscal 1997 % Change Fiscal 1998
----------- -------- ----------- -------- -----------
Selling, general and
administrative expenses $15,449,000 38% $21,364,000 30% $27,705,000
As a percentage of
revenues 21% 27% 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
$5,915,000, or 38%, from fiscal 1996 to fiscal 1997 and $6,341,000, or 30%, from
fiscal 1997 to fiscal 1998. 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 increased as a percentage of the Company's revenues from 21% in fiscal
1996 to 27% in fiscal 1997 and was unchanged at 27% in fiscal 1998. The increase
in these expenses as a percentage of revenues from fiscal 1996 to fiscal 1997
was due to the fact that while selling, general and administrative expenses grew
as planned, the Company's revenues did not. *The Company anticipates that the
amount of these expenses will increase in fiscal 1999, but will decrease
somewhat as a percentage of revenues in fiscal 1999 as compared to fiscal 1998.
*However, the expected decrease 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 1996 % Change Fiscal 1997 % Change Fiscal 1998
----------- -------- ----------- -------- -----------
Interest and other
income, net $1,899,000 39% $2,641,000 29% $3,399,000
As a percentage of
revenues 3% 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 for all comparison periods was
primarily due to increased interest income from higher cash balances resulting
from the positive cash flow from operating activities.
Provision for Income Taxes
Fiscal 1996 % Change Fiscal 1997 % Change Fiscal 1998
----------- -------- ----------- -------- -----------
Provision for income
taxes $9,688,000 (28%) $6,963,000 16% $8,055,000
As a percentage of income
before income taxes 37% 39% 37%
The Company's provision for income taxes represents estimated federal and
state income taxes. The Company's effective rate for fiscal 1996 was 37% which
was 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's effective income tax rate for fiscal 1998 was reduced to 37% due
to increased tax exempt income from the Company's municipal securities portfolio
and the reversal of a portion of prior year timing differences for book versus
tax purposes. *The Company anticipates that its effective income tax rate will
remain unchanged in fiscal 1999.
Net Income per Share
Fiscal 1996 % Change Fiscal 1997 % Change Fiscal 1998
----------- -------- ----------- -------- -----------
Net income $16,788,000 $10,891,000 $13,715,000
Net income per share $0.64 (36%) $0.41 22% $0.50
(diluted)
Shares used in
computing diluted net
income per share 26,389,000 1% 26,498,000 3% 27,495,000
The decrease in net income per share from fiscal 1996 to fiscal 1997 was
due to the decrease in net income, which resulted principally from the slower
than planned rate of growth in revenues, operating expenses increasing at a
higher rate than revenues and the charge associated with the Positron licensing
agreement. 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. The increase in net income per share for fiscal 1998 was due to the
increase in net income, which was a result of the rate of growth of the
Company's revenues being greater than the rate of growth in the Company's
operating expenses. 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. Net income for fiscal 1998 was reduced
by license fees paid to SNT, as discussed above. The Company expensed $4.4
million of license fees for the SNT agreement in fiscal 1998, which reduced
reported net income per share in fiscal 1998 by $0.10.
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.
Liquidity and Capital Resources
Fiscal 1996 % Change Fiscal 1997 % Change Fiscal 1998
----------- --------- ----------- --------- -----------
Net cash provided
by operating activities $6,115,000 51% $9,233,000 189% $26,629,000
Year end cash,
cash equivalents and
short-term investments $60,861,000 20% $73,224,000 45% $105,981,000
Year end
working capital $74,853,000 21% $90,254,000 24% $112,079,000
In fiscal 1998, net cash of $26.6 million was provided by operating
activities primarily due to net income, a decrease in inventories and prepaid
expenses and other assets and an increase in accrued liabilities and accounts
payable, which were partially offset by an increases in accounts receivable.
The Company purchased $4.1 million of property and equipment in fiscal
1998, primarily for computers and peripherals and machinery and equipment. See
Note 2 of Notes to Consolidated Financial Statements. Financing activities
provided $10.3 million of cash in fiscal 1998. The primary sources of financing
in fiscal 1998 were the tax benefits of disqualifying dispositions of exercised
stock options and the issuance of Common Stock in connection with the Company's
employee benefits plan.
At June 30, 1998, the Company's principal sources of liquidity included
$106 million of cash, cash equivalents and short-term investments, and the
Company had working capital of approximately $112.1 million. The Company has no
significant capital spending or purchase commitments other than normal purchase
commitments and commitments under facilities and capital leases. See Note 9 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.
On August 31, 1998, the Company's Board of Directors authorized
repurchase, at management's discretion, of up to four (4) million shares of the
Company's Common Stock over the subsequent 12 months at market prices not to
exceed $14.00 per share and as the market and business conditions warrant. By
September 17, 1998, the Company had repurchased for cash 890,000 shares at
market prices ranging from $8.69 to $10.81 per share. As of September 17, 1998,
pursuant to the authorized stock repurchase program, the Company sold 2.0
million put warrants and purchased 1.5 million call options. The Company had a
maximum potential obligation related to the put warrants of $21.3 million. The
put warrants and call options expire in equal amounts (50% each) on January 15,
1999 and September 15, 1999.
On September 17, 1998, the Company's Board of Directors ("Board") adopted a
Stockholder Rights Plan ("Plan") designated to protect the long-term value of
the Company for its stockholders during any future unsolicited acquisition
attempt. Pursuant to the Plan, the Board declared a dividend of one preferred
share for each share right ("Right") of the Company's Common Stock outstanding
on October 5, 1998. Each Right becomes exercisable to purchase one one-hundredth
(1/100) of a share of Series A Junior Participating Preferred Stock at an
exercise price of $80.00. The Rights will expire on September 18, 2008. The
Company may redeem the Rights at a price of $0.001 per Right.
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 strategic Partners that market and sell the
Company's products could elect to cease marketing and selling the Company's
products, and there can be no assurance that these strategic Partners will
continue to place orders with the Company or that the Company will be able to
obtain orders from new strategic Partners or end users. See "-Relationship with
Paradyne." strategic Partners could develop products that could be sold for
selected applications for which the Company's products are currently provided,
which could reduce the level of demand from these telecommunications equipment
suppliers for the Company's products. See "Competition." In addition, the
Company's revenues for a given quarter may depend to a significant degree upon
planned product shipments for a single carrier's equipment deployment project.
For example, in the quarters ended September 30 and December 31, 1997, March 31,
1998 and June 30, 1998, shipments of the Company's products to a CLEC, MCI,
through ADC, one of the Company's strategic distribution partners, represented
more than 10% of the Company's total revenues for such quarters. Revenues
derived from particular carrier projects 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 materially adversely
affected the Company's business and operating results for that quarter. Such
delays may occur in the future and would have a similar impact if they did
occur. Delays can be caused by late deliveries by other vendors, changes in
implementation priorities, slower than anticipated growth in demand for the
services that the equipment supports or in the capital expenditures of the end
user customer, consolidation among carriers and delays in obtaining regulatory
approvals for new tariffs. See "-Slowdown In Telecommunications Carriers'
Capital Expenditures" and "-Mergers of the Company's Customers." Revenues can
also be affected by delays in initial shipments of new products and new software
releases developed by the Company. See "-Rapidly Evolving Technology." In 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.
SLOWDOWN IN TELECOMMUNICATIONS CARRIERS' CAPITAL EXPENDITURES. Currently,
the end user customers for the Company's products are primarily CLECs and
interexchange carriers ("IXCs"). These carriers have been expanding their local
networks at a rapid pace in the past two years to provide services to small and
medium-sized businesses that have historically been served inadequately by
ILECs. Based on industry information, it now appears likely that the pace of
capital expenditure growth by the CLECs and IXCs will slow significantly. The
Company believes that there are a number of reasons for this potential slowdown.
The largest U.S. CLECs and the IXCs which have been entering local markets have
already built out major portions of their planned local networks using the
billions in capital raised in the past two years. The Company believes that the
smaller U.S. CLEC's may have difficulty continuing to raise capital in the
chaotic financial markets that may persist over the next year. Capital spending
by carriers serving businesses in the Japan, Southeast Asia, Eastern Europe and
Latin America markets are also being negatively impacted by the continuing
financial crisis in Japan and Asia and looming problems in the economies of the
other markets. Besides reducing the rate of growth of the markets into which the
Company sells, the Company believes that this near global slowdown in capital
spending increases the intensity of price competition for these markets. While
the Company has recently introduced its StreamLine and SlimLine products which
are more price competitive than the IMACS platform, which has historically
produced most of its revenues, these new products must compete with an
increasing number of low priced IADs. As a result of the slowdown in
telecommunications carriers' capital expenditures and related increase in price
competition, the Company may find it more difficult to achieve expected levels
of revenues and profitability.
MERGERS OF THE COMPANY'S CUSTOMERS. A number the largest CLECs which use
the Company's products have announced plans to merge with larger carriers over
the next several quarters. MCI has announced an intention to merge with
WorldCom; Teleport has announced an intention to merge with AT&T; and GTE has
announced an intention to merge with Bell Atlantic. The Company believes that
part of the impetus for each of these mergers is to increase the combined
carrier's ability to compete for local access markets. In the long term, the
Company believes that this should cause capital spending on local access, in
which the Company's products serve a vital function, to grow significantly.
However, over the next several quarters, as these mergers are consummated, it is
likely that capital expenditures will be temporarily deferred as the newly
combined companies evaluate inventories of undeployed equipment, potential
overlaps in network deployment plans, strategies for on-net versus off-net
deployments, and assignment of responsibilities for deployments in targeted
local markets. This risk of a deferral in expenditures on local access,
including expenditures for the Company's products, has already materialized in
the case of MCI. Not only may this risk be realized repeatedly as the Teleport
and GTE mergers are completed in up-coming quarters, but the slowdown in
expenditures may persist for multiple quarters following the mergers. In
addition, the increased buying power wielded by these merged carriers and by
merged equipment suppliers, such as Alcatel and DSC, is likely to place added
competitive price pressure on equipment manufacturers such as Premisys.
QUARTERLY FLUCTUATIONS. The Company's operating results may fluctuate on a
quarterly and annual basis due to factors such as the timing of new product
announcements and introductions by the Company, its major customers and its
competitors, delays in equipment deployment, market acceptance of new or
enhanced versions of the Company's products, changes in the product or customer
mix of revenues, changes in the level of operating expenses, competitive pricing
pressures, the gain or loss of significant customers, increased research and
development expense associated with new product introductions, component
shortages (see "-Dependence on Certain Suppliers"), and general economic
conditions. The Company's planned product shipments for a single carrier's
equipment deployment project can be a significant portion of a quarter's
revenues, and delays in the timing of such a project (which have occurred in the
past, including the quarter ended March 31, 1997) 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.
COMPETITION. The market for telecommunications products is highly
competitive and subject to rapid technological change. The Company's principal
competition to date has been from major telecommunications equipment suppliers,
such as Newbridge Networks Corporation and Tellabs, Inc., which offer a broad
line of products including access devices for business applications. 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. As Premisys begins shipping its SlimLine and StreamLine
products, it expects to face additional competition from channel bank and
CSU/DSU vendors as well as with new startups focusing on the access equipment
market. 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 or acquisition of such products could reduce the
level of demand from these telecommunications equipment suppliers for the
Company's products. In addition, certain of the telecommunications equipment
suppliers which market the Company's products have recently either acquired or
expressed an interest in acquiring companies which have products or technologies
that may be adapted to compete with the Company's products in the future.
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 majority 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 backlog. The Company's manufacturing procedures are designed to
assure rapid response to customer demand, but may, in some circumstances, create
risk of excess or inadequate inventory, which may have an adverse affect on the
Company's business and operating results. The Company's agreements with its
customers typically allow customers to cancel orders or delay scheduled
shipments without penalty until a relatively short period of time before planned
shipment. The Company has experienced cancellation of orders from time to time,
and expects to receive order cancellations from time to time in the future,
which could adversely affect the Company's revenues for a quarter or series of
quarters. Because a substantial portion of customer orders are filled within the
fiscal quarter of receipt, and because of the ability of customers to revise or
cancel orders and change delivery schedules without significant penalty, the
Company believes that its backlog as of any given date is not necessarily
indicative of actual revenues for any succeeding period.
RAPIDLY EVOLVING TECHNOLOGY. The telecommunications equipment market is
characterized by rapidly changing technologies and frequent new product
introductions, which include cell and packet technologies and new digital
subscriber line technologies ("xDSL"). The Company's success will depend to a
substantial degree upon its ability to respond to changes in technology and
customer requirements. This will require the timely selection, development and
marketing of new products and enhancements on a cost-effective basis. For
example, the Company has licensed certain technology from Positron for inclusion
in the Company's Q-155 products, which were announced in June 1997 and are
expected to begin shipping in the quarter ending December 31, 1998. Also, in the
quarter ended March 31, 1998, the Company licensed cell and packet technologies
from SNT. The Company intends to ship products based upon the SNT technology in
calendar 1999. However, there can be no assurance that the Company will be able
to successfully integrate the SNT or Positron technology into new products
within such time frames, or at all. In addition, failure to achieve market
acceptance of the recently introduced SlimLine and StreamLine products could
have a material adverse effect on the Company's operating results. The
introduction of new and enhanced products also requires that the Company manage
transitions from older products in order to minimize disruptions in customer
orders, avoid excess inventory of old products and ensure that adequate supplies
of new products can be delivered to meet customer orders. In the past, certain
of the Company's newly introduced products have contained undetected errors and
incompatibilities with installed products, which has resulted in losses and
delays in market acceptance of such products. As the functionality and
complexity of the Company's products continue to grow, the Company has
experienced and may in the future experience an increased incidence of such
errors or failures as well as delays in introducing its products.
RELATIONSHIP WITH PARADYNE. The Company has a strategic relationship with
Paradyne, formerly a wholly-owned subsidiary of AT&T, that involves the joint
development, marketing and sale of the Company's IMACS product by Paradyne. The
Company's agreement with Paradyne provides Paradyne exclusive distribution
rights with respect to the products covered by the agreement to AT&T entities,
as defined under the agreement. At the time that the Company entered into its
OEM agreement with Paradyne, Paradyne was a 100%-owned subsidiary of AT&T. In
1996, AT&T separated into three publicly-held stand-alone businesses, one of
which - Lucent would focus on the communications equipment market. In June 1996,
Lucent concluded a stock purchase agreement for the sale of Paradyne to the
Texas Pacific Group. In the quarter ended March 31, 1997, Paradyne announced new
products which are extensions of its existing line of CSU/DSU products. Premisys
believes that the higher capacity models of Paradyne's 916x series offer
features that are similar to those of the Company's IMACS and StreamLine
products. See "-Competition" and "-Rapidly Evolving Technology." In the quarter
ended December 31, 1997, the Company entered into an OEM agreement with Lucent
for the purchase of the SlimLine and StreamLine products directly from Premisys.
Although sales to Paradyne declined 34% from fiscal 1997 to fiscal 1998,
shipments to Paradyne continued to represent a significant portion of the
Company's revenues in fiscal 1998. Neither Paradyne nor Lucent are subject to
any minimum purchase requirements, and there can be no assurance that they will
continue to place orders with the Company. Significant reductions in shipments
to Paradyne could have a material adverse effect on the Company's business and
operating results.
INDUSTRY STANDARDS AND REGULATORY MATTERS. The market for the Company's
products is also characterized by the need to meet a significant number of voice
and data communications regulations and standards, including those defined by
the Federal Communications Commission, Underwriters Laboratories, Bell
Communications Research ("Bellcore") and, internationally, various countries and
international standards committees. Regulations can be changed by new
legislation, as occurred with the enactment of the Telecommunications Reform Act
of 1996; these changes can impact service offerings and competitiveness in the
communications marketplace, and thus could have an effect on the timing and size
of the industry's investment in access equipment. New standards are evolving as
new technologies, such as ATM and xDSL, are deployed. As existing and new
standards evolve, the Company will be required to modify its products or develop
and support new versions of its products. It is also important that the
Company's products be easily integrated with carriers' network management
systems. The failure of the Company's products to comply, or delays in
compliance, with the various existing and evolving industry standards could
delay introduction of the Company's products, which could have a material
adverse effect on the Company's business and operating results. In addition,
government regulatory policies are likely to continue to have a major impact on
the pricing of existing as well as new public network services and therefore are
expected to affect demand for such services and the telecommunications products
that support such services.
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 Chief
Executive Officer, Senior Vice President, Sales and Marketing and its Senior
Vice President, Finance and Administration, and Chief Financial Officer, have
only recently assumed their current positions. The loss of the services of any
one of the Company's senior officers or key employees could have a material
adverse effect on the Company's business and operating results. The Company's
success also depends to a significant extent on its ability to attract and
retain additional highly-skilled technical, managerial and sales and marketing
personnel, the competition for whom is intense.
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.
YEAR 2000 RISKS. The Company has a formal Year 2000 Conformance Project in
place that focuses on three key readiness areas: (1) internal infrastructure
readiness, addressing internal information systems and non-information
technology systems; (2) supplier readiness, addressing the preparedness of our
supplier base; and (3) product readiness, addressing the Company's product
functionality, which includes customer support of the installed base of the
Company's product. For each readiness area, a task force is systematically
performing a Company-wide risk assessment, conducting testing and remediation,
and communicating with employees, suppliers, customers and other third party
business partners to raise awareness of the Year 2000 problem. Following are
overviews of each readiness area and the Company's progress thereon for becoming
ready for the Year 2000. Internal infrastructure readiness: An assessment of
internal and computer software and hardware is being completed with the
assistance of a third party. The Company is in the process of migrating to an
upgraded version of its enterprise-wide accounting and manufacturing system,
which will be Year 2000 compliant. For other systems, the Company has identified
all non-compliant systems, established a project for prioritized system
compliance, and is in the process of executing under such compliance project.
With respect to the Company's enterprise-wide accounting and manufacturing
system, compliance is scheduled for completion by November 1998. Other systems
are scheduled to be compliant no later than May 1999. In addition to
applications and information technology hardware, the Company is testing and
developing remediation plans for embedded systems, facilities and other
operations. Supplier readiness: This program is focused on minimizing the risk
associated with suppliers in two areas: (1) a supplier's business capability to
continue providing products and services, and (2) a supplier's products
compliance with Year 2000. Suppliers are being identified and contacted based on
their relative risk in these two areas. The Company has received responses from
a significant number of its preferred suppliers. Most of the respondents are in
the process of developing remediation plans. Supplier issues that potentially
affect the Company's products are targeted to be resolved by July 1999. Product
readiness: The Company has completed a comprehensive program which focused on
identifying and resolving Year 2000 issues existing in the Company's products.
The program encompassed a number of key efforts including testing, evaluation,
engineering and manufacturing implementation. In addition, the program focused
on customer support of the installed base, including coordination of retrofit
activity and testing existing customer electronic transaction capability. Based
on these efforts, the Company believes that its products are Year 2000
compliant. General and Risk Factors: The Company's Year 2000 project is
currently in the assessment phase and, with respect to certain information
systems and products, in the remediation phase. The Company believes that its
greatest potential risks are associated with its information systems and systems
embedded in its operations and infrastructure. The Company is at the beginning
stage of assessment for its operations and infrastructure, and cannot predict
whether significant problems will be identified. The Company has not yet
determined the extent of contingency planning that may be required. Based on the
status of the assessment made and remediation plans developed to date, the
Company is not in a position to state the total cost of remediation of all Year
2000 issues, however, the Company believes such costs will not exceed $500,000.
However, the Company has not yet completed its assessments, developed
remediation for all problems, developed any contingency plans, or completely
implemented or tested any of its remediation plans. As the Year 2000 project
continues, the Company may discover additional Year 2000 problems, may not be
able to develop, implement, or test remediation or contingency plans, or may
find that the costs of these activities exceed current expectations. In many
cases, the Company is relying on assurances from suppliers that new and upgraded
information systems and other products will be Year 2000 compliant. The Company
plans to test such third-party products, but cannot be sure that its tests will
be adequate or that, if problems are identified, they will be addressed by the
supplier in a timely and satisfactory way. Because the Company uses a variety of
information systems and has additional systems embedded in its operations and
infrastructure, it cannot be sure that all of its systems will work together in
a Year 2000-compliant fashion. Furthermore, the Company cannot be sure that it
will not suffer business interruptions, either because of its own Year 2000
problems or those of its customers or suppliers whose Year 2000 problems may
make it difficult or impossible for them to fulfill their commitments to the
Company. If the Company fails to satisfactory resolve Year 2000 issues related
to its products in a timely manner, it could be exposed to liability to third
parties.
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
The Company, in the normal course of business, is subject to the risks
associated with foreign currency exchange rates, fluctuations in the market
value of its fixed income securities available-for-sale, and changes in interest
rates.
To date, the Company's exposure to foreign currency fluctuations has been
minimized through the denomination of its foreign sales, and hence its accounts
receivable, in US dollars as well as the use of letters of credit when
warranted. The Company funds its international operations from US dollar bank
accounts on an as needed basis and, accordingly, does not keep significant
amounts of funds in foreign currencies. Presently, the Company does not hedge
foreign currency exposures for its non-dollar denominated operating expenses in
Europe, Asia, Canada and Latin America as such amounts have not been material in
relation to the Company's domestic operating expenses. Until fiscal 1997, the
Company purchased a substantial amount of its modules from one foreign supplier.
Today, substantially all of these modules are sourced in the United States.
The Company also maintains a portfolio of marketable, fixed income
securities, available for sale, of various issuers, types and maturities.
Substantially all of the portfolio consists of municipal securities. The Company
limits its exposure to interest and credit risk by establishing and strictly
monitoring clear policies and guidelines for its fixed income portfolio. The
maximum allowable maturity for any one investment is 3 years and the maximum
allowable duration of the portfolio is limited to 1.5 years. The guidelines also
establish credit quality standards and limits on exposure to one issue, issuer
and type of instrument. The fair market value of the portfolio at June 30, 1998
was $89 million with the corresponding unrealized gain included as a component
of shareholder equity. The average duration of the portfolio at June 30, 1998
was 0.99 years.
The following table presents the hypothetical changes in fair values in
the municipal securities held by the Company at June 30, 1998. Market changes
reflect immediate hypothetical parallel shifts in the yield curve of plus or
minus 50 basis points (BPS), 100 BPS and 150 BPS.
<TABLE>
<CAPTION>
Decrease in Federal Increase in Federal
Funds Rate Funds Rate
--------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Change in Federal Funds Rate (150 BPS)(100 BPS)(50 BPS) 50 BPS 100 BPS 150 BPS
- -----------------------------------------------------------------------------------
Change in Securities
Valuation ($000's) $1,320 $871 $423 ($436) ($865) ($1,287)
</TABLE>
<TABLE>
<CAPTION>
The probability that the Federal Funds Rate will move a specified amount (BPS)
is shown below:
Rate Move
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(200BPS) (150 BPS)(100 BPS) (50 BPS) 0 BPS 50 BPS 100 BPS 150 BPS 200 BPS
3 Months 0% 0% 2% 16% 50% 84% 98% 100% 100%
6 Months 0% 2% 8% 24% 50% 76% 92% 98% 100%
9 Months 1% 4% 12% 28% 50% 72% 88% 96% 99%
1 Year 2% 7% 16% 31% 50% 69% 84% 93% 98%
</TABLE>
Source: Analysis of Federal Funds Rates published by the Federal Reserve Board
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.
