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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 27, 1998
-------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
---------------------- -----------------------
Commission file number 0-25684
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PREMISYS COMMUNICATIONS, INC.
------------------------------------------------------
(Exact name of registrant as specified in its chapter)
Delaware 94-3153847
- ------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
48664 Milmont Drive, Fremont, California 94538
----------------------------------------------------
(Address of principal executive offices)
(Zip Code)
(510) 353-7600
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
-------- --------
The number of shares outstanding of the issuer's common stock, par value $0.01,
as of April 23, 1998 was 25,855,854 shares.
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1
<PAGE>
<TABLE>
<CAPTION>
PREMISYS COMMUNICATIONS, INC.
INDEX
-----
PART I. Financial Information Page No.
--------------------- --------
<S> <C> <C>
Item 1. Financial Statements
Condensed Consolidated Balance Sheet - June 30, 1997 and March 31,
1998 3
Condensed Consolidated Statement of Operations - Three and Nine
Month Periods ended March 31, 1997 and March 31, 1998 4
Condensed Consolidated Statement of Cash Flows - Nine Month Periods
ended March 31, 1997 and March 31, 1998 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 8
Item 3. Quantitative and Qualitative Disclosures About Market Risk 18
PART II. Other Information
-----------------
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 19
Signatures 20
</TABLE>
2
<PAGE>
I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
<TABLE>
Premisys Communications, Inc.
Condensed Consolidated Balance Sheet
(in thousands except share and per share data)
<CAPTION>
June 30, March 31,
-------- ---------
1997 1998
-------- ---------
(unaudited)
ASSETS
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 28,923 $ 21,590
Short-term investments 44,301 74,666
Accounts receivable, net 7,658 5,947
Inventories 8,775 5,783
Deferred tax assets 7,207 7,207
Prepaid expenses and other assets 3,793 1,081
---------------- ---------------
Total current assets 100,657 116,274
Property and equipment, net 6,444 7,456
---------------- ---------------
$107,101 $123,730
================ ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 4,756 $ 5,584
Accrued liabilities 5,528 8,612
Income taxes payable --- 1,630
--------------- ---------------
Total current liabilities 10,284 15,826
--------------- ---------------
Stockholders' equity:
Preferred Stock, $0.01 par value, 2,000,000 shares authorized; no shares issued --- ---
or outstanding
Common Stock, $0.01 par value, 100,000,000 shares authorized; 25,190,751 and
25,704,230 shares issued and outstanding 252 257
Additional paid-in capital 74,994 77,546
Retained earnings 21,571 30,101
--------------- ---------------
Total stockholders' equity 96,817 107,904
--------------- ---------------
$ 107,101 $ 123,730
=============== ===============
<FN>
See notes to condensed consolidated financial statements
</FN>
</TABLE>
3
<PAGE>
<TABLE>
Premisys Communications, Inc.
Condensed Consolidated Statement of Operations (unaudited)
(in thousands, except per share data)
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
--------- ----------
1997 1998 1997 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues $ 12,237 $ 27,154 $ 62,887 $ 71,055
Cost of revenues 4,324 9,109 21,623 24,605
---------------- --------------- --------------- --------------
Gross profit 7,913 18,045 41,264 46,450
---------------- --------------- --------------- --------------
Operating expenses:
Research and development 2,607 3,900 7,445 11,108
Charge for in-process technologies 4,000 4,431 4,000 4,431
Selling, general and administrative 5,458 7,714 15,848 19,877
---------------- --------------- --------------- --------------
Total operating expenses 12,065 16,045 27,293 35,416
---------------- --------------- --------------- --------------
Income (loss) from operations (4,152) 2,000 13,971 11,034
Interest and other income, net 694 923 1,949 2,506
---------------- --------------- --------------- --------------
Income (loss) before income taxes (3,458) 2,923 15,920 13,540
Provision (benefit) for income taxes (1,349) 1,082 6,209 5,010
---------------- --------------- --------------- --------------
Net income (loss) $ (2,109) $ 1,841 $ 9,711 $ 8,530
================ =============== =============== ==============
Net income (loss) per share:
Basic $ (0.09) $ 0.07 $ 0.40 $ 0.33
================ =============== =============== ==============
Diluted $ (0.09) $ 0.07 $ 0.37 $ 0.31
================ =============== =============== ==============
Shares used in computing net income (loss) per share:
Basic 24,764 25,630 24,582 25,467
================ =============== =============== ==============
Diluted 24,764 27,507 26,497 27,457
================ =============== =============== ==============
<FN>
See notes to condensed consolidated financial statements
</FN>
</TABLE>
4
<PAGE>
<TABLE>
Premisys Communications, Inc.
Condensed Consolidated Statement Of Cash Flows (unaudited)
(in thousands)
<CAPTION>
Nine Months Ended March 31,
---------------------------
1997 1998
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 9,711 $ 8,530
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation 857 1,652
Changes in assets and liabilities:
Accounts receivable 7,876 1,711
Inventories (6,224) 2,992
Prepaid expenses and other assets (3,878) 2,712
Accounts payable 1,227 828
Accrued liabilities 1,361 3,084
Income taxes payable (580) 1,630
-------------- --------------
Net cash provided by operating activities 10,350 23,139
-------------- --------------
Cash flows from investing activities:
Purchase of property and equipment (4,745) (2,664)
Purchase of short-term investments (12,925) (30,365)
-------------- --------------
Net cash used in investing activities (17,670) (33,029)
-------------- --------------
Cash flows from financing activities:
Proceeds from issuance of Common Stock, net 3,338 2,557
-------------- --------------
Net cash provided by financing activities 3,338 2,557
-------------- --------------
Net increase (decrease) in cash (3,982) (7,333)
-------------- --------------
Cash and cash equivalents at beginning of period 22,058 28,923
-------------- --------------
Cash and cash equivalents at end of period $ 18,076 $ 21,590
============== ==============
Supplemental disclosures:
Cash paid for income taxes $ 10,644 $ 54
<FN>
See notes to condensed consolidated financial statements
</FN>
</TABLE>
5
<PAGE>
Premisys Communications, Inc.
Notes to Condensed Consolidated Financial Statements
NOTE 1 - Basis of Presentation
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q and
Rule 10-01 of Regulation S-X. Accordingly, they do not contain all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, the
accompanying unaudited condensed consolidated financial statements have been
prepared on the same basis as the audited consolidated financial statements and
include all adjustments, consisting only of normal recurring adjustments,
necessary for the fair statement of the Company's financial position as of March
31, 1998, the results of its operations for the three and nine month periods
ended March 31, 1997 and 1998, and its cash flows for the nine month periods
ended March 31, 1997 and 1998. These financial statements should be read in
conjunction with the Company's audited financial statements as of June 30, 1996
and 1997 and for each of the three years in the period ended June 30, 1997,
including notes thereto, included in the Company's Annual Report on Form 10-K.
Operating results for the nine month period ended March 31, 1998 are not
necessarily indicative of the results that may be expected for the year ending
June 30, 1998.
The Company has a 52/53 week fiscal accounting year that ends on the
Friday closest to June 30. Accordingly, fiscal periods shown herein as ending on
June 30, 1997 and March 31, 1997 and 1998 for financial statement presentation
purposes actually reflect amounts for the fiscal periods ended on June 27, 1997,
March 28, 1997 and March 27, 1998.
NOTE 2 - Inventories (in thousands)
June 30, March 31,
1997 1998
---- ----
(unaudited)
Raw materials $ 2,010 $ 1,075
Work-in-process 1,390 1,515
Finished goods 7,893 6,325
-------- --------
11,293 8,915
Less: Reserves (2,518) (3,132)
-------- --------
$ 8,775 $ 5,783
======== ========
NOTE 3 - Earnings Per Share
The Company adopted Statement of Financial Accounting Standards No. 128,
"Earnings Per Share" ("SFAS 128") during the second quarter of fiscal 1998. SFAS
128 requires presentation of both Basic EPS and Diluted EPS on the face of the
statement of operations. Basic EPS, which replaces primary EPS, is computed by
dividing net income (loss) available to common stockholders (numerator) by the
weighted average number of common shares outstanding (denominator) during the
period. Unlike the computation of primary EPS, Basic EPS excludes the dilutive
effect of stock options. Diluted EPS replaces fully diluted EPS and 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 rather than the higher of the
average or ending stock price as used in the computation of fully diluted EPS.
When there is a reported loss for a period presented, the number of shares used
in computing basic and diluted EPS are equal and are the same as the shares
reported for Basic EPS.
