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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 September 25, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-25684
PREMISYS COMMUNICATIONS, INC.
(Exact name of registrant as specified in its charter)
Delaware 94-3153847
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
48664 Milmont Drive, Fremont, California 94538
(Address of principal executive offices)
(Zip Code)
(510) 353-7600
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
The number of shares outstanding of the issuer's common stock, par value $0.01,
as of October 23, 1998 was 24,053,389 shares.
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<PAGE>
PREMISYS COMMUNICATIONS, INC.
INDEX
PART I. Financial Information Page No.
Item 1. Financial Statements
Condensed Consolidated Balance Sheet - June
30, 1998 and September 30, 1998 3
Condensed Consolidated Statement of Operations
- Three Month Periods ended September 30, 1997 4
and 1998
Condensed Consolidated Statement of Cash Flows
- Three Month Periods ended September 30, 1997
and 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 20
PART II. Other Information
Item 2. Changes in Securities 21
Item 5. Other Information 21
Item 6. Exhibits and Reports on Form 8-K 22
Signatures 23
<PAGE>
I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Premisys Communications, Inc.
Condensed Consolidated Balance Sheet
(in thousands except per share data)
June 30, September 30,
1998 1998
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 31,006 $ 14,020
Short-term investments 74,975 85,148
Accounts receivable, net 12,208 14,698
Inventories 3,859 6,578
Deferred tax assets 7,355 7,355
Prepaid expenses and other assets 657 346
---------- ----------
Total current assets 130,060 128,145
Property and equipment, net 8,392 8,464
Other assets 305 280
---------- ----------
$ 138,757 $ 136,889
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 6,969 $ 7,245
Accrued liabilities 10,207 9,311
Income taxes payable 735 3,075
Current portion of long-term debt 70 93
----------- -----------
Total current liabilities 17,981 19,724
----------- -----------
Put warrants --- 21,250
----------- -----------
Stockholders' equity:
Common Stock, $0.01 par value, 100,000 shares
authorized; 25,974 and 25,274 shares issued
and outstanding 260 262
Additional paid-in capital 85,230 56,354
Retained earnings 35,286 39,299
----------- -----------
Total stockholders' equity 120,776 95,915
----------- -----------
$ 138,757 $ 136,889
=========== ===========
See notes to condensed consolidated financial statements
<PAGE>
Premisys Communications, Inc.
Condensed Consolidated Statement of Operations - (unaudited)
(in thousands, except per share data)
Three Months Ended September 30,
--------------------------------
1997 1998
---- ----
Revenues $19,285 $25,011
Cost of revenues 7,218 8,388
------------ ----------
Gross profit 12,067 16,623
------------ ----------
Operating expenses:
Research and development 3,024 4,748
Selling, general and administrative 5,507 6,493
------------ ----------
Total operating expenses 8,531 11,241
------------ ----------
Income from operations 3,536 5,382
Interest and other income, net 713 988
------------ ----------
Income before income taxes 4,249 6,370
Provision for income taxes 1,572 2,357
------------ ----------
Net income $ 2,677 $ 4,013
============ ==========
Net income per share:
Basic $ 0.11 $ 0.15
Diluted $ 0.10 $ 0.15
============ ==========
Shares used in computing net income per share:
Basic 25,308 25,910
Diluted 27,287 27,025
============ ==========
See notes to condensed consolidated financial statements
<PAGE>
Premisys Communications, Inc.
Condensed Consolidated Statement Of Cash Flows - (unaudited)
(in thousands)
Three Months Ended September 30,
1997 1998
Cash flows from operating activities:
Net income $2,677 $4,013
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation 467 678
Changes in assets and liabilities:
Accounts receivable 789 (2,490)
Inventories 732 (2,719)
Prepaid expenses and other assets 1,249 336
Accounts payable 2,287 276
Accrued liabilities 2,068 (873)
Income taxes payable --- 2,340
------------ -------------
Net cash provided by operating activities 10,269 1,561
------------ -------------
Cash flows from investing activities:
Purchase of property and equipment (587) (750)
Purchase of short-term investments (10,201) (10,173)
------------ -------------
Net cash used in investing activities (10,788) (10,923)
------------ -------------
Cash flows from financing activities:
Proceeds from issuance of Common Stock, 889 1,317
net
Repurchase of Common Stock --- (8,941)
------------ -------------
Net cash provided by (used in) financing 889 (7,624)
activities
------------ -------------
Net increase (decrease) in cash 370 (16,986)
Cash and cash equivalents at beginning of 28,923 31,006
period
------------ -------------
Cash and cash equivalents at end of period $29,293 $14,020
============ =============
See notes to condensed consolidated financial statements
<PAGE>
Premisys Communications, Inc.
Notes to Condensed Consolidated Financial Statements
NOTE 1 - Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Rule
10-01 of Regulation S-X. Accordingly, they do not contain all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, the accompanying unaudited
condensed consolidated financial statements have been prepared on the same basis
as the audited consolidated financial statements and include all adjustments,
consisting only of normal recurring adjustments, necessary for the fair
statement of the Company's financial condition as of September 30, 1998, and the
results of its operations and its cash flows for the three month periods ended
September 30, 1997 and 1998. These financial statements should be read in
conjunction with the Company's audited financial statements as of June 30, 1997
and 1998 and for each of the three years in the period ended June 30, 1998,
including notes thereto, included in the Company's Annual Report on Form 10-K.
Operating results for the three month period ended September 30, 1998 are not
necessarily indicative of the results that may be expected for the year ending
June 30, 1999.
The Company has a 52/53 week fiscal accounting year that ends on the Friday
closest to June 30. Accordingly, fiscal periods shown herein as ending on June
30, 1998 and September 30, 1997 and 1998 for financial statement presentation
purposes actually reflect amounts for the fiscal periods ended on June 26, 1998,
September 26, 1997 and September 25, 1998, respectively.
NOTE 2 - Inventories (in thousands)
June 30, September 30,
1998 1998
(unaudited)
Inventories
Raw materials $ 582 $ 1,061
Work-in-process 676 1,555
Finished goods 2,601 3,962
----------- -------------
$ 3,859 $ 6,578
=========== =============
NOTE 3 - Earnings Per Share
The Company adopted Statement of Financial Accounting Standards No. 128,
"Earnings Per Share" ("SFAS 128") during the second quarter of fiscal 1998. SFAS
128 requires presentation of both Basic EPS and Diluted EPS on the face of the
statement of operations. Basic EPS is computed by dividing net income (loss)
available to common stockholders by the weighted average number of common shares
outstanding during the period. Diluted EPS gives effect to all dilutive
potential common shares outstanding during a period. In computing Diluted EPS,
the average stock price for the period is used in determining the number of
shares assumed to be purchased under the treasury stock method from exercise of
stock options
Following is a presentation of the Basic and Diluted EPS computations for
the periods presented below:
Three Month Period Ended
September 30, 1997 September 30, 1998
--------------------------- ---------------------------
Net Shares Per Net Shares Per
Income Share Income Share
Amount Amount
--------------------------- ---------------------------
(in thousands except per share data)
Basic EPS
Net income
available
to common
stockholders $2,677 25,308 $0.11 $4,013 25,910 $0.15
Effect of
Dilutive
Securities
Common stock
equivalents ---- 1,979 ---- 1,115
------------------ ------------------
Diluted EPS
Net income (loss)
available to
common
stockholders and
assumed
conversions $2,677 27,287 $0.10 $4,013 27,025 $0.15
=========================== ===========================
Options to purchase 609,778 and 2,284,309 shares of Common stock which were
outstanding during the three month periods ended September 30, 1997 and 1998,
respectively, 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 August 31, 1998, the Company's Board of Directors authorized repurchase,
at management's discretion, of up to 4.0 million shares of the Company's Common
Stock over the subsequent 12 months at market prices not to exceed $14.00 per
share and as the market and business conditions warrant. By October 21, 1998,
the Company had repurchased for cash 2.1 million shares of its Common Stock at
market prices ranging from $6.69 to $10.94 per share. As of September 17, 1998,
pursuant to the authorized stock repurchase program, the Company sold 2.0
million put warrants and purchased 1.5 million call options. The Company had a
maximum potential obligation related to the put warrants of $21.3 million. The
put warrants and call options expire in equal amounts (50% each) on January 29,
1999 and September 15, 1999.
On September 17, 1998, the Company's Board of Directors ("Board") adopted a
Stockholder Rights Plan ("Plan") designed to protect the long-term value of the
Company for its stockholders during any future unsolicited acquisition attempt.
Pursuant to the Plan, the Board declared a dividend of one preferred share
purchase right ("Right") for each share of the Company's Common Stock
outstanding on October 5, 1998 (the "Record Date") and further directed the
issuance of one such right with respect to each share of the Company's common
stock that is issued after the Record Date, except in certain circumstances. If
a person or a group (an "Acquiring Person") acquires 20% or more of the
Company's common stock, or announces an intention to make a tender offer for the
Company's common stock, the consummation of which would result in a person or
group becoming an Acquiring Person, then the rights will be distributed (the
"Distribution Date"). After the Distribution Date, each Right becomes
exercisable to purchase one one-hundredth (1/100) of a share of Series A Junior
Participating Preferred Stock at an exercise price of $80.00. The Rights will
generally expire on September 18, 2008. The Company may redeem the Rights until
the occurrence of certain events at a price of $0.001 per Right.
<PAGE>
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
This Form 10-Q contains forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A
of the Securities Act of 1933, as amended. These forward-looking statements
involve a number of risks and uncertainties which are described throughout this
Form 10-Q, including demand from and the Company's relationships with its
strategic partners and major customers, including ADC Telecommunications
("ADC"), Motorola, Inc. ("Motorola") and Paradyne Corporation ("Paradyne");
limited order backlog and quarterly fluctuations; delays and cancellations of
actual and projected customer orders; new product development and introductions
by the Company and its competitors, including products based on the technology
recently licensed by the Company from Positron Fiber Systems Corporation
("Positron") and Switched Network Technologies ("SNT"); deregulation of, and
legislation regarding the domestic and international telecommunications
industry; continued success of competitive local exchange carriers ("CLECs") in
taking market share from incumbent carriers in the U.S. business communications
services market; timely release and market acceptance of the Company's SlimLine
and StreamLine products; rapidly changing technologies and the Company's ability
to respond thereto; the growth of demand for telecommunications services such as
wireless, cellular and the Internet; competition; changes in the mix of products
or customers or in the level of operating expenses; and other factors described
throughout this Form 10-Q, including under "Revenues" and "Other Factors That
May Affect Future Operating Results," and in the Company's Annual Report on Form
10-K for the year ended June 30, 1998. The actual results that the Company
achieves may differ materially from any forward-looking statements due to such
risks and uncertainties. The Company has identified using an asterisk ("*")
various sentences within this Form 10-Q which contain such forward-looking
statements, and words such as "believes," "anticipates," "expects," "intends,"
"will" and similar expressions are intended to identify forward-looking
statements, but are not the exclusive means of identifying such statements. In
addition, the section labeled "Other Factors That May Affect Future Operating
Results," which does not include asterisks for improved readability, consists
primarily of forward-looking statements. The Company undertakes no obligation to
revise any forward-looking statements in order to reflect events or
circumstances that may arise after the date of this report. Readers are urged to
carefully review and consider the various disclosures made by the Company in
this report and in the Company's other reports filed with the Securities and
Exchange Commission, including its Form 10-K, that attempt to advise interested
parties of the risks and factors that may affect the Company's business.