<PAGE>
PREMISYS COMMUNICATIONS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Report of Independent Accountants 31
Consolidated Balance Sheet as of June 30, 1997 and 1998 32
Consolidated Statement of Operations for the years ended June 30, 1996, 33
1997 and 1998
Consolidated Statement of Stockholders' Equity for the years ended June 30, 34
1996, 1997 and 1998
Consolidated Statement of Cash Flows for the years ended June 30, 1996, 35
1997 and 1998
Notes to Consolidated Financial Statements 36
<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, of stockholders' equity and of
cash flows present fairly, in all material respects, the financial position of
Premisys Communications, Inc. and its subsidiaries at June 30, 1997 and 1998,
and the results of their operations and their cash flows for each of the three
years in the period ended June 30, 1998, 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/ PricewaterhouseCoopers LLP
PRICEWATERHOUSECOOPERS LLP
San Jose, California
July 23, 1998, except for Note 10 which is as of September 24, 1998
<PAGE>
PREMISYS COMMUNICATIONS, INC.
CONSOLIDATED BALANCE SHEET
(in thousands, except per share data)
ASSETS
June 30,
----------------------------
1997 1998
------------ -----------
Current assets:
Cash and cash equivalents $ 28,923 $ 31,006
Short-term investments 44,301 74,975
Accounts receivable, net 7,658 12,208
Inventories 8,775 3,859
Deferred tax assets 7,207 7,355
Prepaid expenses and other assets 3,674 657
------------ -----------
Total current assets 100,538 130,060
Property and equipment, net 6,444 8,392
Other assets 119 305
------------ -----------
$ 107,101 $ 138,757
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 4,756 $ 6,969
Accrued liabilities 5,438 10,207
Income taxes payable --- 735
Current portion of long-term debt 90 70
----------- -----------
Total current liabilities 10,284 17,981
----------- -----------
Commitments (Note 9) --- ---
Stockholders' equity:
Preferred Stock, $0.01 par value, 2,000 shares
authorized; no
shares issued or outstanding --- ---
Common stock, $0.01 par value, 100,000 shares
authorized;
25,191 and 25,974 shares issued and outstanding 252 260
Additional paid-in capital 74,994 85,230
Retained earnings 21,571 35,286
----------- -----------
Total stockholders' equity 96,817 120,776
----------- -----------
$ 107,101 $ 138,757
=========== ===========
The accompanying notes are an integral part
of these financial statements.
<PAGE>
PREMISYS COMMUNICATIONS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands, except per share data)
Year Ended June 30,
-------------------------------
1996 1997 1998
---------- --------- ----------
Revenues $ 73,912 $ 78,358 $ 102,298
Cost of revenues 26,418 27,262 35,586
---------- --------- ----------
Gross profit 47,494 51,096 66,712
---------- --------- ----------
Operating expenses:
Research and development 7,468 10,519 16,205
Acquired in-process technology --- 4,000 4,431
Selling, general and administrative 15,449 21,364 27,705
-------- ------- --------
Total operating expenses 22,917 35,883 48,341
---------- --------- ----------
Income from operations 24,577 15,213 18,371
Interest and other income, net 1,899 2,641 3,399
---------- --------- ----------
Income before income taxes 26,476 17,854 21,770
Provision for income taxes 9,688 6,963 8,055
---------- --------- ----------
Net income $ 16,788 $ 10,891 $ 13,715
========== ========= ==========
Net income per share
Basic $ 0.70 $ 0.44 $ 0.54
========== ========= ==========
Diluted $ 0.64 $ 0.41 $ 0.50
========== ========= ==========
Shares used in computing net income per share
Basic 23,876 24,722 25,569
========== ========= ==========
Diluted 26,389 26,498 27,495
========== ========= ==========
The accompanying notes are an integral part
of these financial statements.
<PAGE>
<TABLE>
<CAPTION>
PREMISYS COMMUNICATIONS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(in thousands)
Notes
Additional Receivable
Common Stock Paid-In From Retained
Shares Amount Capital Stockholders Earnings
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1995 11,716 $ 117 $ 53,017 $ (138) $ (5,989)
Stock dividend 11,716 119 --- --- (119)
Shares issued under
Employee Stock Purchase Plan 51 --- 677 --- ---
Exercise of options 916 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 24,399 244 6,656 --- 10,680
Shares issued under
Employee Stock Purchase Plan 46 --- 1,109 --- ---
Exercise of options 746 8 2,776 --- ---
Tax benefit of exercised
stock options --- --- 4,453 --- ---
Net income for fiscal 1997 --- --- --- --- 10,891
--------------------------- --------- --------- ---------- ------------ -----------
Balance, June 30, 1997 25,191 252 74,994 --- 21,571
Shares issued under
Employee Stock Purchase Plan 52 --- 919 --- ---
Exercise of options 731 8 3,213 --- ---
Tax benefit of exercised
stock options --- --- 6,104 --- ---
Net income for fiscal 1998 --- --- --- --- 13,715
--------------------------- --------- --------- ---------- ------------ -----------
Balance, June 30, 1998 25,974 $ 260 $ 85,230 --- $ 35,286
========= ========= ========== ============ ===========
</TABLE>
The accompanying notes are an integral part of these
financial statements.
<PAGE>
<TABLE>
<CAPTION>
PREMISYS COMMUNICATIONS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
Year Ended June 30,
1996 1997 1998
- ------------------------------------------------- ------------ ------------- ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 16,788 $ 10,891 $ 13,715
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation 838 1,347 2,194
Deferred tax assets (1,831) (4,292) (148)
Changes in assets and liabilities:
Accounts receivable (12,725) 8,609 (4,550)
Inventories (1,107) (4,554) 4,916
Prepaid expenses and other assets (171) (3,235) 2,831
Accounts payable 1,946 1,506 2,213
Accrued liabilities 3,242 (459) 4,769
Income taxes payable (865) (580) 735
------------ ------------- ------------
Net cash provided by operating activities 6,115 9,233 26,675
------------ ------------- ------------
Cash flows from investing activities:
Purchase of property and equipment (2,007) (5,091) (4,142)
Purchase of short-term investments (8,113) (5,498) (30,674)
------------ ------------- ------------
Net cash used in investing activities (10,120) (10,589) (34,816)
------------ ------------- ------------
Cash flows from financing activities:
Proceeds from issuance of Common Stock, net 2,264 3,893 4,140
Tax benefit of exercised stock options 11,384 4,453 6,104
Repayment of notes receivable from stockholders 138 --- ---
Proceeds (repayment) of long-term debt 4 (125) (20)
------------ ------------- ------------
Net cash provided by financing activities 13,790 8,221 10,224
------------ ------------- ------------
Net increase in cash 9,785 6,865 2,083
Cash and cash equivalents at beginning of year 12,273 22,058 28,923
------------ ------------- ------------
Cash and cash equivalents at end of year $ 22,058 $ 28,923 $ 31,006
============ ============= ============
Supplemental disclosures:
Cash paid for income taxes $ 975 $ 10,644 $ 63
</TABLE>
The accompanying notes are an integral part
of these financial statements.
<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, (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
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.
Principles of consolidation
The consolidated financial statements include the accounts of Premisys
Communications, Inc. and its wholly-owned subsidiaries. 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
municipal 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, 1997 and 1998, 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 two 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 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 the 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.
Net income per share
The Company adopted Financial Accounting Standards Board Statement No. 128,
"Earnings per Share," ("SFAS 128")in the first quarter of fiscal 1998. SFAS 128
requires presentation of both Basic EPS and Diluted EPS on the face of the
statement of operations. Basic EPS is computed by dividing net income (loss)
available to common stockholders by the weighted average number of common shares
outstanding during the period. Diluted EPS gives effect to all dilutive
potential common shares outstanding during a period. In computing Diluted EPS,
the average stock price for the period is used in determining the number of
shares assumed to be purchased under the treasury stock method from exercise of
stock options.
Foreign currency transactions
The U.S. dollar is the functional currency of Premisys Asia, Premisys
Canada 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
The Company uses 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.
Recently issued accounting pronouncements
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.
In June 1998, the FASB issued Statement No. 133, "Accounting for
Derivative Instruments and Hedging Activities," ("SFAS 133"). This statement
provides guidance on accounting for derivative instruments and hedging
activities. SFAS 133 requires that an entity recognize all derivatives as either
assets or liabilities and measure those instruments at fair value. It also
provides guidance for accounting changes in the fair value of a derivative
(i.e., gains and losses). SFAS 133 is effective for all quarters of fiscal years
beginning after June 15, 1999.
<PAGE>
NOTE 2 - BALANCE SHEET COMPONENTS
June 30,
--------------------
1997 1998
--------- ----------
(in thousands)
Accounts receivable:
Trade accounts receivable $ 7,858 $ 12,408
Less: allowance for doubtful accounts (200) (200)
--------- ----------
$ 7,658 $ 12,208
========= ==========
Inventories:
Raw materials $ 1,562 $ 582
Work-in-process 1,080 676
Finished goods 6,133 2,601
--------- ----------
$ 8,775 $ 3,859
========= ==========
Property and equipment:
Machinery and equipment $ 3,099 $ 4,355
Computers and purchased software 2,707 4,931
Furniture and fixtures 1,638 2,074
Leasehold improvements 2,176 2,402
--------- ----------
9,620 13,762
Less: Accumulated depreciation (3,176) (5,370)
--------- ----------
$ 6,444 $ 8,392
========= ==========
Accrued liabilities:
Employee compensation $ 1,868 $ 3,960
Warranty 2,424 3,842
Other 1,146 2,405
--------- ----------
$ 5,438 $ 10,207
========= ==========
NOTE 3 - ACQUIRED RESEARCH AND DEVELOPMENT IN-PROCESS
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, which
was announced in June 1997. 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 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 as acquired research and development in process in the
quarter ended March 31, 1997. Payments of license fees to Positron in fiscal
1997 and 1998 totaled $2.0 million and $1.0 million, respectively.
In the quarter ended March 31, 1998, the Company announced the execution of a
technology license agreement with SNT. SNT's technologies will provide the
Company with a non-blocking switching core expandable to 11.6 Gbs, ATM
interfaces to OC-3 and OC-12, 10/100MB Ethernet/Fast Ethernet interfaces, and
related software. The Company will use these technologies to develop broadband
ATM and IP multiservice platforms.
The Company is paying a total of $4.4 million for licensing SNT
technologies and related software. The Company expensed these fees as acquired
research and development in-process in the March 31, 1998 quarter. The Company
also received options to license future releases of SNT software for additional
fees.
NOTE 4 - INCOME TAXES
The provision for income taxes consists of the following:
Year Ended June 30,
---------------------------------------
1996 1997 1998
----------- ----------- -----------
Current: (in thousands)
Federal $ 8,889 $ 9,058 $ 6,230
State 2,494 2,138 1,891
Foreign 136 59 82
----------- ----------- -----------
11,519 11,255 8,203
----------- ----------- -----------
Deferred:
Federal (1,024) (3,467) (216)
State (807) (825) 68
----------- ----------- -----------
(1,831) (4,292) (148)
----------- ----------- -----------
$ 9,688 $ 6,963 $ 8,055
=========== =========== ===========
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,
------------------------
1997 1998
---------- ----------
(in thousands)
Financial accruals not yet deductible $ 6,086 $ 5,265
Capitalized purchased technology 1,067 2,076
Capitalized research and development expenses 54 14
---------- ----------
$ 7,207 $ 7,355
========== ==========
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,
------------------------------------------
1996 1997 1998
------------ ------------ ------------
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 (2.7) --- ---
Tax exempt interest income (2.4) (4.8) (5.0)
Other 0.6 2.7 0.9
------------ ------------ ------------
Effective tax rate 36.6% 39.0% 37.0%
============ ============ ============
<PAGE>
NOTE 5 - NET INCOME PER SHARE
<TABLE>
<CAPTION>
Following is a presentation of the Basic and Diluted EPS computations for
the periods presented below:
Per share
(In thousands, except per share amounts) Income Shares Amount
- ---------------------------------------------------------------------------------------
YEAR ENDED JUNE 30, 1996
<S> <C> <C> <C>
Earnings per share of common stock - basic $ 16,788 23,876 $ 0.70
Effect of dilutive securities:
Stock options --- 2,513
------------ ------------
Earnings per share of common stock - diluted $ 16,788 26,389 $ 0.64
------------ ------------ ----------
YEAR ENDED JUNE 30, 1997
Earnings per share of common stock - basic $ 10,891 24,722 $ 0.44
Effect of dilutive securities:
Stock options --- 1,776
------------ ------------
Earnings per share of common stock - diluted $ 10,891 26,498 $ 0.41
------------ ------------ ----------
YEAR ENDED JUNE 30, 1998
Earnings per share of common stock - basic $ 13,715 25,569 $ 0.54
Effect of dilutive securities:
Stock options --- 1,926
------------ ------------
Earnings per share of common stock - diluted $ 13,715 27,495 $ 0.50
------------ ------------ ----------
</TABLE>
NOTE 6 - STOCK 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, 5,200,000 shares of the Company's Common Stock are reserved for issuance
at exercise prices not less than the fair value of the Company's Common 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 have vesting terms of four years. The
1994 Option Plan will terminate ten years after its adoption unless terminated
earlier 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 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. Each
Eligible Director will automatically be granted an additional option for 6,000
shares of Common Stock annually. Each 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 Company's 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 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, 1998, of the 4,653,215 shares subject to outstanding
options, 1,298,957 shares of such Options were exercisable; and options to
purchase 776,639 shares of the Company's Common Stock 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:
Options Options Outstanding
-------------------------------
Available Weighted
for Grant Shares Average
Exercise Price
--------------- --------------- --------------
Balance at June 30, 1995 (a) 1,447,100 3,176,462 $2.49
Additional shares authorized, 2,000,000 --- ---
December 1995
Options granted (774,300) 774,300 $32.31
Options canceled 124,961 (124,961) $4.18
Options exercised --- (916,343) $1.70
--------------- --------------- --------------
Balance at June 30, 1996 2,797,761 2,909,458 $10.61
Options granted (3,401,647) 3,401,647 $16.35
Options canceled 1,457,105 (1,457,105) $27.33
Options exercised --- (746,089) $3.80
--------------- --------------- --------------
Balance at June 30, 1997 853,219 4,107,911 $10.67
Additional shares authorized, 1,200,000 --- ---
December 1997
Options granted (1,761,550) 1,761,550 $24.07
Options canceled 484,970 (484,970) $12.03
Options exercised --- (731,276) $4.41
--------------- --------------- --------------
Balance at June 30, 1998 776,639 4,653,215 $16.58
=============== =============== ==============
(a) All share amounts adjusted for 2 for 1 stock dividend at December, 1995.
The following table summarizes information concerning outstanding and
exercisable options as of June 30, 1998:
Options Outstanding Options Exercisable
----------------------------------- ----------------------
Weighted
Average
Remaining Weighted
Contractual Average Weighted
Range of Number Life Exercise Number Average
Exercise Prices Outstanding (in years) Price Exerciseable Exercise
Price
$0.10 - $5.25 711,993 6.30 $ 3.51 584,898 $ 3.23
$7.25 - $8.19 1,330,299 8.34 $ 8.09 307,099 $ 8.09
$8.88 - $20.56 612,823 9.01 $ 13.18 97,623 $10.16
$21.31 - $29.50 1,413,838 9.66 $ 25.07 43,171 $24.68
$30.75 - $51.00 584,262 8.16 $ 34.91 266,166 $34.61
=========== ============
$0.10 - $51.00 4,653,215 8.50 $ 16.59 1,298,957 $12.04
=========== ============
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 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 Stock Purchase
Plan will terminate ten years after its adoption unless terminated earlier 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 has in all cases equaled 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 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 1997 and 1998 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 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 123, the Company's Results of Operations for the years ended June 30, 1996,
1997 and 1998 would have been as follows:
Year Ended June 30,
--------------------------------------------
1996 1997 1998
(in thousands except per share data)
Net income:
As reported $16,788 $10,891 $13,715
Pro forma $14,642 $2,371 $3,474
Earnings per share -- basic:
As reported $0.70 $0.44 $0.54
Pro forma $0.61 $0.10 $0.14
Earnings per share -- diluted
As reported $0.64 $0.41 $0.50
Pro forma $0.55 $0.09 $0.13
The pro forma effect on net income and earnings per share for fiscal 1996,
1997 and fiscal 1998 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.
<PAGE>
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 1998
Stock option plans:
Expected dividend yield 0.0% 0.0% 0.0%
Expected stock price volatility 65.0% 65.0% 65.0%
Risk free interest rate 6.2% 6.4% 5.6%
Expected life of options (years) 3.11 3.09 3.57
Stock purchase plan:
Expected dividend yield 0.0% 0.0% 0.0%
Expected stock price volatility 65.0% 65.0% 65.0%
Risk free interest rate 5.8% 5.4% 5.3%
Expected life of options (years) 0.39 0.50 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, 1997 and
1998 was $15.37, $7.51 and $11.18 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, 1997 and 1998 was
$5.45, $7.46 and $5.75 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 1996, the Company matched
employee contributions up to $800 per contributor per plan year and reduced 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
and 1998.
<PAGE>
NOTE 7 - INTERNATIONAL OPERATIONS
The following is a summary of the Company's operations:
Year Ended June 30,
1996 1997 1998
------------- -------------- ------------
(in thousands)
Revenues from third party customers:
United States $ 65,342 $ 72,679 $ 97,358
Asia 6,961 3,452 2,996
Europe 1,609 355 954
Latin America --- 1,872 990
------------- -------------- ------------
$ 73,912 $ 78,358 $ 102,298
============= ============== ============
Income (loss) from operations:
United States $ 21,043 $ 15,114 $ 18,060
Asia 3,917 1,025 1,216
Europe (383) (1,706) (796)
Latin America --- 780 (109)
------------- -------------- ------------
$ 24,577 $ 15,213 $ 18,371
============= ============== ============
June 30,
-----------------------------
1997 1998
------------- -------------
(in thousands)
Identifiable assets:
United States $ 106,127 $ 137,104
Asia 874 307
Canada --- 646
Europe 100 683
Latin America --- 17
============= =============
$ 107,101 $ 138,757
============= =============
The Company derived 11%, 7% and 5% of its revenues from direct sales to
international customers in fiscal 1996, 1997 and 1998, respectively.
NOTE 8 - 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,
------------------------------------------
1996 1997 1998
ADC Telecommunications 16% 12% 29%
Paradyne 33% 30% 15%
Motorola 15% 15% 11%
DSC (a) 10% (a)
(a) - Amounts not provided as revenues for the period were less than 10% of the
total.
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash and cash equivalents,
short-term investments, municipal securities 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 9 - COMMITMENTS
The Company's principal offices are located in three facilities, totaling
150,281 square feet, leased by the Company in Fremont, California. The leases on
these facilities, which are classified as non-cancelable operating leases,
expire on various dates through December 31, 2005. In addition, the Company
leases facilities in other locations. The leases on these facilities, which are
classified as non-cancelable operating leases, expire on various dates through
September 30, 2003.
Future minimum lease payments under all noncancelable operating leases are
as follows:
Year Ending June 30,
(In thousands)
1999 $ 1,869
2000 2,047
2001 2,007
2002 2,020
2003 2,080
Thereafter 2,858
------------
Total minimum payments $ 12,881
============
Rent expense under facility leases totaled $372,000, $941,000 and
$1,365,000 during fiscal 1996, 1997 and 1998, respectively.
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, 1997 and 1998
include assets acquired under capitalized leases of $437,000 and $351,000, with
related accumulated amortization of $342,000 and $272,000, respectively. Future
minimum payments under capitalized leases are not material.
NOTE 10 - SUBSEQUENT EVENTS
On August 31, 1998, the Company's Board of Directors authorized
repurchase, at management's discretion, of up to four (4) million shares of the
Company's Common Stock over the subsequent 12 months at market prices not to
exceed $14.00 per share and as the market and business conditions warrant. By
September 17, 1998, the Company had repurchased for cash 890,000 shares at
market prices ranging from $8.69 to $10.81 per share. As of September 17, 1998,
pursuant to the authorized stock repurchase program, the Company sold 2.0
million put warrants and purchased 1.5 million call options. The Company had a
maximum potential obligation related to the put warrants of $21.3 million. The
put warrants and call options expire in equal amounts (50% each) on January 15,
1999 and September 15, 1999.
On September 17, 1998, the Company's Board of Directors ("Board") adopted a
Stockholder Rights Plan ("Plan") designated to protect the long-term value of
the Company for its stockholders during any future unsolicited acquisition
attempt. Pursuant to the Plan, the Board declared a dividend of one preferred
share for each share right ("Right") of the Company's Common Stock outstanding
on October 5, 1998. Each Right becomes exercisable to purchase one one-hundredth
(1/100) of a share of Series A Junior Participating Preferred Stock at an
exercise price of $80.00. The Rights will expire on September 18, 2008. The
Company may redeem the Rights at a price of $0.001 per Right.
PART III
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
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 1998 (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)(1) The following financial statements and schedules are filed as part of
this report:
Financial Statements See index included in Part II, Item 8.
(a)(2) and (d) 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)
3.02 Certificate of Amendment of Amended and Restated Certificate of
Incorporation of Premisys Communications, Inc.(4)
3.03 Certifcate of Designations Specifying the Terms of the Series A Junior
Participating Preferred Stock of Premisys Communications, Inc. (15)
3.04 Registrant's Bylaws, as amended.(1)
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)
4.04 Rights Agreement dated September 18, 1998 between Registrant and
ChaseMellon Shareholder Services LLC, as Rights Agent. (15)
+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.(13)***
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)
<PAGE>
10.36 Manufacturing Agreement by and between Premisys Communications,
Inc. and CMC Mississippi, Inc. as of January 9, 1997. (11)**
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. (11)**
10.38 Employment Agreement by and between Premisys Communications Inc.
and Nicholas Williams dated as of March 31, 1997. (11)
+10.39 Registrant's Management Incentive Plan for the fiscal year ended
June 30, 1998. (11)
10.40 License Agreement dated December 27, 1996 between Premisys
Communications Inc. and Positron Fiber Systems Corporation. **
(11)
+10.41 Employment Status Change Agreement by and between Premisys
Communications, Inc. and William J. Smith dated as of October
31, 1997. (12)
+10.42 Employment Agreement by and between Premisys Communications,
Inc. and Peter Hauser dated as of January 5, 1998. (13)
10.43 Third Amendment to Lease Agreement by and between Premisys
Communications, Inc. and Aetna Life Insurance Company, dated
January 8, 1998. (14)
+10.44 Employment Status Change Agreement by and between Premisys
Communications, Inc. and Riley R. Willcox dated as of July 16,
1998.
+10.45 Employment Agreement by and between Premisys Communications,
Inc. and John J. Hagedorn dated as of June 1, 1998.
+10.46 Amendment to Employment Agreement by and between Premisys
Communications, Inc. and John J. Hagedorn dated as of July 14,
1998.
+10.47 Registrant's Management Incentive Plan for the fiscal year ended June
30, 1999.
10.48 Lease Agreement by and between Premisys Communications, Inc. and Aetna
Life Insurance Company, dated June 4, 1998 for the premises located at
48634 Milmont Drive, Fremont, California.
10.49 First Amendment to Lease Agreement by and between Premisys
Communications, Inc. and Aetna Life Insurance Company, dated July 20,
1998 for the premises located at 48634 Milmont Drive, Fremont,
California.
21.01 List of Registrant's subsidiaries.
23.01 Consent of PricewaterhouseCoopers LLP, Independent Accountants.
24.01 Power of Attorney (See page 49 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 Exhibit 3.05 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 13, 1998 (File No. 333-49991).