6
<PAGE>
<TABLE>
Following is a presentation of the numerators and denominators of the
Basic and Diluted EPS computations for the periods presented below:
<CAPTION>
March 31, 1997 March 31, 1998
-------------------------------------- --------------------------------------
Three Month Period Net Income Shares Per Share Net Income Shares Per Share
Ended (Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
-------------------------------------- --------------------------------------
(in thousands except per share data)
<S> <C> <C> <C> <C> <C> <C>
Basic EPS
Net income (loss)
Available
to common stockholders $(2,109) $24,764 $(0.09) $1,841 $25,630 $0.07
Effect of Dilutive
Securities
Common stock equivalents ---- ---- ---- 1,877
------------ ------------ ------------ ------------
Diluted EPS
Net income (loss)
available to common
stockholders and assumed
conversions $(2,109) 24,764 $(0.09) $1,841 27,507 $0.07
============ ============ ============ ============ ============ ============
March 31, 1997 March 31, 1998
-------------------------------------- --------------------------------------
Nine Month Period Net Income Shares Per Share Net Income Shares Per Share
Ended (Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
------------ ------------ ------------ ------------ ------------ ------------
(in thousands except per share data)
Basic EPS
Net income available
to common stockholders $9,711 24,582 $0.40 $8,530 25,467 $0.33
Effect of Dilutive
Securities
Common stock equivalents ---- 1,915 ---- 1,990
------------ ------------ ------------ ------------
Diluted EPS
Net income available to
common stockholders and
assumed conversions $9,711 26,497 $0.37 $8,530 27,457 $0.31
============ ============ ============ ============ ============ ============
</TABLE>
Options to purchase 1,660,916, 712,587, 226,420 and 833,410 shares of Common
stock were outstanding during the three month periods ended March 31, 1997 and
1998 and the nine month periods ended March 31, 1997 and 1998, respectively, but
were not included in the computation of Diluted EPS because the exercise prices
of the options were greater than the average market price of the common shares
in each period.
NOTE 4 - Significant Events
On March 12, 1998, the Company announced the execution of a technology
license agreement with Switched Network Technologies ("SNT"). The Company
intends to use cell and packet technologies from SNT in future Premisys
products.
The licensed technologies are to provide Premisys 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
intends to use these technologies to develop broadband ATM and IP multiservice
platforms. If the company is unsuccessful in developing the product, the
licensed technologies have no alternative future use.
7
<PAGE>
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 current quarter ended March 31, 1998,
reducing its diluted earnings per share for such quarter by $0.10. The Company
also received options to license future releases of SNT software for additional
fees, which it expects to exercise.
NOTE 5 - Commitments
In January 1998, the Company executed a lease agreement for an
additional 24,590 square feet of space in the facility located at 48664 Milmont
Drive, Fremont, CA. The agreement begins on April 1, 1998 and expires on
September 30, 2004. The future minimum rental payments under all building leases
are as follows (in thousands):
Amount
-----------
Three months ending June 30,1998 $ 303
Fiscal Year Ending June 30:
1999 1,231
2000 1,335
2001 1,375
2002 1,418
2003 1,461
Thereafter 1,952
-----------
Total minimum lease payments $ 9,075
===========
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
This Form 10-Q contains forward-looking statements within the meaning of Section
21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the
Securities Act of 1933, as amended. These forward-looking statements involve a
number of risks and uncertainties which are described throughout this Form 10-Q,
including demand from and its relationships with its strategic partners and
major customers, including ADC Telecommunications ("ADC"), Alcatel Network
Systems, Inc. ("Alcatel"), DSC Communication Corporation ("DSC"), 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 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-Q, including under "Revenues" and "Other Factors That
May Affect Future Operating Results," and in the Company's Annual Report on Form
10-K for the year ended June 30, 1997. The actual results that the Company
achieves may differ materially from any forward-looking statements due to such
risks and uncertainties. The Company has identified using an asterisk ("*")
various sentences within this Form 10-Q which contain such forward-looking
statements, and words such as "believes," "anticipates," "expects," "intends,"
"will," "may" and similar expressions are intended to identify forward-looking
statements, but
8
<PAGE>
are not the exclusive means of identifying such statements. In addition, the
section labeled "Other Factors That May Affect Future Operating Results", which
does not include asterisks for improved readability, consists primarily of
forward-looking statements. The Company undertakes no obligation to revise any
forward-looking statements in order to reflect events or circumstances that may
arise after the date of this report. Readers are urged to carefully review and
consider the various disclosures made by the Company in this report and in the
Company's other reports filed with the Securities and Exchange Commission,
including its Form 10-K, that attempt to advise interested parties of the risks
and factors that may affect the Company's business.
Revenues
Three Months Ended March 31,
-----------------------------------------------------
1997 % Change 1998
---- -------- ----
Revenues $12,237,000 122% $27,154,000
Nine Months Ended March 31,
-----------------------------------------------------
1997 % Change 1998
---- -------- ----
Revenues $62,887,000 13% $71,055,000
Revenues consist primarily of gross sales of products, less discounts
and sales returns and allowances. A majority of the revenue increase from the
three and nine month periods ended March 31, 1997 to the comparable periods in
fiscal 1998 was attributable to an increase in unit volumes of platforms and
modules sold. An important contributor to the Company's unit growth has been its
success with domestic CLECs. Several rapidly growing CLECs have selected the
Company's products for providing services to business customers. Sales to CLECs
have been realized both through distribution partners and direct sales. The
increase in unit volumes in the quarter ended March 31, 1998 versus the same
period in fiscal 1997 was primarily due to an increase in shipments to ADC,
Alcatel, Other Domestic Customers and Paradyne. The increase in unit volumes in
the nine month period ended March 31, 1998 versus the same period in fiscal 1997
was primarily due to an increase in shipments to Other Domestic Customers and
ADC, partially offset by a decrease in shipments to Paradyne, Motorola and DSC.
See "Other Factors That May Affect Future Operating Results - Indirect Channels
of Distribution." In the quarter ended March 31, 1998, revenues increased
$2,538,000, or 10%, to $27,154,000 from $24,616,000 in the quarter ended
December 31, 1997. This increase in revenues in the third quarter of fiscal 1998
versus the second quarter of fiscal 1998 was due primarily to increased
shipments of the Company's products to Other Domestic Customers, Alcatel,
Paradyne and DSC, partially offset by decreases in shipments to ADC and
International Customers. *The Company expects that revenues will increase in the
June 1998 quarter over those reported for the quarter ended March 31, 1998.
However, these expectations are subject to a number of uncertainties, in
particular the level of demand from ADC, Paradyne, Alcatel and their customers.
The following table sets forth, for the periods indicated, the revenues
generated from the Company's customers which exceeded 10% of total revenues
during the three and nine month periods ended March 31, 1997 and 1998, Other
Domestic Customers as a group and international customers as a group, in
absolute dollars and as a percentage of total revenues. The category "Other
Domestic Customers" is the aggregate of all domestic customers individually
representing less than 10% of the Company's revenues for the reported period.
9
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended March 31,
--------------------------------------------------------------------
1997 % 1998 %
------------------- ------------ ------------------ -------------
<S> <C> <C> <C> <C>
ADC $ (a) less than10% $ 5,716,000 21%
Paradyne 2,300,000 19% 3,901,000 14%
Alcatel (a) less than10% 3,831,000 14%
DSC 3,052,000 25% 2,898,000 11%
Motorola, Inc. 2,197,000 18% (a) less than10%
Other Domestic Customers 3,748,000 31% 10,419,000 38%
International Customers 940,000 7% 389,000 2%
=================== ============ ================== =============
Total Revenues $12,237,000 100% $27,154,000 100%
=================== ============ ================== =============
Nine Months Ended March 31,
--------------------------------------------------------------------
1997 % 1998 %
------------------- ------------ ------------------ -------------
ADC $ 6,602,000 11% $21,171,000 30%
Paradyne 20,791,000 33% 9,341,000 13%
DSC 7,560,000 12% (a) less than10%
Motorola, Inc. 7,809,000 12% (a) less than10%
Other Domestic Customers 16,026,000 25% 36,409,000 51%
International Customers 4,099,000 7% 4,134,000 6%
=================== ============ ================== =============
Total Revenues $62,887,000 100% $71,055,000 100%
=================== ============ ================== =============
<FN>
(a) - Amounts not provided as revenues for the period were less than 10% of the total.
</FN>
</TABLE>
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. Customers individually representing 10% or more of the
Company's revenues for the three month periods ended March 31, 1997 and 1998
totaled 62% and 60% of the Company's total revenues, respectively. For the nine
month periods ended March 31, 1997 and 1998, revenues from customers
individually representing 10% or more of the Company's revenues totaled 68% and
43% of the Company's total revenues, respectively. The change in the percentages
from fiscal 1997 to 1998 reflects the growth of the Company's other domestic
customers and the increased acceptance of the Company's products. In the quarter
ended December 31, 1997, customers individually representing 10% or more of the
Company's revenues represented 55% of the Company's total revenues. *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. See "Other Factors That
May Affect Future Operating Results - Indirect Channels of Distribution",
"-Limited Order Backlog" and "-Relationship with Paradyne."