Revenues
Three Months Ended September 30,
--------------------------------------
1997 % Change 1998
---- -------- ----
Revenues $19,285,000 30% $25,011,000
Revenues consist primarily of gross sales of products, less discounts and
sales returns and allowances. A majority of the revenue increase from the
quarter ended September 30, 1997 to the quarter ended September 30, 1998 was
attributable to an increase in unit volumes of platforms and modules sold. This
increase in unit volumes in the quarter ended September 30, 1998 versus the
quarter ended September 30, 1997 was primarily due to an increase in shipments
to Paradyne and Motorola, which was partially offset by a decrease in shipments
to ADC. See "Other Factors That May Affect Future Operating Results Relationship
with Paradyne." However, revenues decreased $6,232,000, or 20%, from $31,243,000
in the quarter ended June 30, 1998 to $25,011,000 in the quarter ended September
30, 1998. This decrease in revenues in the first fiscal quarter of 1999 versus
the fourth fiscal quarter of 1998 was due primarily to reduced shipments of the
Company's products to one CLEC customer of ADC, one of the Company's strategic
distribution partners. *The Company expects that revenues in the December 1998
quarter will increase somewhat compared with those reported for the quarter
ended September 30, 1998. *However, these expectations are subject to a number
of uncertainties, which include but are not limited to the following: the level
of business which the Company expects to ship through its marketing partners,
Paradyne, Motorola, ADC and Alcatel U.S.A. ("Alcatel"); the growth in business
shipped direct to international customers; and the shipment in the quarter of
orders for the Company's new products, the SlimLine and StreamLine. In the prior
two quarters shipments of the SlimLine and StreamLine products have been delayed
pending the resolution of design issues identified in customer and production
testing. *There is a risk that additional issues which will restrict the
availability of these products will be identified as the unit volumes produced
and shipped to customers grow in the December 1998 quarter.
The following table sets forth, for the periods indicated, the revenues
generated by customers which accounted for 10% or more of the Company's revenues
in the quarters ended September 30, 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.
Source of Revenues
Three Months Ended September 30,
-----------------------------------------------
1997 % 1998 %
---- -- ---- --
ADC $ 7,008,000 36% (a) ---
Paradyne 2,668,000 14% 9,037,000 36%
Motorola (a) --- 3,157,000 13%
Other Domestic Customers 8,212,000 43% 11,856,000 47%
Direct International
Customers 1,397,000 7% 961,000 4%
====================== ======================
Total Revenues $19,285,000 100% $25,011,000 100%
====================== ======================
(a) - Amounts not separately provided (but are instead included in "Other
Domestic Customers") as revenues for the period were less than 10% of the total.
The Company sells a substantial majority of its products to a limited
number of customers which generally resell the Company's products to public
carriers and end users. For the quarters ended September 30, 1997 and 1998,
customers individually representing 10% or more of the Company's revenue
generated 50% and 49% of the Company's total revenues, respectively. *The loss
of any one or more of the Company's major customers would have a material
adverse effect on the Company's business and operating results. *Any of the
telecommunications equipment suppliers that market and sell the Company's
products could elect to cease marketing and selling the Company's products, and
there can be no assurance that these telecommunications equipment suppliers will
continue to place orders with the Company or that the Company will be able to
obtain orders from new telecommunications equipment suppliers or end users. See
"Other Factors That May Affect Future Operating Results - Indirect Channels of
Distribution," "-Slowdown in Telecommunications Carriers' Capital Expenditures,"
"-Limited Order Backlog" and "-Relationship with Paradyne."
During the quarter ended September 30, 1998, direct international revenues
accounted for 4% of the Company's revenues, compared to 7% for the same period
in fiscal 1998. The Company believes this reduction in direct international
revenues is attributable to the current economic situations in Asia and Russia.
Certain of the Company's domestic customers also sell Premisys products into
international markets. *The Company intends to expand its operations outside the
United States and anticipates that international sales will increase in the
future both in absolute dollars and as a percentage of revenues. However, 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 currency exchange rates, difficulties in staffing and
managing foreign operations, greater difficulty in accounts receivable
collection and potentially adverse tax consequences. See "Other Factors That May
Affect Future Operating Results - Industry Standards and Regulatory Matters."
Gross Profit
Three Months Ended September 30,
--------------------------------------
1997 % Change 1998
---- -------- ----
Gross Profit $12,067,000 38% $16,623,000
As a percentage of revenues 63% 66%
Cost of revenues consists of component costs, compensation costs and
overhead related to the Company's manufacturing operations and warranty
expenses. Gross profit increased from the three months ended September 30, 1997
to the quarter ended September 30, 1998 primarily as a result of higher unit
shipment volumes. The gross margin increased from the quarter ended September
30, 1997 to the quarter ended September 30, 1998, due primarily to a shift in
customer mix. *The Company expects its gross margins for the remainder of fiscal
1999 to decline somewhat from the 66% reported in the quarter ended September
30, 1998, due primarily to anticipated changes in product mix. *However,
achievement of the Company's expectations is subject to a number of
uncertainties, including customer mix, market acceptance of the SlimLine and
StreamLine products, the mix and volume of products sold and the Company's
ability to realize expected revenue levels.
Research and Development Expenses
Three Months Ended September 30,
-------------------------------------
1997 % Change 1998
---- -------- ----
Research and development expenses $3,024,000 57% $4,748,000
As a percentage of revenues 16% 19%
Research and development expenses consist of personnel costs, consulting,
testing, supplies and depreciation expenses. All software development costs have
been expensed in the period in which they were incurred. Research and
development expenses increased $1,724,000, or 57%, from the quarter ended
September 30, 1997 to the quarter ended September 30, 1998. This increase was
primarily due to increased personnel expenses and to a lesser extent to
increased expenses for outside services and materials used associated with the
development of the Company's SlimLine and Q-155 products. The increase in
research and development expenses as a percentage of the Company's revenues in
the quarter ended September 30, 1998 versus the quarter ended September 30, 1997
was primarily the result of lower than anticipated revenue growth in the quarter
ended September 30, 1998. *The Company expects that during the remaining
quarters of fiscal 1999 these expenses will increase in absolute dollars as
compared to the quarter ended September 30, 1998. *However, the Company expects
that the rate of growth of these expenses will be less than the sequential rate
of growth in revenues during the remaining quarters of fiscal 1999. *These
expectations are subject to a number of uncertainties, including the Company's
level of revenues and the level of personnel dedicated to research and
development activities.
Selling, General and Administrative Expenses
Three Months Ended September 30,
-------------------------------------
1997 % Change 1998
---- -------- ----
Selling, general and administrative $5,507,000 18% $6,493,000
expenses
As a percentage of revenues 29% 26%
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 $986,000, or
18%, from the quarter ended September 30, 1997 to the quarter ended September
30, 1998. This increase was primarily a 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 in the quarter ended September 30, 1998
versus the quarter ended September 30, 1997 was the result of lower than
anticipated selling, general and administrative expenses, in large part due to
lower than anticipated revenue growth, in the quarter ended September 30, 1998.
*The Company expects that these expenses will increase in absolute dollars
versus the quarter ended September 30, 1998 during the remaining quarters of
fiscal 1999. *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
remaining quarters of fiscal 1999. *These expectations are subject to a number
of uncertainties, including, among other things, the Company's level of revenues
and the level of personnel dedicated to sales, marketing and administrative
activities.
Interest and Other Income, Net
Three Months Ended September 30,
-------------------------------------
1997 % Change 1998
---- -------- ----
Interest and other income, net $713,000 39% $988,000
As a percentage of revenues 4% 4%
Interest and other income, net consists of interest income less interest
expense, and, to a much lesser extent, foreign currency gains and losses. The
increase in interest and other income, net, for the quarter ended September 30,
1998 as compared to the quarter ended September 30, 1997 was due to higher cash
balances.
Provision for Income Taxes
Three Months Ended September 30,
-------------------------------------
1997 % Change 1998
---- -------- ----
Provision for income taxes $1,572,000 50% $2,357,000
As a percentage of income before 37% 37%
income taxes
The Company's provision for income taxes represents estimated federal and
state income taxes. The Company's effective tax rate for the quarter ended
September 30, 1998 remained at 37%, which was less than the combined federal and
state statutory rate as a result of tax-exempt interest income from the
Company's municipal securities portfolio.
Net Income per Share
Three Months Ended September 30,
-------------------------------------
1997 % Change 1998
---- -------- ----
Net income $2,677,000 50% $4,013,000
Net income per share (diluted) $.10 50% $.15
Shares used in calculating diluted
net income per share 27,287,000 (1%) 27,025,000
Net income per share increased from $0.10 in the quarter ended September
30, 1997 to $0.15 in the quarter ended September 30, 1998. This increase was due
primarily to an increase of 50% in net income between the three-month periods
ended September 30, 1997 and 1998.
Liquidity and Capital Resources
Three Months Ended September 30,
--------------------------------------
1997 % Change 1998
---- -------- ----
Net cash provided by operating
activities $10,269,000 (85%) $ 1,561,000
Period-end cash, cash equivalents
and short-term investments $83,795,000 18% $ 99,168,000
Period-end working capital $93,819,000 16% $108,421,000
At September 30, 1998, the Company had approximately $99.2 million of
cash, cash equivalents and short-term investments. Net cash totaling $1.6
million was provided by operating activities during the three months ended
September 30, 1998, most significantly due to net income of $4.0 million and an
increase in income taxes payable of $2.3 million, offset partially by increases
in inventory and accounts receivable, aggregating $5.2 million.
Cash used in investing activities during the three months ended September
30, 1998 consisted principally of purchases of short-term securities totaling
$10.2 million. Financing activities during the three months ended September 30,
1998 resulted in a net use of cash of $7.6 million. The net use of cash is the
result of $8.9 million of cash used in the repurchase of the Company's Common
Stock partially offset by cash provided by the issuance of Common Stock in
connection with the Company's employee benefit plans.
As of September 30, 1998, the Company's working capital was approximately
$108.4 million. Except for the potential obligation related to put warrants, as
discussed below and in the Company's Annual Report on Form 10-K for the year
ended June 30, 1998, the Company has no significant capital spending or purchase
commitments other than normal purchase commitments and commitments under
facilities and capital leases. *The Company believes that its available funds
and anticipated cash flows from operations will satisfy the Company's projected
working capital and capital expenditure requirements for at least the next
twelve months.
On August 31, 1998, the Company's Board of Directors authorized repurchase,
at management's discretion, of up to 4.0 million shares of the Company's Common
Stock at market prices not to exceed $14.00 per share and as the market and
business conditions warrant. By October 21, 1998, the Company had repurchased
for cash 2.1 million shares at market prices ranging from $6.69 to $10.94 per
share. As of September 17, 1998, pursuant to the authorized stock repurchase
program, the Company sold 2.0 million put warrants and purchased 1.5 million
call options. The Company had a maximum potential obligation related to the put
warrants of $21.3 million. The put warrants and call options expire in equal
amounts (50% each) on January 29, 1999 and September 15, 1999.
<PAGE>
Other Factors That May Affect Future Operating Results
As referenced in the first paragraph of this Item 2, this section consists
primarily of forward looking statements but does not include asterisks for
improved readability.