(11) 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 27,
1997 initially filed September 25, 1997.
(12) 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 26,
1997 filed November 10, 1997.
(13) 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 26,
1997 filed February 2, 1998.
(14) 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 27, 1998
filed May 1, 1998.
(15) Incorporated by reference to the exhibit bearing the same number in
Registrant's Form 8-A (File No. 0-25684) filed September 22, 1998.
+ 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, 1998.
<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 24th day of September, 1998.
PREMISYS COMMUNICATIONS, INC.
By: /s/Nicholas J. Williams
---------------------------------
Nicholas J. Williams
Chief Executive Officer
Each person whose signature appears below constitutes and appoints
Nicholas J. Williams and John J. Hagedorn, 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 confirming 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/Nicholas J. Williams Chief Executive Officer, September 24, 1998
President, Chief
- --------------------------------
Nicholas J. Williams Operating Officer and a
Director
Principal Financial Officer:
/s/John J. Hagedorn Senior Vice President, September 24, 1998
Finance and Administration
- --------------------------------
John J. Hagedorn Chief Financial Officer
and Secretary
Principal Accounting Officer:
/s/Robert W. Dilfer Vice President and Controller September 24, 1998
- --------------------------------
Robert W. Dilfer
Additional Directors:
/s/Raymond C. Lin Chairman of the Board of September 24, 1998
Directors
- --------------------------------
Raymond C. Lin
/s/Boris J. Auerbuch Director September 24, 1998
- --------------------------------
Boris J. Auerbuch
/s/Lip-Bu Tan Director September 24, 1998
- --------------------------------
Lip-Bu Tan
<PAGE>
/s/Gary J. Morgenthaler Director September 24, 1998
- --------------------------------
Gary J. Morgenthaler
/s/Marino R. Polestra Director September 24, 1998
- --------------------------------
Marino R. Polestra
/s/Edward A. Keible Director September 24, 1998
- --------------------------------
Edward A. Keible
/s/Robert C. Hawk Director September 24, 1998
- --------------------------------
Robert C. Hawk
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------
EXHIBITS
to
Form 10-K
Under
THE SECURITIES ACT OF 1933
-----------
PREMISYS COMMUNICATIONS, INC.
<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)
3.02 Certificate of Amendment of Amended and Restated Certificate of
Incorporation of Premisys Communications, Inc.(4)
3.03 Certifcate of Designations Specifying the Terms of the Series A Junior
Participating Preferred Stock of Premisys Communications, Inc. (15)
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)
4.04 Rights Agreement dated September 18, 1998 between Registrant and
ChaseMellon Shareholder Services LLC, as Rights Agent. (15)
+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.(13)***
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)
<PAGE>
10.36 Manufacturing Agreement by and between Premisys Communications,
Inc. and CMC Mississippi, Inc. as of January 9, 1997. (11)**
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. (11)**
10.38 Employment Agreement by and between Premisys Communications Inc.
and Nicholas Williams dated as of March 31, 1997. (11)
+10.39 Registrant's Management Incentive Plan for the fiscal year ended
June 30, 1998. (11)
10.40 License Agreement dated December 27, 1996 between Premisys
Communications Inc. and Positron Fiber Systems Corporation. **
(11)
+10.41 Employment Status Change Agreement by and between Premisys
Communications, Inc. and William J. Smith dated as of October
31, 1997. (12)
+10.42 Employment Agreement by and between Premisys Communications,
Inc. and Peter Hauser dated as of January 5, 1998. (13)
10.43 Third Amendment to Lease Agreement by and between Premisys
Communications, Inc. and Aetna Life Insurance Company, dated
January 8, 1998. (14)
+10.44 Employment Status Change Agreement by and between Premisys
Communications, Inc. and Riley R. Willcox dated as of July 16,
1998.
+10.45 Employment Agreement by and between Premisys Communications,
Inc. and John J. Hagedorn dated as of June 1, 1998.
+10.46 Amendment to Employment Agreement by and between Premisys
Communications, Inc. and John J. Hagedorn dated as of July 14,
1998.
+10.47 Registrant's Management Incentive Plan for the fiscal year ended June
30, 1999.
10.48 Lease Agreement by and between Registrant and Aetna Life Insurance
Company, dated June 4, 1998 for the premises located at 48634 Milmont
Drive, Fremont, California.
10.49 First Amendment to Lease Agreement by and between Premisys
Communications, Inc. and Aetna Life Insurance Company dated July 20,
1998 for the premises located at 48634 Milmont Drive, Fremont,
California.
21.01 List of Registrant's subsidiaries.
23.01 Consent of PricewaterhouseCoopers LLP, Independent Accountants.
24.01 Power of Attorney (See page 49 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 Exhibit 3.05 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 13, 1998 (File No. 333-49991).
(11) 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 27,
1997 initially filed September 25, 1997.
(12) 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 26,
1997 filed November 10, 1997.
(13) 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 26,
1997 filed February 2, 1998.
(14) 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 27, 1998
filed May 1, 1998.
(15) Incorporated by reference to the exhibit bearing the same number in
Registrant's Form 8-A (File No. 0-25684) filed September 22, 1998.
+ 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.
Exhibit 10.44
July 16, 1998
Mr. Riley R. Willcox
56 Marvin Avenue
Los Altos, California 94022
Re: Change in Status to Part-Time Employment
Dear Riley:
This letter confirms the agreement between you and Premisys Corporation, Inc.
("Premisys") concerning the change in the terms of your employment with
Premisys.
1. Change in Employment Status: Effective August 31, 1998, your employment
status with Premisys will change from full-time to part-time. You and Premisys
anticipate you will work approximately ten (10) hours per week beginning
September 1, 1998 and ending March 30, 1999. In addition, you hereby resign from
your position as the Chief Financial Officer, Corporate Secretary, and Senior
Vice President of Finance and Administration, and you further hereby resign from
your position as an officer of Premisys, effective August 3, 1998.
2. Compensation: Premisys will pay you an annual salary of $50,000.00 for
your part-time work. You will receive a pro rate portion (for the 2 months of
full time employment) of your MIP bonus earned during the first half of fiscal
1999. Premisys will continue to reimburse you for all reasonable and necessary
business expenses approved in accordance with Company Policy. As a employee
working less than 20 hours per week, you will no longer be able to participate
in certain employee benefit programs (e.g., Employee Stock Purchase Plan, 401k
savings plan, group life and disability insurance). You will continue to earn
vacation at one-fourth the rate you would accrue as a full-time employee. Your
will be able to continue your medical and dental insurance under COBRA; Premisys
will pay the premiums associated with your coverage; you will continue your
current level of contribution to this insurance.
3. Vesting of Shares: Premisys agrees that all stock options granted to
you during the term of your full-time employment with Premisys will continue to
vest.
4. Services for other Entities: You agree that during the term of your
part-time employment with Premisys, you will not accept full-time employment
with any other company or business entity. You may accept a position as a Board
member for another company, but you agree not to accept a position on the Board
of any competitors of Premisys, and you agree to notify Premisys in advance of
accepting membership on the Board of any company. You may also perform
consulting services for other companies during the term of your part-time
employment with Premisys, but you agree not to perform consulting services for
any competitors of Premisys and you agree to notify Premisys in advance of
performing any consulting services for other companies.
5. Return of Company Property: You hereby warrant to Premisys that you
will return to Premisys at the end of your part-time employment (March 30, 1999)
all property or data to Premisys of any type whatsoever that has been in your
possession or control.
6. Confidential Information: You acknowledge that you have acquired and
will acquire information and materials from Premisys and knowledge about the
business, products, programming techniques, experimental work, customers,
clients and suppliers of Premisys and that all such knowledge, information and
materials acquired are and will be the trade secrets and confidential and
proprietary information of Premisys (collectively "Confidential Information").
Confidential Information will not include, however, any information which is or
becomes part of the public domain through no fault of yours or that Premisys
regularly gives to third parties without restriction on use or disclosure. You
agree to hold all such Confidential Information in strict confidence, not to
disclose it to others or use it in any way, commercially or otherwise, except in
performing services for Premisys, and not to allow any unauthorized person
access to it, either before or after expiration or termination of this
Agreement. You further agree to take all action reasonably necessary and
satisfactory to protect the confidentiality of the Confidential Information in
your possession, including, without limitation, implementing and enforcing
operating procedures to minimize the possibility of unauthorized use or copying
of the Confidential Information.
7. At-Will Employment: You acknowledge that your employment with Premisys
is "at will," and that you may terminate your employment with Premisys at any
time, with our without cause, and Premisys may terminate your employment at any
time, with or without cause.
8. Entire Agreement: This agreement constitutes the entire agreement
between you and Premisys with respect to the subject matter hereof and
supersedes all prior negotiations and agreements, whether written or oral,
relating to such subject matter. You acknowledge that neither Premisys nor their
agents or attorneys have made any promise, representation or warranty
whatsoever, either express or implied, written or oral, which is not contained
in this agreement for the purpose of inducing you to execute the agreement, and
you acknowledge that you have executed this agreement in reliance only upon such
promises, representations and warranties as are contained herein.
9. Modification: It is expressly agreed that this agreement may not be
altered, amended, modified, or otherwise changed in any respect except by
another written agreement that specifically refers to this agreement, executed
by authorized representatives of each of the parties to this agreement.
<PAGE>
If you agree to abide by the terms outlined in this letter, please sign the
attached copy and return it to me.
Sincerely,
PREMISYS CORPORATION, INC.
By: /s/Raymond C. Lin
Raymond C. Lin
READ, UNDERSTOOD AND AGREED
/s/Riley R. Willcox Date: July 16, 1998
Riley R. Willcox
<PAGE>
Exhibit 10.45
June 1, 1998
John J. Hagedorn
19 Woodhill Drive
Redwood City, California 94061
Dear John:
I am pleased to offer you the position of Chief Financial Officer and Senior
Vice President, Finance and Administration, reporting directly to the Chief
Executive Officer. Your salary will be payable biweekly in the amount of
$7,692.31 ($200,000 annualized). Your will also participate in the Management
Incentive Plan, with a target bonus of $90,000 for fiscal 1999. The Compensation
Committee of the Board of Directors has approved a stock option grant for
200,000 shares of Premisys stock as governed by the Premisys Employee Stock
Plan, which will vest over four years (25% at the end of the first year, monthly
thereafter).
Your responsibilities will include accounting, treasury, tax, investor
relations, legal, planning, information systems, human resources, and
facilities. You will be a full member of the senior management team.
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.
Premisys will also provide a twelve-month salary extension and accelerated
vesting of your outstanding stock options if Premisys is acquired and you are
not named Chief Financial Officer of the combined companies.
<PAGE>
This offer is contingent upon the receipt of two items: (1) a signed copy of
this letter by June 8, 1998, and (2) documentary proof that you are a United
States citizen or a non citizen who is lawfully entitled to work in the United
States within three days following your start date. Your employment with
Premisys, if you choose to accept this offer, will be at-will. Thus, either you
or the Company may terminate the employment relationship at any time with or
without cause. 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.
John, I am pleased to offer you this challenging opportunity to contribute to
the success of Premisys and look forward to having you join us on July 15, 1998.
Sincerely,
/s/Raymond C. Lin
Raymond C. Lin
Chief Executive Officer
I accept the above offer of employment, pursuant to the items and conditions set
forth in this letter.
Signature: /s/John J. Hagedorn
Date: _________6/21/98__________________
Attachments: Copy of offer letter
Benefit Summary
Description of Management Incentive Plan
<PAGE>
Exhibit 10.46
July 14, 1998
John J. Hagedorn
19 Woodhill Drive
Redwood City, CA 94061
Dear John:
In my letter of June 1, 1998 in which I offered you employment as Premisys's
Chief Financial Officer, which you accepted on June 2, the following commitment
was made:
Premisys will also provide a twelve-month salary extension and accelerated
vesting of your outstanding stock options if Premisys [the "Company"] is
acquired and you are not named Chief Financial Officer of the combined
companies.
As you have requested, I am defining the terms of this commitment and the
obligations of successors to Premisys so as to prevent potential
misunderstanding between you and any such successors with regard to the letter
and spirit of this commitment.
1. Acquisition of Premisys
Premisys shall be deemed to be "acquired" should any of the following events
occur:
a) Any "person" (as such term is used in Sections 13(d) and 14(d) of the
Securities Exchange Act of 1934, as amended), is or becomes the
"beneficial owner" (as defined in Rule 13d-3 under said Act), directly or
indirectly, of securities of Premisys representing more than 50% of the
total voting power represented by the Company's then outstanding voting
securities.
b) The shareholders of Premisys approve a merger or consolidation of the
Company with any other corporation, other than a merger or consolidation
which would result in the voting securities of Company outstanding
immediately prior thereto continuing to represent (either by remaining
outstanding or by being converted into voting securities of the surviving
entity) more than fifty percent (50%) of the total voting power
represented by the voting securities of Company or such surviving entity
outstanding immediately after such merger or consolidation.
c) The shareholders of Premisys approve a plan of complete liquidation of
Company or an agreement for the sale or disposition by Company of all or
substantially all the Company's assets.
2. Chief Financial Officer of the Combined Companies
Positions which would qualify as being the Chief Financial Officer of the
combined companies under the intent of the above described commitment shall
not entail any of the following limitations:
a) The "combined companies" are organized as a division or wholly owned
subsidiary of a third company and have no publicly traded stock.
b) The "combined companies" publicly traded voting stock is more than fifty
percent (50%) owned by another "person" (as defined above) or a third
company.
c) The facility in which the Chief Financial Officer of the "combined
companies" is required to maintain his principal office is more than 30
miles distance from your Redwood City home to which the offer letter was
addressed.
3. Premisys's Successors
Any successor to Premisys (whether direct or indirect and whether by
purchase, lease, merger, consolidation, liquidation or otherwise) to all or
substantially all of Premisys's business, equity securities and/or assets
shall assume the obligations under the offer letter and agree expressly to
perform the obligations under this letter in the same manner and to the same
extent as Premisys would be required to perform such obligations in the
absence of a succession.
John, I hope that these definitions provide you with the comfort which you are
seeking that the commitment which I made in my offer letter to you will be
carried out in the spirit in which it was intended should Premisys be
"acquired."
Sincerely,
/s/Raymond C. Lin
Raymond C. Lin
Chief Executive Officer
I accept the above definitions to the commitment made in the offer letter of
June 1, 1998 that should Premisys be acquired and I not be named CFO of the
combined companies, my options would vest and I would be provided a twelve-month
salary extension.
Signature: /s/John J. Hagedorn
Date: ______July 15, 1998____________________
<PAGE>
Exhibit 10.47
Management Incentive Plan for FY1999
Premisys Communications, Inc.
Compensation Committee of Board of Directors
July 23, 1998
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
("Pre-bonus Operating Profit").
C. The basis of earning bonuses varies with the responsibilities of the
manager:
1. Ray Lin, Nick Williams and John J. Hagedorn - Company performance;
measured as actual Pre-bonus Operating Profit versus plan
2. Al Fyffe and Peter Hauser- product revenue (through his sales
commission plan), goal accomplishments and actual Pre-bonus Operating
Profit versus plan
3. All other participants - combination of actual Pre-bonus Operating
Profit versus plan and achievement of individual goals, with specific
portions of their bonuses tied to the accomplishment of each goal.
D. The Company performance bonuses that are tied to actual Pre-bonus
Operating Profit versus plan will be calculated as follows: 1. The earned
bonus is the product of individual bonus percentage of planned
Pre-bonus Operating Profit times the actual Pre-bonus Operating Profit.
2. If actual Pre-bonus Operating Profit versus plan is 120% or more
of Plan for the complete fiscal year, the earned bonus is the
product of individual bonus percentage of planned Pre-bonus Operating
Profit times the ratio of the actual/planned Pre-bonus Operating
Profit times the actual Pre-bonus 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 1999
<PAGE>
Exhibit 10.48
Lease Agreement
By And Between
Aetna Life Insurance Company,
A Connecticut Corporation
As Landlord
And
Premisys Communications, Inc.,
A Delaware Corporation
As Tenant
Dated June 4, 1998
<PAGE>
17
98LEASE\PREMRV1.DOC: 06/10/98
Table Of Contents
Page
Basic Lease Information....................................................iii
1. Demise.................................................................1
2. Premises...............................................................1
3. Term...................................................................1
4. Rent...................................................................1
5. Late Charge............................................................3
6. Security Deposit.......................................................3
7. Possession.............................................................3
8. Use of Premises........................................................3
9. Acceptance of Premises.................................................4
10. Surrender..............................................................4
11. Alterations and Additions..............................................4
12. Maintenance of Premises................................................5
13. Landlord's Insurance...................................................5
14. Tenant's Insurance.....................................................5
15. Indemnification........................................................6
16. Subrogation............................................................6
17. Abandonment............................................................7
18. Free From Liens........................................................7
19. Advertisements and Signs...............................................7
20. Utilities..............................................................7
21. Entry by Landlord......................................................7
22. Destruction and Damage.................................................7
23. Condemnation...........................................................9
24. Assignment and Subletting..............................................9
25. Tenant's Default......................................................10
26. Landlord's Remedies...................................................11
27. Attorney's Fees.......................................................12
28. Taxes.................................................................12
29. Effect of Conveyance..................................................12
30. Tenant's Estoppel Certificate.........................................12
31. Subordination.........................................................13
32. Environmental Covenants...............................................13
33. Notices...............................................................15
34. Waiver................................................................15
35. Holding Over..........................................................15
36. Successors and Assigns................................................15
37. Time..................................................................15
38. Brokers...............................................................15
39. Limitation of Liability...............................................15
40. Financial Statements..................................................15
41. Rules and Regulations.................................................16
42. Mortgagee Protection..................................................16
43. Entire Agreement......................................................16
44. Interest..............................................................16
45. Construction..........................................................16
46. Representations and Warranties of Tenant..............................16
Exhibit
A Diagram of the Premises
B Tenant Improvements
B-1 Final Plans and Specifications for Tenant Improvements
(Intentionally omitted)
C Commencement and Expiration Date
Memorandum
D Rules and Regulations
E Sign Criteria (Intentionally
omitted)
F Hazardous Materials Disclosure
Certificate
G Tenant Improvements Loan
Amortization Memorandum
(Intentionally omitted)
Addenda Addendum 1: Option to Extend the
Lease
<PAGE>
Lease Agreement
Basic Lease Information
Lease Date: June 4, 1998
Landlord: Aetna Life Insurance Company,
a Connecticut corporation
Landlord's Address: c/o Allegis Realty Investors llc
455 Market Street, Suite 1540
San Francisco, California 94105
All notices sent to Landlord under this Lease shall be
sent to the above address, with copies to:
LPC MS. Inc.,
101 Lincoln Center Drive, 4th Floor
Foster City, California 94404
Tenant: Premisys Communications, Inc.,
a Delaware corporation
Tenant's Address and 48664 Milmont Drive, Fremont, California 94538
Telephone Number: (510) 353-4588
Premises Square Footage: Approximately twenty nine thousand eight hundred
forty (29,840) rentable square feet
Premises Address: 48634 Milmont Drive, Fremont, California 94538
Project: Sutter Hill Business Park - 174 RESA, together with
the land on which the Project is situated and all
Common Areas
Building (if not the 48630-48634 Milmont Drive, Fremont, California same as
the Project):
Tenant's Proportionate
Share of Project: 52.2%
Tenant's Proportionate
Share of Building: 52.2%
Length of Term: Eighty four (84) months
Estimated Commencement
Date: January 3, 1999
Estimated Expiration December 31, 2005
Date:
Monthly Base Rent: Monthly Base Monthly
Months Sq. Ft. Rate Base Rent
01-12 29,840 x $1.30 = $ 38,792.00
13-24 29,840 x $1.34 = $ 39,985.60
25-36 29,840 x $1.38 = $ 41,179.20
37-48 29,840 x $1.42 = $ 42,372.80
49-60 29,840 x $1.46 = $ 43,566.40
61-72 29,840 x $1.50 = $ 44,760.00
73-84 29,840 x $1.54 = $ 45,953.60
Prepaid Rent: Thirty eight thousand seven hundred ninety two and
00/100 dollars ($38,792.00)
Month to which Prepaid
Base Rent and
Additional Rent will be First (1st) month of the Term Applied:
Security Deposit: Forty five thousand nine hundred fifty three and
60/100 dollars ($45,953.60)
Permitted Use: General office and administration,
telecommunications, computers, software, electronic and
biomedical research and development, light
manufacturing and assembly of components, but only to
the extent permitted by the City of Fremont and all
agencies and governmental authorities having
jurisdiction thereof.
Unreserved Parking One hundred nineteen (119) nonexclusive and
Spaces: undesignated parking spaces
Broker(s): Bishop Hawk for Tenant
LPC MS, Inc. for Landlord
Tenant Improvements
Allowance: Twenty nine thousand eight hundred forty and 00/100
dollars ($29,840.00)
Architect: N/A
<PAGE>
LEASE AGREEMENT
This Lease Agreement is made and entered into by and between Landlord and
Tenant on the Lease Date. The defined terms used in this Lease which are defined
in the Basic Lease Information set forth on page 1 of this Lease Agreement
("Basic Lease Information") shall have the meaning and definition given them in
the Basic Lease Information. The Basic Lease Information, the exhibit(s), the
addendum or addenda described in the Basic Lease Information, and this Lease
Agreement are and shall be construed as a single instrument and are referred to
herein as the "Lease".
1. Demise
In consideration for the rents and all other charges and payments payable by
Tenant, and for the agreements, terms and conditions to be performed by Tenant
in this Lease, LANDLORD DOES HEREBY LEASE TO TENANT, AND TENANT DOES HEREBY HIRE
AND TAKE FROM LANDLORD, the Premises described below (the "Premises"), upon the
agreements, terms and conditions of this Lease for the Term hereinafter stated.
2. Premises
The Premises demised by this Lease is the square footage of space specified in
the Basic Lease Information and has the address specified in the Basic Lease
Information. The Premises are a part of and are contained in the Building
specified in the Basic Lease Information. The location and dimensions of the
Premises are depicted on Exhibit A, which is attached hereto and incorporated
herein by this reference. Tenant shall have the non-exclusive right to use the
parking and other common areas on the real property on which the Building is
situated (the "Property"). No easement for light or air is incorporated in the
Premises.
The Premises demised by this Lease shall also include the Tenant Improvements
(as that term is defined in Exhibit B, attached hereto and incorporated herein
by this reference) to be constructed by Landlord within the interior of the
Premises. Landlord shall construct the Tenant Improvements on the terms and
conditions set forth in Exhibit B. Landlord and Tenant agree to and shall be
bound by the terms and conditions of Exhibit B.
3. Term
The term of this Lease (the "Term") shall be for the period of months specified
in the Basic Lease Information, commencing on the earliest to occur of the
following dates (the "Commencement Date"):
(a)The date the Tenant Improvements are approved by the appropriate
governmental agency as being in accordance with its building code and the
building permit issued for such improvements, as evidenced by the issuance of
a final building inspection approval; or
(b)The date Landlord's architect and general contractor have both
certified in writing to Tenant that the Tenant Improvements have been
substantially completed in accordance with the plans and specifications
therefor; or
(c)The date Tenant commences occupancy of the Premises;
when the Commencement Date has been determined pursuant to the foregoing,
Landlord and Tenant shall promptly execute a Commencement Date Memorandum in the
form attached hereto as Exhibit C.
4. Rent
(a)Base Rent. Tenant shall pay to Landlord, in advance on the first day
of each month, without further notice or demand and without offset or
deduction, the monthly installments of rent specified in the Basic Lease
Information (the "Base Rent").