During the three and nine month periods ended March 31, 1998, direct
international revenues accounted for 2% and 6% of the Company's revenues,
respectively, compared to 7% for the three and nine month periods ended March
31, 1997. The decline in direct international revenues between the three month
periods is primarily due to lower shipments into the Asia-Pacific region.
Certain of the Company's domestic customers also resell Premisys products into
international markets. *The Company intends to expand its operations outside the
United States and anticipates that international sales will increase in the
future both in absolute dollars and as a percentage of revenues. In order to
sell its products internationally, the Company must meet standards established
by international telecommunications committees and authorities in various
countries. *Conducting business outside of the United States is subject to
certain risks, including longer payment cycles, unexpected changes in regulatory
requirements and tariffs, more volatile economic conditions, risks associated
with foreign
10
<PAGE>
currency exchange rates, difficulties in staffing and managing foreign
operations, greater difficulty in accounts receivable collection and potentially
adverse tax consequences.
Gross Profit
Three Months Ended March 31,
-----------------------------------------------
1997 % Change 1998
---- -------- ----
Gross Profit $7,913,000 128% $18,045,000
As a percentage of revenues 65% 66%
Nine Months Ended March 31,
-----------------------------------------------
1997 % Change 1998
---- -------- ----
Gross Profit $41,264,000 13% $46,450,000
As a percentage of revenues 66% 65%
Cost of revenues consists of component costs, compensation costs and
overhead related to the Company's manufacturing operations and warranty
expenses. Gross profit increased from the three and nine month periods ended
March 31, 1997 to the comparable periods in fiscal 1998 primarily as a result of
higher unit shipment volumes. The gross margin was relatively unchanged from the
three and nine month periods ended March 31, 1997 to the comparable periods in
fiscal 1998. *The Company expects its gross margins in the fourth quarter of
fiscal 1998 to decline by two to four percentage points from the 66% reported in
the quarter ended March 31, 1998 due primarily to changes in product mix.
*However, achievement of the Company's expectations is subject to a number of
risks, including customer mix, the mix of products sold and the Company's
ability to realize expected revenue levels.
Research and Development Expenses (excluding charge for in-process technologies)
Three Months Ended March 31,
--------------------------------------------
1997 % Change 1998
---- -------- ----
Research and development expenses $2,607,000 50% $3,900,000
As a percentage of revenues 21% 14%
Nine Months Ended March 31,
--------------------------------------------
1997 % Change 1998
---- -------- ----
Research and development expenses $7,445,000 49% $11,108,000
As a percentage of revenues 12% 16%
Research and development expenses consist of personnel costs,
consulting, testing, supplies and depreciation expenses. All software
development costs have been expensed in the period in which they were incurred.
Research and development expenses increased $1,293,000, or 50%, from the three
months ended March 31, 1997 to the comparable period in fiscal 1998 and by
$3,663,000, or 49%, from the nine month period ended March 31, 1997 to the
comparable period in fiscal 1998. This increase was due to the combination of
increased expenses for personnel, outside services and materials used in product
development. The decrease in research and development expenses as a percentage
of the Company's revenues between the three month periods was the result of the
sharp decline in revenues which occurred in the three months ended March 31,
1997. The increase in research and development expenses as a percentage of the
Company's revenues for the nine month period ended March 31, 1998 as compared
with the comparable period in fiscal 1997 was primarily the result of increased
research and development expenses for personnel, outside services and materials
used in product development. *In the fourth quarter of fiscal 1998, the Company
expects that these expenses will increase in absolute dollars as compared to the
quarter ended March 31, 1998. *However, the Company expects that the
11
<PAGE>
sequential rate of growth of these expenses will be less than the rate of growth
in revenues during the fourth quarter of fiscal 1998. *These expectations are
subject to a number of risks, including the Company's ability to realize
expected revenue levels.
Charge for In-process Technologies
As previously announced, the Company expensed, in the quarter ended
March 31, 1998, $4.4 million for licensing cell and packet technologies and
related development software. (See Note 4 - "Significant Events" of the notes to
the condensed consolidated financial statements included in this Form 10-Q.)
This charge is shown separately as "Charge for in-process technologies" in the
Condensed Consolidated Statement of Operations in this Form 10-Q. The charge
related to the SNT license in the quarter ended March 31, 1998 compares to a
charge of $4.0 million incurred in the quarter ended March 31, 1997 in
connection with the licensing of SONET and SDH technologies from Positron. *The
licensed technologies are to be used in products that the Company is currently
developing. *If the Company is unsuccessful in developing the product, the
technologies have no future alternative use. See"- Other Factors That May Affect
Future Operating Results - Rapidly Evolving Technology."
Selling, General and Administrative Expenses
Three Months Ended March 31,
----------------------------------
1997 % Change 1998
---- -------- ----
Selling, general and administrative expenses $5,458,000 41% $7,714,000
As a percentage of revenues 45% 28%
Nine Months Ended March 31,
----------------------------------
1997 % Change 1998
---- -------- ----
Selling, general and administrative expenses $15,848,000 25% $19,877,000
As a percentage of revenues 25% 28%
Selling expenses consist principally of compensation costs for sales
and marketing personnel (including sales commissions and bonuses), travel
expenses, customer support expenses, trade show expenses and advertising
expenses. General and administrative expenses consist primarily of compensation
expenses for administration, finance, and general management personnel, as well
as legal and audit fees. Selling, general and administrative expenses increased
$2,256,000, or 41%, from the three months ended March 31, 1997 to the comparable
period in fiscal 1998 and by $4,029,000, or 25%, from the nine month period
ended March 31, 1997 to the comparable period in fiscal 1998. These increases
were primarily the result of increased staffing and associated expenses, and, to
a lesser extent, travel and customer support expenses. The decrease in selling,
general and administrative expenses as a percentage of the Company's revenues
between the three month periods was the result of the sharp decline in revenues
which occurred in the three months ended March 31, 1997. The increase in
selling, general and administrative expenses as a percentage of the Company's
revenues for the nine month period ended March 31, 1998 as compared with the
comparable period in fiscal 1997 was primarily the result of increased selling
expenses for compensation, customer support and travel. *The Company expects
that these expenses will increase in absolute dollars during the fourth quarter
of fiscal 1998 as compared to the quarter ended March 31, 1998. *However, the
Company expects that the sequential rate of growth of these expenses will be
less than the rate of growth in revenues during the fourth quarter of fiscal
1998. *These expectations are subject to a number of risks, including the
Company's ability to realize expected revenue levels.
12
<PAGE>
Interest and Other Income, net
Three Months Ended March 31,
--------------------------------------------
1997 % Change 1998
---- -------- ----
Interest and other income, net $ 694,000 33% $ 923,000
As a percentage of revenues 6% 3%
Nine Months Ended March 31,
--------------------------------------------
1997 % Change 1998
---- -------- ----
Interest and other income, net $ 1,949,000 29% $ 2,506,000
As a percentage of revenues 3% 4%
Interest and other income, net consists of interest income less
interest expense, and, to a much lesser extent, foreign currency exchange rate
gains and losses. The increase in interest and other income, net, for the three
and nine month periods ended March 31, 1998 as compared to the same period in
fiscal 1997 was due to higher cash balances.
<TABLE>
Provision (Benefit) for Income Taxes
<CAPTION>
Three Months Ended March 31,
-----------------------------------------------------
1997 % Change 1998
---- -------- ----
<S> <C> <C> <C>
Provision (benefit) for income taxes $(1,349,000) 180% $1,082,000
As a percentage of income (loss) before taxes 39% 37%
Nine Months Ended March 31,
-----------------------------------------------------
1997 % Change 1998
---- -------- ----
Provision for income taxes $6,209,000 (19%) $5,010,000
As a percentage of income before taxes 39% 37%
</TABLE>
The Company's provision for income taxes represents estimated federal
and state income taxes. The Company's effective tax rate for the three and nine
month periods ended March 31, 1998 was 37% which was less than the combined
federal and state statutory rate as a result of tax-exempt interest income from
the Company's municipal securities portfolio and the utilization of research and
development tax credits available in fiscal 1998. The decrease in the Company's
income tax rate from 39% in fiscal 1997 to 37% in fiscal 1998 is due to the
extension of the federal research and development tax credit.