INDIRECT CHANNELS OF DISTRIBUTION. Substantially all of the sales of the
Company's products are through indirect channels of distribution. Thus, the
Company's ability to affect and judge the timing and size of individual user
orders is more limited than for manufacturers selling directly to the end users
of their products. Any of the strategic partners that market and sell the
Company's products could elect to cease marketing and selling the Company's
products, and there can be no assurance that these strategic partners will
continue to place orders with the Company or that the Company will be able to
obtain orders from new strategic partners or end users. See "-Relationship with
Paradyne." Strategic partners could develop products that could be sold for
selected applications for which the Company's products are currently provided,
which could reduce the level of demand from these telecommunications equipment
suppliers for the Company's products. See "Competition." In addition, the
Company's revenues for a given quarter may depend to a significant degree upon
planned product shipments for a single carrier's equipment deployment project.
For example, in the quarters ended September 30 and December 31, 1997, March 31,
1998 and June 30, 1998, shipments of the Company's products to CLEC, MCI
Communications Corporation ("MCI"), through ADC, one of the Company's strategic
distribution partners, represented more than 10% of the Company's total revenues
for such quarters. Revenues derived from particular carrier projects have been
and continue to be difficult to forecast due to a relatively long sales cycle
and delays in the timing of such projects. For example, the Company's financial
results for the first quarter of fiscal 1999 were adversely affected when
product shipments for MCI were lower than expected. The Company's business and
operating results were also adversely affected in the quarter ended March 31,
1997 as a result of deployment delays by particular carriers. Such delays that
have occurred in the past, and have had a material adverse effect on the
Company, may occur in the future and would have a similar impact if they did
occur. Delays can be caused by late deliveries by other vendors, changes in
implementation priorities, slower than anticipated growth in demand for the
services that the equipment supports or in the capital expenditures of the end
user customer, consolidation among carriers and delays in obtaining regulatory
approvals for new tariffs. See "-Slowdown In Telecommunications Carriers'
Capital Expenditures" and "-Mergers of the Company's Customers." Revenues can
also be affected by delays in initial shipments of new products and new software
releases developed by the Company. See "-Rapidly Evolving Technology." In
developing countries, delays and reductions in the planned deployment of the
Company's products can also be caused by sudden declines in the local economy or
capital availability and by new import controls. Suppliers of the Company's
products have in the past and may in the future build significant inventory in
order to facilitate more rapid deployment of anticipated major projects or for
other reasons. Decisions by such suppliers to sell from their inventory could
lead to reductions in purchases from the Company. These reductions, in turn,
could cause fluctuations in the Company's operating results and have an adverse
effect on the Company's business and operating results in the periods in which
the inventory is utilized. In addition, the Company has in the past experienced
delays as a result of the need to modify its products to comply with unique
customer specifications. While such delays have not to date had a material
adverse effect on the Company's business or operating results, there can be no
assurance that any future delays would not have such an adverse effect.
SLOWDOWN IN TELECOMMUNICATIONS CARRIERS' CAPITAL EXPENDITURES. Currently,
the primary targeted end user customers for the Company's products are CLECs and
interexchange carriers ("IXCs"). These carriers have been expanding their local
networks at a rapid pace in the past two years to provide services to small and
medium-sized businesses that have historically been served inadequately by
incumbent local exchange carriers ("ILECs"). Based on industry information, it
now appears likely that the pace of capital expenditure growth by the CLECs and
IXCs will slow significantly. The Company believes that there are a number of
reasons for this potential slowdown. The largest U.S. CLECs and the IXCs which
have been entering local markets have already built out major portions of their
planned local networks using the billions in capital raised in the past two
years. The Company believes that the smaller U.S. CLECs may have difficulty
continuing to raise capital in the current environment of the financial markets.
Capital spending by carriers serving businesses in the Japan, Southeast Asia,
Eastern Europe and Latin America markets are also being negatively impacted by
the continuing financial crisis in Japan and Asia and looming problems in the
economies of the other markets. Besides reducing the rate of growth of the
markets into which the Company sells, the Company believes that this slowdown in
capital spending increases the intensity of price competition for these markets.
While the Company has recently introduced its StreamLine and SlimLine products,
which are more price competitive than its IMACS platform, these new products
must compete with an increasing number of low priced integrated access devices
("IADs"). As a result of the anticipated slowdown in telecommunications
carriers' capital expenditures and related increase in price competition, the
Company may find it more difficult to achieve expected levels of revenues and
profitability.
MERGERS OF THE COMPANY'S CUSTOMERS. A number of the largest CLECs which
use the Company's products have either merged or announced plans to merge with
larger carriers over the next several quarters. MCI has merged with WorldCom,
Inc. ("WorldCom"); Teleport Communications Group ("Teleport") has merged with
AT&T Corporation ("AT&T"); and GTE Network Services ("GTE") has announced an
intention to merge with Bell Atlantic Corporation ("Bell Atlantic"). The Company
believes that part of the impetus for each of these mergers is to increase the
combined carrier's ability to compete for local access markets. In the long
term, the Company believes that this should cause capital spending on local
access, in which the Company's products serve a vital function, to grow
significantly. However, over the next several quarters, as these mergers are
implemented, it is likely that capital expenditures will be temporarily deferred
as the newly combined companies evaluate inventories of undeployed equipment,
potential overlaps in network deployment plans, strategies for on-net versus
off-net deployments, and assignment of responsibilities for deployments in
targeted local markets. This risk of a deferral in expenditures on local access,
including expenditures for the Company's products, has already materialized in
the case of MCI. Not only may this risk be realized repeatedly with the Teleport
merger and the up-coming GTE merger, but the slowdown in expenditures may
persist for multiple quarters following the mergers. In addition, the increased
buying power wielded by these merged carriers and by merged equipment suppliers,
such as Alcatel and DSC Communications Corp. ("DSC"), is likely to place added
competitive price pressure on equipment manufacturers such as Premisys.
QUARTERLY FLUCTUATIONS. The Company's operating results may fluctuate on a
quarterly and annual basis due to factors such as the timing of new product
announcements and introductions by the Company, its major customers and its
competitors, delays in equipment deployment, market acceptance of new or
enhanced versions of the Company's products, changes in the product or customer
mix of revenues, changes in the level of operating expenses, competitive pricing
pressures, the gain or loss of significant customers, increased research and
development expense associated with new product introductions, component
shortages (see "-Dependence on Certain Suppliers"), and general economic
conditions. The Company's planned product shipments for a single carrier's
equipment deployment project can be a significant portion of a quarter's
revenues, and delays in the timing of such a project (which have occurred in the
past, including the quarter ended March 31, 1997) or reductions in expected
shipments to a single carrier (which occurred in the quarter ended September 30,
1998) could and have had a material adverse effect on the Company's business and
operating results. All of the above factors are difficult for the Company to
forecast, and these or other factors can materially adversely affect the
Company's business and operating results for one quarter or a series of
quarters. The Company's expense levels are based in part on its expectations
regarding future revenues and in the short term are fixed to a large extent.
Therefore, the Company may be unable to adjust spending in a timely manner to
compensate for any unexpected future revenue shortfall. In the quarter ended
March 31, 1997, the Company experienced such an unforecasted revenue shortfall
and was not able to compensate for it through expense reduction, which resulted
in a net loss. Any significant decline in demand relative to the Company's
expectations or any material delay of customer orders would have a material
adverse effect on the Company's business and operating results. The Company's
operating results may also be affected by seasonal trends. Such trends may
include lower revenues in the summer months during the Company's first fiscal
quarter when many businesses experience lower sales, and in the Company's third
fiscal quarter, as compared to its second fiscal quarter, as a result of strong
calendar year end purchasing patterns from certain of the Company's strategic
customers.
COMPETITION. The market for telecommunications products is highly
competitive and subject to rapid technological change. The Company's principal
competition to date has been from major telecommunications equipment suppliers,
such as Newbridge Networks Corporation and Tellabs, Inc., which offer a broad
line of products including access devices for business applications. The Company
expects substantial additional competition from existing competitors as they
develop products to compete with the functionality and flexibility of the
Company's products. As shipments of the Company's SlimLine and StreamLine
products increase, it expects to face additional competition from channel bank
and CSU/DSU vendors as well as with new startups focusing on the access
equipment market. See "-Relationship With Paradyne." The Q-155 product will
likely compete with broadband access products offered or announced by a number
of vendors. Certain of the telecommunications equipment suppliers that market
and distribute the Company's products may in the future develop products that
could be sold for selected applications for which the Company's products are
currently provided. Successful, timely development or acquisition of such
products could reduce the level of demand from these telecommunications
equipment suppliers for the Company's products. In addition, certain of the
telecommunications equipment suppliers which market the Company's products have
recently either acquired or expressed an interest in acquiring companies which
have products or technologies that may be adapted to compete with the Company's
products in the future.
LIMITED ORDER BACKLOG. The Company typically operates with limited order
backlog, and a majority of its revenues in each quarter result from orders
booked in that quarter. Also, the Company has from time-to-time recognized a
majority of its revenues from sales booked and shipped in the last month of a
quarter. Due to the delivery requirements of its customers, the Company expects
to continue to experience limited order backlog. The Company's manufacturing
procedures are designed to assure rapid response to customer demand, but may, in
some circumstances, create risk of excess or inadequate inventory, which may
have an adverse affect on the Company's business and operating results. The
Company's agreements with its customers typically allow customers to cancel
orders or delay scheduled shipments without penalty until a relatively short
period of time before planned shipment. The Company has experienced cancellation
of orders from time to time, and expects to receive order cancellations from
time to time in the future, which could adversely affect the Company's revenues
for a quarter or series of quarters. Because a substantial portion of customer
orders are filled within the fiscal quarter of receipt, and because of the
ability of customers to revise or cancel orders and change delivery schedules
without significant penalty, the Company believes that its backlog as of any
given date is not necessarily indicative of actual revenues for any succeeding
period.
RAPIDLY EVOLVING TECHNOLOGY. The telecommunications equipment market is
characterized by rapidly changing technologies and frequent new product
introductions, which include cell and packet technologies and new digital
subscriber line technologies ("xDSL"). The Company's success will depend to a
substantial degree upon its ability to respond to changes in technology and
customer requirements. This will require the timely selection, development and
marketing of new products and enhancements on a cost-effective basis. For
example, the Company has licensed certain technology from Positron for inclusion
in the Company's Q-155 products, which were announced in June 1997, and are
expected to begin field trials in the quarter ending December 31, 1998 and to
begin shipping by the end of the quarter ending March 31, 1999. Also, in the
quarter ended March 31, 1998, the Company licensed cell and packet technologies
from SNT. The Company intends to ship products based upon the SNT technology in
calendar 1999. However, there can be no assurance that the Company will be able
to successfully develop new products or new enhancements to existing products on
a timely and cost-effective basis. In addition, failure to achieve market
acceptance of new products could have a material adverse effect on the Company's
operating results. The introduction of new and enhanced products also requires
that the Company manage transitions from older products in order to minimize
disruptions in customer orders, avoid excess inventory of old products and
ensure that adequate supplies of new products can be delivered to meet customer
orders. In the past, certain of the Company's newly introduced products have
contained undetected errors and incompatibilities with installed products, which
has resulted in losses and delays in market acceptance of such products. As the
functionality and complexity of the Company's products continue to grow, the
Company has experienced and may in the future experience an increased incidence
of such errors or failures as well as delays in introducing its products.