Upon execution of this Lease, Tenant shall pay to Landlord the Prepaid Rent
specified in the Basic Lease Information to be applied toward Base Rent for the
month of the Term specified in the Basic Lease Information.
(b)Additional Rent. In addition to the Base Rent, Tenant shall pay to
Landlord, in accordance with this Paragraph 4, Tenant's proportionate share
(which is hereby agreed to be Tenant's Proportionate Share as specified in
the Basic Lease Information) of the following items related to the Building,
the Property, and/or the Outside Areas (as defined in Paragraph 4(b)(3)) (the
"Additional Rent"):
(1) Taxes and Assessments. All real estate taxes and assessments. Real
estate taxes and assessments shall include any form of assessment,
license, fee, tax, levy, penalty (if a result of Tenant's delinquency),
or tax (other than net income, estate, succession, inheritance, transfer
or franchise taxes), imposed by any authority having the direct or
indirect power to tax, or by any city, county, state or federal
government or any improvement or other district or division thereof,
whether such tax is (i) determined by the area of the Premises, the
Building or the Property, or any part thereof, or the Rent and other sums
payable hereunder by Tenant or by other tenants, including, but not
limited to, any gross income or excise tax levied by any of the foregoing
authorities with respect to receipt of Rent or other sums due under this
Lease; (ii) upon any legal or equitable interest of Landlord in the
Premises, the Building or the Property, or any part thereof; (iii) upon
this transaction or any document to which Tenant is a party creating or
transferring any interest in the Premises, the Building or the Property;
(iv) levied or assessed in lieu of, in substitution for, or in addition
to, existing or additional taxes against the Premises, the Building or
the Property, whether or not now customary or within the contemplation of
the parties; or (v) surcharged against the parking area. Tenant and
Landlord acknowledge that Proposition 13 was adopted by the voters of the
State of California in the June, 1978 election and that assessments,
taxes, fees, levies and charges may be imposed by governmental agencies
for such purposes as fire protection, street, sidewalk, road, utility
construction and maintenance, refuse removal and for other governmental
services which may formerly have been provided without charge to property
owners or occupants. It is the intention of the parties that all new and
increased assessments, taxes, fees, levies and charges due to Proposition
13 or any other cause are to be included within the definition of real
property taxes for purposes of this Lease.
(2) Insurance. All insurance premiums, including premiums for "all
risk," fire and extended coverage (including earthquake endorsements)
insurance for the Building, public liability insurance, other insurance
as Landlord reasonably deems necessary, and any deductibles paid under
policies of any such insurance.
(3) Outside Areas Expenses. All reasonable costs to maintain, repair,
replace, supervise, insure (including provision of public liability
insurance) and administer the areas outside of the Building ("Outside
Areas"), including parking areas, landscaping (including maintenance
contracts), sprinkler systems, sidewalks, driveways, curbs, lighting
systems, and utilities for Outside Areas.
(4) Parking Charges. Any parking charges or other costs levied,
assessed or imposed by, or at the direction of, or resulting from
statutes or regulations, or interpretations thereof, promulgated by any
governmental authority or insurer (not affiliated with Landlord) in
connection with the use or occupancy of the Building, the Outside Areas
and/or the Property.
(5) Maintenance and Repair of Building. All reasonable costs to
maintain, repair, and replace the structural portions of the roof, the
roof coverings, the foundation, the floor slab, the load bearing walls,
and the painting of the exterior walls (including the painting thereof)
of the Building, the heating, ventilation, and air conditioning ("HVAC")
systems serving the Building and/or the Premises (including the cost of
maintenance contracts), and all reasonable costs to maintain, repair and
replace all utility and plumbing systems, fixtures and equipment located
outside the Building. Notwithstanding the foregoing, Tenant shall be
responsible for the cost of replacement of capital expenditures described
in this subparagraph 4(b)(5) only on a pro rata basis corresponding to
the portion of the useful life of the capital expenditure that will be
exhausted during the remainder of the Term.
(6) Management and Administration. All reasonable costs for management
and administration of the Building and the Property, including a property
management fee, accounting, auditing, billing, postage, employee
benefits, payroll taxes, etc.
(c)Payment of Additional Rent.
(1) Upon commencement of this Lease, Landlord shall submit to Tenant
an estimate of monthly Additional Rent for the period between the
Commencement Date and the following December 31 and Tenant shall pay such
estimated Additional Rent on a monthly basis concurrently with the
payment of the Base Rent. Tenant shall continue to make said monthly
payments until notified by Landlord of a change therein. By March 1 of
each calendar year, Landlord shall endeavor to provide to Tenant a
statement showing the actual Additional Rent due to Landlord for the
prior calendar year, prorated from the Commencement Date during the first
year. If the total of the monthly payments of Additional Rent that Tenant
has made for the prior calendar year (or portion thereof during which
this Lease was in effect) is less than the actual Additional Rent
chargeable to Tenant for such prior calendar year, then Tenant shall pay
the difference in a lump sum within ten (10) business days after receipt
of such statement from Landlord. Any overpayment by Tenant of Additional
Rent for the prior calendar year shall be credited towards the Additional
Rent next due.
<PAGE>
(2) The actual Additional Rent for the prior calendar year shall be used
for purposes of calculating Tenant's monthly payment of estimated
Additional Rent for the current year, subject to adjustment as provided
above, except that in any year in which resurfacing of the parking area or
material roof repairs are planned, Landlord may include the estimated cost
of such work in the estimated monthly Additional Rent. Landlord shall make
the final determination of Additional Rent for the year in which this
Lease terminates as soon as possible after termination of such year.
Tenant shall remain liable for payment of any amount due to Landlord in
excess of the estimated Additional Rent previously paid by Tenant, and,
conversely, Landlord shall promptly return to Tenant any overpayment, even
though the Term has expired and Tenant has vacated the Premises. Failure
of Landlord to submit statements as called for herein shall not be deemed
a waiver of Tenant's obligation to pay Additional Rent as herein provided.
(d)General Payment Terms. The Base Rent, Additional Rent and all other
sums payable by Tenant to Landlord hereunder are referred to as the "Rent".
All Rent shall be paid without deduction, offset or abatement in lawful money
of the United States of America. Checks are to be made payable to AEtna
Property Services and shall be mailed to: AEtna Property Services, Kodak
Center, 1740 Technology Drive, #600, San Jose, California 95110, or to such
other person or place as Landlord may, from time to time, designate to Tenant
in writing. Rent for any partial month during the Term shall be prorated for
the portion thereof falling due within the Term.
5. Late Charge
Notwithstanding any other provision of this Lease, Tenant hereby acknowledges
that late payment to Landlord of Rent, or other amounts due hereunder will cause
Landlord to incur costs not contemplated by this Lease, the exact amount of
which will be extremely difficult to ascertain. If any Rent or other sums due
from Tenant are not received by Landlord or by Landlord's designated agent
within ten (10) days after their due date, then Tenant shall pay to Landlord a
late charge equal to ten five percent (10%) (5%) of such overdue amount, plus
any reasonable attorneys' fees incurred by Landlord by reason of Tenant's
failure to pay Rent and/or other charges when due hereunder. Landlord and Tenant
hereby agree that such late charges represent a fair and reasonable estimate of
the cost that Landlord will incur by reason of Tenant's late payment. Landlord's
acceptance of such late charges shall not constitute a waiver of Tenant's
default with respect to such overdue amount or estop Landlord from exercising
any of the other rights and remedies granted under this Lease.
6. Security Deposit
Concurrently with Tenant's execution of the Lease, Tenant shall deposit with
Landlord the Security Deposit specified in the Basic Lease Information as
security for the full and faithful performance of each and every term, covenant
and condition of this Lease. Landlord may use, apply or retain the whole or any
part of the Security Deposit as may be reasonably necessary (a) to remedy
Tenant's default in the payment of any Rent, (b) to repair damage to the
Premises caused by Tenant, (c) to clean the Premises upon termination of this
Lease, (d) to reimburse Landlord for the payment of any amount which Landlord
may reasonably spend or be required to spend by reason of Tenant's default, or
(e) to compensate Landlord for any other loss or damage which Landlord may
suffer by reason of Tenant's default. Should Tenant faithfully and fully comply
with all of the terms, covenants and conditions of this Lease, within thirty 30
twenty (20) days following the expiration of the Term, the Security Deposit or
any balance thereof shall be returned to Tenant or, at the option of Landlord,
to the last assignee of Tenant's interest in this Lease. Landlord shall not be
required to keep the Security Deposit separate from its general funds and Tenant
shall not be entitled to any interest on such deposit deposits. If Landlord so
uses or applies all or any portion of said deposit, within five (5) days after
written demand therefor Tenant shall deposit cash with Landlord in an amount
sufficient to restore the Security Deposit to the full extent of the above
amount, and Tenant's failure to do so shall be a default under this Lease. In
the event Landlord transfers its interest in this Lease, Landlord shall transfer
the then remaining amount of the Security Deposit to Landlord's successor in
interest, and thereafter Landlord shall have no further liability to Tenant with
respect to such Security Deposit.
7. Possession
(a)Tenant's Right of Possession. Subject to Paragraph 7(b), Tenant shall
be entitled to possession of the Premises upon commencement of the Term.
(b)Delay in Delivering Possession. If for any reason whatsoever, Landlord
cannot deliver possession of the Premises to Tenant at the commencement of
the Term, this Lease shall not be void or voidable, nor shall Landlord, or
Landlord's agents, be liable to Tenant for any loss or damage resulting
therefrom. Tenant shall not be liable for Rent until Landlord delivers
possession of the Premises to Tenant. The expiration date of the Term shall
be extended by the same number of days that Tenant's possession of the
Premises was delayed.
<PAGE>
8. Use of Premises
(a)Permitted Uses. The Premises shall be used for the Permitted Uses
specified in the Basic Lease Information and no other. The Premises shall not
be used to create any nuisance or trespass, for any illegal purpose, for any
purpose not permitted by applicable laws and regulations, or for any purpose
that would vitiate the insurance or increase the premiums for insurance on
the Premises or the Building. Tenant agrees not to overload the floor(s) of
the Building.
(b)Compliance with Governmental Regulations. Tenant shall, at Tenant's
expense, faithfully observe and comply with all Municipal, State and Federal
statutes, rules, regulations, ordinances, requirements, and orders, now in
force or which may hereafter be in force pertaining to the Premises or
Tenant's use thereof, including without limitation, any statutes, rules,
regulations, ordinances, requirements, or orders requiring, as a result of
Tenant's use of the Premises, installation of fire sprinkler systems, seismic
reinforcement and related alterations, and removal of asbestos, whether
substantial in cost or otherwise, and all recorded covenants, conditions and
restrictions affecting the Property ("Private Restrictions") now in force or
which may hereafter be in force; provided, however, that Tenant shall not be
required to make structural changes to the Premises or Building not related
to Tenant's specific use of the Premises unless the requirement for such
changes is imposed as a result of any improvements or additions made or
proposed to be made at Tenant's request. The judgment of any court of
competent jurisdiction, or the admission of Tenant in any action or
proceeding against Tenant, whether Landlord be a party thereto or not, that
Tenant has violated any such rule, regulation, ordinance, statute or Private
Restrictions, shall be conclusive of that fact as between Landlord and
Tenant.
9. Acceptance of Premises
By entry hereunder, Tenant accepts the Premises as suitable for Tenant's
intended use and as being in good and sanitary operating order, condition and
repair, AS IS, and without representation or warranty by Landlord as to the
condition, use or occupancy which may be made thereof. Any exceptions to the
foregoing must be by written agreement executed by Landlord and Tenant.
10. Surrender
Tenant agrees that on the last day of the Term, or on the sooner termination of
this Lease, Tenant shall surrender the Premises to Landlord (a) in good
condition and repair (damage by Acts of God, fire, and normal wear and tear
excepted), but with all interior walls painted or cleaned so they appear
painted, any carpets cleaned, and with all floors cleaned and waxed, together
with all alterations, additions and improvements which may have been made in or
on the Premises; except that Tenant shall remove trade fixtures put in at the
expense of Tenant and any improvements as to which Landlord has, prior to the
date of surrender, consented to or requested removal; and (b) otherwise in
accordance with Paragraph 32(f). Tenant shall repair all damage caused by such
removal and otherwise restore the Premises in accordance with the preceding
sentence at Tenant's sole cost and expense. On or before the expiration or
sooner termination of this Lease, Tenant shall remove all of Tenant's personal
property from the Premises. All property of Tenant not so removed, unless such
non-removal is consented to by Landlord, shall be deemed abandoned by Tenant,
provided that in such event Tenant shall remain liable to Landlord for all costs
incurred in storing and disposing of such abandoned property of Tenant. If the
Premises are not surrendered at the end of the Term or sooner termination of
this Lease, and in accordance with the provisions of this Paragraph 10 and of
Paragraph 32(f), Tenant hereby indemnifies Landlord against loss or liability
resulting from delay by Tenant in so surrendering the Premises including,
without limitation, any claims made by any succeeding tenant founded on such
delay.
11. Alterations and Additions
(a)Tenant shall not make, or permit to be made, any alteration or
addition to the Premises, or any part thereof, without the prior written
consent of Landlord, such consent not to be unreasonably withheld, provided,
however, Tenant without Landlord's consent, shall be entitled to make
interior, non-structural alterations or additions to the Premises not
requiring any permits which separately or in the aggregate over each twelve
(12) month period of the Term do not exceed five thousand dollars
($5,000.00).
(b)Any alteration or addition to the Premises shall be at Tenant's sole
cost and expense, in compliance with all applicable laws and requirements
requested by Landlord, and in accordance with plans and specifications
approved in writing by Landlord.
(c)In the event Landlord consents to a proposed alteration or addition,
such consent shall include Landlord's advice in writing, whether or not such
proposed alteration or addition shall be required to be removed at the
expiration or termination of this Lease. If Landlord fails so to advise
Tenant regarding whether or not a proposed alteration or addition may be
removed at the expiration or termination of this Lease, then Tenant, shall be
required may, at Tenant's option, remove the alteration or addition, or to
surrender the alteration or addition to Landlord with the Premises, without
compensation to Tenant, at the expiration or termination of this Lease. All
additions, alterations or improvements, including, but not limited to,
heating, lighting, electrical, air conditioning, fixed partitioning, drapery,
wall covering and paneling, built-in cabinet work and carpeting installations
made by Tenant, together with all property that has become an integral part
of the Building, shall at once be and become the property of Landlord, and
shall not be deemed trade fixtures.
(d)Tenant agrees not to proceed to make such alterations or additions,
notwithstanding consent from Landlord to do so, until five (5) days after
Tenant's receipt of such consent, in order that Landlord may post appropriate
notices to avoid any liability to contractors or material suppliers for
payment for Tenant's improvements. Tenant will at all times permit such
notices to be posted and to remain posted until the completion of work.
12. Maintenance of Premises
(a)Maintenance by Tenant. Throughout the Term, Tenant shall, at its sole
expense, (1) keep and maintain in good order and condition, repair, and
replace the Premises, and every part thereof, including glass, windows,
window frames, skylights, interior and exterior doors and door frames, and
the interior of the Premises, (excepting only those portions of the Building
to be maintained by Landlord, as provided in Paragraph 12(c) below), (2) keep
and maintain in good order and condition, repair, and replace all utility and
plumbing systems, fixtures and equipment, including without limitation,
electricity, gas, water, and sewer, located in or on the Premises, Tenant
shall be responsible for these costs of replacement only on a pro rata basis
corresponding to the portion of the useful life of the capital expenditure
that will be exhausted during the remainder of the Term and , (3) furnish all
expendables, including light bulbs, paper goods and soaps, used in the
Premises, (3) (4) repair all damage to the Premises, the Building or the
Outside Areas caused by the negligence or willful misconduct of Tenant or its
agents, employees, contractors or invitees. Tenant shall not do anything to
cause any damage, deterioration or unsightliness to the Building and the
Outside Areas.
(b)Landlord's Right to Maintain and Repair at Tenant's Expense.
Notwithstanding the foregoing, Landlord shall have the right, but not the
obligation, at Tenant's expense, to enter the Premises and perform Tenant's
maintenance, repair and replacement work. Within ten (10) days after invoice
therefor from Landlord, Tenant shall pay all reasonable costs and expenses
incurred by Landlord in connection with such maintenance, repair and
replacement work.
(c)Maintenance by Landlord. Subject to the provisions of Paragraphs
12(a), 22 and 23, and further subject to Tenant's obligation under Paragraph
4 to reimburse Landlord, in the form of Additional Rent, for Tenant's
Proportionate Share of the cost and expense of the following items, Landlord
agrees to repair and maintain the following items: the structural portions of
the roof and the roof coverings (provided that Tenant installs no additional
air conditioning or other equipment on the roof that damages structural
portions of the roof or the roof coverings), the foundation, the floor slab,
the load bearing walls, and the exterior walls (excluding any glass therein
but including the painting thereof) of the Building; the HVAC systems serving
the Building and/or the Premises; the utility and plumbing systems, fixtures,
and equipment located outside the Building; and the parking areas,
landscaping, sprinkler systems, sidewalks, driveways, curbs, and lighting
systems in the Outside Areas. Landlord shall not be required to repair or
maintain conditions created due to any act, negligence or omission of Tenant
or its agents, contractors, employees or invitees. Landlord's obligation
hereunder to repair and maintain is subject to the condition precedent that
Landlord shall have received written notice of the need for such repairs and
maintenance. Tenant shall promptly report in writing to Landlord any
defective condition known to it which Landlord is required to repair, and
failure to so report such defects shall make Tenant responsible to Landlord
for any liability incurred by Landlord by reason of such condition.
(d)Tenant's Waiver of Rights. Tenant hereby expressly waives all rights
to make repairs at the expense of Landlord or to terminate this Lease, as
provided for in California Civil Code Sections 1941 and 1942, and 1932(1),
respectively, and any similar or successor statute or law in effect or any
amendment thereof during the Term.
13. Landlord's Insurance
Landlord shall purchase and keep in force fire, extended coverage and "all risk"
insurance covering the Building in an amount equal to eighty percent (80%) of
the replacement cost of the Building. Tenant shall, at its sole cost and
expense, comply with any and all reasonable requirements pertaining to the
Premises of any insurer necessary for the maintenance of reasonable fire and
public liability insurance, covering the Building and appurtenances. Landlord,
at Tenant's cost, may maintain "Loss of Rents" insurance, insuring that the Rent
will be paid in a timely manner to Landlord for a period of at least twelve (12)
months if the Premises are destroyed or rendered unusable or inaccessible by any
cause insured against under this Lease.
14. Tenant's Insurance
(a)Public Liability Insurance. Tenant shall, at Tenant's expense, secure
and keep in force a "broad form" public liability insurance and property
damage policy covering the Premises and the Outside Areas, insuring Tenant,
and naming Landlord and its lenders as additional insureds, against any
liability arising out of the ownership, use, occupancy or maintenance of the
Premises and all Outside Areas. The minimum limit of coverage of such policy
shall be in the amount of not less than Three Two Million Dollars
($3,000,000.00) ($2,000,000.00) for injury or death of one person in any one
accident or occurrence and in the amount of not less than Three Two Million
Dollars ($3,000,000.00) ($2,000,000.00) for injury or death of more than one
person in any one accident or occurrence, shall include an extended liability
endorsement providing contractual liability coverage (which shall include
coverage for Tenant's indemnification obligations in this Lease), and shall
contain a severability of interest clause or a cross liability endorsement.
Such insurance shall further insure Landlord and Tenant against liability for
property damage of at least One Million Dollars ($1,000,000.00). The limit of
any insurance shall not limit the liability of Tenant hereunder. No policy
shall be cancelable or subject to reduction of coverage, and loss payable
clauses shall be subject to Landlord's approval. Such policies of insurance
shall be issued as primary policies and not contributing with or in excess of
coverage that Landlord may carry, by an insurance company authorized to do
business in the State of California for the issuance of such type of
insurance coverage and rated A:XIII or better in Best's Key Rating Guide. A
copy of said policy or a certificate evidencing to Landlord's reasonable
satisfaction that such insurance is in effect shall be delivered to Landlord
upon commencement of the Term, and thereafter whenever Landlord shall
reasonably request.
(b)Personal Property Insurance. Tenant shall maintain in full force and
effect on all of its fixtures and equipment on the Premises, a policy or
policies of fire and extended coverage insurance with standard coverage
endorsement to the extent of the full replacement cost thereof. During the
term of this Lease the proceeds from any such policy or policies of insurance
shall be used for the repair or replacement of the fixtures and equipment so
insured. Landlord shall have no interest in the insurance upon Tenant's
equipment and fixtures and will sign all documents reasonably necessary in
connection with the settlement of any claim or loss by Tenant. Landlord will
not carry insurance on Tenant's possessions. Tenant shall furnish Landlord
with a certificate evidencing to Landlord's reasonable satisfaction that such
insurance is in effect, and whenever required, shall satisfy Landlord that
such policy is in full force and effect.
15. Indemnification
(a)Of Landlord. Tenant shall indemnify and hold harmless Landlord and
agents, employees, partners, shareholders, directors, invitees, and
independent contractors (collectively "Agents") of Landlord against and from
any and all claims, liabilities, judgments, costs, demands, causes of action
and expenses (including, without limitation, reasonable attorneys' fees)
arising from (1) Tenant's use of the Premises or from any activity done,
permitted or suffered by Tenant in or about the Premises, the Building or the
Property, and (2) any act, neglect, fault, willful misconduct or omission of
Tenant, or Tenant's Agents or from any breach or default in the terms of this
Lease by Tenant, and (3) any action or proceeding brought on account of any
matter in items (1) or (2), except to the extent caused by the sole active
negligence or willful misconduct by Landlord or its agents. If any action or
proceeding is brought against Landlord by reason of any such claim, upon
notice from Landlord, Tenant shall defend the same at Tenant's expense by
counsel reasonably satisfactory to Landlord. As a material part of the
consideration to Landlord, Tenant hereby assumes all risk of damage to
property or injury to persons in or about the Premises from any cause
whatsoever (except that which is caused by the sole active negligence or
willful misconduct by Landlord or its Agents or by the failure of Landlord to
observe any of the terms and conditions of this Lease, if such failure has
persisted for an unreasonable period of time after written notice of such
failure), and Tenant hereby waives all claims in respect thereof against
Landlord. The obligations of Tenant under this Paragraph 15 shall survive any
termination of this Lease.
(b)No Impairment of Insurance. The foregoing indemnity shall not relieve
any insurance carrier of its obligations under any policies required to be
carried by either party pursuant to this Lease, to the extent that such
policies cover the peril or occurrence that results in the claim that is
subject to the foregoing indemnity.
16. Subrogation
Landlord and Tenant hereby mutually waive any claim against the other for any
loss or damage to any of their property located on or about the Premises, the
Building or the Property that is caused by or results from perils covered by
property insurance carried by the respective parties, to the extent of the
proceeds of such insurance actually received with respect to such loss or
damage, whether or not due to the negligence of the other party or its agents.
Because the foregoing waivers will preclude the assignment of any claim by way
of subrogation to an insurance company or any other person, each party now
agrees to immediately give to its insurer written notice of the terms of these
mutual waivers and shall have their insurance policies endorsed to prevent the
invalidation of the insurance coverage because of these waivers. Nothing in this
Paragraph 16 shall relieve a party of liability to the other for failure to
carry insurance required by this Lease.