<TABLE>
Net Income (Loss) per Share
<CAPTION>
Three Months Ended March 31,
-----------------------------------------------------
1997 % Change 1998
---- -------- ----
<S> <C> <C> <C>
Net income (loss) $(2,109,000) 187% $1,841,000
Net income (loss) per share (diluted) $(0.09) 178% $0.07
Shares used in computing diluted net income (loss) per 24,764,000 11% 27,507,000
share
Nine Months Ended March 31,
-----------------------------------------------------
1997 % Change 1998
---- -------- ----
Net income $9,711,000 (12%) $8,530,000
Net income per share (diluted) $0.37 (16%) $0.31
Shares used in computing diluted net income per share 26,497,000 4% 27,457,000
</TABLE>
Net income (loss) per share (diluted) increased by $0.16, or 178%, in
the quarter ended March 31, 1998 and decreased by $0.06, or 16%, in the nine
month period ended March 31, 1998 as compared to the same periods in fiscal
1997. The increase in net income per share (diluted) between the three-
13
<PAGE>
month comparative periods in fiscal 1997 and 1998 was due primarily to an
increase in net income from the three month period ended March 31, 1997 to the
same period in fiscal 1998. The decrease in net income per share from the nine
month period ended March 31, 1997 as compared to the same period in fiscal 1998
is due primarily to a decrease in net income and, to a lesser extent, an
increase in shares used in calculating net income per share between the nine
month periods ended March 31, 1997 and 1998.
Liquidity and Capital Resources
Nine Months Ended March 31,
1997 % Change 1998
---- -------- ----
Net cash provided by operating activities $10,350,000 124% $ 23,139,000
Period end cash, cash equivalents and
short-term investments $69,827,000 38% $ 96,256,000
Period end working capital $83,973,000 20% $100,448,000
At March 31, 1998, the Company had approximately $96.3 million of cash,
cash equivalents and short-term investments. Net cash totaling $23.1 million was
provided by operating activities during the nine months ended March 31, 1998,
due primarily to net income of $8.5 million and increases in accrued
liabilities, income taxes payable and accounts payable, and decreases in
inventories, prepaid expenses and other assets and accounts receivable,
aggregating $12.2 million.
The decrease in accounts receivable for the nine months ended March 31,
1998 was due to several factors. In comparing the operating results of the
quarter ended March 31, 1998 to the quarter ended June 30, 1997, the Company
improved shipment linearity, had higher early payments and improved collections.
For the quarter ended March 31, 1998, days sales outstanding, based on
quarter-end net balances, were 20 days versus 45 days for the quarter ended June
30, 1997. *The Company expects days sales outstanding, based on quarter-end net
balances, at the end of the June 1998 quarter to increase to the mid-to-high
thirties before the favorable impact, if any, of early payments. However, these
expectations are subject to a number of uncertainties, in particular revenues
levels, shipment linearity and customer payment patterns.
Cash used in investing activities during the nine months ended March
31, 1998 consisted principally of purchases of short-term securities totaling
$30.4 million. Cash flows from financing activities during the nine months ended
March 31, 1998 consisted primarily of $2.6 million from the exercise of employee
stock options and the issuance of stock under the Company's 1995 employee stock
purchase plan.
As of March 31, 1998, the Company's working capital was approximately
$100.4 million. The Company has no significant capital spending or purchase
commitments other than normal purchase commitments and commitments under
facilities and capital leases. *The Company believes that its available funds
and anticipated cash flows from operations will satisfy the Company's projected
working capital and capital expenditure requirements for at least the next
twelve months.
Other Factors That May Affect Future Operating Results
As referenced in the first paragraph of this Item 2, this section
consists primarily of forward looking statements and associated risks but, for
improved readability, does not include asterisks.
INDIRECT CHANNELS OF DISTRIBUTION. Substantially all of the sales of
the Company's products are through indirect channels of distribution. Thus, the
Company's ability to affect and judge the timing and size of individual user
orders is more limited than for manufacturers selling directly to the end users
of their products. Any of the telecommunications equipment suppliers that market
and sell the Company's products could elect to cease marketing and selling the
Company's products, and there can be no assurance that these telecommunications
equipment suppliers will continue to place orders with the Company or that the
Company will be able to obtain orders from new telecommunications equipment
suppliers or end users. See "-Relationship with Paradyne". These
telecommunications equipment suppliers could develop products that could be sold
for selected applications for which the Company's products are currently
provided, which could reduce the level of demand from these telecommunications
equipment suppliers for the Company's products. See "- Competition". In
addition, the Company's
14
<PAGE>
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 and March 31,
1998, shipments of the Company's products to one CLEC customer of ADC, one of
the Company's strategic distribution partners, represented more than 10% of the
Company's total revenues for each quarter. 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 and delays in obtaining regulatory approvals for new tariffs. Revenues
can also be affected by delays in initial shipments of new products and new
software releases 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.
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 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 revenue for a quarter or series of quarters.
QUARTERLY FLUCTUATIONS. The Company's operating results may fluctuate
on a quarterly and annual basis due to factors such as the timing of new product
announcements and introductions by the Company, its major customers and its
competitors, delays in equipment deployment, market acceptance of new or
enhanced versions of the Company's products, changes in the product or customer
mix of revenues, changes in the level of operating expenses, competitive pricing
pressures, the gain or loss of significant customers, increased research and
development expense associated with new product introductions, component
shortages (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
15
<PAGE>
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.
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 XTRA products, which were announced in June 1997 and are
expected to begin shipping in the quarter ending September 30, 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 Corporation ("AT&T"),
that involves the joint development, marketing and sale of most of the Company's
products 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 from the
three and nine month periods ended March 31, 1997 to the comparable periods
ended March 31, 1998, shipments to Paradyne continued to represent a substantial
portion (14% and 13%, respectively) of the Company's revenues in the three and
nine month periods ended March 31, 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
16
<PAGE>
reductions in shipments to Paradyne would have a material adverse effect on the
Company's business and operating results.
COMPETITION. The market for telecommunications products is highly
competitive and subject to rapid technological change. The Company's principal
competition to date has been from major telecommunications equipment suppliers,
such as Newbridge Networks Corporation and Tellabs, which offer a broad line of
products including access devices for business applications. The Company expects
substantial additional competition from existing competitors as they develop
products to compete with the functionality and flexibility of the Company's
products. 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 of such products could reduce the level of demand
from these telecommunications equipment suppliers for the Company's products.
DEPENDENCE ON KEY PERSONNEL. The Company's success to date has been
significantly dependent on the contributions of its senior officers and other
key employees. The loss of the services of any one of the Company's senior
officers or key employees could have a material adverse effect on the Company's
business and operating results. The Company's success also depends to a
significant extent on its ability to attract and retain additional
highly-skilled technical, managerial, sales and marketing personnel, the
competition for whom is intense.
INDUSTRY STANDARDS AND REGULATORY MATTERS. The market for the Company's
products is also characterized by the need to meet a significant number of voice
and data communications regulations and standards, including those defined by
the Federal Communications Commission, Underwriters Laboratories, Bell
Communications Research ("Bellcore") and, internationally, various countries and
international standards committees. Regulations can be changed by new
legislation, as occurred with the enactment of the Telecommunications Reform Act
of 1996; these changes can impact service offerings and competitiveness in the
communications marketplace, and thus could have an effect on the timing and size
of the industry's investment in access equipment. New standards are evolving as
new technologies, such as ATM and xDSL, are deployed. As existing and new
standards evolve, the Company will be required to modify its products or develop
and support new versions of its products. It is also important that the
Company's products be easily integrated with carriers' network management
systems. The failure of the Company's products to comply, or delays in
compliance, with the various existing and evolving industry standards could
delay introduction of the Company's products, which could have a material
adverse effect on the Company's business and operating results. In addition,
government regulatory policies are likely to continue to have a major impact on
the pricing of existing as well as new public network services and therefore are
expected to affect demand for such services and the telecommunications products
that support such services.
LIMITED PROTECTION OF INTELLECTUAL PROPERTY. The Company relies upon a
combination of patent, trade secret, copyright and trademark laws and
contractual restrictions to establish and protect proprietary rights in its
products. There can be no assurance that these statutory and contractual
arrangements will prove sufficient to deter misappropriation of the Company's
technologies or independent third-party development of similar technologies. The
telecommunications industry is characterized by the existence of a large number
of patents and frequent litigation based on allegations of patent infringement.
In the event of litigation to determine the validity of any third-party claims
asserting that the Company's products infringe or may infringe the proprietary
rights of such third parties, such litigation, whether or not determined in
favor of the Company, could result in significant
17
<PAGE>
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. The Company also utilizes independent contractors
for some new product developments. Delays in completing assigned development
projects or design errors could cause delays in new product releases and poor
market acceptance.
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.
YEAR 2000 RISKS. Business systems failures due to errors arising from
calculations using Year 2000 dates are a known risk, and the Company has
established a project for identifying and resolving potential problems
associated with entering the Year 2000 and the new millennium. Based upon its
evaluation and current efforts, the Company believes that its computer systems
will be Year 2000 compliant before the end of fiscal Q1, 1999. However, the
Company believes that the purchasing patterns of customers and potential
customers could be affected by Year 2000 issues as companies expend significant
resources to correct or patch their current software systems for Year 2000
compliance. These resource expenditures may result in delays of purchases of
products offered by the Company, which could result in a material adverse effect
on the Company's business, operating results and financial condition.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk.