RELATIONSHIP WITH PARADYNE. The Company has a strategic relationship with
Paradyne, formerly a wholly-owned subsidiary of AT&T, that involves the joint
development, marketing and sale of the Company's IMACS product by Paradyne. The
Company's agreement with Paradyne provides Paradyne exclusive distribution
rights with respect to the products covered by the agreement to AT&T entities,
as defined under the agreement. At the time that the Company entered into its
OEM agreement with Paradyne, Paradyne was a 100%-owned subsidiary of AT&T. In
1996, AT&T separated into three publicly-held stand-alone businesses, one of
which - Lucent - would focus on the communications equipment market. In June
1996, Lucent concluded a stock purchase agreement for the sale of Paradyne to
the Texas Pacific Group. In the quarter ended March 31, 1997, Paradyne announced
new products which are extensions of its existing line of CSU/DSU products.
Premisys believes that the higher capacity models of Paradyne's 916x series
offer features that are similar to those of the Company's IMACS and StreamLine
products. See "-Competition" and "-Rapidly Evolving Technology." In the quarter
ended December 31, 1997, the Company entered into an OEM agreement with Lucent
for the purchase of the SlimLine and StreamLine products directly from Premisys.
Although sales to Paradyne declined 34% from fiscal 1997 to fiscal 1998,
shipments to Paradyne continued to represent a significant portion of the
Company's revenues in fiscal 1998 as well as the first quarter of fiscal 1999.
Neither Paradyne nor Lucent are subject to any minimum purchase requirements,
and there can be no assurance that they will continue to place orders with the
Company. Significant reductions in shipments to Paradyne could have a material
adverse effect on the Company's business and operating results.
INDUSTRY STANDARDS AND REGULATORY MATTERS. The market for the Company's
products is also characterized by the need to meet a significant number of voice
and data communications regulations and standards, including those defined by
the Federal Communications Commission, Underwriters Laboratories, Bell
Communications Research ("Bellcore") and, internationally, various countries and
international standards committees. Regulations can be changed by new
legislation, as occurred with the enactment of the Telecommunications Reform Act
of 1996; these changes can impact service offerings and competitiveness in the
communications marketplace, and thus could have an effect on the timing and size
of the industry's investment in access equipment. New standards are evolving as
new technologies, such as ATM and xDSL, are deployed. As existing and new
standards evolve, the Company will be required to modify its products or develop
and support new versions of its products. It is also important that the
Company's products be easily integrated with carriers' network management
systems. The failure of the Company's products to comply, or delays in
compliance, with the various existing and evolving industry standards could
delay introduction of the Company's products, which could have a material
adverse effect on the Company's business and operating results. In addition,
government regulatory policies are likely to continue to have a major impact on
the pricing of existing as well as new public network services and therefore are
expected to affect demand for such services and the telecommunications products
that support such services.
DEPENDENCE ON KEY PERSONNEL. The Company's success to date has been
significantly dependent on the contributions of its senior officers and other
key employees. Certain of the Company's senior officers, including its Chief
Executive Officer, Senior Vice President, Sales and Marketing and its Senior
Vice President, Finance and Administration, and Chief Financial Officer, have
only recently assumed their current positions. In addition, the Company is
currently seeking to fill the recently vacated position of Senior Vice
President, Engineering. The loss of the services of any one of the Company's
senior officers or key employees could have a material adverse effect on the
Company's business and operating results. The Company's success also depends to
a significant extent on its ability to attract and retain additional
highly-skilled technical, managerial and sales and marketing personnel, the
competition for whom is intense.
LIMITED PROTECTION OF INTELLECTUAL PROPERTY. The Company relies upon a
combination of patent, trade secret, copyright and trademark laws and
contractual restrictions to establish and protect proprietary rights in its
products. There can be no assurance that these statutory and contractual
arrangements will prove sufficient to deter misappropriation of the Company's
technologies or independent third-party development of similar technologies. The
telecommunications industry is characterized by the existence of a large number
of patents and frequent litigation based on allegations of patent infringement.
In the event of litigation to determine the validity of any third-party claims
asserting that the Company's products infringe or may infringe the proprietary
rights of such third parties, such litigation, whether or not determined in
favor of the Company, could result in significant expense to the Company and
divert the efforts of the Company's technical and management personnel from
productive tasks. In the event of an adverse ruling in such litigation, the
Company might be required to discontinue the use and sale of infringing
products, expend significant resources to develop non-infringing technology or
obtain licenses from third parties.
DEPENDENCE ON CERTAIN SUPPLIERS. Certain components used in the Company's
products are currently available from only one supplier. In addition, the
Company relies on contract manufacturers to produce its printed circuit board
assemblies. Use of contract manufacturers can expose Premisys to supply
interruptions due to production, quality or financial problems of its
contractors. Shortages or delays in the delivery of the components used in the
Company's products (which have occurred in the past) or extended delays in
deliveries of printed circuit board assemblies could result in delays in the
shipment of the Company's products and/or increase component costs. Failure of
the Company to order sufficient quantities of any required component in advance
could prevent the Company from increasing production of products in response to
customer orders in excess of amounts projected by the Company. Although the
Company typically maintains some reserve inventory of components and printed
circuit board assemblies, this inventory would not cover a significant delay in
the delivery of such items.
YEAR 2000 RISKS. The Company has a formal Year 2000 Conformance Project in
place that focuses on three key readiness areas: (1) internal infrastructure
readiness, addressing internal information systems and non-information
technology systems; (2) supplier readiness, addressing the preparedness of our
supplier base; and (3) product readiness, addressing the Company's product
functionality, which includes customer support of the installed base of the
Company's product. For each readiness area, a task force is systematically
performing a Company-wide risk assessment, conducting testing and remediation,
and communicating with employees, suppliers, customers and other third party
business partners to raise awareness of the Year 2000 problem. Following are
overviews of each readiness area and the Company's progress thereon for becoming
ready for the Year 2000.
Internal infrastructure readiness: An assessment of internal and computer
software and hardware has been completed with the assistance of a third party.
The Company has migrated to an upgraded version of its enterprise-wide
accounting and manufacturing system, which is Year 2000 compliant. For other
systems, the Company has identified all non-compliant systems, established a
project for prioritized system compliance, and is in the process of executing
under such compliance project. Other systems are scheduled to be compliant no
later than May 1999. In addition to applications and information technology
hardware, the Company is testing and developing remediation plans for embedded
systems, facilities and other operations.
Supplier readiness: This program is focused on minimizing the risk
associated with suppliers in two areas: (1) a supplier's business capability to
continue providing products and services, and (2) compliance of a supplier's
products with Year 2000. Suppliers have been identified and contacted based on
their criticality to the Company. The Company has received responses from a
significant number of its preferred suppliers. Most of the respondents are in
the process of developing remediation plans. Supplier issues that potentially
affect the Company's products are targeted to be resolved by July 1999.
Product readiness: The Company has completed a comprehensive program which
focused on identifying and resolving Year 2000 issues existing in the Company's
products. The program encompassed a number of key efforts including testing,
evaluation, engineering and manufacturing implementation. In addition, the
program focused on customer support of the installed base, including
coordination of retrofit activity and testing existing customer electronic
transaction capability. Based on these efforts, the Company believes that its
products are Year 2000 compliant.
General and Risk Factors: The Company's Year 2000 project is currently in
the assessment phase and, with respect to certain information systems and
products, in the remediation phase. The Company believes that its greatest
potential risks are associated with its information systems and systems embedded
in its operations and infrastructure. The Company is at the beginning stage of
assessment for its operations and infrastructure, and cannot predict whether
significant problems will be identified. The Company has not yet determined the
extent of contingency planning that may be required. Based on the status of the
assessment made and remediation plans developed to date, the Company is not in a
position to state the total cost of remediation of all Year 2000 issues,
however, the Company believes such costs will not exceed $500,000. However, the
Company has not yet completed its assessments, developed remediation for all
problems, developed any contingency plans, or completely implemented or tested
any of its remediation plans. As the Year 2000 project continues, the Company
may discover additional Year 2000 problems, may not be able to develop,
implement, or test remediation or contingency plans, or may find that the costs
of these activities exceed current expectations. In many cases, the Company is
relying on assurances from suppliers that new and upgraded information systems
and other products will be Year 2000 compliant. The Company plans to test such
third-party products, but cannot be sure that its tests will be adequate or
that, if problems are identified, they will be addressed by the supplier in a
timely and satisfactory way. Because the Company uses a variety of information
systems and has additional systems embedded in its operations and
infrastructure, it cannot be sure that all of its systems will work together in
a Year 2000-compliant fashion. Furthermore, the Company cannot be sure that it
will not suffer business interruptions, either because of its own Year 2000
problems or those of its customers or suppliers whose Year 2000 problems may
make it difficult or impossible for them to fulfill their commitments to the
Company. If the Company fails to satisfactory resolve Year 2000 issues related
to its products in a timely manner, it could be exposed to liability to third
parties.
STOCK PRICE FLUCTUATIONS. All of the above factors are difficult for the
Company to forecast, and these or other factors, such as changes in earnings
estimates by securities analysts, can materially affect the Company's stock
price for one quarter or a series of quarters. Further, the stock market has
experienced extreme price and volume fluctuations that have particularly
affected the market prices of securities of many high technology companies.
These fluctuations, as well as general economic, political and market
conditions, may materially adversely affect the market price of the Company's
Common Stock. There can be no assurance that the trading price of the Company's
Common Stock will remain at or near its current level.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk.
The Company, in the normal course of business, is subject to the risks
associated with foreign currency exchange rates, fluctuations in the market
value of its fixed income securities available-for-sale, and changes in interest
rates. Please refer to Item 7A "Quantitative and Qualitative Disclosures About
Market Risk" of the Company's Form 10-K for the fiscal year ended June 26, 1998
for a more detailed discussion.
There has been no significant change in the Company's exposure to foreign
currency fluctuations during the quarter ended September 30, 1998 versus the
quarter ended June 30, 1998.
The fair market value of the Company's fixed income securities portfolio
at September 30, 1998 was $90 million, as compared to $89 million at June 30,
1998. In both comparison periods the corresponding unrealized gain was included
as a component of shareholders' equity. The average duration of the portfolio
increased from .99 years at June 30, 1998 to 1.26 years at September 30, 1998.
The following table presents the hypothetical change in the aggregate fair
market value of the Company's fixed income securities portfolio at September 30,
1998 which would result if the Federal Funds Rate changed as shown. Market
changes reflect immediate hypothetical parallel shifts in the yield curve of
plus or minus 50 basis points (BPS), 100 BPS and 150 BPS.
Decrease in Federal Increase in Federal
Funds Rate Funds Rate
--------------------------------------------------
Change in Federal Funds Rate (150 BPS) (100 BPS)(50 BPS) 50 BPS 100 BPS 150 BPS
(BPS)
- --------------------------------------------------------------------------------
Change in Securities $1,699 $1,122 $544 ($561)($1,113)($1,658)
Valuation ($000's)
<PAGE>
II. OTHER INFORMATION
ITEM 2. Changes in Securities
On September 17, 1998, the Board of Directors adopted a stockholder rights
plan designed to protect the long-term value of the Company for its stockholders
during any future unsolicited acquisition attempt. In connection with the plan,
the Board declared a dividend of one preferred share purchase right for each
share of the Company's common stock outstanding on October 5, 1998 (the "Record
Date") and further directed the issuance of one such right with respect to each
share of the Company's common stock that is issued after the Record Date, except
in certain circumstances. The rights will expire on September 17, 2008.