<PAGE>
17. Abandonment
Tenant shall not abandon the Premises at any time during the Term. In the event
of abandonment, the rights and remedies of Tenant and Landlord shall be
determined in accordance with the applicable California statutes in effect at
the time of abandonment.
18. Free From Liens
Tenant shall keep the Premises and the Property, free from any liens arising out
of any work performed, materials furnished, or obligations incurred by or for
Tenant.
19. Advertisements and Signs
Tenant shall not place or permit to be placed in, upon, or about the Premises or
the Property any signs, advertisements or notices without obtaining Landlord's
prior written consent, which consent shall not be unreasonably withheld, or
without complying with applicable law, and will not conduct, or permit to be
conducted, any sale by auction on the Premises or otherwise on the Property.
Tenant shall remove any sign, advertisement or notice placed on the Premises by
Tenant upon the expiration of the Term or sooner termination of this Lease, and
Tenant shall repair any damage or injury to the Premises or the Property caused
thereby, all at Tenant's expense. If any signs are not removed, or necessary
repairs not made, Landlord shall have the right to remove the signs and repair
any damage or injury to the Premises at Tenant's sole cost and expense.
20. Utilities
Tenant shall pay for all water, gas, heat, light, power, telephone service and
all other materials and services supplied to the Premises. If Tenant fails to
pay for any of the foregoing when due, Landlord may pay the same and add such
amount to the Rent.
21. Entry by Landlord
Tenant shall permit Landlord and its Agents to enter into and upon the Premises
at all reasonable times, upon reasonable notice (except in the case of an
emergency, for which no notice shall be required), and subject to Tenant's
reasonable security arrangements, for the purpose of inspecting the same or
showing the Premises to prospective purchasers, lenders or tenants or to alter,
improve, maintain and repair the Premises as required or permitted of Landlord
under the terms hereof, without any rebate of Rent and without any liability to
Tenant for any loss of occupation or quiet enjoyment of the Premises thereby
occasioned (except for actual damages resulting from the negligence or willful
misconduct of Landlord or its agents); and Tenant shall permit Landlord to post
notices of non-responsibility and ordinary "for sale" or "for lease" signs,
provided that Landlord may post such "for lease" signs and exhibit the Premises
to prospective tenants only during the six (6) months prior to termination of
this Lease. No such entry shall be construed to be a forcible or unlawful entry
into, or a detainer of, the Premises, or an eviction of Tenant from the
Premises.
22. Destruction and Damage
(a)If the Building is damaged by fire or other perils covered by extended
coverage insurance, Landlord shall, at Landlord's option:
(1) In the event of total destruction (which shall mean destruction or
damage in excess of twenty-five percent (25%) of the full insurable value
thereof) of the Premises, elect either to commence promptly to repair and
restore the Premises and prosecute the same diligently to completion, in
which event this Lease shall remain in full force and effect; or not to
repair or restore the Premises, in which event this Lease shall
terminate. Landlord shall give Tenant written notice of its intention
within sixty (60) days after the date (the "Casualty Discovery Date")
Landlord obtains actual knowledge of such destruction. If Landlord elects
not to restore the Premises, this Lease shall be deemed to have
terminated as of the date of such total destruction.
(2) In the event of a partial destruction (which shall mean
destruction or damage to an extent not exceeding twenty-five percent
(25%) of the full insurable value thereof) of the Premises for which
Landlord will receive insurance proceeds sufficient to cover the cost to
repair and restore such partial destruction and, if the damage thereto is
such that the Premises may be substantially repaired or restored to its
condition existing immediately prior to such damage or destruction within
one hundred eighty (180) days from the Casualty Discovery Date, Landlord
shall commence and proceed diligently with the work of repair and
restoration, in which event the Lease shall continue in full force and
effect. If such repair and restoration requires longer than one hundred
eighty (180) days or if the insurance proceeds therefor (plus any amounts
Tenant may elect or is obligated to contribute) are not sufficient to
cover the cost of such repair and restoration, Landlord may elect either
to so repair and restore, in which event the Lease shall continue in full
force and effect, or not to repair or restore, in which event the Lease
shall terminate. In either case, Landlord shall give written notice to
Tenant of its intention within sixty (60) days after the Casualty
Discovery Date. If Landlord elects not to restore the Premises, this
Lease shall be deemed to have terminated as of the date of such partial
destruction.
(3) Notwithstanding anything to the contrary contained in this
Paragraph 22, in the event of damage to the Premises occurring during the
last twelve (12) months of the Term, Landlord may elect to terminate this
Lease by written notice of such election given to Tenant within thirty
(30) days after the Casualty Discovery Date. Tenant at its option shall
have up to 120 days to vacate, from date of Landlord's notice; provided,
however, that Tenant shall pay the full scheduled monthly base rent
without offset, except for those portions of the Premises that Landlord
is occupying or making unusable to Tenant as a result of Landlord's
reconstruction or repair of the Premises, while Tenant is in occupancy of
the Premises.
(b)If the Premises is damaged by any peril not covered by extended
coverage insurance, and the cost to repair such damage exceeds any amount
Tenant may agree to contribute, Landlord may elect either to commence
promptly to repair and restore the Premises and prosecute the same diligently
to completion, in which event this Lease shall remain in full force and
effect; or not to repair or restore the Premises, in which event this Lease
shall terminate. Landlord shall give Tenant written notice of its intention
within sixty (60) days after the Casualty Discovery Date. If Landlord elects
not to restore the Premises, this Lease shall be deemed to have terminated as
of the date on which Tenant surrenders possession of the Premises to
Landlord, except that if the damage to the Premises materially impairs
Tenant's ability to continue its business operations in the Premises, then
this Lease shall be deemed to have terminated as of the date such damage
occurred.
(c)Notwithstanding anything to the contrary in this Paragraph 22,
Landlord shall have the option to terminate this Lease, exercisable by notice
to Tenant within sixty (60) days after the Casualty Discovery Date, in each
of the following instances:
(1) If more than twenty-five percent (25%) of the full insurable value
of the Building or the Project is damaged or destroyed, regardless of whether
or not the Premises are destroyed.
(2) If the Building or the Project or any portion thereof is damaged
or destroyed and the repair and restoration of such damage requires longer
than one hundred eighty (180) days from the Casualty Discovery Date.
(3) If the Building or the Project or any portion thereof is damaged
or destroyed and the insurance proceeds therefor are not sufficient to cover
the costs of repair and restoration.
(4) If the Building or the Project or any portion thereof is damaged
or destroyed during the last twelve (12) months of the Term.
(d)In the event of repair and restoration as herein provided, the monthly
installments of Base Rent shall be abated proportionately in the ratio which
Tenant's use of the Premises is impaired during the period of such repair or
restoration, provided, however, that Tenant shall not be entitled to such
abatement to the extent that such damage or destruction resulted from the
acts or inaction of Tenant or Tenant?s Agents. Except as expressly provided
in the immediately preceding sentence with respect to abatement of Base Rent,
Tenant shall have no claim against Landlord for, and hereby releases Landlord
and Landlord?s Agents from responsibility for and waives its entire claim of
recovery for any cost, loss or expense suffered or incurred by Tenant as a
result of any damage to or destruction of the Premises, the Building or the
Project or the repair or restoration thereof, including, without limitation,
any cost, loss or expense resulting from any loss of use of the whole or any
part of the Premises, the Building or the Project and/or any inconvenience or
annoyance occasioned by such damage, repair or restoration.however, that
Tenant shall not be entitled to any compensation or damages for loss of use
of the whole or any part of the Premises and/or any inconvenience or
annoyance occasioned by such damage, repair or restoration.
(e)If Landlord is obligated to or elects to repair or restore as herein
provided, Landlord shall repair or restore only the initial tenant
improvements, if any, constructed by Landlord in the Premises pursuant to the
terms of this Lease, substantially to their condition existing immediately
prior to the occurrence of the damage or destruction; and Tenant shall
promptly repair and restore, at Tenant?s expense, Tenant?s Alterations which
were not constructed by Landlord.
(f)Tenant hereby waives the provisions of California Civil Code Section
1932(2) and Section 1933(4) which permit termination of a lease upon
destruction of the leased premises, and the provisions of any similar law now
or hereinafter in effect, and the provisions of this Paragraph 22 shall
govern exclusively in case of such destruction.
<PAGE>
Notwithstanding anything to the contrary contained in the Lease:
A. If the Premises are substantially damaged or impaired by fire (25% or
more) or other casualty as reasonably determined by Landlord, and the Premises
cannot be restored within two hundred ten (210) days after the date of such
damage, Tenant may terminate this Lease.
B. If this Lease is not terminated by Landlord as provided herein,
Landlord shall restore the Premises and all Tenant Improvements installed by
Landlord to the condition in which they existed immediately prior to the
casualty.
23. Condemnation
If twenty-five percent (25%) or more of the Building or the parking area for the
Premises is taken for any public or quasi-public purpose by any lawful
governmental power or authority, by exercise of the right of appropriation,
inverse condemnation, condemnation or eminent domain, or sold to prevent such
taking (each such event being referred to as a "Condemnation"), Landlord may, at
its option, terminate this Lease as of the date title vests in the condemning
party. If the Building after any Condemnation and any repairs by Landlord would
be untenantable for the conduct of Tenant's business operations, Tenant shall
have the right to terminate this Lease as of the date title vests in the
condemning party. If either party elects to terminate this Lease as provided
herein, such election shall be made by written notice to the other party given
within thirty (30) days after the nature and extent of such Condemnation have
been finally determined. Tenant shall not because of such taking assert any
claim against Landlord. Landlord shall be entitled to receive the proceeds of
all Condemnation awards, and Tenant hereby assigns to Landlord all of its
interest in such awards. If less than twenty-five percent (25%) of the Building
or the parking area is taken, Landlord at its option may terminate this Lease.
If neither Landlord nor Tenant elects to terminate this Lease to the extent
permitted above, Landlord shall promptly proceed to restore the Premises, to the
extent of any Condemnation award received by Landlord, to substantially their
same condition as existed prior to such Condemnation, allowing for the
reasonable effects of such Condemnation, and a proportionate abatement shall be
made to the Base Rent corresponding to the time during which, and to the portion
of the floor area of the Building (adjusted for any increase thereto resulting
from any reconstruction) of which, Tenant is deprived on account of such
Condemnation and restoration. The provisions of California Code of Civil
Procedure Section 1265.130, which allows either party to petition the Superior
Court to terminate the Lease in the event of a partial taking of the Premises,
and any other applicable law now or hereafter enacted, are hereby waived by
Landlord and Tenant.
24. Assignment and Subletting
(a)Tenant shall not voluntarily or by operation of law, (1) mortgage,
pledge, hypothecate or encumber this Lease or any interest herein, (2) assign
or transfer this Lease or any interest herein, sublet the Premises or any
part thereof, or any right or privilege appurtenant thereto, or allow any
other person (the employees, agents and invitees of Tenant excepted) to
occupy or use the Premises, or any portion thereof, without first obtaining
the written consent of Landlord, which consent shall not be withheld
unreasonably. When Tenant requests Landlord's consent to such assignment or
subletting, it shall notify Landlord in writing of the name and address of
the proposed assignee or subtenant and the nature and character of the
business of the proposed assignee or subtenant and shall provide current
financial statements for the proposed assignee or subtenant prepared in
accordance with generally accepted accounting principles. Tenant shall also
provide Landlord with a copy of the proposed sublet or assignment agreement,
including all material terms and conditions thereof. Landlord shall have the
option, to be exercised within thirty (30) days of receipt of the foregoing,
to (1) cancel this Lease as of the commencement date stated in the proposed
sublease or assignment, (2) acquire from Tenant the interest, or any portion
thereof, in this Lease and/or the Premises that Tenant proposes to assign or
sublease, on the same terms and conditions as stated in the proposed sublet
or assignment agreement, (3) consent to the proposed assignment or sublease,
or (4) refuse its consent to the proposed assignment or sublease, providing
that such consent shall not be unreasonably withheld.
(b)Without otherwise limiting the criteria upon which Landlord may
withhold its consent, Landlord may take into account the reputation and
credit worthiness of the proposed assignee or subtenant, the character of the
business proposed to be conducted in the Premises or portion thereof sought
to be subleased, and the potential impact of the proposed assignment or
sublease on the economic value of the Premises. In any event, Landlord may
reasonably withhold its consent to any assignment or sublease, if (1) the
actual use proposed to be conducted in the Premises or portion thereof
conflicts with the provisions of Paragraph 8(a), unless such actual use
proposed is consented to by Landlord, which consent shall not be withheld
unreasonably. or 8(b) above or with any other lease which restricts the use
to which any space in the Building may be put, or (2) the proposed assignment
or sublease requires alterations, improvements or additions to the Premises
or portions thereof, which Landlord does not consent to, which consent shall
not be unreasonably withheld.
(c)If Landlord approves an assignment or subletting as herein provided,
Tenant shall pay to Landlord, as Additional Rent, seventy-five percent (75%)
of the difference, if any, between (1) the Base Rent plus Additional Rent
allocable to that part of the Premises affected by such assignment or
sublease pursuant to the provisions of this Lease, and (2) the rent and any
additional rent payable by the assignee or sublessee to Tenant, after
deducting the costs incurred by Tenant in connection with any such assignment
or sublease. The assignment or sublease agreement, as the case may be, after
approval by Landlord, shall not be amended without Landlord's prior written
consent, and shall contain a provision directing the assignee or subtenant to
pay the rent and other sums due thereunder directly to Landlord upon
receiving written notice from Landlord that Tenant is in default under this
Lease with respect to the payment of Rent. Landlord's collection of such rent
and other sums shall not constitute an acceptance by Landlord of attornment
by such assignee or subtenant. A consent to one assignment, subletting,
occupation or use shall not be deemed to be a consent to any other or
subsequent assignment, subletting, occupation or use, and consent to any
assignment or subletting shall in no way relieve Tenant of any liability
under this Lease. Any assignment or subletting without Landlord's consent
shall be void, and shall, at the option of Landlord, constitute a Default
under this Lease.
(d)Tenant shall pay Landlord's reasonable fees, not to exceed One
Thousand Five Hundred Dollars ($1,000.00) ($500) per transaction, incurred in
connection with Landlord's review and processing of documents regarding
any proposed assignment or sublease.
(e)Tenant acknowledges and agrees that the restrictions, conditions and
limitations imposed by this Paragraph 24 on Tenant's ability to assign or
transfer this Lease or any interest herein, to sublet the Premises or any
part thereof, to transfer or assign any right or privilege appurtenant to the
Premises, or to allow any other person to occupy or use the Premises or any
portion thereof, are, for the purposes of California Civil Code Section
1951.4, as amended from time to time, and for all other purposes, reasonable
at the time that the Lease was entered into, and shall be deemed to be
reasonable at the time that Tenant seeks to assign or transfer this Lease or
any interest herein, to sublet the Premises or any part thereof, to transfer
or assign any right or privilege appurtenant to the Premises, or to allow any
other person to occupy or use the Premises or any portion thereof.
25. Tenant's Default
The occurrence of any one of the following events shall constitute an event of
default on the part of Tenant ("Default"):
(a)The abandonment of the Premises by Tenant;
(b)Failure to pay any installment of Rent or any other monies due and
payable hereunder, said failure continuing for a period of three (3) days
after the same is due;written notice that said Rent or other monies have not
been paid; however, said notice shall constitute the Three-Day Notice to Pay
Rent or Quit required under California Law;
(c)A general assignment by Tenant for the benefit of creditors;
(d)The filing of a voluntary petition in bankruptcy by Tenant, the filing
of a voluntary petition for an arrangement, the filing of a petition,
voluntary or involuntary, for reorganization, or the filing of an involuntary
petition by Tenant's creditors, said involuntary petition remaining
undischarged for a period of sixty (60) days;
(e)Receivership, attachment, or other judicial seizure of substantially
all of Tenant's assets on the Premises, such attachment or other seizure
remaining undismissed or undischarged for a period of sixty (60) days after
the levy thereof;
(f)Failure of Tenant to execute and deliver to Landlord any estoppel
certificate, subordination agreement, or lease amendment within the time
periods and in the manner required by Paragraph 30 or 31 or 42;
(g)An assignment or sublease, or attempted assignment or sublease, of
this Lease or the Premises by Tenant contrary to the provision of Paragraph
24, unless such assignment or sublease is expressly conditioned upon Tenant
having received Landlord's consent thereto;
(h)Failure of Tenant to restore the Security Deposit to the amount and
within the time period provided in Paragraph 6 above;
(i)Failure in the performance of any of Tenant's covenants, agreements or
obligations hereunder (except those failures specified as events of Default
in other Paragraphs of this Paragraph 25, which shall be governed by such
other Paragraphs), which failure continues for ten (10) days after written
notice thereof from Landlord to Tenant provided that, if Tenant has exercised
reasonable diligence to cure such failure and such failure cannot be cured
within such ten (10) day period despite reasonable diligence, Tenant shall
not be in default under this subparagraph unless Tenant fails thereafter
diligently and continuously to prosecute the cure to completion; and
<PAGE>
(j)Chronic delinquency by Tenant in the payment of Rent, or any other
periodic payments required to be paid by Tenant under this Lease. "Chronic
delinquency" shall mean failure by Tenant to pay Rent, or any other payments
required to be paid by Tenant under this Lease for any three (3) months
(consecutive or nonconsecutive) during any twelve (12) month period. In the
event of a Chronic Delinquency, in addition to Landlord's other remedies for
Default provided in this Lease, at Landlord's option, Landlord shall have the
right to require that Rent be paid by Tenant quarterly, in advance.
Tenant agrees that any notice given by Landlord pursuant to Paragraph
25(b), (i) or (j) above shall satisfy the requirements for notice under
California Code of Civil Procedure Section 1161, and Landlord shall not be
required to give any additional notice in order to be entitled to commence an
unlawful detainer proceeding.
26. Landlord's Remedies
(a)Termination. In the event of any Default by Tenant, then in addition
to any other remedies available to Landlord at law or in equity and under
this Lease, Landlord shall have the immediate option to terminate this Lease
and all rights of Tenant hereunder by giving written notice of such intention
to terminate. In the event that Landlord shall elect to so terminate this
Lease then Landlord may recover from Tenant:
(1) the worth at the time of award of any unpaid Rent and any other
sums due and payable which have been earned at the time of such
termination; plus
(2) the worth at the time of award of the amount by which the unpaid
Rent and any other sums due and payable which would have been earned
after termination until the time of award exceeds the amount of such
rental loss Tenant proves could have been reasonably avoided; plus
(3) the worth at the time of award of the amount by which the unpaid
Rent and any other sums due and payable for the balance of the term of
this Lease after the time of award exceeds the amount of such rental loss
that Tenant proves could be reasonably avoided; plus
(4) any other amount necessary to compensate Landlord for all the
detriment proximately caused by Tenant's failure to perform its
obligations under this Lease or which in the ordinary course would be
likely to result therefrom, including, without limitation, any costs or
expenses incurred by Landlord (i) in retaking possession of the Premises;
(ii) in maintaining, repairing, preserving, restoring, replacing,
cleaning, altering or rehabilitating the Premises or any portion thereof,
including such acts for reletting to a new tenant or tenants; (iii) for
leasing commissions; or (iv) for any other costs necessary or appropriate
to relet the Premises; plus
(5) such reasonable attorneys' fees incurred by Landlord as a result
of a Default, and costs in the event suit is filed by Landlord to enforce
such remedy; and plus
(6) at Landlord's election, such other amounts in addition to or in
lieu of the foregoing as may be permitted from time to time by applicable
law.
As used in subparagraphs (1) and (2) above, the "worth at the time of award" is
computed by allowing interest at an annual rate equal to twelve percent (12%)
per annum or the maximum rate permitted by law, whichever is less. As used in
subparagraph (3) above, the "worth at the time of award" is computed by
discounting such amount at the discount rate of the Federal Reserve Bank of San
Francisco at the time of award, plus one percent (1%). Tenant waives redemption
or relief from forfeiture under California Code of Civil Procedure Sections 1174
and 1179, or under any other present or future law, in the event Tenant is
evicted or Landlord takes possession of the Premises by reason of any Default of
Tenant hereunder.
(b)Continuation of Lease. In the event of any Default by Tenant, then in
addition to any other remedies available to Landlord at law or in equity and
under this Lease, Landlord shall have the remedy described in California
Civil Code Section 1951.4 (Landlord may continue this Lease in effect after
Tenant's Default and abandonment and recover Rent as it becomes due, provided
Tenant has the right to sublet or assign, subject only to reasonable
limitations).
(c)Re-entry. In the event of any Default by Tenant, Landlord shall also
have the right, with or without terminating this Lease, in compliance with
applicable law, to re-enter the Premises and remove all persons and property
from the Premises; such property may be removed and stored in a public
warehouse or elsewhere at the cost of and for the account of Tenant.
(d)Reletting. In the event of the abandonment of the Premises by Tenant
or in the event that Landlord shall elect to re-enter as provided in
Paragraph 26(c) or shall take possession of the Premises pursuant to legal
proceeding or pursuant to any notice provided by law, then if Landlord does
not elect to terminate this Lease as provided in Paragraph 26(a), Landlord
may from time to time, without terminating this Lease, relet the Premises or
any part thereof for such term or terms and at such rental or rentals and
upon such other terms and conditions as Landlord in its sole discretion may
deem advisable with the right to make alterations and repairs to the
Premises. In the event that Landlord shall elect to so relet, then rentals
received by Landlord from such reletting shall be applied in the following
order: (1) to reasonable attorneys' fees incurred by Landlord as a result of
a Default and costs in the event suit is filed by Landlord to enforce such
remedies; (2) to the payment of any indebtedness other than Rent due
hereunder from Tenant to Landlord; (3) to the payment of any costs of such
reletting; (4) to the payment of the costs of any alterations and repairs to
the Premises; (5) to the payment of Rent due and unpaid hereunder; and (6)
the residue, if any, shall be held by Landlord and applied in payment of
future Rent and other sums payable by Tenant hereunder as the same may become
due and payable hereunder. Should that portion of such rentals received from
such reletting during any month, which is applied to the payment of Rent
hereunder, be less than the Rent payable during the month by Tenant
hereunder, then Tenant shall pay such deficiency to Landlord. Such deficiency
shall be calculated and paid monthly. Tenant shall also pay to Landlord, as
soon as ascertained, any costs and expenses incurred by Landlord in such
reletting or in making such alterations and repairs not covered by the
rentals received from such reletting.
(e)Termination. No re-entry or taking of possession of the Premises by
Landlord pursuant to this Paragraph 26 shall be construed as an election to
terminate this Lease unless a written notice of such intention is given to
Tenant or unless the termination thereof is decreed by a court of competent
jurisdiction. Notwithstanding any reletting without termination by Landlord
because of any Default by Tenant, Landlord may at any time after such
reletting elect to terminate this Lease for any such Default.
(f)Cumulative Remedies. The remedies herein provided are not exclusive
and Landlord shall have any and all other remedies provided herein or by law
or in equity.
(g)No Surrender. No act or conduct of Landlord, whether consisting of the
acceptance of the keys to the Premises, or otherwise, shall be deemed to be
or constitute an acceptance of the surrender of the Premises by Tenant prior
to the expiration of the Term, and such acceptance by Landlord of surrender
by Tenant shall only flow from and must be evidenced by a written
acknowledgment of acceptance of surrender signed by Landlord. The surrender
of this Lease by Tenant, voluntarily or otherwise, shall not work a merger
unless Landlord elects in writing that such merger take place, but shall
operate as an assignment to Landlord of any and all existing subleases, or
Landlord may, at its option, elect in writing to treat such surrender as a
merger terminating Tenant's estate under this Lease, and thereupon Landlord
may terminate any or all such subleases by notifying the sublessee of its
election so to do within five (5) days after such surrender.