Not applicable.
18
<PAGE>
II. OTHER INFORMATION
ITEM 5. Other Information
In March, 1998, Michael Kazban resigned as the Company's Vice President,
Business Management.
ITEM 6. Exhibits and Reports on Form 8-K
A. Exhibits
Exhibit No. Description of Exhibit
----------- ----------------------
10.43 Third Amendment to Lease Agreement by and between Premisys
Communications, Inc. and Aetna Life Insurance Company, dated
January 8, 1998
27.01 Financial Data Schedule (Nine month period ended March 27,
1998)
27.02 Restated Financial Data Schedule (Three month period ended
September 27, 1997)
27.03 Restated Financial Data Schedule (Year ended June 27, 1997)
27.04 Restated Financial Data Schedule (Nine month period ended March
28, 1997)
27.05 Restated Financial Data Schedule (Six month period ended
December 27, 1996)
27.06 Restated Financial Data Schedule (Three month period ended
September 27, 1996)
B. Reports on Form 8-K
None
19
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PREMISYS COMMUNICATIONS, INC.
May 1, 1998 /S/ Robert W. Dilfer
- ------------------------------ ---------------------------------------
Date Robert W. Dilfer
Vice President and Controller
(Duly Authorized Officer and Chief
Accounting Officer)
20
<PAGE>
Index to Exhibits
-----------------
Exhibit No. Description of Exhibit
----------- ----------------------
10.43 Third Amendment to Lease Agreement by and between Premisys
Communications, Inc. and Aetna Life Insurance Company, dated
January 8, 1998
27.01 Financial Data Schedule (Nine month period ended March 27,
1998)
27.02 Restated Financial Data Schedule (Three month period ended
September 27, 1997)
27.03 Restated Financial Data Schedule (Year ended June 27, 1997)
27.04 Restated Financial Data Schedule (Nine month period ended March
28, 1997)
27.05 Restated Financial Data Schedule (Six month period ended
December 27, 1996)
27.06 Restated Financial Data Schedule (Three month period ended
September 27, 1996)
21
Exhibit 10.43
Third Amendment to Lease Agreement
This Third Amendment to Lease Agreement (the "Amendment") is made and entered
into as of January 8, 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 Premisys Communications Holdings, Inc., a California
corporation have entered into that certain Lease Agreement dated as of
October 4, 1993, and that certain First Amendment dated November 4, 1994
and that certain Second Amendment dated August 9, 1996 (hereinafter,
collectively the "Lease") for the leasing of certain premises consisting
of approximately 43,851 rentable square feet located at 48664 Milmont
Drive, Fremont, California (the "Original Premises") as such Original
Premises are more fully described in the Lease.
B. Premisys Communications Holdings, Inc. assigned its interest in the Lease
to Tenant.
C. Landlord and Tenant now wish to amend the Lease to provide for, among
other things, the addition of certain space to the Original Premises, all
upon and subject to each of the terms, conditions, and provisions set
forth herein.
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 agree as follows:
1. Recitals: Landlord and Tenant agree that the above recitals are true
and correct and are hereby incorporated herein as though set forth in full.
2. Premises:
2.1 Addition of Additional Premises Subject to the provisions of
Section 2.3 below, commencing on April 1, 1998, (the "AP Commencement
Date"): there shall be added to the Original Premises those certain
premises consisting of approximately 24,590 rentable square feet located
at 48668 Milmont Drive, Fremont, California (the "Additional Premises"),
which Additional Premises are depicted on the site plan attached hereto
and made a part hereof as Exhibit A.
2.2 Early Occupancy of Additional Premises On or about March 1,
1998, (the "Early Occupancy Commencement Date"), Landlord shall permit
Tenant to enter and occupy the Additional Premises prior to the AP
Commencement Date, for purposes of installing the Tenant Improvements (as
such term is defined in Exhibit B hereto). In no event may Tenant conduct
its business or operations from the Additional Premises until the AP
Commencement Date. Such limited purpose occupancy by Tenant shall be at
Tenant's sole risk and shall also be subject to all of the provisions of
this Lease other than the requirement to pay Rent (other than any Utility
Expenses incurred during the time period Tenant is constructing the Tenant
Improvements), including, but not limited to, the requirement to obtain
the insurance required pursuant to the Lease (including without
limitation, the
1
<PAGE>
provisions to Exhibit B hereto) and to deliver insurance certificates as
required herein, and to pay for all Utilities and Utility Expenses to the
extent incurred during the time period Tenant is constructing the Tenant
Improvements. In addition to the foregoing and the provisions of Exhibit B
hereto regarding such early occupancy, Landlord shall have the right to
impose such additional conditions on Tenant's early entry as Landlord
shall deem reasonably appropriate. If, at any time, Tenant is in default
of any term, condition or provision of the Lease, any such waiver by
Landlord of Tenant's requirement to pay rental payments shall be null and
void and Tenant shall immediately pay to Landlord all rental payments so
waived by Landlord.
2.3 Delivery of the Additional Premises Tenant hereby acknowledges
that the Additional Premises are presently being occupied by Target
Therapeutics, Inc. a Delaware corporation (the "Existing Tenant").
Landlord's delivery to Tenant of possession of the Additional Premises on
the Early Occupancy Commencement Date is contingent upon the Existing
Tenant vacating the Additional Premises and surrendering possession
thereof to Landlord by February 28, 1998.
2.4 Notwithstanding anything to the contrary contained herein or in
the Lease, Landlord shall neither be subject to any liability, nor shall
the validity of the Lease be affected if Landlord is not able to deliver
to Tenant possession of the Additional Premises by the Early Occupancy
Commencement Date. Provided, however, Tenant's obligation to pay Rent on
the Additional Premises shall commence on the date which is one month
following the Early Occupancy Commencement Date. In the event the Early
Occupancy Commencement Date is other than the date specified in Section
2.2 above, Landlord and Tenant shall execute a written amendment to the
Lease, wherein the parties shall specify the actual Early Occupancy
Commencement Date and the AP Commencement Date and the date on which
Tenant is to commence paying Rent.
2.5 For purposes of the Lease, from and after the AP Commencement
Date, the "Premises" as defined in the Basic Lease Information and Section
2 of the Lease shall mean and refer to the aggregate of the Original
Premises and the Additional Premises consisting of a combined total of
approximately 68,441 rentable square feet located at 48664 and 48668
Milmont Drive, Fremont, California. Accordingly, from and after the AP
Commencement Date, all references in this Amendment and in the Lease to
the term "Premises" shall mean and refer to the Original Premises and the
Additional Premises. Landlord and Tenant hereby agree that for purposes of
the Lease, from and after the AP Commencement Date, the rentable square
footage area of the Premises shall be conclusively deemed to be 68,441
rentable square feet. In addition to the foregoing, it is the parties
express intention that the balance of the Term of the Lease for the
Original Premises and the Additional Premises be coterminous with the
Expiration Date of the initial Term as specified in the Lease and that any
option or renewal term described in the Lease shall be applicable to both
the Premises and the Additional Premises.
<TABLE>
3. Base Rent: The Basic Lease Information and Section 4 of the Lease are
hereby modified to provide that from and after the AP Commencement Date
the monthly Base Rent payable by Tenant to Landlord, in accordance with
the provisions of Section 4 of the Lease shall be as follows:
<CAPTION>
Original Premises Additional Premises Aggregate amount of
Period monthly Base Rent monthly Base Rent monthly Base Rent
------ ----------------- ----------------- -----------------
<S> <C> <C> <C>
4/1/98 - 3/31/99 $28,503.15 $23,852.30 $52,355.45
4/1/99 - 5/31/99 $28,503.15 $24,590.00 $53,093.15
6/1/99 - 3/31/00 $35,519.31 $24,590.00 $60,109.31
2
<PAGE>
4/1/00 - 5/31/00 $35,519.31 $25,327.70 $60,847.01
6/1/00 - 3/31/01 $36,834.84 $25,327.70 $62,162.54
4/1/01 - 5/31/01 $36,834.84 $26,065.40 $62,900.24
6/1/01 - 3/31/02 $38,369.63 $26,065.40 $64,435.03
4/1/02 - 5/31/02 $38,369.63 $26,803.10 $65,172.73
6/1/02 - 3/31/03 $39,904.41 $26,803.10 $66,707.51
4/1/03 - 5/31/03 $39,904.41 $27,540.80 $67,445.21
6/1/03 - 3/31/04 $41,439.20 $27,540.80 $68,980.00
4/1/04 - 10/31/04 $41,439.20 $28,278.50 $69,717.70
</TABLE>
In addition to the monthly Base Rent set forth above, Tenant shall
continue to pay $964.83 per month as the amortized amount for Excess
Tenant Improvements Costs for the Original Premises.