The rights are initially attached to the Company's common stock and will
not trade separately. If a person or a group (an "Acquiring Person") acquires
beneficial ownership of 20% or more of the Company's common stock, or announces
an intention to make a tender offer for the Company's common stock, the
consummation of which would result in a person or group becoming an Acquiring
Person, then the rights will be distributed (the "Distribution Date") and will
thereafter trade separately from the common stock.
After the Distribution Date, each right may be exercised for 1/100th of a
share of a newly designated Series A Junior Participating Preferred Stock at an
exercise price of $80. The preferred stock has been structured so that the value
of 1/100th of a share of such preferred stock will approximate the value of one
share of common stock.
In connection with the adoption of the plan, the Board of Directors also
amended two provisions of the Company's Bylaws. Special meetings of Premisys
shareholders may now only be called by the Chairman of the Board, the Chief
Executive Officer, the President or by a majority of the Board of Directors.
Additionally, vacancies on the Board of Directors may now be filled until the
next annual meeting of shareholders only by majority vote of the Directors then
in office.
The Company filed a Form 8-K on September 23, 1998 to report the adoption
of the stockholder rights plan and the amendments to its bylaws. Further
information regarding the Company's stockholder rights plan can be found in the
Company's Form 8-A filed with the Securities and Exchange Commission on
September 23, 1998.
ITEM 5. Other Information
In October 1998, Andrew Aczel resigned as the Company's Senior Vice
President, Engineering.
<PAGE>
ITEM 6. Exhibits and Reports on Form 8-K
A. Exhibits
Exhibit No. Description of Exhibit
10.50 OTC Issuer Stock Option Master Agreement with amendment dated
September 9, 1998
27.01 Financial Data Schedule
B. Reports on Form 8-K
The Company filed a report on Form 8-K on September 23, 1998. The report
included information under Items 5 and 7 with respect to the adoption of a
Stockholder Rights Plan and the amendment of the Company's Bylaws.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PREMISYS COMMUNICATIONS, INC.
November 9, 1998 /S/ Robert W. Dilfer
- -------------------------------------- -------------------------------------
Date Robert W. Dilfer
Vice President and Controller
(Duly Authorized Officer and Chief
Accounting Officer)
<PAGE>
Index to Exhibits
Exhibit No. Description of Exhibit
10.50 OTC Issuer Stock Option Master Agreement with amendment
dated September 9, 1998
27.01 Financial Data Schedule
Exhibit 10.50
OTC Issuer Stock Option Master Agreement
TERMS AND CONDITIONS
The terms and conditions below shall govern all transactions in Options
(as hereinafter defined) between Goldman Sachs & Co. ("GS&Co.") and the
undersigned (the Company). These terms and conditions are collectively referred
to as the "Agreement". Please acknowledge your agreement to and acceptance of
this Agreement by signing and returning the enclosed copy hereof. Until the
signed copy of this Agreement is received, any Option transactions entered into
between the Company and GS&Co. shall nevertheless be governed hereby.
1. Definitions.
(a) American Option: An Option which may be exercised on any Business Day,
except an the Expiration Date, between the hours of 9:00 A.M. and 2:30 PM. Now
York time, and on the Expiration Date between the hours of 9:00 A.M. and 4:30
P.M., New York time,
(b) Averaging Period: The number of consecutive Business Days indicated in the
Confirmation beginning on and including the Exercise Date,
(c) Business Day: Any day that (1) Federal Reserve Member Banks in New York, NY
are open for business, and (2) the primary market for trading the Option
Securities Is (or, but for the existence of a Market Disruption Event, would be)
open for business.
(d) Confirmation: The written evidence of an Option delivered by GS&CO, to the
Company, containing the specific terms with respect thereto. Each Confirmation,
signed by both the Company and GS&CO , together with this Agreement, shall
constitute the written agreement between the Company and GS&Co. with respect to
such Option. GS&Co. shall send the Confirmation to the Company by facsimile. on
the Trade Date and the Company shall immediately review the terms thereof for
accuracy and, if accurate, countersign and return the Confirmation (by
facsimile) to GS&Co. If the Confirmation is inaccurate, GS&Co. will promptly
correct the Confirmation and resend it to the Company for signature. Such
confirmation delivered by GS&Co. together with this Agreement shall constitute
the written agreement between the Company and GS&Co. with respect to such option
unless the Company notifies GS&Co. within three Business Days of its objections
to that Confirmation.
(e) Contracts: The 'Trading Unit" of an Option, consisting Initially of 100
shares of the Option Security, subject to adjustment as provided in Section 2.
(f) Early Termination Amount: The net amount payable by one party to the other,
calculated by the Non-Defaulting party by aggregating and setting-off, as
applicable:
(i) the outstanding payments due (or that would have been due but for
Section 6) under this Agreement to each party immediately prior to
the Early Termination Date;
(ii) the Replacement Value of Options to be settled under Section 9
which are unexercised immediately prior to the Early Termination Date;
(iii) the Non-Defaulting Party's Other Expenses; and
(iv) at the option of the Non-Defaulting party, any cash collateral or
the liquidation value of non-cash collateral.
(g) European Option, An Option which may be exercised only on the Expiration
Date between the hours of 9:00 A.M. and 4:30 PM. New York time.
1
<PAGE>
(h) Exercise Date; The Business Day on which exercise of an Option is, or is
deemed to be, effective.
(i)Exercise Price: The price per share, as set forth in a Confirmation, at which
an Option Security may be purchased or sold or otherwise settled upon exercise
of the related Option.
(j) Expiration Date: For an Option means 4:30 PM., New York time, on the date
identified as the Expiration Oats in the related Confirmation, at which time, if
an Option has not been exercised, the rights granted to the holder thereunder
expire and the Option is deemed terminated. If an Expiration Date is not a
Business Day, then the next succeeding Business Day shall be deemed to be the
Expiration Date for such Option.
(k) Major Dealer: A securities broker/dealer or bank other than an affiliate of
the Non-Defaulting Party selected by the Non-Defaulting Party, which has a net
worth of at least U.S.$200,000,000 (or its equivalent) and regularly makes
markets in Options on securities and indices,
(1) Market Disruption Event: The occurrence during the half hour period
immediately prior to the time at which valuation will take place of the material
suspension or material limitation of trading in (i) Option Securities on the
primary market or (ii) options or futures on Option Securities on the primary
market or on any other exchange on which such options or futures are traded. For
the purposes of this definition, (iii) a limitation on the hours and number of
days of trading will not constitute a Market Disruption Event if it results from
an announced change in the regular business hours of the primary market or other
relevant exchange and (iv) a limitation on trading imposed during the course of
a day by reason of movements in price otherwise exceeding levels permitted by
the primary market or other relevant stock exchange may, if GS&Co. so
determines, constitute a Market Disruption Event.
(m) Market Price; The closing sale price (or, if no closing sale price is
reported, the average of the bid and asked prices) reported on the Now York
Stock exchange or, in the event the Option Security is not listed on the New
York Stock Exchange, such other national or regional stock exchange upon which
the Option Security Is listed and principally traded. If the Option Security is
not listed on a national or regional securities exchange, then the Market Price
will be the average of the closing bid and asked prices reported by the National
Association of Securities Dealers Automated Quotation System ("NASDAQ").
(n) Option: The right, but not the obligation, of the holder (purchaser) of an
Option to purchase from the issuer (seller) of the Option (in the case of a
"Call Option") or to sell to its issuer (In the case of a "Put Option") the
number of Contracts set forth in the applicable Confirmation.
(o) Option Security: With respect to any Option, the security of the Company
identified in the related Confirmation for purchase or sale upon exercise of the
Option.
(p) Other Expenses, In relation to an Early Termination Date, all costs, losses
and expenses (including, without limitation, legal fees, stamp, registration,
documentation and similar taxes, and value added taxes but for the avoidance of
doubt, without duplication of any amounts failing within subparagraphs (i) and
(ii) of the definition of Early Termination Amount) incurred or suffered by the
Non-Defaulting Party as a result of the other party's default, any steps taken
by ft to implement, protect or enforce its rights under the Agreement and all
commercially reasonable steps taken by it as a result of the default (or in
contemplation of the impending default), including purchase or sale of Option
Securities pursuant to Options exercised but not settled, In order to unwind any
hedges or cover any expenses,
(q) Premium., The purchase price of an Option specified in the Confirmation.
(r) Quotation., In respect of an Option, a quotation from a Major Dealer of the
amount that would be required to be paid by or to the Non-Defaulting Party for
an instrument that would have the effect of preserving the economic equivalent
of the payment and/or delivery obligations of the parties under
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<PAGE>
the Option that would, but for the occurrence of the Early Termination Date,
otherwise have fallen due.
(s) Replacement Value: With respect to an Option, the value of the Option
calculated as an amount
equal to:
(i) the arithmetic mean of three Quotations; or
(ii) if only two Quotations are available to the Non-Defaulting Party,
the arithmetic mean of those two Quotations; or
(iii) if only one Quotation Is available, that Quotation; or
(iv) if no Quotation Is available, the amount reasonably
determined by the Non-Defaulting Party to be the value of the Option
on the Early Termination Date.
(t) Settlement Value; The amount In U.S. dollars by which the Exercise Price
exceeds the Market Price (in the case of a Put Option) or the Market Price
exceeds the Exercise Price (in the case of a Call Option) in either case
multiplied by the number of shares of the Option Security covered by an exercise
notice given pursuant to Section 3 below. The Market Price shall be determined
as of the Exercise Date, or, If an Averaging Period is indicated in the
Confirmation, the average of the Market Prices for each Business Day in the
Averaging Period.
2. Adjustments . The Exercise Price and the Trading Units of an Option are each
subject to adjustments as follows:
(a) During the term an Option is in effect (the "Exercise Period"), if any
adjustment is made by the Options Clearing Corporation or its successors ("OCC")
in the terms of outstanding OCC-issued options ("OCC Options") on the Option
Securities, an equivalent and pro rata adjustment shall be made in the terms of
such Option to the extent such adjustment is applicable on the date of any
exercise of such Option, Except as provided in Sub-paragraph (b) below, no
adjustments shall be made in the terms of such Option in any event that does not
result in an adjustment to the terms of outstanding OCC Options on Option
Securities. Without limiting the generality of the foregoing NO ADJUSTMENT SHALL
BE MADE IN THE TERMS OF ANY OPTION FOR ORDINARY CASH DIVIDENDS ON OPTION
SECURITIES. A summary of the terms under which the OCC may make adjustments is
set forth below:
(i) Whenever there is a dividend, stock dividend, stock distribution,
stock split, reverse stock split, rights offering, distribution, reorganization,
recapitalization, reclassification or similar event in respect of the Option
Securities or a merger, consolidation, dissolution or liquidation of the issuer
of the Option Securities, the number of option contracts, the unit of trading,
the exercise price, and the Option Securities, or any of them, with respect to
all outstanding option contracts open for trading in the Option Securities may
be adjusted.
(ii) All adjustments pursuant to this Section shall be made by GS&Co. by
reference to actions taken by the Securities Committee of the OCC and in
consultation with the Company, The Securities Committee determines whether to
make adjustments to reflect particular events in respect of the Option
Securities and the nature and extent of any such adjustment, based on Its
judgment as to what is appropriate for the protection of Investors and the
public Interest, taking into account such factors as fairness to holders and
writers of option contracts on the Option Securities, the maintenance of a fair
and orderly market in options on the Option Securities, consistency of
Interpretation and practice, efficiency of exercise settlement procedures, and
the coordination with other clearing agencies of the clearance and settlement of
transactions in the Option Securities. The Securities Committee of the OCC may,
in addition to determining adjustments on a case-by-case basis, adopt statements
of policy or interpretation having general application to specified types of
events.