27. Attorney's Fees
In the event any legal action or proceeding, including arbitration and
declaratory relief, is commenced for the purpose of enforcing any rights or
remedies pursuant to this Lease, the prevailing party shall be entitled to
recover from the non-prevailing party reasonable attorneys' fees, as well as
costs of suit, in said action or proceeding, whether or not such action is
prosecuted to judgment.
28. Taxes
Tenant shall be liable for and shall pay, prior to delinquency, all taxes levied
against personal property and trade or business fixtures of Tenant. If any
alteration, addition or improvement installed by Tenant pursuant to Paragraph
11, or any personal property, trade fixture or other property of Tenant, is
assessed and taxed with the Property, Tenant shall pay such taxes to Landlord
within ten (10) days after delivery to Tenant of a statement therefor.
29. Effect of Conveyance
The term "Landlord" as used in this Lease, means only the owner for the time
being of the Property containing the Building, so that, in the event of any sale
of the Property or the Building, Landlord shall be and hereby is entirely freed
and relieved of all covenants and obligations of Landlord hereunder accruing
from and after the transfer, and it shall be deemed and construed, without
further agreement between the parties and the purchaser at any such sale, that
the purchaser of the Property or the Building has assumed and agreed to carry
out any and all covenants and obligations of Landlord hereunder.
30. Tenant's Estoppel Certificate
From time to time, upon written request of Landlord, Tenant shall execute,
acknowledge and deliver to Landlord or its designee, a written certificate
stating (a) the date this Lease was executed, the Commencement Date of the Term
and the date the Term expires; (b) the date Tenant entered into occupancy of the
Premises; (c) the amount of Rent and the date to which such Rent has been paid;
(d) that this Lease is in full force and effect and has not been assigned,
modified, supplemented or amended in any way (or, if assigned, modified,
supplemented or amended, specifying the date and terms of any agreement so
affecting this Lease); (e) that this Lease represents the entire agreement
between the parties with respect to Tenant's right to use and occupy the
Premises (or specifying such other agreements, if any); (f) that all obligations
under this Lease to be performed by Landlord as of the date of such certificate
have been satisfied (or specifying those as to which Tenant claims that Landlord
has yet to perform); (g) that all required contributions by Landlord to Tenant
on account of Tenant's improvements have been received (or stating exceptions
thereto); (h) that on such date there exist no defenses or offsets that Tenant
has against the enforcement of this Lease by Landlord (or stating exceptions
thereto); (i) that no Rent or other sum payable by Tenant hereunder has been
paid more than one (1) month in advance (or stating exceptions thereto); (j)
that security has been deposited with Landlord, stating the amount thereof; and
(k) any other matters evidencing the status of this Lease that may be required
either by a lender making a loan to Landlord to be secured by a deed of trust
covering the Premises or by a purchaser of the Premises. Any such certificate
delivered pursuant to this Paragraph 30 may be relied upon by a prospective
purchaser of Landlord's interest or a mortgagee of Landlord's interest or
assignee of any mortgage upon Landlord's interest in the Premises. If Tenant
shall fail to provide such certificate within ten (10) days of receipt by Tenant
of a written request by Landlord as herein provided, such failure shall, at
Landlord's election, constitute a Default under this Lease, and Tenant shall be
deemed to have given such certificate as above provided without modification and
shall be deemed to have admitted the accuracy of any information supplied by
Landlord to a prospective purchaser or mortgagee.
31. Subordination
Landlord shall have the right to cause this Lease to be and remain subject and
subordinate to any and all mortgages, deeds of trust and ground leases, if any
("Encumbrances") that are now or may hereafter be executed covering the
Premises, or any renewals, modifications, consolidations, replacements or
extensions thereof, for the full amount of all advances made or to be made
thereunder and without regard to the time or character of such advances,
together with interest thereon and subject to all the terms and provisions
thereof; provided only, that in the event of termination of any such ground
lease or upon the foreclosure of any such mortgage or deed of trust, so long as
Tenant is not in default, the holder thereof ("Holder") shall agree to recognize
Tenant's rights under this Lease as long as Tenant shall pay the Rent and
observe and perform all the provisions of this Lease to be observed and
performed by Tenant. Within ten (10) days after Landlord's written request,
Tenant shall execute, acknowledge and deliver any and all reasonable documents
required by Landlord or the Holder to effectuate such subordination. If Tenant
fails to do so, such failure shall constitute a Default by Tenant under this
Lease. Notwithstanding anything to the contrary set forth in this Paragraph 31,
Tenant hereby attorns and agrees to attorn to any person or entity purchasing or
otherwise acquiring the Premises at any sale or other proceeding or pursuant to
the exercise of any other rights, powers or remedies under such Encumbrance.
32. Environmental Covenants
(a)As used herein, the term "Hazardous Material" shall mean any substance
or material which has been determined by any state, federal or local
governmental authority to be capable of posing a risk of injury to health,
safety or property, including all of those materials and substances
designated as hazardous or toxic by the city in which the Premises are
located, the U.S. Environmental Protection Agency, the Consumer Product
Safety Commission, the Food and Drug Administration, the California Water
Resources Control Board, the Regional Water Quality Control Board, San
Francisco Bay Region, the California Air Resources Board, CAL/OSHA Standards
Board, Division of Occupational Safety and Health, the California Department
of Food and Agriculture, the California Department of Health Services, and
any federal agencies that have overlapping jurisdiction with such California
agencies, or any other governmental agency now or hereafter authorized to
regulate materials and substances in the environment. Without limiting the
generality of the foregoing, the term "Hazardous Material" shall include all
of those materials and substances defined as "hazardous materials" or
"hazardous waste" in Sections 66680 through 66685 of Title 22 of the
California Administrative Code, Division 4, Chapter 30, as the same shall be
amended from time to time, petroleum, petroleum-related substances and the
by-products, fractions, constituents and sub-constituents of petroleum or
petroleum-related substances, asbestos, and any other materials requiring
remediation now or in the future under federal, state or local statutes,
ordinances, regulations or policies.
(b)Tenant represents, warrants and covenants (i) that it will use and
store in, on or about the Premises, only those Hazardous Materials that are
necessary for Tenant to conduct its business activities on the Premises, (ii)
that, with respect to any such Hazardous Materials, Tenant shall comply with
all applicable federal, state and local laws, rules, regulations, policies
and authorities relating to the storage, use, disposal or cleanup of
Hazardous Materials, including, but not limited to, the obtaining of proper
permits, and (iii) that it will not dispose of any Hazardous Materials in, on
or about the Premises under any circumstances.
(c)Tenant shall immediately notify Landlord of any inquiry, test,
investigation or enforcement proceeding by or against Tenant, Landlord or the
Premises concerning a Hazardous Material. Tenant acknowledges that Landlord,
as the owner of the Premises, shall have the right, at its election, in its
own name or as Tenant's agent, to negotiate, defend, approve and appeal, at
Tenant's expense, any action taken or order issued with regard to a Hazardous
Material by an applicable governmental authority.
<PAGE>
(d)If Tenant's storage, use or disposal of any Hazardous Material in, on
or adjacent to the Premises results in any contamination of the Premises, the
soil or surface or groundwater (1) requiring remediation under federal, state
or local statutes, ordinances, regulations, or policies, or (2) at levels
which are unacceptable to Landlord, in Landlord's reasonable judgment, Tenant
agrees to clean up said contamination. Tenant further agrees to indemnify,
defend and hold Landlord harmless from and against any claims, liabilities,
losses, suits, causes of action, costs, expenses or fees, including
attorneys' fees and costs, arising out of or in connection with any
remediation, cleanup work, inquiry or enforcement proceeding in connection
therewith, and any Hazardous Materials currently or hereafter used, stored or
disposed of by Tenant or its agents, employees, contractors or invitees in,
on or adjacent to the Premises.
(e)Notwithstanding any other right of entry granted to Landlord under
this Lease, Landlord shall have the right to enter the Premises or to have
consultants enter the Premises throughout the term of this Lease, at
reasonable times and upon reasonable notice, for the purpose of (1)
determining whether the Premises are in conformity with federal, state and
local statutes, regulations, ordinances, and policies including those
pertaining to the environmental condition of the Premises, (2) conducting an
environmental audit or investigation of the Premises for purposes of sale,
transfer, conveyance or financing, (3) determining whether Tenant has
complied with this Paragraph 32, and (4) determining the corrective measures,
if any, required of Tenant to ensure the safe use, storage and disposal of
Hazardous Materials, or to remove Hazardous Materials (except to the extent
used, stored or disposed of by Tenant or its agents, employees, contractors
or invitees in compliance with applicable law). Tenant agrees to provide
access and reasonable assistance for such inspections. Such inspections may
include, but are not limited to, entering the Premises or adjacent property
with drill rigs or other machinery for the purpose of obtaining laboratory
samples. Landlord shall not be limited in the number of such inspections
during the term of this Lease. To the extent such inspections disclose the
presence of Hazardous Materials used, stored or disposed of by Tenant or its
agents, employees, contractors or invitees, Tenant shall reimburse Landlord
for the cost of such inspections within ten (10) days of receipt of a written
statement thereof. If such consultants determine that the Premises are
contaminated with Hazardous Materials used, stored or disposed of by Tenant
or its agents, employees contractors or invitees, Tenant shall, in a timely
manner, at its expense, remove such Hazardous Materials or otherwise comply
with the recommendations of such consultants to the reasonable satisfaction
of Landlord and any applicable governmental agencies. The right granted to
Landlord herein to inspect the Premises shall not create a duty on Landlord's
part to inspect the Premises, or liability of Landlord for Tenant's use,
storage or disposal of Hazardous Materials, it being understood that Tenant
shall be solely responsible for all liability in connection therewith.
(f)Tenant shall surrender the Premises to Landlord upon the expiration or
earlier termination of this Lease free of debris, waste and Hazardous
Materials used, stored or disposed of by Tenant or its agents, employees,
contractors or invitees, and in a condition which complies with all
governmental statutes, ordinances, regulations and policies, recommendations
of consultants hired by Landlord, and such other reasonable requirements as
may be imposed by Landlord.
(g)Tenant's obligations under this Paragraph 32 shall survive termination
of this Lease.
(h)Landlord hereby discloses to Tenant that the Premises and the Property
are or may be in an area in which contamination of soils or groundwater by
Hazardous Materials may exist. If Tenant desires more definite information
regarding the existence or possible existence of contamination by Hazardous
Materials of soils or groundwater of or beneath the Premises, the Property,
or other real property in the general area of the Property, then Tenant shall
investigate such matters.
(i)Landlord will not charge Tenant for, and Tenant shall not be obligated
to Landlord under any provision of this Lease with respect to (i) any claim,
remediation obligation, investigation obligation, liability, cause of action,
penalty, attorneys' fee, consultants' cost, expense or damage owing or
alleged to be owing with respect to any Hazardous Material present in, on or
about the Premises or the Building, or the soil, groundwater or surface water
thereof, prior to the Commencement Date; or (ii) the removal, investigation,
monitoring or remediation of any Hazardous Material present on or about the
Premises or the Building, or the soil, groundwater or surface water thereof,
caused by any source, including third parties other than Tenant, prior to the
Commencement Date as a result of or in connection with the acts or omissions
of persons other than Tenant or its parent, subsidiaries, affiliates,
divisions, directors, officers, agents, employees, contractors, customers,
invitees, subtenants or assigns (all such parties collectively hereinafter
referred to in this subparagraph as "Tenant"); provided, however, Tenant
shall be fully obligated to Landlord under the provisions of this Lease for
all claims incurred by Landlord to the extent that (a) Tenant contributes to
the presence of such Hazardous Materials or Tenant exacerbates the conditions
of the conditions caused by such Hazardous Materials, or (b) Tenant allows or
permits such persons to cause such Hazardous Materials to be present in, on,
under, through or about the Premises or the Property or does not prevent such
person from causing the presence of Hazardous Materials in, on, under,
through or about the Premises or the Property.
33. Notices
All notices and demands which may or are to be required or permitted to be given
to either party by the other hereunder shall be in writing and shall be sent by
United States mail, postage prepaid, certified, or by personal delivery or
overnight courier, addressed to the addressee at the address for such addressee
as specified in the Basic Lease Information, or to such other place as such
party may from time to time designate in a notice to the other party given as
provided herein, or by telex or telecopy at the number therefor designated by
the addressee in a written notice given as provided herein. Notice shall be
deemed given upon the earlier of actual receipt or the third day following
deposit in the United States mail in the manner described above.
34. Waiver
The waiver of any breach of any term, covenant or condition of this Lease shall
not be deemed to be a waiver of such term, covenant or condition or any
subsequent breach of the same or any other term, covenant or condition herein
contained. The subsequent acceptance of Rent by Landlord shall not be deemed to
be a waiver of any preceding breach by Tenant, other than the failure of Tenant
to pay the particular rental so accepted, regardless of Landlord's knowledge of
such preceding breach at the time of acceptance of such Rent. No delay or
omission in the exercise of any right or remedy of Landlord on any Default by
Tenant shall impair such a right or remedy or be construed as a waiver. Any
waiver by Landlord of any Default must be in writing and shall not be a waiver
of any other Default concerning the same or any other provisions of this Lease.
35. Holding Over
Any holding over after the expiration of the Term, without the express written
consent of Landlord, shall constitute a Default and, without limiting Landlord's
remedies provided in this Lease, such holding over shall be construed to be a
tenancy at sufferance, at a rental rate of one hundred fifty thirty-five percent
(150%) (135%) of the Base Rent last due in this Lease, plus Additional Rent, and
shall otherwise be on the terms and conditions herein specified, so far as
applicable.
36. Successors and Assigns
The terms, covenants and conditions of this Lease shall, subject to the
provisions as to assignment, apply to and bind the heirs, successors, executors,
administrators and assigns of all of the parties hereto. If Tenant shall consist
of more than one entity or person, the obligations of Tenant under this Lease
shall be joint and several.
37. Time
Time is of the essence of this Lease and each and every term, condition and
provision herein.
38. Brokers
Landlord and Tenant each represents and warrants to the other that neither it
nor its officers or agents nor anyone acting on its behalf has dealt with any
real estate broker except the Broker(s) specified in the Basic Lease Information
in the negotiating or making of this Lease, and each party agrees to indemnify
and hold harmless the other from any claim or claims, and costs and expenses,
including attorneys' fees, incurred by the indemnified party in conjunction with
any such claim or claims of any other broker or brokers to a commission in
connection with this Lease as a result of the actions of the indemnifying party.
39. Limitation of Liability
Tenant agrees that, in the event of any default or breach by Landlord with
respect to any of the terms of the Lease to be observed and performed by
Landlord (a) Tenant shall look solely to the estate and property of Landlord or
any a successor in interest in the Property and the Building, for the
satisfaction of Tenant's remedies for the collection of a judgment (or other
judicial process) requiring the payment of money by Landlord; (b) no other
property or assets of Landlord, its partners, shareholder, officers, directors
or any successor in interest shall be subject to levy, execution or other
enforcement procedure for the satisfaction of Tenant's remedies; (c) no personal
liability shall at any time be asserted or enforceable against Landlord's
partners or successors in interest (except to the extent permitted in (a)
above), or against Landlord's shareholders, officers or directors, or their
respective partners, shareholders, officers, directors or successors in
interest; and (d) no judgment will be taken against any partner, shareholder,
officer or director of Landlord. The provisions of this section shall apply only
to the Landlord and the parties herein described, and shall not be for the
benefit of any insurer nor any other third party.
40. Financial Statements
Within thirty (30) days after Landlord's request, but not more than once in any
calendar year, Tenant shall deliver to Landlord the then current financial
statements of Tenant (including interim periods following the end of the last
fiscal year for which annual statements are available), prepared or compiled by
a certified public accountant, including a balance sheet and profit and loss
statement for the most recent prior year, all prepared in accordance with
generally accepted accounting principles consistently applied.
<PAGE>
41. Rules and Regulations
Tenant agrees to comply with such reasonable rules and regulations as Landlord
may adopt from time to time for the orderly and proper operating of the Building
and parking and other common areas. Such rules may include but shall not be
limited to the following: (a) restriction of employee parking to a limited,
designated area or areas; and (b) regulation of the removal, storage and
disposal of Tenant's refuse and other rubbish at the sole cost and expense of
Tenant. The rules and regulations shall be binding upon Tenant upon delivery of
a copy of them to Tenant. Landlord shall not be responsible to Tenant for the
failure of any other person to observe and abide by any of said rules and
regulations.
42. Mortgagee Protection
(a)Modifications for Lender. If, in connection with obtaining financing
for the Premises or any portion thereof, Landlord's lender shall request
reasonable modifications to this Lease as a condition to such financing,
Tenant shall not unreasonably withhold, delay or defer its consent to such
modifications, provided such modifications do not materially adversely affect
Tenant's rights or increase Tenant's obligations under this Lease.
(b)Rights to Cure. Tenant agrees to give to any trust deed or mortgage
holder ("Holder"), by registered mail, at the same time as it is given to
Landlord, a copy of any notice of default given to Landlord, provided that
prior to such notice Tenant has been notified, in writing, (by way of notice
of assignment of rents and leases, or otherwise) of the address of such
Holder. Tenant further agrees that if Landlord shall have failed to cure such
default within the time provided for in this Lease, then the Holder shall
have an additional twenty (20) days after expiration of such period, or after
receipt of such notice from Tenant (if such notice to the Holder is required
by this Paragraph 42(b)), whichever shall last occur, within which to cure
such default or if such default cannot be cured within that time, then such
additional time as may be necessary if within such twenty (20) days, any
Holder has commenced and is diligently pursuing the remedies necessary to
cure such default (including but not limited to commencement of foreclosure
proceedings, if necessary to effect such cure), in which event this Lease
shall not be terminated.
43. Entire Agreement
This Lease, including the Exhibits and any Addenda attached hereto, which are
hereby incorporated herein by this reference, contains the entire agreement of
the parties hereto, and no representations, inducements, promises or agreements,
oral or otherwise, between the parties, not embodied herein or therein, shall be
of any force and effect.
44. Interest
Any installment of Rent and any other sum due from Tenant under this Lease which
is not received by Landlord within ten (10) days from when the same is due shall
bear interest from such tenth (10th) day until paid at an annual rate equal to
the maximum rate of interest permitted by law. Payment of such interest shall
not excuse or cure any Default by Tenant. In addition, Tenant shall pay all
costs and attorneys' fees incurred by Landlord in collection of such amounts.
45. Construction
This Lease shall be construed and interpreted in accordance with the laws of the
State of California. The parties acknowledge and agree that no rule of
construction to the effect that any ambiguities are to be resolved against the
drafting party shall be employed in the interpretation of this Lease, including
the Exhibits and any Addenda attached hereto. All captions in this Lease are for
reference only and shall not be used in the interpretation of this Lease.
Whenever required by the context of this Lease, the singular shall include the
plural, the masculine shall include the feminine, and vice versa. If any
provision of this Lease shall be determined to be illegal or unenforceable, such
determination shall not affect any other provision of this Lease and all such
other provisions shall remain in full force and effect.
46. Representations and Warranties of Tenant
Tenant hereby makes the following representations and warranties, each of which
is material and being relied upon by Landlord, is true in all respects as of the
date of this Lease, and shall survive the expiration or termination of the
Lease.
(a)If Tenant is an entity, Tenant is duly organized, validly existing and
in good standing under the laws of the state of its organization and the
persons executing this Lease on behalf of Tenant have the full right and
authority to execute this Lease on behalf of Tenant and to bind Tenant
without the consent or approval of any other person or entity. Tenant has
full power, capacity, authority and legal right to execute and deliver this
Lease and to perform all of its obligations hereunder. This Lease is a legal,
valid and binding obligation of Tenant, enforceable in accordance with its
terms.
(b)Tenant has not (1) made a general assignment for the benefit of
creditors, (2) filed any voluntary petition in bankruptcy or suffered the
filing of an involuntary petition by any creditors, (3) suffered the
appointment of a receiver to take possession of all or substantially all of
its assets, (4) suffered the attachment or other judicial seizure of all or
substantially all of its assets, (5) admitted in writing its inability to pay
its debts as they come due, or (6) made an offer of settlement, extension or
composition to its creditors generally.
Landlord and Tenant have executed and delivered this Lease as of the Lease
Date specified in the Basic Lease Information.
Tenant:
Premisys Communications, Inc.,
a Delaware Corporation
By: /s/ Nicholas J. Williams
------------------------------
Nicholas J. Williams
Chief Executive Officer
Date: June 26, 1998
Landlord:
AETNA LIFE INSURANCE COMPANY,
a Connecticut corporation
By: Allegis Realty Investors, LLC
Its Investment Advisor
By: /s/ Silvia Melikian
------------------------
Silvia Melikian
Vice President
Date: August 20, 1998
<PAGE>
1
98LEASE\PREMRV1.DOC: 06/10/98
Exhibit A
Diagram of the Premises
<PAGE>
Exhibit B to Lease Agreement
Tenant Improvements
This exhibit, entitled "Tenant Improvements", is and shall constitute EXHIBIT B
to that certain Lease Agreement dated June 4, 1998 (the "Lease"), by and between
AEtna Life Insurance Company, a Connecticut corporation ("Landlord") and
Premisys Communications, Inc., a Delaware corporation ("Tenant") for the leasing
of certain premises located in the Sutter Hill Business Park at Building A,
48634 Milmont Drive, Fremont, California (the "Premises"). The terms, conditions
and provisions of this EXHIBIT B are hereby incorporated into and are made a
part of the Lease. Any capitalized terms used herein and not otherwise defined
herein shall have the meaning ascribed to such terms as set forth in the Lease:
1. Tenant To Construct Tenant Improvements. Subject to the provisions below,
Tenant shall be solely responsible for the planning, construction and completion
of the interior tenant improvements ("Tenant Improvements") to the Premises in
accordance with the terms and conditions of this Exhibit B. The Tenant
Improvements shall not include any of Tenant's personal property, trade
fixtures, furnishings, equipment or similar items.
2. Tenant Improvement Plans.
A. Preliminary Plans and Specifications. Promptly after execution of the
Lease, Tenant shall retain a licensed and insured architect ("Architect") to
prepare preliminary working architectural and engineering plans and
specifications ("Preliminary Plans and Specifications") for the Tenant
Improvements. Tenant shall deliver the Preliminary Plans and Specifications to
Landlord. The Preliminary Plans and Specifications shall be in sufficient detail
to show locations, types and requirements for all heat loads, people loads,
floor loads, power and plumbing, regular and special HVAC needs, telephone
communications, telephone and electrical outlets, lighting, lighting fixtures
and related power, and electrical and telephone switches. Landlord shall
reasonably approve or disapprove the Preliminary Plans and Specifications within
five (5) days after Landlord receives the Preliminary Plans and Specifications
and, if disapproved, Landlord shall return the Preliminary Plans and
Specifications to Tenant, who shall make all necessary revisions within ten (10)
days after Tenant's receipt thereof. This procedure shall be repeated until
Landlord approves the Preliminary Plans and Specifications. The approved
Preliminary Plans and Specifications, as modified, shall be deemed the "Final
Preliminary Plans and Specifications".