4. Condition of the Additional Premises: Subject to the provisions of
Section 2 above, on the Early Occupancy Commencement Date, Landlord shall
deliver to Tenant possession of the Additional Premises in its then
existing condition and state of repair, "AS IS", without any obligation of
Landlord to remodel, improve or alter the Additional Premises, or to
perform any other construction or work of improvement upon the Additional
Premises provided, however, Landlord shall deliver the Additional Premises
on the AP Commencement Date with the HVAC, mechanical, and electrical
systems (the "Systems"), and the roof in good condition and state of
repair. Tenant shall have up until the date which is sixty (60) days after
the AP Commencement Date to report any repairs required to the Systems
and/or the roof to Landlord, and Landlord shall make all such repairs as
soon as practicable. Tenant acknowledges that no representations or
warranties of any kind, express or implied, respecting the condition of
the Additional Premises, have been made by Landlord or any agent of
Landlord to Tenant, except as expressly set forth herein. Tenant further
acknowledges that neither Landlord nor any of Landlord's agents,
representatives or employees have made any representations as to the
suitability or fitness of the Additional Premises for the conduct of
Tenant's business, including without limitation, any storage incidental
thereto, or for any other purpose. Any exception to the foregoing
provisions must be made by express written agreement signed by both
parties.
5. Tenant Improvements by Tenant: Tenant shall install and construct
Tenant Improvements (as such term is defined in Exhibit B hereto) in
accordance with the terms, conditions, criteria and provisions set forth
in Exhibit B. Landlord and Tenant hereby agree to and shall be bound by
the terms, conditions and provisions of Exhibit B.
6. Security Deposit: Concurrent with its execution of this Amendment,
Tenant shall deliver to Landlord the sum of Twenty eight thousand two
hundred seventy eight and 50/100 ($28,278.50 (the "AP Security Deposit").
The AP Security Deposit shall be added to the Security Deposit presently
being held by Landlord under the Lease in the amount of 26,000.00 (the
"Original Security Deposit"). The aggregate amount of the AP Security
Deposit and the Original Security Deposit is $54,278.50. From and after
the AP Commencement Date, the term "Security Deposit" shall mean and refer
to the aggregate of the AP Security Deposit and the Original Security
Deposit in the amount of $54,278.50. The AP Security Deposit shall be
subject to, and the use and application thereof governed by, Section 6 of
the Lease.
7. Tenant's Share of Additional Rent As of the AP Commencement Date, the
Lease shall be modified to provide that Tenant's Share of Additional Rent
(as defined in the Basic Lease Information and Section 4 of the Lease)
shall be increased to 100% of the Building.
3
<PAGE>
8. Unreserved Parking Spaces: As of the AP Commencement Date, Tenant
shall have the license to use 274 undesignated and nonexclusive parking
spaces.
9. Insurance: Tenant shall deliver to Landlord, upon execution of this
Amendment, a certificate of insurance evidencing that the Additional
Premises are included within and covered by Tenant's insurance policies
required to be carried by Tenant pursuant to the Lease.
10. Expansion: The parties hereby agree that Addendum 3 of the Lease,
entitled "Expansion" shall be deleted and of no further force or effect.
11. Right of First Refusal: The parties hereby agree that Addendum 2 of
the Lease, entitled "Right of First Refusal" shall be deleted and of no
further force or effect.
12. Right of First Negotiation:
12.1 Grant of Right of First Negotiation. Subject to the
provisions, limitations and conditions set forth in this Section
12, Tenant shall have a one time first right to negotiate ("Right
of First Negotiation") with Landlord for the leasing of the
premises located in the building adjacent to the Premises commonly
known as 48630-48634 Milmont Drive, Fremont, California (the
"Expansion Space"), as depicted on Exhibit A attached hereto.
12.2 Right of First Negotiation Notice. Subject to the conditions
set forth in Section 12.3 below, and upon the Expansion Space
becoming available for lease, Landlord will offer the Expansion
Space to Tenant in writing stating all material terms on which
Landlord proposes to lease such Expansion Space to Tenant and
Tenant shall have five (5) business days after delivery of such
notice to notify Landlord in writing ("Election Notice") of
Tenant's acceptance of Landlord's offer to lease the entirety of
the Expansion Space upon the terms specified in Landlord's notice.
If Tenant fails to notify Landlord if its election to lease the
Expansion Space within the time specified herein, or if Tenant
attempts to modify any of the material terms specified in
Landlord's notice, it shall be deemed that (i) Tenant has elected
not to lease the Expansion Space; (ii) Landlord may thereafter
enter into a lease agreement with a third party; and (iii) all
rights under this Right of First Negotiation shall automatically
terminate and be and be of no further force or effect. Upon receipt
of the Election Notice from Tenant, 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. Time is of the essence with respect to each and every time
period described herein. Tenant shall have no other first rights of
negotiation or expansion rights under the Lease unless Landlord and
Tenant otherwise agree in writing.
12.3 Limitations On, and Conditions To, Right of First Negotiation.
This Right of First Negotiation is personal to Tenant and may not
be assigned, voluntarily or involuntarily, separate from or as part
of the Lease, and shall be subject to the rights of the existing
tenant(s) currently occupying the Expansion Space pursuant to their
existing lease(s), as such lease(s) may be modified, amended or
extended. At Landlord's option, all rights of Tenant under this
Right of First Negotiation 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
4
<PAGE>
default at any time during the initial term of the Lease beyond any
applicable notice and cure periods, 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
Right of First Negotiation is delivered to Tenant; and/or (4)
Tenant has failed to properly exercise this Right of First
Negotiation in a timely manner in strict accordance with the
provisions of this Section 12; and/or (5) the initial term of the
Lease has expired; and/or (6) 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.
13. Brokers: Tenant warrants that it has had no dealings with any real
estate broker or agent in connection with the negotiation of this
Amendment, other than Bishop Hawk. If Tenant has dealt with any person,
real estate broker or agent with respect to this Amendment, Tenant shall
be solely responsible for the payment of any fee due to said person or
firm, and Tenant shall indemnify, defend and hold Landlord free and
harmless against any claims, judgments, damages, costs, expenses, and
liabilities with respect thereto, including attorneys' fees and costs.
14. 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.
15. Definitions: Unless otherwise defined in this Amendment, all terms
not defined in this Amendment shall have the meanings assigned to such
terms in the Lease.
16. Authority: Subject to the assignment and subletting 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.
17. Incorporation: The terms and provisions of the Lease are hereby
incorporated in this Amendment.
5
<PAGE>
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: /S/ Riley R. Willcox
-----------------------
Its: Senior Vice President, Chief Financial Officer
-----------------------------------------------
Date: January 15, 1998
------------------
LANDLORD:
AEtna Life Insurance Company,
a Connecticut corporation
By: Allegis Realty Investors LLC,
Its investment advisor
By: /S/ Julia Viskanta
-------------------
Julia Viskanta
Vice President
Date: January 27, 1998
-------------------
6
<PAGE>
Third Amendment to Lease Agreement
Exhibit B
Tenant Improvements
This exhibit, entitled "Tenant Improvements", is and shall constitute
Exhibit B to that certain Third Amendment to Lease Agreement, dated as of
December 11, 1997 (the "Amendment"), by and between AEtna Life Insurance
Company, a Connecticut corporation ("Landlord") and Premisys
Communications, Inc., a Delaware corporation ("Tenant"). The terms and
conditions 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 meanings ascribed to such terms in the
Amendment.
1. Tenant To Construct Tenant Improvements. Subject to the provisions
below, Tenant shall be solely responsible for the design, planning,
construction and completion of the interior tenant improvements ("Tenant
Improvements") to the Additional Premises in accordance with the terms
and conditions of this Exhibit B.
2. Definition. "Tenant Improvements" as used in the Amendment and this
Exhibit B shall include only those improvements within the interior
portions of the Additional Premises which are depicted on the Final Plans
and Specifications (hereafter defined in Paragraph 3 (b)) or described
here in below. "Tenant Improvements" shall expressly not include Tenant's
personal property, trade fixtures, furnishings, equipment or similar
items.
The Tenant Improvements may include:
a. Partitioning, doors, floor coverings, finishes, ceilings, wall
coverings and painting, millwork and similar items.
b. Electrical wiring, lighting fixtures, outlets and switches,
and other electrical work.
c. Duct work, terminal boxes, defusers and accessories required
for the completion of the heating, ventilation and air conditioning
systems serving the Additional Premises, including the cost of meter and
key control for after-hour air conditioning.
d. All fire and life safety control systems such as fire walls,
sprinklers, halon, fire alarms, including piping, wiring and accessories
installed within the Building and serving the Additional Premises.
e. All plumbing, fixtures, pipes, and accessories to be installed
within the Building and serving the Additional Premises.