(iii) In the case of a stock dividend, stock distribution or stock split
whereby one or more Option Securities are issued with respect to each
outstanding Option Security, each Option covering the Option Securities shall be
increased by the same number of additional rights as the number of shares Issued
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with respect to each Option Security under the Option. The Exercise Price per
share in effect immediately prior to such event' shall be proportionately
reduced, and the unit of trading shall remain the same.
(iv) In the case of a stock dividend, stock distribution or stock split
whereby other than a whole number of Option Securities are issued in respect of
each outstanding share, the Exercise Price in effect immediately prior to such
event shall be proportionately reduced, and conversely, in the case of a reverse
stock split or combination of shares of the Option Security, the Exercise Price
in effect immediately prior to such event shall be proportionately increased,
Whenever the Exercise Price with respect to an Option has been reduced or
increased in accordance with this Sub-paragraph (iv), the unit of trading shall
be proportionately increased or reduced, as the case may be.
(v) In the case of any distribution made with respect to Option
Securities, other than cash distributions subject to paragraph (a) and other
than distributions for which adjustments are provided in Sub-paragraphs (iii) or
(iv), if an adjustment is determined by the Securities Committee of the OCC to
be appropriate, 1) the Exercise Price in effect immediately prior to such event
shall be reduced by the value per share of the distributed property, in which
event the unit of trading shall not be adjusted, or 2) the unit of trading in
effect Immediately prior to such event shall be adjusted so as to include the
amount of property distributed with respect to the number of shares of the
Option Security represented by the unit of trading in affect prior to such
adjustment, in which event the Exercise Price shall not be adjusted.
(vi) Adjustments shall as a general rule become effective on the
"ex-date" established by the primary market on which the Option Securities are
open for trading.
(b) If at any time during the life of an Option there shall be no outstanding
OCC options on Option Securities, and an event shall occur for which an
adjustment might have been required under the ByLaws, Rules and stated policies
of the OCC applicable to the adjustment of OCC options, as described above, (the
"OCC Adjustment Rules"), Company and GS&Co. shall mutually determine, applying
the principles set forth in the OCC Adjustment Rules, whether to adjust the
terms of such Option), and the nature of any such adjustment.
(c) No adjustment of the Exercise Price shall be required unless such adjustment
would require an increase or decrease in such price of at least one U.S. cant:
provided that any adjustment which by reason of this Sub-paragraph (e) is not
required to be made shall be carried forward and taken into account (as if such
adjustment had been made at the time when it would have made but for the
provisions of this Sub-paragraph (c)) in any subsequent adjustment. All
calculations under this Subparagraph shall be made to the nearest U.S. cent with
five tenths or more of a U.S. cent to be considered (rounded up) a full cent.
(d) If the Exercise Date falls on or after a date with effect from which an
adjustment takes. retroactive affect pursuant to any of the provisions of this
Section 2 and such adjustment has not yet been reflected on such Exercise Date,
the Settlement Value will be adjusted to reflect the additional Option
Securities, being equal to the excess of the number of the Option Securities
which would have been used In the calculation of the Settlement Value at such
retroactively adjusted Exercise Price over the number of Option Securities
covered by the Option immediately prior to such adjustment.
3. Exercise Procedure; Automatic Exercise.
(a) An Option may be exercised by the holder thereof by giving notice of
exercise either orally or In writing to the person specified for such purpose in
the space provided below the signature block of this Agreement or as otherwise
notified in writing to the holder of such Option. Oral notice of exercise shall
be confirmed in writing within three Business Days. An Option may be exercised
only in whole and not in part unless "Exercisable in part" is speoff led in the
related Confirmation,
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<PAGE>
(b) If the holder has not given notice of exercise or notice of intent not to
exercise to 'the writer by 4:30 P.M., New York time, on the Expiration Date, the
Option shall be deemed to have been exercised by the holder if such Option is
in-the-money based upon the Market Price on the Expiration Date. An Option is
"in the money" as of 4.30 P.M. on the Expiration Date if the Settlement Value of
the unexercised portion of such Option Is based on an amount equal to or greater
than twenty-five cents ($.25) per share. GS&Co. shall attempt to notify the
Company of such automatic exercise as soon as practicable but in any case by the
close of business in New York on the Business Day following the Expiration Date.
Failure or inability to give such notice will not affect the validity of the
exercise.
4. Exercise Limit. If an Option is an American style option, the maximum
aggregate number of shares of the Option Securitry as to which such Option and
any similar (i.e., put or call) Option then outstanding may be exercised by the
holder on any Business Day is the number of shares, if any, specified In the
related Confirmation as the "Exercise Limit".
5. Settlement upon Exercise.
(a) If "Physical Settlement" is specified In the related Confirmation,
within three Business Days following the Exercise Date (or such other period as
agreed to by the Company and GS&Co.) payment for the Option Securities shall be
made at the Exercise Price per share therefor in clearing house funds against
delivery of such Option Securities. Option Securities will be delivered in good
transferable form as is customary for that type of Option Security. Whenever an
Option security is transferable or deliverable by wire transfer or book entry at
a depository or clearing house at which both parties or their clearing agents
are members, such method will be used to effect transfer or delivery, Physical
delivery shall only be made if the foregoing cannot be affected.
(b) If "Net Share Settlement" is specified in the related Confirmation,
then the Company may elect to have the related Option settled by payment of the,
Settlement Value in shares of the Option Security by giving notice of such
election to GS&Co. at least two Business Days before the Exercise Date, provided
that, the Option Security shall be listed for trading on the Now York Stock
Exchange or Nasdaq at the time of such notice and on the Exercise Day.
If such election is made, settlement " be made by delivery of the number of
shares of the Option Security equal in value to the Settlement Value, with such
shares valued based on the average of the Market Prices for the consecutive
Business Days in the Net Share Valuation Period. The "Net Share Valuation
Period" shall commence on (but exclude) the final Business Day of any Averaging
Period and end on (and include) the date which follows it by the same number of
Business Days in the Averaging Period. If no Averaging Period is indicated on
the Confirmation, the Net Share Valuation Period shall be deemed to be the
Business Day following the Exercise Date. Delivery of such shares shall be made
"free" in good transferable form by the third Business Day following the Net
Share Valuation Period.
Net Share Settlement of an Option issued by the Company is subject to the
following conditions precedent being fulfilled on the Exercise Date: the Company
shall have (i) registered pursuant to an effective registration statement -filed
under the Securities Act of 1933. as amended, the offering and sale by Goldman
of not less than 125% of the shares of the Option Security necessary to fulfill
the delivery obligation by the Company assuming that the number of such shares
were determined on the basis of the average of the Market Price on the five (5)
Business Days prior to the Exercise Date; (ii) delivered to Goldnan such number
of prospectuses relating thereto as Goldman shall have reasonably requested and
(iii) entered into an indemnification agreement reasonably acceptable to Goldman
covering the information contained in such prospectus. If these conditions
precedent are not satisfied on the Exercise Date, Goldman may require such
Option to be physically settled pursuant to Section 5(a).
5
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(c) Settlement for Fair Value: On any Business Day prior to the Expiration Date
(the 'Notification Date"), the Company may irrevocably elect to Net Share Settle
an Option (in whole or in part) at the fair market value (as determined below)
by orally notifying GS&CQ. of the number of shares of the Option Security for
which such election applies, The Company shall deliver written notice of such
election by the close of business on the following Business Day by fax to Rachel
Parrish at 212-346-2126. Upon receiving such notice, GS&Co. will quote to the
Company a "Settlement Warrant Price", and a "Settlement Share Price" both
expressed in dollars per share. If the Company accepts such Settlement Warrant
Price and Settlement Share Price, the "Settlement Value" shall be the product of
(i) the number of shares designated by the Company on its notice, multiplied by
(ii) the Settlement Warrant Price. Where an Option is to be settled by
Settlement for Fair Value, the options shall settle on the third Business Day
following the Notification Date by delivery of a number of shares to the holder
of such Option. Where the Company is the writer of such Option, then delivery at
shares under this provision is subject to the conditions precedent set forth In
paragraph 5 (d)
(d) With respect to any Option that is to be settled by Net Share Settlement, if
GS&Co. determines that a Market Disruption Event is occurring on what would
otherwise be the Exercise Date, then the Exercise Date shall be the next
Business Day on which a Market Disruption Event is not occurring, provided that
if a Market Disruption Event is still subsisting on the fifth Business Day after
the Exercise Date, then such fifth Business Day shall be the Exercise Date and
GS&Co. shall determine the Market Price as of such fifth day. In the event that
GS&Co. determines that a Market Disruption Event is occurring on a Business Day
in an Averaging Period or a Net Share Valuation Period, then such period shall
be extended so that the number of Business Days in such period on which a Market
Disruption Event is not occurring equals the number of days indicated in the
Confirmation for the Averaging Period, provided that if a Market Disruption
Event is subsisting for five Business Days, then such fifth Business Day shall
be deemed to conclude the Average Period or the Net Share Valuation Period.
6. No Default, Each obligation of a party In rasped of each Option to make a
payment or deliver Option Securities is subject to the condition precedent that
no Event of Default or event that, with the lapse Of time or the giving of
notice or both, would become an Event of Default by the other party has occurred
and is continuing.
7. Representations, Warranties and Covenants
(a) The Company and GS&Co each represent and warrant to and covenant with the
other with respect to this Agreement and each option entered into hereunder
that:
(i) This Agreement has been duly authorized, executed and delivered by
such party and constitutes its valid and legally binding obligation, enforceable
against such party In accordance with its terms; and the issuance sale and
purchase, as the case may be, of each Option will be duly authorized, executed
and, when delivered by such party, will constitute the valid and legally binding
obligation of such party enforceable against such party in accordance with the
terms thereof,
(ii) The execution and delivery of this Agreement by such party does not,
and the performance by it of its obligations hereunder and under each Option
will not, violate, conflict with or constitute a breach under any agreement or
instrument to which it is party or which is binding on any of its properties.
(b) Each party represents and warrants to the other that it has the right to
enter into the Option transactions entered into hereunder,
(c) In addition to the foregoing, the Company represents and warrants to Goldman
that (1) as of the trade date of each Option hereunder the Company's most recent
Annual Report on Form 10-K, together with all reports subsequently filed by the
Company pursuant to the Exchange Act, taken together, do not
6
<PAGE>
contain any untrue statement of a material fact or any omission of a material
fact required to be stated therein or necessary to make the statements therein,
In the light of the circumstances in which they were made, not misleading; and
(ii) it has taken such advice from its legal, tax and accounting advisors as it
has deemed necessary prior to entering into this Agreement, and is not relying
on Goldman for any such advice regarding this Agreement or any action either
party may take or refrain from taking thereunder.