B. Final Plans and Specifications. After the Final Preliminary Plans and
Specifications are approved by Landlord and are deemed to be the Final
Preliminary Plans and Specifications, Tenant shall cause the Architect to
prepare in twenty (20) days following Landlord's approval of the Final
Preliminary Plans and Specifications the final working architectural and
engineering plans, specifications and drawings, ("Final Plans and
Specifications") for the Tenant Improvements. Tenant shall then deliver the
Final Plans and Specifications to Landlord. Landlord shall reasonably approve or
disapprove the Final Plans and Specifications within five (5) days after
Landlord receives the Final Plans and Specifications and, if disapproved,
Landlord shall return the Final Plans and Specifications to Tenant who shall
make all necessary revisions within ten (10) days after Tenant's receipt
thereof. This procedure shall be repeated until Landlord approves, in writing,
the Final Plans and Specifications. The approved Final Plans and Specifications,
as modified, shall be deemed the "Construction Documents".
C. Miscellaneous. All deliveries of the Preliminary Plans and
Specifications, the Final Preliminary Plans and Specifications, the Final Plans
and Specifications, and the Construction Documents shall be delivered by
messenger service, by personal hand delivery or by overnight parcel service.
While Landlord has the right to approve the Preliminary Plans and
Specifications, the Final Preliminary Plans and Specifications, the Final Plans
and Specifications, and the Construction Documents, Landlord's interest in doing
so is to protect the Premises, the Building and Landlord's interest.
Accordingly, Tenant shall not rely upon Landlord's approvals and Landlord shall
not be the guarantor of, nor responsible for, the adequacy and correctness or
accuracy of the Preliminary Plans and Specifications, the Final Preliminary
Plans and Specifications, the Final Plans and Specifications, and the
Construction Documents, or the compliance thereof with applicable laws, and
Landlord shall incur no liability of any kind by reason of granting such
approvals.
D. Building Standard Work. The Construction Documents shall provide that
the Tenant Improvements to be constructed in accordance therewith must be at
least equal, in quality, to Landlord's building standard materials, quantities
and procedures then in use by Landlord ("Building Standards") attached hereto as
Exhibit B-2, and shall consist of improvements which are generic in nature.
E. Construction Agreements. Tenant hereby covenants and agrees that a
provision shall be included in each and every agreement made with the Architect
and the Contractor with respect to the Tenant Improvements specifying that
Landlord shall be a third party beneficiary thereof, including without
limitation, a third party beneficiary of all covenants, representations,
indemnities and warranties made by the Architect and/or Contractor.
3. Permits. Tenant at its sole cost and expense (subject to the provisions of
Paragraph 5 below) shall obtain all governmental approvals of the Construction
Documents to the full extent necessary for the issuance of a building permit for
the Tenant Improvements based upon such Construction Documents. Tenant at its
sole cost and expense shall also cause to be obtained all other necessary
approvals and permits from all governmental agencies having jurisdiction or
authority for the construction and installation of the Tenant Improvements in
accordance with the approved Construction Documents. Tenant at its sole cost and
expense (subject to the provisions of Paragraph 5 below) shall undertake all
steps necessary to insure that the construction of the Tenant Improvements is
accomplished in strict compliance with all statutes, laws, ordinances, codes,
rules, and regulations applicable to the construction of the Tenant Improvements
and the requirements and standards of any insurance underwriting board,
inspection bureau or insurance carrier insuring the Premises and/or the
Building.
4. Construction.
A. Tenant shall be solely responsible for the construction, installation
and completion of the Tenant Improvements in accordance with the Construction
Documents approved by Landlord and is solely responsible for the payment of all
amounts when payable in connection therewith without any cost or expense to
Landlord, except for Landlord's obligation to contribute the Tenant Improvement
Allowance in accordance with the provisions of Paragraph 5 below. Tenant shall
diligently proceed with the construction, installation and completion of the
Tenant Improvements in accordance with the Construction Documents and the
completion schedule reasonably approved by Landlord. No material changes shall
be made to the Construction Documents and the completion schedule approved by
Landlord without Landlord's prior written consent, which consent shall not be
unreasonably withheld or delayed.
B. Tenant at its sole cost and expense (subject to the provisions of
Paragraph 5 below) shall employ a licensed, insured and bonded general
contractor ("Contractor") to construct the Tenant Improvements in accordance
with the Construction Documents. The construction contracts between Tenant and
the Contractor and between the Contractor and subcontractors shall be subject to
Landlord's prior written approval, which approval shall not be unreasonably
withheld or delayed. Proof that the Contractor is licensed in California, is
bonded as required under California law, and has the insurance specified in
Exhibit B-1, attached hereto and incorporated herein by this reference, shall be
provided to Landlord at the time that Tenant requests approval of the Contractor
from Landlord. Tenant shall comply with or cause the Contractor to comply with
all other terms and provisions of Exhibit B-1.
C. Prior to the commencement of the construction and installation of the
Tenant Improvements, Tenant shall provide the following to Landlord, all of
which shall be to Landlord's reasonable satisfaction:
(i) An estimated budget and cost breakdown for the Tenant
Improvements.
(ii) Estimated completion schedule for the Tenant Improvements.
(iii) Copies of all required approvals and permits from governmental
agencies having jurisdiction or authority for the construction and installation
of the Tenant Improvements; provided, however, if prior to commencement of the
construction and installation of Tenant Improvements Tenant has not received the
electrical, plumbing or mechanical permits, Tenant shall only be required to
provide Landlord with evidence that Tenant has made application therefor, and,
upon receipt by Tenant of such permits, Tenant shall promptly provide Landlord
with copies thereof.
(iv) Evidence of Tenant's procurement of insurance required to be
obtained pursuant to the provisions of Paragraphs 4.B and 4.G.
D. Landlord shall at all reasonable times have a right to inspect the
Tenant Improvements (provided Landlord does not materially interfere with the
work being performed by the Contractor or its subcontractors) and Tenant shall
immediately cease work upon written notice from Landlord if the Tenant
Improvements are not in compliance with the Construction Documents approved by
Landlord. If Landlord shall give notice of faulty construction or any other
deviation from the Construction Documents, Tenant shall cause the Contractor to
make corrections promptly. However, neither the privilege herein granted to
Landlord to make such inspections, nor the making of such inspections by
Landlord, shall operate as a waiver of any rights of Landlord to require good
and workmanlike construction and improvements constructed in accordance with the
Construction Documents.
E. Subject to Landlord complying with its obligations in Paragraph 5
below, Tenant shall pay and discharge promptly and fully all claims for labor
done and materials and services furnished in connection with the Tenant
Improvements. The Tenant Improvements shall not be commenced until five (5)
business days after Landlord has received notice from Tenant stating the date
the construction of the Tenant Improvements is to commence so that Landlord can
post and record any appropriate Notice of Nonresponsibility.
F. Tenant acknowledges and agrees that the agreements and covenants of
Tenant in Sections 10 and 37 of the Lease shall be fully applicable to Tenant's
construction of the Tenant Improvements.
G. Tenant shall maintain, and cause to be maintained, during the
construction of the Tenant Improvements, at its sole cost and expense, insurance
of the types and in the amounts specified in Exhibit B-1 and in Section 12 of
the Lease, together with builders' risk insurance for the amount of the
completed value of the Tenant Improvements on an all-risk non-reporting form
covering all improvements under construction, including building materials, and
other insurance in amounts and against such risks as the Landlord shall
reasonably require in connection with the Tenant Improvements.
H. No materials, equipment or fixtures shall be delivered to or installed
upon the Premises pursuant to any agreement by which another party has a
security interest or rights to remove or repossess such items, without the prior
written consent of Landlord, which consent shall not be unreasonably withheld.
I. Landlord reserves the right to establish reasonable rules and
regulations for the use of the Building during the course of construction of the
Tenant Improvements, including, but not limited to, construction parking,
storage of materials, hours of work, use of elevators, and clean-up of
construction related debris.
J. Upon completion of the Tenant Improvements, Tenant shall deliver to
Landlord the following, all of which shall be to Landlord's reasonable
satisfaction:
(i) Any certificates required for occupancy, including a permanent
and complete Certificate of Occupancy issued by the City of Fremont.
(ii) A Certificate of Completion signed by the Architect who
prepared the Construction Documents, reasonably approved by Landlord.
(iii) A cost breakdown itemizing all expenses for the Tenant
Improvements, together with invoices and receipts for the same or other evidence
of payment.
(iv) Final and unconditional mechanic's lien waivers for all the
Tenant Improvements.
(v) A Notice of Completion for execution by Landlord, which
certificate once executed by Landlord shall be recorded by Tenant in the
official records of the county of Santa Clara, and Tenant shall then deliver to
Landlord a true and correct copy of the recorded Notice of Completion.
(vi) A true and complete copy of all as-built plans and drawings for
the Tenant Improvements.
5. Tenant Improvement Allowance.
A. Subject to Tenant's compliance with the provisions of this Exhibit B,
Landlord shall provide to Tenant an allowance in the amount of twenty nine
thousand eight hundred forty and 00/100 dollars and ($29,840.00) (the "Tenant
Improvement Allowance") to construct and install only the Tenant Improvements.
The Tenant Improvement Allowance shall be used to design, prepare, plan, obtain
the approval of, construct and install the Tenant Improvements and for no other
purpose. Except as otherwise expressly provided herein, Landlord shall have no
obligation to contribute the Tenant Improvement Allowance unless and until the
Construction Documents have been approved by Landlord and Tenant has complied
with all requirements set forth in Paragraph 4.C. of this Exhibit B. The costs
to be paid out of the Tenant Improvement Allowance shall include all reasonable
costs and expenses associated with the design, preparation, approval, planning,
construction and installation of the Tenant Improvements (the "Tenant
Improvement Costs"), including all of the following:
(i) All costs of the Preliminary Plans and Specifications, the Final
Plans and Specifications, and the Construction Documents, and engineering costs
associated with completion of the State of California energy utilization
calculations under Title 24 legislation:
(ii) All costs of obtaining building permits and other necessary
authorizations from local governmental authorities;
(iii) All costs of interior design and finish schedule plans and
specifications including as-built drawings, if applicable;
(iv) All direct and indirect costs of procuring, constructing and
installing the Tenant Improvements in the Premises, including, but not limited
to, the construction fee for overhead and profit and the cost of all on-site
supervisory and administrative staff, office, equipment and temporary services
rendered by the Contractor in connection with the construction of the Tenant
Improvements; provided, however, that the construction fee for overhead and
profit, the cost of all on-site supervisory and administrative staff, office,
equipment and temporary services shall not exceed amounts which are reasonable
and customary for such items in the local construction industry;
(v) All fees payable to the Architect and any engineer if they are
required to redesign any portion of the Tenant Improvements following Tenant's
and Landlord's approval of the Construction Documents;
(vi) Utility connection fees;
(vii) Inspection fees and filing fees payable to local governmental
authorities, if any;
(viii) All costs of all permanently affixed equipment and non-trade
fixtures provided for in the Construction Documents, including the cost of
installation; and,
The Tenant Improvement Allowance shall be the maximum contribution by Landlord
for the Tenant Improvement Costs, and the disbursement of the Tenant Improvement
Allowance is subject to the terms contained hereinbelow.
Landlord will make payments to Tenant from the Tenant Improvement Allowance to
reimburse Tenant for Tenant Improvement Costs paid or incurred by Tenant. All
payments of the Tenant Improvement Allowance shall be by progress payments not
more frequently than once per month and only after satisfaction of the following
conditions precedent: (a) receipt by Landlord of conditional mechanics' lien
releases for the work completed and to be paid by said progress payment,
conditioned only on the payment of the sums set forth in the mechanics' lien
release, executed by the Contractor and all subcontractors, labor suppliers and
materialmen; (b) receipt by Landlord of unconditional mechanics' lien releases
from the Contractor and all subcontractors, labor suppliers and materialmen for
all work other than that being paid by the current progress payment previously
completed by the Contractor, subcontractors, labor suppliers and materialmen and
for which Tenant has received funds from the Tenant Improvement Allowance to pay
for such work; (c) receipt by Landlord of any and all documentation reasonably
required by Landlord detailing the work that has been completed and the
materials and supplies used as of the date of Tenant's request for the progress
payment, including, without limitation, invoices, bills, or statements for the
work completed and the materials and supplies used; and (d) completion by
Landlord or Landlord's agents of any inspections of the work completed and
materials and supplies used as deemed reasonably necessary by Landlord. Except
for the CM Fee payment (credit), Tenant Improvement Allowance progress payments
shall be paid to Tenant within fourteen (14) days from the satisfaction of the
conditions set forth in the immediately preceding sentence. The preceding
notwithstanding, all Tenant Improvement Costs paid or incurred by Tenant prior
to Landlord's approval of the Construction Documents in connection with the
design and planning of the Tenant Improvements by Architect shall be paid from
the Tenant Improvement Allowance, without any retention, within fourteen (14)
days following Landlord's receipt of invoices, bills or statements from
Architect evidencing such costs. Notwithstanding the foregoing to the contrary,
Landlord shall be entitled to withhold and retain five percent (5%) of the
Tenant Improvement Allowance or of any Tenant Improvement Allowance progress
payment until the lien-free expiration of the time for filing of any mechanics'
liens claimed or which might be filed on account of any work ordered by Tenant
or the Contractor or any subcontractor in connection with the construction and
installation of the Tenant Improvements.
B. Landlord shall not be obligated to pay any Tenant Improvement Allowance
progress payment or the Tenant Improvement Allowance retention if on the date
Tenant is entitled to receive the Tenant Improvement Allowance progress payment
or the Tenant Improvement Allowance retention Tenant is in default of this
Lease. Such payments shall resume upon Tenant curing any such default within the
time periods which may be provided for in the Lease.
C. Should the total cost of constructing the Tenant Improvements be less
than the Tenant Improvement Allowance, the Tenant Improvement Allowance shall be
automatically reduced to the amount equal to said actual cost.
6. Termination. If the Lease is terminated prior to the date on which the Tenant
Improvements are completed, for any reason due to the default of Tenant
hereunder, in addition to any other remedies available to Landlord under the
Lease, Tenant shall pay to Landlord as Additional Rent under the Lease, within
five (5) days of receipt of a statement therefor, any and all costs incurred by
Landlord and not reimbursed or otherwise paid by Tenant through the date of
termination in connection with the Tenant Improvements to the extent planned,
installed and/or constructed as of such date of termination, including, but not
limited to, any costs related to the removal of all or any portion of the Tenant
Improvements and restoration costs related thereto. Subject to the provisions of
Section 10.2 of the Lease, upon the expiration or earlier termination of the
Lease, Tenant shall not be required to remove the Tenant Improvements it being
the intention of the parties that the Tenant Improvements are to be considered
incorporated into the Building.
7. Lease Provisions; Conflict. The terms and provisions of the Lease, insofar as
they are applicable, in whole or in part, to this EXHIBIT B, are hereby
incorporated herein by reference, and specifically including all of the
provisions of Section 31 of the Lease. In the event of any conflict between the
terms of the Lease and this EXHIBIT B, the terms of this EXHIBIT B shall
prevail. Any amounts payable by Tenant to Landlord hereunder shall be deemed to
be Additional Rent under the Lease and, upon any default in the payment of same,
Landlord shall have all rights and remedies available to it as provided for in
the Lease.
<PAGE>
Exhibit B-1
Construction Insurance Requirements
Before commencing work, the contractor shall procure and maintain at its sole
cost and expense until completion and final acceptance of the work, at least the
following minimum levels of insurance.
A. Workers' Compensation in statutory amounts and Employers Liability Insurance
in the minimum amounts of $100,000 each accident for bodily injury by
accident and $100,000 each employee for bodily injury by disease with a
$500,000 policy limit, covering each and every worker used in connection
with the contract work.
B. Comprehensive General Liability Insurance on an occurrence basis including,
but not limited to, protection for Premises/Operations Liability, Broad Form
Contractual Liability, Owner's and Contractor's Protective, and
Products/Completed Operations Liability*, in the
following minimum limits of liability.
Bodily Injury, Property Damage, and
Personal Injury Liability $2,000,000/each occurrence
$3,000,000/aggregate
* Products/Completed Operations Liability Insurance is to be provided for a
period of at least one (1) year after completion of work.
Coverage should include protection for Explosion, Collapse and Underground
Damage.
C. Comprehensive Automobile Liability Insurance with the following minimum
limits of liability.
Bodily Injury and Property $1,000,000/each occurrence
Damage Liability $2,000,000/aggregate
This insurance will apply to all owned, non-owned or hired automobiles to be
used by the Contractor in the completion of the work.
D. Umbrella Liability Insurance in a minimum amount of five million dollars
($5,000,000), providing excess coverage on a following-form basis over the
Employer's Liability limit in Paragraph A and the liability coverages
outlined in Paragraphs B and C.
E. Equipment and Installation coverages in the broadest form available covering
Contractor's tools and equipment and material not accepted by Tenant. Tenant
will provide Builders Risk Insurance on all accepted and installed
materials.
All policies of insurance, duplicates thereof or certificates evidencing
coverage shall be delivered to Landlord prior to commencement of any work and
shall name Landlord, and its partners and lenders as additional insureds as
their interests may appear. All insurance policies shall (1) be issued by a
company or companies licensed to be business in the state of California, (2)
provide that no cancellation, non-renewal or material modification shall be
effective without thirty (30) days prior written notice provided to Landlord,
(3) provide no deductible greater than $15,000 per occurrence, (4) contain a
waiver to subrogation clause in favor of Landlord, and its partners and lenders,
and (5) comply with the requirements of Sections 12.2, 12.3 and 12.4 of the
Lease to the extent such requirements are applicable.
<PAGE>
3
98LEASE\PREMRV1.DOC: 06/10/98
Exhibit B-2
Building Standards
OUTLINE SPECIFICATION FOR
NEW OFFICE BUILD-OUT IN R & D BUILDINGS
Office Area
DEMISING PARTITION AND CORRIDOR WALLS:
Note: One hr. rated walls where required based on occupancy group.
A. 6" 20-gage metal studs at 24" O.C. (or as required by code based on
roof height) framed full height from finish floor to surface above.
B. One (1) LAYER 5/8" drywall Type "X" both sides of wall, fire taped only.
INTERIOR PARTITIONS:
A. 3 5/8" 25 gage metal studs at 24" O.C. to bottom of T-Bar ceiling
grid approximately 9' 0' high.
B. One (1) layer 5/8" drywall both sides of wall, smooth ready for paint.
C. 3 5/8" metal studs including all lateral bracing as required by
code.
PERIMETER DRYWALL (AT OFFICE AREAS):
A. 3 5/8" metal studs @ 24"O.C. to 12'0" above finished floor. (or as
required by Title-24 for full height envelope then use demising wall
spec.)
B. One (1) layer 5/8" Type "X" drywall taped smooth and ready for paint.
COLUMN FURRING:
A. Furring channel all sides of 2 1/2" metal studs per details.
B. One (1) layer 5/8" drywall taped smooth and ready for paint.
C. Columns within walls shall be furred-out.
ACOUSTICAL CEILINGS:
Note: Gyp. Bd. ceiling at all restrooms Typ.
A. 2'X 4" standard white T-Bar grid system as manufactured by Chicago
Metallic of equal.
B. 2'X 4" X 5/8" white, no-directional acoustical tile to be regular
second look as manufactured by Armstrong or equal.
PAINTING:
A. Sheetrock walls within office to receive two (2) coats of interior latex
paint as manufactured by Kelly Moore or equal. Some portions of second
coat to be single accent color.
B. Semigloss paint all restrooms and lunch rooms.
WINDOW COVERING:
A. 1" aluminum mini-blinds as manufactured by Levelor, Bali or equal,
color to be selected by L.P.C. (brushed aluminum or white).
B. Blinds to be sized to fit window module.
VCT:
A. VCT to be 1/8" x 12" x 12" as manufactured by Armstrong -Excelon Series or
equal.
B. Slabs shall be water proofed per manufacturer recommendations, at sheet
vinyl or VCT areas.
LIGHT FIXTURES:
A. 2" X 4" T-bar lay in 3-tube energy efficient fixture with cool white
fluorescent tubes with parabolic lens as manufactured by Lithonia or
equal. (Approximately 50 F.C.)
LIGHT SWITCHES:
A. Switching as required by Title 24.
B. Switch assembly to be Levinton or equal, color - White
ELECTRICAL OUTLET:
A. 110V duplex outlet in demising or interior partitions only, as
manufactured by Leviton or equal, color to be White.
B. Maximum eight (8) outlets per circuit, spacing to meet code or minimum 2
per office, conference room, reception and 2 dedicated over cabinet at
lunch room junction boxes above ceiling for large open area with furniture
partitions.
C. Transformers to be a minimum of 20% or over required capacity.
D. Contractors to inspect electric room and to include all necessary
metering cost.
E. No aluminum wiring is acceptable.
TELEPHONE/DATA OUTLET:
A. One(1) single outlet box in wall with pullwire from outlet box to area
above T-bar ceiling per office.
B. Cover plate for phone outlets by telephone/data vendors.
FIRE SPRINKLERS:
As required by fire codes.
TOPSET BASE:
A. 4" rubber base as manufactured by Burke or equal, standard colors
only.
B. 4" rubber base at VCT areas.
TOILET AREAS:
Wet walls to receive Duraboard or Wonder Board and ceramic tile up to 48".
Floors to receive ceramic tile with self covered base as required by code.
CARPET:
Note any of the following carpets are acceptable
Designweave: Alumni 28 oz., Windswept Classic 30 oz. or Stratton Design Series
III 30 oz, Structure II
28 oz.
WOOD DOORS:
Shall be 3' 0" x 9' 0" x 1 3/4" (unless otherwise specified) solid core,
prefinished harmony (rotary N. birch).
DOOR FRAMES:
Shall be ACI or equal, 33/4" or 4 7/8" throat, brushed, standard aluminum,
snap-on trim.
HARDWARE:
1 1/2 pr. butts F179 Stanley, Latchset D10S Rhodes Schlage, Lockset D53PD Rhodes
Schlage, Dome Type floor stop Gylnn Johnson FB13, Closer 4110LCN (where
required) brushed chrome.
INSULATION:
By Title 24 insulation.
PLUMBING:
A. Shall comply with all local codes and handicapped code requirements.
Fixtures shall be either AAmerican Standard@, AKohler@ or ANorris@. All
toilet accessories and grab bars shall be ABobrick@ or equal and approved
by owner.
B. Plumbing bid shall include 5 gallon minimum hot water heater, or insta hot
with mixer valve including all connections.
TOILET PARTITIONS:
Shall be as manufactured by Fiat, global or equal if approved by owner. Color to
be white or gray.
HVAC:
HVAC units per specifications.
Five (5) year warranty provided on all HVAC compressor units. All penetrations
including curbs and sleepers to be hot moped to LPC standard.
WAREHOUSE AREAS:
Floor - seal concrete with water base clear acrylic sealer. Fire Extinguishers -
2A 10 BC surface mount by code x by S.F.
400 W metal halide lighting at warehouse minimum 5-7 foot candles.
Note: All high pile storage requirements are excluded for standard building T.I.
<PAGE>
1
98LEASE\PREM-RVI.doc: 06/22/98
Exhibit C
Commencement and Expiration Date Memorandum
Landlord: Aetna Life Insurance Company
Tenant: Premisys Communications, Inc., a Delaware
corporation
Lease Date: June 4, 1998
Premises: Located at 48634 Milmont Drive, Fremont,
California 94538
Tenant hereby accepts the Premises as being in the condition required under
the Lease, with all Tenant Improvements completed (except for minor punchlist
items which Landlord agrees to complete).
The Commencement Date of the Lease is hereby established as
____________________________ and the Expiration Date is____________________.
Tenant: Premisys Communications, Inc.,
a Delaware corporation
By: .....................................