3. Tenant Improvements Plans.
a. Preliminary Plans and Specifications. Tenant shall retain an
architect ("Architect") and/or engineer ("Engineer") to prepare
preliminary working architectural and engineering plans and
specifications ("Preliminary Plans and Specifications") for the Tenant
Improvements. The Preliminary Plans and Specifications shall be in
sufficient detail to show locations, types and requirements for all heat
loads, people loads, floor loads, power and plumbing, regular and special
HVAC needs, telephone communications, telephone and electrical outlets,
lighting, lighting fixtures and related power, and electrical and
telephone switches. Landlord shall approve or disapprove the Preliminary
Plans and Specifications within five (5) business days after Landlord
receives the Preliminary Plans and Specifications, and if disapproved,
Landlord shall return the Preliminary
1
<PAGE>
Plans and Specifications to Tenant, who shall make all necessary
revisions. This procedure shall be repeated until Landlord approves the
Preliminary Plans and Specifications. Landlord shall not unreasonably
withhold its approval of the Preliminary Plans and Specifications. The
approved Preliminary Plans and Specifications, as modified, shall be
deemed the "Final Preliminary Plans and Specifications".
b. Final Preliminary Plans and Specifications. After the
Preliminary Plans and Specifications are approved by Landlord and are
deemed to be the Final Preliminary Plans and Specifications, Tenant shall
cause the Architect and/or the Engineer to prepare the final working
architectural and engineering plans and specifications ("Final Plans and
Specifications") for the Tenant Improvements. Upon preparation of the
Final Plans and Specifications Tenant shall deliver the Final Plans and
Specifications to Landlord. Landlord shall approve or disapprove the
Final Plans and Specifications within five (5) business days after
Landlord receives the Final Plans and Specifications and, if disapproved,
Landlord shall return the Final Plans and Specifications to Tenant who
shall make all necessary revisions. This procedure shall be repeated
until Landlord approves the Final Plans and Specifications. Landlord
shall not unreasonably withhold its approval of the Final Plans and
Specifications. The approved Final Plans and Specifications, as modified,
shall be deemed the "Construction Documents".
c. Miscellaneous. All deliveries of the Preliminary Plans and
Specifications, the Final Preliminary Plans and Specifications, the Final
Plans and Specifications, and the Construction Documents shall be
delivered by messenger service, by personal hand delivery or by overnight
parcel service. While Landlord has the right to approve the Preliminary
Plans and Specifications, the Final Preliminary Plans and Specifications,
the Final Plans and Specifications, and the Construction Documents,
Landlord's interest in doing so is to protect the Additional Premises,
the Building and Landlord's interest therein. Accordingly, Tenant shall
not rely upon Landlord's approvals and Landlord shall not be the
guarantor of, nor responsible for, the correctness or accuracy of the
Preliminary Plans and Specifications, the Final Preliminary Plans and
Specifications, the Final Plans and Specifications, and the Construction
Documents, or the compliance thereof with applicable laws, and Landlord
shall incur no liability of any kind by reason of granting such
approvals.
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, or shall match the
existing materials installed within the Additional Premises.
4. Permits. Tenant at its sole cost and expense shall obtain all
governmental approvals of the Construction Documents to the full extent
necessary for the issuance of a building permit for the Tenant
Improvements based upon such Construction Documents. Tenant at its sole
cost and expense shall also cause to be obtained all other necessary
approvals and permits from all governmental agencies having jurisdiction
or authority for the construction and installation of the Tenant
Improvements in accordance with the approved Construction Documents.
Landlord shall cooperate with Tenant at no cost or expense to Landlord in
the obtaining of such approvals and permits. Tenant at its sole cost and
expense shall undertake all steps necessary to ensure that the
construction of the Tenant Improvements is accomplished in strict
compliance with all statutes, laws, ordinances, rules, and regulations
applicable to the construction of the Tenant Improvements and the
requirements and standards of any insurance underwriting board,
inspection bureau or insurance carrier insuring the Additional Premises
and/or the Building.
5. Construction.
2
<PAGE>
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 Section 6 below. Once undertaken, Tenant shall diligently
proceed with the construction, installation and completion of the Tenant
Improvements in accordance with the Construction Documents. No material
changes shall be made to the Construction Documents approved by Landlord
without Landlord's prior written consent, which consent shall not be
unreasonably withheld or delayed.
b. Tenant at its sole cost and expense (subject to the provisions
of Section 6 below) shall employ a reputable licensed and bonded general
contractor ("Contractor") to construct the Tenant Improvements in
accordance with the Construction Documents. The Contractor selected by
Tenant shall be subject to the written approval of Landlord, which
approval shall not be unreasonably withheld or delayed. The construction
contract between Tenant and the Contractor shall be subject to Landlord's
prior written approval. Proof that the Contractor is licensed in
California, is bonded as required under California law, and has insurance
coverage typically carried by a reputable general contractor in the State
of California shall be provided to Landlord at the time that Tenant
requests approval of the Contractor from Landlord. Tenant shall ensure
that all subcontractors hired by the Contractor are licensed in
California and have insurance typically carried by reputable
subcontractors in the State of California.
c. Prior to the commencement of the construction and installation
of the Tenant Improvements, Tenant shall provide the following to the
Landlord, all of which shall be to the Landlord's reasonable
satisfaction:
i. An estimated completion schedule for the Tenant
Improvements.
ii. Copies of all required approvals and permits from
governmental agencies having jurisdiction or authority over the
construction and installation of the Tenant Improvements.
iii Evidence of Tenant's procurement of insurance required to
be obtained pursuant to the provisions of the Amendment and this Exhibit
B
d. Landlord shall at all times have the right to inspect the
Tenant Improvements and Tenant shall immediately cease work upon written notice
from the Landlord if the Tenant Improvements are not substantially in compliance
with the Construction Documents approved by the Landlord. If Landlord gives
notice of faulty construction or any other deviation from the Construction
Documents, Tenant shall cause Contractor to make corrections promptly. However,
neither the privilege herein granted to Landlord to make such inspection, nor
the making of such inspections by Landlord, shall operate as a waiver of any
rights of Landlord to require good and workmanlike construction and improvements
constructed in accordance with the Construction Documents.
e. Subject to Landlord complying with its obligations in Section
6 below, Tenant shall pay and discharge promptly and fully, by payment or
appropriate bond satisfactory to Landlord in form and substance, all claims for
labor done and materials and services furnished in connection with the Tenant
Improvements. Tenant Improvements shall not be commenced until five (5) days
after Landlord has received notice from Tenant stating the date the construction
of the Tenant Improvements is to commence so that Landlord can post and record
any appropriate Notice of Non-responsibility.
f. Tenant shall maintain during the construction of the Tenant
Improvements, at its sole cost and expense, builders' risk insurance for the
amount of the completed value of the Tenant Improvements on an all-risk
non-reporting form covering all improvements under construction, including
3
<PAGE>
building materials, and other insurance in amounts and against such risks as the
Landlord shall reasonably require in connection with the Tenant Improvements.
g. No materials, equipment of fixtures shall be delivered to or
installed upon the Additional Premises pursuant to any agreement by which
another party has a security interest or right to remove or repossess such
items, without the prior written consent of Landlord.
h. Upon completion of the Tenant Improvements, Tenant shall
deliver to Landlord the following, all of which shall be to the Landlord's
reasonable satisfaction:
i. Any certificates required for occupancy, including a
permanent and complete Certificate of Occupancy issued by the City of Fremont or
a final signed-off building permit or its equivalent.
ii. A Certificate of Completion signed by the Architect
who prepared the Construction Documents approved by the Landlord.
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 true and complete copy of all as-built plans and
drawings for the Tenant Improvements.
6. Tenant Improvement Allowance.
a. Subject to Tenant's compliance with the provisions of this Exhibit
B, Landlord shall provide an allowance in the amount of thirty six
thousand eight hundred eighty five and 00/100 dollars ($36,885.00)
($1.50 per square foot of the Additional Premises), (the "Tenant
Improvement Allowance"). The Tenant Improvement Allowance shall be
the maximum contribution by Landlord for the Tenant Improvements
and shall be used to design, construct and install the Tenant
Improvements and for no other purpose. Except as otherwise
expressly provided herein, Landlord shall have no obligation to
disburse the Tenant Improvement Allowance or any portion thereof
unless and until the Tenant Improvements have been completed in a
lien-free and good and workmanlike manner and in accordance with
all statues, laws, ordinances, rules and regulations applicable
thereto, Tenant has made the deliveries required under Paragraph
5(h.) above, and the Lien Period (as hereinafter defined) has
expired and Landlord has been reasonably able to confirm that no
mechanics' or materialsmens' liens have been filed against the
Property during such Lien Period. As used herein, "Lien Period"
means the period during which the Contractor and any
subcontractors, labor suppliers and materialmen providing services
or materials for the Tenant Improvements may file a lien against
the Property of otherwise enforce lien rights.
b. Notwithstanding the foregoing to the contrary, Landlord shall not
be obligated to disburse any portion of the Tenant Improvement Allowance while
Tenant is in Default of this Lease.
c. Should the total cost of 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.