8. Default. If any of the following events (each an "Event of Default") shall
occur with respect to a party to an Option (the "Defaulting Party"), the
party which is not in default (the "Non-Defaulting Party") shall have the
rights set forth in Section 9:
(i) the Defaulting Party fails to perform any obligation required to be
performed under this Agreement or any Option entered into hereunder, Including,
without limitation, the failure to pay any Premium when due, and such failure is
not cured within three Business Days after receipt of notice thereof;
(ii) the Defaulting Party repudiates any of Its obligations hereunder or
under any Option;
(iii) a case in bankruptcy shall be commenced or consented to or a petition
for the appointment of a receiver shall be filed by the Defaulting Party or
brought against the Defaulting Party or the Defaulting Party shall make a
general assignment for the benefit of creditors or admit in writing that it is
unable to pay its debts as they become due, or shall suspend the transaction of
its usual business or any material portion thereof or (if a corporation) shall
be dissolved or shall be a party, other than the surviving party, to a merger or
consolidation; or
(iv) the Non-Defaulting Party shall reasonably believe in good faith that
the Defaulting Party will be unable to meet its obligations when due for any
reason and the Defaulting Party fails, after 10 Business Days prior written
notice from the Non-Defaulting party to provide the Non-Defaulting Party with
adequate assurance of Its ability to perform.
9. Remedies.
(a) Upon the occurrence of an Event of Default and with respect to all unexpired
but unexercised Options (for which purpose a partially exercised Option is an
unexercised Option but only as to the unexercised portion), the Non-Defaulting
Party may by written notice to the Defaulting Party sent while the Event of
Default is continuing and a specifying the relevant Event of Default, elect to
terminate and settle all Options (but not some only) in accordance with this
Section 9 on the Early Termination Date, being the date specified in and no
earlier than the date of the notice.
(b) If an Early Termination Date occurs, the Non-Defaulting Party shall
calculate the Early Termination Amount payable by one party to the other and
shall as soon as reasonably practicable give to the Defaulting Party a statement
thereof (including details of any relevant Quotations).
(c) The Early Termination Amount shall be payable on the Business Day
immediately after notice of its amount Is given to the Defaulting Party and,
unless payable by the Non-Defaulting Party, shall be paid together with interest
thereon from (and including) the Early Termination Date to (but excluding) the
date of payment at the rate, to the extent permitted by applicable law, of 2 per
cent per annum above Morgan Guaranty Trust Company's prime (or base) commercial
loan rate for short term borrowings as In effect from time to time.
The parties agree that the amounts recoverable under this Section 9 are a
reasonable preestimate of loss and not a penalty, Such amounts are payable for
the loss of bargain and the loss of protection against future risks.
7
<PAGE>
(e) The Non-Defaulting Party's rights under this Section 9 shall be in addition
to, and not in limitation or exclusion of, any other rights which the
Non-Defaulting Party may have (whether by agreement, operation of law or
otherwise) against the Defaulting Party.
10. Miscellaneous.
(a) A Confirmation sent by GS&Co. to the Company on a Business Day shall be
deemed to have been received by the Company on the same day (or, if sent on a
day which is not a Business Day, on the next succeeding Business Day) if sent by
same-day messenger, by telex or other telecommunication device capable of
transmitting or creating a written record of transmission, and on the third day
after the day It Is sent if by first class mail, postage prepaid (or, if mailed
on a day which is a Federal holiday, three days after the next succeeding day
which is not a Federal holiday). If the Company fails to object to the terms
contained in a Confirmation within three Business Days after receipt thereof,
the terms of such Option (as evidenced by the Confirmation) shall be deemed to
have been accepted,
(b) Neither this Agreement nor any Option may be assigned or transferred by
either party hereto without the consent of the other party, except for an
assignment and delegation of all of GS&Co.'s rights and obligations hereunder in
whatever form GS&Co. determiner, may be appropriate to a partnership,
corporation, trust or other organization in whatever form that succeeds to all
or substantially all of GS&Co.'s assets and business and that assumes such
obligations by contract, operation of law or otherwise. Upon any such delegation
and assumption of obligations, GS&Co. shall be relieved of and fully discharged
from all obligations hereunder, whether such obligations arose before or after
such delegation and assumption.
(c) This Agreement shall be governed by and construed In accordance with the
Internal laws of the State of Now York, United States of America without giving
effect to conflicts of law principles.
(d) This Agreement and each Option entered into hereunder shall be subject to
all laws, rules and regulations applicable thereto, including, but not by way of
limitation, the provisions of the Securities Act of 1933, and the Securities
Exchange Act of 1934, as amended and all rules and regulations, promulgated or
to be promulgated thereunder. The Company and GS&Co., each acknowledge that the
Options acquired by it from the other party hereunder will not be registered
under the Securities Act of 1933, as amended (the "Act") and will be sold by the
issuer of the Option in reliance upon the exemption for private placements
pursuant to Section 4(2) of the Act.
(e) The parties agree that this Agreement and the terms of each Option entered
into hereunder are confidential and may not be publicly disclosed by either
party except with the prior written consent of the other party or pursuant to
the demand or requirement of any court or regulatory agency having jurisdiction
over a party.
8
<PAGE>
(f) Each Option is being entered Into by the parties hereto acting as principal
for their respective own account. Subject to the termination of any Option by
expiration or full performance upon exercise, no failure on the part of either
party to exercise, and no delay In exercising, any contractual right prior to
termination of any such Option as aforesaid will operate as a waiver thereof,
nor will any single or partial exercise by either party of any right preclude
any other or future exercise thereof or the exercise of any other right. No
modification or waiver of any provision hereof nor any consent to any departure
by either party therefrom shall In any event be effective unless the same shall
be in writing, and then such waiver or consent shall be effective only in the
specific instance and for the purpose for which given, All written notices
hereunder shall be sent to a party at its address by mail, hand delivery or
facsimile transmission as set forth below, or to such other address or telex
number as a party shall have last notified the other party in writing, or to
such other address as either party shall have last notified the other party in
writing. For purposes of telephone notice, GS&Co.'s relevant telephone number
and the Company's relevant telephone number are set forth below and each of
GS&Co. and the Company shall notify the other in writing of any change thereof.
11. Arbitration.
(a) Arbitration Is final and binding on the Company and OS&CO.
(b) The Company and OS&CO. am waiving their right to seek remedies In court,
including the right to a jury trial.
(c) Pre-arbitration discovery is generally more limited than and different from
court proceedings.
(d) The arbitrator's award is not required to include factual findings or legal
reasoning and any party's right to appeal or to seek modification of rulings by
the arbitrators Is strictly limited.
(e) The panel of arbitrators will typically Include a minority of arbitrators
who were or are affiliated with the securities Industry.
Any controversy between or among GS&Co. or ft affiliates, or any of Its or
their partners, directors, agents or employees, on the one hand, and the Company
or Its agents and affiliates, on the other hand, arising out of or relating to
this Agreement or any Option entered into hereunder, shall be settled by
arbitration, In accordance with the then current rules of, at the Company's
election, the American Arbitration Association ("AAA',) or the Board of
Arbitration of the Now York Stock Exchange ("BANYSE"). If the Company does not
make such election by registered mail addressed to OS&CO. within five (5)
Business Days after receipt of notification from GS&Co. requesting such
election, then the Company Irrevocably authorizes OS&CO. to make such election
on behalf of the Company. The award of the arbitrators shall be final, and
judgment upon the award rendered may be entered in any court, state or Federal,
having jurisdiction.
Neither party shall bring a putative or certified class action to arbitration,
nor seek to enforce any pro-dispute arbitration agreement against any person who
has Initiated in court a putative class action; who is a member of a putative
class who has not opted out of the, class with respect to any claims encompassed
by the putative class action until:
(i) the class certification is denied;
(ii) the class is decertified; or
(iii) the customer is excluded from the class by the court.
Such forbearance to enforce an agreement to arbitrate shall not constitute a
waiver of any rights under this agreement except to the extent stated herein.
9
<PAGE>
By signing below, the Company acknowledges receipt of a copy of this
Options Agreement A pre-dispute arbitration clause is contained in Section 11
hereof.
GOLDMAN, SACHS & CO.
Name: Tony Monaco
Address: 86 Broad Street New York, New York 10004
Telex No.:
Domestic: WU Tlex 12-5654 Goldsachs
International:ITT421344GOLSAX
TRT 177784 GSUT
WUI62506G0LSAC
Telefax No.: 212-902-8996
Telephone No.: 212-902-0112
Exercise Notice to: Equity Operations:
Options and Derivatives
Accepted and Agreed to this
9 day of September, 1998,
Premisys Communications, Inc.
By: /s/ John J. Hagedorn
John J. Hagedorn
48664 Milmont Drive, Fremont, CA 94538
Telex No.:
Domestic:
International:
Telefax No.: 510-353-2321
Telephone No.: 510-353-2768
Robert W. Dilfer, VP and Corporate Controller
Exercise Notice to: ---------------------------------------------------------
Above address and fax number
10
<PAGE>
Performance Assurance Amendment to
OTC Issuer Stock Option Master Agreement
Goldman, Sachs & Co. ("GS&Co.") and Premisys Communications, Inc. (the
"Company"), having entered into an OTC Issuer Stock Option Master Agreement
(the "Master Agreement"), agree that the Master Agreement is amended and
modified by adding the following subsections which shall form and be a part of
the Master Agreement as though included[ therein as of the date the Master
Agreement became effective.
1. Performance Assurance
(a) For each option, the Company's "Performance Assurance Requirement" as of
any day shall equal such Option's in-the-money amount on such day (if any)
provided that in no event shall the Performance Assurance Requirement for
an Option be less than zero.
(b) The Company's "Aggregate Performance Assurance Requirement" as of any day
shall equal the sum of (i) the Company's Basic Amount, plus (ii) the sum
of the Performance Assurance Requirements on such day for all outstanding
Options written by such party under the Master Agreement.
(c) "Basic Amount" shall mean 15% of the Aggregate Put Strike Price Value.
(d) "in-the-money" shall mean an amount equal to the product of the excess (if
any) of the Option Exercise price over the Market Price, multiplied by the
quantity of Option Securities in respect of such Option.
<PAGE>
2. Payment/Delivery of Performance Assurance
(a) The Company will, on demand by GS&Co., pay or deliver to GS&Co.,
Performance Assurance equal to the Company's Aggregate Performance
Assurance Requirement;
(b) Performance Assurance is due by the close of business in New York on the
next Business Day following demand.
3. Grant of Security Interest
The Company hereby grants to GS&Co. a first priority security interest in and a
lien upon all Performance Assurance and all property included therein, together
with the proceeds thereof, any distributions thereon and any property delivered
in substitution therefor, as security for the satisfaction of the obligations of
the Company under the Master Agreement. In the event of a default by the
Company, GS&Co. shall have all of the rights With respect to the Performance
Assurance granted to a secured party under the Uniform Commercial Code as then
in effect in the State of New York. GS&Co. shall have the unrestricted right to
use any property included in the Performance Assurance (subject only to its
obligation to return such property, or property of the same class, Issue,
issuer, series, principal amount, maturity and value to Company in accordance
with the terms hereof), including but not limited to the fight to rehypothecate
or transfer such property to third parties.
Performance Assurance shall at all times remain the property of the Company
subject only to the extent of the interest and rights therein of GS&Co. as the
pledgee and secured party thereof.