Print Name: .............................
Its: ....................................
Approved and Agreed:
Landlord:
Aetna Life Insurance Company,
a Connecticut corporation
By: Allegis Realty Investors, LLC
Its Investment Advisor
By: ...........................
Date: ..........................
<PAGE>
2
98LEASE\PREM-RV1.doc: 06/22/98
EXHIBIT D - RULES & REGULATIONS
Page 1 of 2
Industrial Lease Agreement dated June 4, 1998, between
Premisys Communications, Inc.,
a Delaware Corporation
("Tenant"),
and
AEtna LIFE INSURANCE COMPANY,
a Connecticut corporation
("Landlord")
1. No advertisement, picture or sign of any sort shall be displayed on or
outside the Premises without the prior written consent of Lessor, which
shall not be unreasonably withheld. Lessor shall have the right to
remove any such unapproved item without notice and at Lessee's expense.
2. Lessee shall not regularly park motor vehicles in designated parking
areas after the conclusion of normal daily business activity.
3. Lessee shall not use any method of heating or air conditioning other
than that supplied by Lessor without the consent of Lessor.
4. All window coverings installed by Lessee and visible from the outside
of the building require the prior written approval of Lessor.
5. Lessee shall not use, keep or permit to be used or kept any foul or
noxious gas or substance or any flammable or combustible materials on
or around the Premises.
6. Lessee shall not alter any lock or install any new locks or bolts on
any door at the Premises without the prior consent of Lessor.
7. Lessee agrees not to make any duplicate keys without the prior consent
of Lessor.
8.7. Lessee shall park motor vehicles in those general parking areas as
designated by Lessor except for loading and unloading. During those
periods of loading and unloading, Lessee shall not unreasonably
interfere with traffic flow within the Project and loading and
unloading areas of other Lessees.
9.8. Lessee shall not disturb, solicit or canvas any occupant of the
Building or Project and shall cooperate to prevent same.
10.9. No person shall go on the roof without Lessor's permission.
11.10.Business machines and mechanical equipment belonging to Lessee which
cause noise or vibration that may be transmitted to the structure of
the Building, to such a degree as to be objectionable to Lessor or
other Lessees, shall be placed and maintained by Lessee, at Lessee's
expense, on vibration eliminators or other devices sufficient to
eliminate noise or vibration.
12.11.All goods, including material used to store goods, delivered to the
Premises of Lessee shall be immediately moved into the Premises and
shall not be left in parking or receiving areas overnight.
13.12.Tractor trailers which must be unhooked or parked with dolly wheels
beyond the concrete loading areas must use steel plates or wood blocks
under the dolly wheels to prevent damage to the asphalt paving
surfaces. No parking or storing of such trailers will be permitted in
the auto parking areas of the Project or on streets adjacent thereto.
14.13.Forklifts which operate on asphalt paving areas shall not have solid
rubber tires and shall only use tires that do not damage the asphalt.
15.14.Lessee is responsible for the storage and removal of all trash and
refuse. All such trash and refuse shall be contained in suitable
receptacles stored behind screened enclosures at locations approved by
Lessor.
16.15.Lessee shall not store or permit the storage or placement of goods or
merchandise in or around the common areas surrounding the Premises. No
displays or sales or merchandise shall be allowed in the parking lots
or other common areas.
<PAGE>
98LEASE\PREM-RV1.doc: 6/22/98
1
EXHIBIT F
HAZARDOUS MATERIALS DISCLOSURE CERTIFICATE
Your cooperation in this matter is appreciated. Initially, the information
provided by you in this Hazardous Materials Disclosure Certificate is necessary
for the Landlord to evaluate your proposed uses of the premises (the "Premises")
and to determine whether to enter into a lease agreement with you as tenant. If
a lease agreement is signed by you and the Landlord (the "Lease Agreement"), on
an annual basis in accordance with the provisions of Paragraph 32 of the Lease
Agreement, you are to provide an update to the information initially provided by
you in this certificate. Any questions regarding this certificate should be
directed to, and when completed, the certificate should be delivered to:
Landlord: c/o Allegis Realty Investors LLC
455 Market Street, Suite 1540
San Francisco, California 94105
Attention: Rod Chu
Phone: (415) 538-4800
Name of (Prospective) Tenant: Premisys Communications, Inc., a Delaware
corporation Mailing Address: 48664 Milmont Drive, Fremont, California 94538
Contact Person, Title and Telephone Number(s):
Contact Person for Hazardous Waste Materials Management and Manifests and
Telephone Number(s):
Address of (Prospective) Premises: 48634 Milmont Drive, Fremont, California
94538
Length of (Prospective) initial Term: Eighty four (84) months
1. GENERAL INFORMATION:
Describe the initial proposed operations to take place in, on, or about
the Premises, including, without limitation, principal products processed,
manufactured or assembled services and activities to be provided or
otherwise conducted. Existing tenants should describe any proposed changes
to on-going operations.
2. USE, STORAGE AND DISPOSAL OF HAZARDOUS MATERIALS
2.1 Will any Hazardous Materials (as hereinafter defined) be used,
generated, stored or disposed of in, on or about the Premises?
Existing tenants should describe any Hazardous Materials which
continue to be used, generated, stored or disposed of in, on or
about the Premises.
Wastes Yes No
Chemical Products Yes No
Other Yes No
If Yes is marked, please explain:
2.2 If Yes is marked in Section 2.1, attach a list of any Hazardous
Materials to be used, generated, stored or disposed of in, on or
about the Premises, including the applicable hazard class and an
estimate of the quantities of such Hazardous Materials to be present
on or about Premisys at any given time; estimated annual throughput;
the proposed location(s) and method of storage (excluding nominal
amounts of ordinary household cleaners and janitorial supplies which
are not regulated by any Environmental Laws, as hereinafter
defined); and the proposed location(s) and method(s) of disposal for
each Hazardous Material, including, the estimated frequency, and the
proposed contractors or subcontractors. Existing tenants should
attach a list setting forth the information requested above and such
list should include actual data from on-going operations and the
identification of any variations in such information from the prior
year's certificate.
3. STORAGE TANKS AND SUMPS
3.1 Is any above or below ground storage of gasoline, diesel, petroleum,
or other Hazardous Materials in tanks or sumps proposed in, on or
about the Premises? Existing tenants should describe any such actual
or proposed activities.
Yes No
If yes, please explain:
4. WASTE MANAGEMENT
4.1 Has your company been issued an EPA Hazardous Waste Generator I.D.
Number? Existing tenants should describe any additional
identification numbers issued since the previous certificate.
Yes No
4.2 Has your company filed a biennial or quarterly reports as a
hazardous waste generator? Existing tenants should describe any new
reports filed.
Yes No
If yes, attach a copy of the most recent report filed.
5. WASTEWATER TREATMENT AND DISCHARGE
5.1 Will your company discharge wastewater or other wastes to:
storm drain? sewer?
surface water? no wastewater or other wastes
discharged.
Existing tenants should indicate any actual discharges. If so,
describe the nature of any proposed or actual discharge(s).
5.2 Will any such wastewater or waste be treated before discharge?
Yes No
If yes, describe the type of treatment proposed to be conducted.
Existing tenants should describe the actual treatment conducted.
6. AIR DISCHARGES
6.1 Do you plan for any air filtration systems or stacks to be used in
your company's operations in, on or about the Premises that will
discharge into the air; and will such air emissions be monitored?
Existing tenants should indicate whether or not there are any such
air filtration systems or stacks in use in, on or about the Premises
which discharge into the air and whether such air emissions are
being monitored.
Yes No
If yes, please describe:
6.2 Do you propose to operate any of the following types of equipment,
or any other equipment requiring an air emissions permit? Existing
tenants should specify any such equipment being operated in, on or
about the Premises.
Spray booth(s) Incinerator(s)
Dip tank(s) Other (Please describe)
Drying oven(s) No Equipment Requiring Air
Permits
If yes, please describe:
6.3 Please describe (and submit copies of with this Hazardous Materials
Disclosure Certificate) any reports you have filed in the past
(thirty-six) months with any governmental or quasi-governmental
agencies or authorities related to air discharges or clean air
requirements and any such reports which have been issued during such
period by any agencies or authorities with respect to you or your
business operations.
7. HAZARDOUS MATERIALS DISCLOSURES
7.1 Has your company prepared or will it be required to prepare a
Hazardous Materials management plan ("Management Plan") or Hazardous
Materials Business Plan and Inventory ("Business Plan") pursuant to
Fire Department or other governmental or regulatory agencies'
requirements? Existing tenants should indicate whether or not a
Management Plan is required and has been prepared.
Yes No
If yes, attach a copy of the Management Plan or Business Plan.
Existing tenants should attach a copy of any required updates to the
Management Plan or Business Plan.
7.2 Are any of the Hazardous Materials, and in particular chemicals,
proposed to be used in your operations in, on or about the Premises
regulated under Proposition 65? Existing tenants should indicate
whether or not there are any new Hazardous Materials being so used
which are regulated under Proposition 65.
Yes No
If yes, please explain:
8. ENFORCEMENT ACTIONS AND COMPLAINTS
8.1 With respect to Hazardous Materials or Environmental Laws, has your
company ever been subject to any agency enforcement actions,
administrative orders, or consent decrees or has your company
received requests for information, notice or demand letters, or any
other inquiries regarding its operations? Existing tenants should
indicate whether or not any such actions, orders or decrees have
been, or are in the process of being, undertaken or if any such
requests have been received.
Yes No
If yes, describe the actions, orders or decrees and any continuing
compliance obligations imposed as a result of these actions, orders
or decrees and also describe any requests, notices or demands, and
attach a copy of all such documents. Existing tenants should
describe and attach a copy of any new actions, orders, decrees,
requests, notices or demands not already delivered to Landlord
pursuant to the provisions of Paragraph 32 of the Lease Agreement.
8.2 Have there ever been, or are there now pending, any lawsuits against
your company regarding any environmental or health and safety
concerns?
Yes No
If yes, describe any such lawsuits and attach copies of the
complaint(s), cross-complaint(s), pleadings and all other documents
related thereto as requested by Landlord. Existing tenants should
describe and attach a copy of any new complaint(s),
cross-complaint(s), pleadings and other related documents not
already delivered to Landlord pursuant to the provisions of
Paragraph 32 of the Lease Agreement.
8.3 Have there been any problems or complaints from adjacent tenants,
owners or other neighbors at your company's current facility with
regard to environmental or health and safety concerns? Existing
tenants should indicate whether or not there have been any such
problems or complaints from adjacent tenants, owners or other
neighbors at, about or near the Premises and the current status of
any such problems or complaints.
Yes No
If yes, please describe. Existing tenants should describe any such
problems or complaints not already disclosed to Landlord under the
provisions of the signed Lease Agreement and the current status of
any such problems or complaints.
9. PERMITS AND LICENSES
9.1 Attach copies of all permits and licenses issued to your company
with respect to its proposed operations in, or on or about Premisys,
including, without limitation, any wastewater discharge permits, air
emissions permits, and use permits or approvals. Existing tenants
should attach copies of any new permits and licenses as well as any
renewals of permits or licenses previously issued.
As used herein, "Hazardous Materials" shall mean and include any substance that
is or contains (a) any "hazardous substance" as now or hereafter defined in
101(14) of the Comprehensive Environmental Response, Compensation, and
Liability Act of 1980, as amended ("CERCLA") (42 U.S.C. 9601 et seq.) or
any regulations promulgated under CERCLA; (b) any "hazardous waste" as now or
hereafter defined in the Resource Conservation and Recovery Act, as amended
("RCRA") (42 U.S.C. 6901 et seq.) or any regulations promulgated under
RCRA; (c) any substance now or hereafter regulated by the Toxic Substances
Control Act, as amended ("TSCA") (15 U.S.C.
2601 et seq.) or any
regulations promulgated under TSCA; (d) petroleum, petroleum by-products,
gasoline, diesel fuel, or other petroleum hydrocarbons; (e) asbestos and
asbestos-containing material, on any form, whether friable or non-friable; (f)
polychlorinated biphenyls; (g) lead and lead-containing materials; or (h) any
additional substance material or waste (A) the presence of which on or about
Premisys (i) requires reporting, investigation or remediation under any
Environmental Laws (as hereinafter defined), (ii) causes or threatens to cause a
nuisance on the Premises or any adjacent property or poses or threatens to pose
a hazard to the health or safety of persons on the Premises or any adjacent
property, or (iii) which, if it emanated or migrated from the Premises, could
constitute a trespass, or (B) which is now or hereafter classified or considered
to be hazardous or toxic under any Environmental Laws; and "Environmental "Laws"
shall mean and include (a) CERCLA, RCRA and TSCA; and (b) any other federal,
state or local laws, ordinances, statutes, codes, rules, regulations, orders or
decrees now or hereinafter in effect relating to (i) pollution, (ii) the
protection or regulation of human health, natural resources or the environment,
(iii) the treatment, storage or disposal of Hazardous Materials, or (iv) the
emission, discharge, release of threatened release of Hazardous Materials into
the environment.
The undersigned hereby acknowledges and agrees that this Hazardous Materials
Disclosure Certificate is being delivered to Landlord in connection with the
evaluation of a Lease Agreement and, if such Lease Agreement is executed, will
be attached thereto as an exhibit. The undersigned further acknowledges and
agrees that if such Lease Agreement is executed, this Hazardous Materials
Disclosure Certificate will be updated from time to time in accordance with
Paragraph 32 of the Lease Agreement. The undersigned further acknowledges and
agrees that the Landlord and its partners, lenders and representatives may, and
will, rely upon the statements, representations, warranties, and certifications
made herein and the truthfulness thereof in entering into the Lease Agreement
and the continuance thereof throughout the term, and any renews thereof, of the
Lease Agreement. I (print name) _______________________________, acting with
full authority to bind the (proposed) Tenant and on behalf of the (proposed)
Tenant, certify, represent and warrant that the information contained in this
certificate is true and correct.
(PROSPECTIVE) TENANT:
By:
Title:
Date:
<PAGE>
Addendum 1
Option to Extend the Lease
This Addendum 1 ("Addendum") is incorporated as a part of that certain Lease
Agreement dated June 4, 1998 (the "Lease"), by and between Premisys
Communications, Inc., a Delaware corporation ("Tenant"), and AEtna Life
Insurance Company, a Connecticut corporation ("Landlord"), for the leasing of
those certain premises located at 48634 Milmont Drive, Fremont, California 94538
as more particularly described in Exhibit A to the Lease (the "Premises"). Any
capitalized terms used herein and not otherwise defined herein shall have the
meaning ascribed to such terms as set forth in the Lease.
1. Grant of Extension Option. Subject to the provisions, limitations and
conditions set forth in Paragraph 5 below, Tenant shall have an Option
("Option") to extend the term of the Lease for five (5) years (the "Extended
Term").
2. Tenant's Option Notice. If Landlord does not receive written notice from
Tenant of its exercise of this Option on a date which is not more than three
hundred sixty (360) days nor less than two hundred forty (240) days prior to the
end of the initial term of the Lease (the "Option Notice"), all rights under
this Option shall automatically terminate and shall be of no further force or
effect.
3. Establishing the Initial Monthly Base Rent for the Extended Term. The initial
monthly Base Rent for the Extended Term shall be the then current market rent
for similar space within the competitive market area of the Premises (the "Fair
Rental Value"). "Fair Rental Value" of the Premises means the fair market rental
value of the Premises as of the commencement of the Extended Term, taking into
consideration all relevant factors, including length of term, the uses permitted
under the Lease, the quality, size, design and location of the Premises,
including the condition and value of existing tenant improvements, and the
monthly base rent paid by tenants for premises comparable to the Premises, and
located within the competitive market area of the Premises as reasonably
determined by Landlord.
Neither Landlord nor Tenant shall have the right to have a court or any other
third party entity establish the Fair Rental Value. If Landlord and Tenant are
unable to agree on the Fair Rental Value for the Extended Term within ten (10)
days of receipt by Landlord of the Option Notice, Landlord and Tenant being
obligated only to act in good faith, this Option shall automatically terminate
and the Lease shall terminate at the end of its initial term.
In no event shall the monthly Base Rent for any period of the Extended Term be
less than the highest monthly Base Rent charged during the initial term of the
Lease. Upon determination of the initial monthly Base Rent for the Extended Term
in accordance with the terms outlined above, Landlord and Tenant shall
immediately execute, at Landlord's sole option, either the standard lease
agreement then in use by Landlord, or an amendment to this Lease. Such new lease
agreement or amendment, as the case may be, shall set forth among other things,
the initial monthly Base Rent for the Extended Term and the actual commencement
date and expiration date of the Extended Term. Tenant shall have no other right
to extend the term of the Lease under this Addendum unless Landlord and Tenant
otherwise agree in writing.
4. Condition of Premises and Brokerage Commissions for the Extended Term. If
Tenant timely and properly exercises this Option, in strict accordance with the
terms contained herein: (1) Tenant shall accept the Premises in its then "As-Is"
condition and, accordingly, Landlord shall not be required to perform any
additional improvements to the Premises; and (2) Tenant hereby agrees that it
will be solely responsible for any and all brokerage commissions and finder's
fees payable to any broker now or hereafter procured or hired by Tenant or who
otherwise claims a commission based on any act or statement of Tenant ("Tenant's
Broker") in connection with the Option; and Tenant hereby further agrees that
Landlord shall in no event or circumstance be responsible for the payment of any
such commissions and fees to Tenant's Broker.
5. Limitations On, and Conditions To, Extension Option. This Option is personal
to Tenant and may not be assigned, voluntarily or involuntarily, separate from
or as part of the Lease. At Landlord's option, all rights of Tenant under this
Option shall terminate and be of no force or effect if any of the following
individual events occur or any combination thereof occur: (1) Tenant has been in
default at any time during the initial term of the Lease, or is currently in
default of any provision of the Lease; and/or (2) Tenant has assigned its rights
and obligations under all or part of the Lease or Tenant has subleased all or
part of the Premises; and/or (3) Tenant's financial condition is unacceptable to
Landlord at the time the Option Notice is delivered to Landlord; and/or (4)
Tenant has failed to properly exercise this Option in a timely manner in strict
accordance with the provisions of this Addendum; and/or (5) Tenant no longer has
possession of all or any part of the Premises under the Lease, or if the Lease
has been terminated earlier, pursuant to the terms of the Lease.
6. Time is of the Essence. Time is of the essence with respect to each and every
time period described in this Addendum.
Exhibit 10.49
First Amendment to Lease Agreement
Change of Commencement Date
This First Amendment to Lease Agreement (the "Amendment") is made and entered
into to be effective as of July 20, 1998, by and between AEtna Life Insurance
Company, a Connecticut corporation ("Landlord"), and Premisys Communications,
Inc., a Delaware corporation ("Tenant"), with reference to the following facts:
Recitals
A. Landlord and Tenant have entered into that certain Lease Agreement dated
June 4, 1998 (the "Lease"), for the leasing of certain premises containing
approximately 29,840 rentable square feet of space located at 48634 Milmont
Drive, Fremont, California (the "Premises") as such Premises are more fully
described in the Lease.
B. Landlord and Tenant wish to amend the Commencement Date of the Lease.
NOW, THEREFORE, in consideration of the foregoing and for other good and
valuable consideration, the receipt and adequacy of which are hereby
acknowledged, Landlord and Tenant hereby agree as follows:
1. Recitals: Landlord and Tenant agree that the above recitals are
true and correct.
2. The Commencement Date of the Lease shall be August 1, 1998.
3. The last day of the Term of the Lease (the "Expiration Date") shall be
December 31, 2005.
4. The dates on which the Base Rent will be adjusted are:
for the period August 1, 1998 to July 31, 1999 the monthly Base Rent
shall be $38,792.00;
for the period August 1, 1999 to July 31, 2000 the monthly Base Rent
shall be $39,985.60;
for the period August 1, 2000 to July 31, 2001 the monthly Base Rent
shall be $41,179.20;
for the period August 1, 2001 to July 31, 2002 the monthly Base Rent
shall be $42,372.80;
for the period August 1, 2002 to July 31, 2003 the monthly Base Rent
shall be $43,566.40;
for the period August 1, 2003 to July 31, 2004 the monthly Base Rent
shall be $44,760.00;
for the period August 1, 2004 to July 31, 2005 the monthly Base Rent
shall be $45,953.60; and
for the period August 1, 2005 to December 31, 2005 the monthly Base Rent
shall be $47,147.20.
5. Effect of Amendment: Except as modified herein, the terms and conditions
of the Lease shall remain unmodified and continue in full force and
effect. In the event of any conflict between the terms and conditions of
the Lease and this Amendment, the terms and conditions of this Amendment
shall prevail.
6. Definitions: Unless otherwise defined in this Amendment, all terms not
defined in this Amendment shall have the meaning set forth in the Lease.
7. Authority: Subject to the provisions of the Lease, this Amendment shall
be binding upon and inure to the benefit of the parties hereto, their
respective heirs, legal representatives, successors and assigns. Each
party hereto and the persons signing below warrant that the person
signing below on such party's behalf is authorized to do so and to bind
such party to the terms of this Amendment.
8. The terms and provisions of the Lease are hereby incorporated in this
Amendment.
IN WITNESS WHEREOF, the parties have executed this Amendment as of the date and
year first above written.
TENANT:
Premisys Communications, Inc.,
a Delaware corporation
By: John J. Hagedorn
Its: SVP/CFO
Date: 8/10/98
By:
Its:
Date:
LANDLORD:
AEtna Life Insurance Company,
a Connecticut corporation
By: Allegis Realty Investors, LLC,
Its Investment Advisor
By: Silvia Melikian
Vice President
Date: 8/20/98
<PAGE>
EXHIBIT 21.01
LIST OF REGISTRANT'S SUBSIDIARIES
Country of Percentage Owned by
Name Organization Registrant
- ------------------------------------ ----------------- -----------------------
Premisys Communications Pte Ltd Singapore 100%
Premisys Communications Limited United Kingdom 100%
Premisys Communications (Canada)Inc Canada 100%
Inc.
<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 No. 333-49991) of Premisys Communications, Inc. of
our report dated July 23, 1998, except for Note 10 which is as of September 24,
1998, appearing on page 30 of this Annual Report on Form 10-K.
/s/ PricewaterhouseCoopers LLP
PRICEWATERHOUSECOOPERS LLP
San Jose, California
September 24, 1998
<PAGE>
EXHIBIT 27.01
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheet, consolidated statement of operations and
consolidated statement of cash flows included in the Company's Form 10-K for the
period ended June 26, 1998, 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-26-1998
<PERIOD-START> JUN-28-1997
<PERIOD-END> JUN-26-1998
<CASH> 31,006
<SECURITIES> 74,975
<RECEIVABLES> 12,208
<ALLOWANCES> 0
<INVENTORY> 3,859
<CURRENT-ASSETS> 130,060
<PP&E> 13,762
<DEPRECIATION> 5,370
<TOTAL-ASSETS> 138,757
<CURRENT-LIABILITIES> 17,981
<BONDS> 0
0
0
<COMMON> 260
<OTHER-SE> 120,516
<TOTAL-LIABILITY-AND-EQUITY> 138,757
<SALES> 102,298
<TOTAL-REVENUES> 102,298
<CGS> 35,586
<TOTAL-COSTS> 83,927
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 21,770
<INCOME-TAX> 8,055
<INCOME-CONTINUING> 13,715
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13,715
<EPS-PRIMARY> 0.54
<EPS-DILUTED> 0.50
</TABLE>