7. Excess Tenant Improvement Costs. The term "Excess Tenant Improvement
Costs" as used herein shall mean and refer to the sum equal to the aggregate of
the amount by which the actual Tenant
4
<PAGE>
Improvement costs exceed the Tenant Improvement Allowance. Tenant shall pay for
any and all Excess Tenant Improvement Costs; provided, however, that Tenant may
elect to have an amount of up to $36,885.00 of such Excess Tenant Improvements
Costs amortized over eighty (80) months of the Lease term at the interest rate
of twelve percent (12%) per annum, and the monthly Base Rent otherwise payable
by Tenant during the remainder of the Term of the Lease shall be increased by
the monthly amount resulting from such amortization.
8. Condition Precedent. Landlord shall have no obligation to approve or
review any plans or take any other actions required by Landlord pursuant to this
Exhibit B if at the time Tenant requests such approval, review or action or at
any time thereafter Tenant is in Default of this Lease.
9. Landlord's Consents. If Landlord does not respond to any request for
consent under this Exhibit A within the period set forth for such consent
herein, then such consent shall be deemed given.
5
<PAGE>
Exhibit B-2
Building Standards
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 AX 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 AX 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.
6
<PAGE>
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.
7
<PAGE>
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 coved 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, 3 3/4@ 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.
8
<PAGE>
PLUMBING:
A. Shall comply with all local codes and handicapped code requirements. Fixtures
shall be either American Standard, Kohler or Norris. All toilet accessories and
grab bars shall be Bobrick 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.
9
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheet, consolidated statement of operations and
consolidated statement of cash flows included in the Company's Form 10-Q for the
period ended March 27, 1998, and is qualified in its entirety by reference to
such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-26-1998
<PERIOD-START> JUN-28-1997
<PERIOD-END> MAR-27-1998
<CASH> 21,590
<SECURITIES> 74,666
<RECEIVABLES> 5,948
<ALLOWANCES> 1
<INVENTORY> 5,783
<CURRENT-ASSETS> 116,274
<PP&E> 12,216
<DEPRECIATION> 4,760
<TOTAL-ASSETS> 123,730
<CURRENT-LIABILITIES> 15,826
<BONDS> 0
0
0
<COMMON> 257
<OTHER-SE> 107,647
<TOTAL-LIABILITY-AND-EQUITY> 107,904
<SALES> 71,055
<TOTAL-REVENUES> 71,055
<CGS> 24,605
<TOTAL-COSTS> 60,021
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 13,540
<INCOME-TAX> 5,010
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,530
<EPS-PRIMARY> 0.33
<EPS-DILUTED> 0.31
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheet, consolidated statement of operations and
consolidated statement of cash flows included in the Company's Form 10-Q for the
period ended September 26, 1997, and is qualified in its entirety by reference
to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-26-1998
<PERIOD-START> JUN-28-1997
<PERIOD-END> SEP-26-1997
<CASH> 29,293
<SECURITIES> 54,502
<RECEIVABLES> 6,869
<ALLOWANCES> 0
<INVENTORY> 8,043
<CURRENT-ASSETS> 108,458
<PP&E> 10,141
<DEPRECIATION> 3,577
<TOTAL-ASSETS> 115,022
<CURRENT-LIABILITIES> 14,639
<BONDS> 0
0
0
<COMMON> 254
<OTHER-SE> 100,129
<TOTAL-LIABILITY-AND-EQUITY> 115,022
<SALES> 19,285
<TOTAL-REVENUES> 19,285
<CGS> 7,218
<TOTAL-COSTS> 15,749
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 4,249
<INCOME-TAX> 1,572
<INCOME-CONTINUING> 2,677
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,677
<EPS-PRIMARY> 0.11
<EPS-DILUTED> 0.10
</TABLE>
<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 27, 1997, and is qualified in its entirety by reference to
such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-27-1997
<PERIOD-START> JUN-29-1996
<PERIOD-END> JUN-27-1997
<CASH> 28,923
<SECURITIES> 44,301
<RECEIVABLES> 7,658
<ALLOWANCES> 0
<INVENTORY> 8,775
<CURRENT-ASSETS> 100,538
<PP&E> 9,620
<DEPRECIATION> 3,176
<TOTAL-ASSETS> 107,101
<CURRENT-LIABILITIES> 10,275
<BONDS> 9
0
0
<COMMON> 252
<OTHER-SE> 96,565
<TOTAL-LIABILITY-AND-EQUITY> 107,101
<SALES> 78,385
<TOTAL-REVENUES> 78,358
<CGS> 27,262
<TOTAL-COSTS> 63,145
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 17,854
<INCOME-TAX> 6,963
<INCOME-CONTINUING> 10,891
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,891
<EPS-PRIMARY> 0.44
<EPS-DILUTED> 0.41
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheet, consolidated statement of operations and
consolidated statement of cash flows included in the Company's Form 10-Q for the
period ended March 28, 1997, and is qualified in its entirety by reference to
such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-27-1997
<PERIOD-START> JUN-29-1996
<PERIOD-END> MAR-28-1997
<CASH> 18,076
<SECURITIES> 51,751
<RECEIVABLES> 8,391
<ALLOWANCES> 0
<INVENTORY> 10,445
<CURRENT-ASSETS> 95,895
<PP&E> 9,245
<DEPRECIATION> 2,657
<TOTAL-ASSETS> 102,602
<CURRENT-LIABILITIES> 11,922
<BONDS> 28
0
0
<COMMON> 248
<OTHER-SE> 90,404
<TOTAL-LIABILITY-AND-EQUITY> 102,602
<SALES> 62,888
<TOTAL-REVENUES> 62,888
<CGS> 21,624
<TOTAL-COSTS> 48,917
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 15,920
<INCOME-TAX> 6,209
<INCOME-CONTINUING> 9,711
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,711
<EPS-PRIMARY> 0.40
<EPS-DILUTED> 0.37
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheet, consolidated statement of operations and
consolidated statement of cash flows included in the Company's Form 10-Q for the
period ended December 27, 1996, and is qualified in its entirety by reference to
such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-27-1997
<PERIOD-START> JUN-29-1996
<PERIOD-END> DEC-27-1996
<CASH> 12,214
<SECURITIES> 55,263
<RECEIVABLES> 21,918
<ALLOWANCES> 0
<INVENTORY> 5,355
<CURRENT-ASSETS> 98,660
<PP&E> 8,260
<DEPRECIATION> 2,363
<TOTAL-ASSETS> 104,676
<CURRENT-LIABILITIES> 12,576
<BONDS> 49
0
0
<COMMON> 247
<OTHER-SE> 91,804
<TOTAL-LIABILITY-AND-EQUITY> 104,676
<SALES> 50,650
<TOTAL-REVENUES> 50,650
<CGS> 17,299
<TOTAL-COSTS> 32,527
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 19,378
<INCOME-TAX> 7,557
<INCOME-CONTINUING> 11,821
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,821
<EPS-PRIMARY> 0.48
<EPS-DILUTED> 0.44
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheet, consolidated statement of operations and
consolidated statement of cash flows included in the Company's Form 10-Q for the
period ended September 27, 1996, and is qualified in its entirety by reference
to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-27-1997
<PERIOD-START> JUN-29-1996
<PERIOD-END> SEP-27-1996
<CASH> 23,838
<SECURITIES> 48,373
<RECEIVABLES> 16,397
<ALLOWANCES> 0
<INVENTORY> 4,316
<CURRENT-ASSETS> 96,215
<PP&E> 4,888
<DEPRECIATION> 2,055
<TOTAL-ASSETS> 99,175
<CURRENT-LIABILITIES> 14,974
<BONDS> 70
0
0
<COMMON> 245
<OTHER-SE> 83,886
<TOTAL-LIABILITY-AND-EQUITY> 99,175
<SALES> 24,294
<TOTAL-REVENUES> 24,294
<CGS> 8,531
<TOTAL-COSTS> 15,506
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 9,382
<INCOME-TAX> 3,659
<INCOME-CONTINUING> 5,723
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,723
<EPS-PRIMARY> 0.23
<EPS-DILUTED> 0.22
</TABLE>