4. Value of Performance Assurance
Performance Assurance shall be provided by the deposit with GS&Co. of cash
("Cash Performance Assurance") or securities reasonably acceptable to GS&Co.,
which shall consist of the following types and shall be valued at the current
market value as determined in good faith by GS&Co. less the percentage of the
current market value indicated below:
<PAGE>
Securities issues or guaranteed by the united States or its Agencies
Less than one year to maturity 1%
One year but less than three years to maturity 2
Three years but less than five years to maturity 3
Five years but less than ten years to maturity 4
Ten years but less than twenty years to maturity 5
Twenty years or more to maturity 6
U.S. Dollar denominated commercial paper rated at least Al/PI With
less than 90 days to maturity (cannot constitute more than 20% of the
required Performance Assurance 5
U.S. Dollar denominated Municipal Bonds rated at least A3/A- Maximum of 30%
of Face Value
or 8% of
Market Value
Other Securities acceptable to GS&Co. (to be determined)
5. Return of Performance Assurance
If Performance Assurance held by GS&Co. exceeds the Company's Aggregate
Performance Assurance Requirement, then GS&Co. shall, at the Company's request,
return Performance Assurance to the Company sufficient to reduce the amount of
Performance Assurance hold by GS&Co. to an amount not less than the Company's
Aggregate Performance Assurance Requirement. GS&Co. will return all Performance
Assurance if the Company's Aggregate Performance Assurance Requirement is zero.
Agreed to on September 9, 1998
Goldman, Sachs & Co. Premisys Communications, Inc.
By: /s/ Eric Schwartz By: /s/ John J. Hagedorn
Name Eric Schwartz Name John J. Hagedorn
Title: Managing Director Title: VP/CFO
<PAGE>
EQUITY OPTION CONFIRMATION
September 10, 1998
Trade Date
To: Premisys Communications, Inc. (the "Company")
Attention: John Hagedorn
Ladies and Gentlemen:
This Confirmation of the option transaction described below supplements any
prior confirmation furnished to you in connection with such option transaction
and supplements, forms a part of, and is subject to the agreement entered into
between us containing terms and conditions governing over-the-counter options
transactions for ft above referenced account.
I. Transaction: The Company x bought _ sold
II. Option Security: The Company's Common Stock ("PRMS")
III. No. of Contracts: 7,500 (100 shares per contract)
IV. Expiration Date: January 29,1999
V. Exercise Price: $11.625 per share
VI. Premium: $1.67 per share, net Total: $1,250,000.00
Due and payable on September 15, 1999
VII. Type of Option: Put X Call
American X European
Exercise Limit:
VIII. Exercise: X Physical Settlement Cash Settlement
Net Share Settlement
IX. Exercise Notice: By telephone to writer's representative named
below at writer's telephone number indicated
below. Confirm in writing by fax to writer's
number, at writer's address below.
X. Special terms: Exercisable in whole only X Exercisable in part
X Net Share Settlement at Company's Election
The Exercise Price shall be increased by an amount per share equal to the
amount by which the Market Price on the Expiration Dale (if physically
settled) or the Market Price as used in determining the Settlement value
(if cash settled) exceeds $20.00 per share.
If Net Share Settlement is elected, the Market Price as used In determining
the Settlement Value will be the average of the Market Prices for the five
trading days commencing an (and including) the Expiration Dale. The options
will be settled on the third Business Day following the determination of
the Settlement Value.
Very truly yours, GOLDMAN, SACHS & CO.
By: /s/ Richard Sussman
Managing Director
Please sign and return a copy of this Confirmation to Rachel Parrish at the
address below
Phone: 212-902-1722
Fax: 212-346-2126
Address: 1 New York Plaza,50th Floor
New York, NY 10004
Exercise Notice to:Equity Operations
Options & Derivatives
Attn: Tony Monaco
Accepted and Agreed to on this
9th day of September, 1998
Premisys Communications, Inc.
By: /s/ John Hagedorn
Name: John Hagedom
Title: Chief Financial Officer, and Vice President, Finance
Phone: 510-353-2768
Fax: 510-353-2321
Exercise Notice to:
<PAGE>
EQUITY OPTION CONFIRMATION
September 10, 1998
Trade Date
To: Premisys Communications, Inc. (the "Company")
Attention: John Hagedorn
Ladies and Gentlemen:
This Confirmation of the option transaction described below supplements any
prior confirmation furnished to you in connection with such option transaction
and supplements, forms a part of, and is subject to the agreement entered into
between us containing terms and conditions governing over-the-counter options
transactions for ft above referenced account.
I. Transaction: The Company bought X sold
II. Option Security: The Company's Common Stock ("PRMS")
III. No. of Contracts: 10,000 (100 shares per contract)
IV. Expiration Date: January 29,1999
V. Exercise Price: $10.625 per share
VI. Premium: $1.25 per share, net Total: $1,250,000.00
Due and payable on September 15, 1999
VII. Type of Option: X Put Call
American X European
Exercise Limit:
VIII. Exercise: X Physical Settlement Cash Settlement
Net Share Settlement
IX. Exercise Notice:By telephone to writer's representative named below
at writer's telephone number indicated below.
Confirm in writing by fax to writer's number, at
writer's address below.
X. Special terms: Exercisable in whole only X Exercisable in part
X Net Share Settlement at Company's Election
The Exercise Price shall be increased by ft amount per share equal to the
amount by which the Market Price on the Expiration Dale (if physically
settled) or the Market Price as used in determining the Settlement value
(if cash settled) exceeds $20.00 per share.
If Net Share Settlement is elected, the Market Price as used In determining
the Settlement Value will be the average of the Market Prices for the five
trading days commencing an (and including) the Expiration Dale. The options
will be settled on the third Business Day following the determination of
the Settlement Value.
Very truly yours, GOLDMAN, SACHS & CO.
By: /s/ Richard Sussman
Managing Director
Please sign and return a copy of this Confirmation to Rachel Parrish at the
address below
Phone: 212-902-1722
Fax: 212-346-2126
Address: 1 New York Plaza,50th Floor
New York, NY 10004
Exercise Notice to:Equity Operations
Options & Derivatives
Attn: Tony Monaco
Accepted and Agreed to on this
9th day of September, 1998
Premisys Communications, Inc.
By: /s/ John Hagedorn
Name: John Hagedom
Title: Chief Financial Officer, and Vice President, Finance
Phone: 510-353-2768
Fax: 510-353-2321
Exercise Notice to:
<PAGE>
EQUITY OPTION CONFIRMATION
September 10, 1998
Trade Date
To: Premisys Communications, Inc. (the "Company")
Attention: John Hagedorn
Ladies and Gentlemen:
This Confirmation of the option transaction described below supplements any
prior confirmation furnished to you in connection with such option transaction
and supplements, forms a part of, and is subject to the agreement entered into
between us containing terms and conditions governing over-the-counter options
transactions for ft above referenced account.
I. Transaction: The Company x bought _ sold
II. Option Security: The Company's Common Stock ("PRMS")
III. No. of Contracts: 7,500 (100 shares per contract)
IV. Expiration Date: January 29,1999
V. Exercise Price: $11.625 per share
VI. Premium: $2.33 per share, net Total: $1,750,000.00
Due and payable on September 15, 1999
VII. Type of Option: Put X Call
American X European
Exercise Limit:
VIII. Exercise: X Physical Settlement Cash Settlement
Net Share Settlement
IX. Exercise Notice:By telephone to writer's representative named below
at writer's telephone number indicated below.
Confirm in writing by fax to writer's number, at
writer's address below.
X. Special terms: Exercisable in whole only X Exercisable in part
X Net Share Settlement at Company's Election
The Exercise Price shall be increased by ft amount per share equal to the
amount by which the Market Price on the Expiration Dale (if physically
settled) or the Market Price as used in determining the Settlement value
(if cash settled) exceeds $20.00 per share.
If Net Share Settlement is elected, the Market Price as used In determining
the Settlement Value will be the average of the Market Prices for the five
trading days commencing an (and including) the Expiration Dale. The options
will be settled on the third Business Day following the determination of
the Settlement Value.
Very truly yours, GOLDMAN, SACHS & CO.
By: /s/ Richard Sussman
Managing Director
Please sign and return a copy of this Confirmation to Rachel Parrish at the
address below
Phone: 212-902-1722
Fax: 212-346-2126
Address:1 New York Plaza, 50th Floor
New York, NY 10004
Exercise Notice to:Equity Operations
Options & Derivatives
Attn: Tony Monaco
Accepted and Agreed to on this
9th day of September, 1998
Premisys Communications, Inc.
By: /s/ John Hagedorn
Name: John Hagedom
Title: Chief Financial Officer, and Vice President, Finance
Phone: 510-353-2768
Fax: 510-353-2321
Exercise Notice to:
<PAGE>
EQUITY OPTION CONFIRMATION
September 10, 1998
Trade Date
To: Premisys Communications, Inc. (the "Company")
Attention: John Hagedorn
Ladies and Gentlemen:
This Confirmation of the option transaction described below supplements any
prior confirmation furnished to you in connection with such option transaction
and supplements, forms a part of, and is subject to the agreement entered into
between us containing terms and conditions governing over-the-counter options
transactions for ft above referenced account.
I. Transaction: The Company bought X sold
II. Option Security: The Company's Common Stock ("PRMS")
III. No. of Contracts: 10,000 (100 shares per contract)
IV. Expiration Date: January 29,1999
V. Exercise Price: $10.625 per share
VI. Premium: $1.75 per share, net Total: $1,750,000.00
Due and payable on September 15, 1999
VII. Type of Option: X Put Call
American X European
Exercise Limit:
VIII. Exercise: X Physical Settlement Cash Settlement
Net Share Settlement
lX. Exercise Notice:By telephone to writer's representative named below
at writer's telephone number indicated below.
Confirm in writing by fax to writer's number,
at writer's address below.
X. Special terms: Exercisable in whole only X Exercisable in part
X Net Share Settlement at Company's Election
The Exercise Price shall be increased by ft amount per share equal to the
amount by which the Market Price on the Expiration Dale (if physically
settled) or the Market Price as used in determining the Settlement value
(if cash settled) exceeds $20.00 per share.
If Net Share Settlement is elected, the Market Price as used In determining
the Settlement Value will be the average of the Market Prices for the five
trading days commencing an (and including) the Expiration Dale. The options
will be settled on the third Business Day following the determination of
the Settlement Value.
Very truly yours, GOLDMAN, SACHS & CO.
By: /s/ Richard J Susan
Managing Director
Please sign and return a copy of this Confirmation to Rachel Parrish at the
address below
Phone: 212-902-1722
Fax: 212-346-2126
Address:1 New York Plaza, 50th Floor
New York, NY 10004
Exercise Notice to:Equity Operations
Options & Derivatives
Attn: Tony Monaco
Accepted and Agreed to on this
9th day of September, 1998
Premisys Communications, Inc.
By: /s/ John Hagedorn
Name: John Hagedom
Title: Chief Financial Officer, and Vice President, Finance
Phone: 510-353-2768
Fax: 510-353-2321
Exercise Notice to:
<PAGE>
<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 25, 1998, 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-25-1999
<PERIOD-START> JUN-27-1998
<PERIOD-END> SEP-25-1998
<CASH> 14,020
<SECURITIES> 85,148
<RECEIVABLES> 14,698
<ALLOWANCES> 0
<INVENTORY> 6,578
<CURRENT-ASSETS> 128,145
<PP&E> 14,512
<DEPRECIATION> 6,048
<TOTAL-ASSETS> 136,889
<CURRENT-LIABILITIES> 40,974
<BONDS> 0
0
0
<COMMON> 262
<OTHER-SE> 95,653
<TOTAL-LIABILITY-AND-EQUITY> 136,889
<SALES> 25,011
<TOTAL-REVENUES> 25,011
<CGS> 8,388
<TOTAL-COSTS> 19,629
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 6,370
<INCOME-TAX> 2,357
<INCOME-CONTINUING> 4,013
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,013
<EPS-PRIMARY> 0.15
<EPS-DILUTED> 0.15
</TABLE>
